The article below is written by Ivar Rietbergen on March 2, 2012
It is often stated that the commoditization of core technologies opens up opportunities for consolidating a firm’s supply base. People frequently point to the high-tech Machine Manufacturing Industry (MMI) as an example of this. MMI companies have sought to consolidate their supply base on the expectation that the increasing demand for modular product design in new product development makes it possible to reduce complexity in the supply network. Complexity can be reduced by replacing several component suppliers with one system supplier who is responsible for the sub-assembly of a predetermined set of components into a sub-system.
In this post, I will argue that this way of thinking is flawed because it grossly simplifies the reality of system sourcing. System sourcing can often imply large shifts in the roles of actors in the supply network and the way in which relationships should be managed during new product development. Systems can also be sourced in many different ways; there is no universal solution for dividing a whole into its parts. Therefore, procurement managers must carefully manage supplier relationships during system sourcing and leave room for the supply network to find new ways to collaborate.
The high-tech MMI
The MMI consists of firms that produce knowledge and capital intensive goods (e.g., pumps, packaging machines and cooling devices) as well as goods that are specific to a set of end users (e.g., medical equipment or chemical devices). The industry is highly innovative and companies spend as much as 20% of their annual revenue on research and development in order to support new product development.
Recently, many OEM’s have changed their manufacturing strategies (see Figure 1). OEMs increasingly want to build machines by integrating interchangeable modules that can easily be outsourced to their supplier base. This increases the agility of their operations and enables them to quickly respond to the changing demands of clients. Additionally, this strategy makes it possible for each party in the supply chain to concentrate on its own functional expertise. Due to this trend, high-tech OEMs are increasingly referred to as ‘head-tail’ firms, focusing more exclusively on the beginning of the manufacturing process (e.g., determination of functional specifications) and the end of the process (e.g., final assembly and client system solutions). As this trend continues, OEM’s will increasingly rely on their 1st tier suppliers to manufacture modules, and these suppliers (likely to be referred to as “Original Module Manufacturers” in the future) will play an increasingly important role in the new product development process.
Fig. 1:Expected future supply chain structure in the MMI (based on brainport industries)
Strategic perspectives on supply chain management
Although this new supply chain may appear simple, many procurement managers in OEMs today still struggle with the complex relationships and supply networks that it creates. This is a serious challenge. When clear and well-organized supply markets are replaced by complex networks, firms have to look beyond their immediate buyer-supplier relationships and make full use of the many benefits available. The responsibilities for developing a new system can be allocated in many different ways throughout a supply network, and the question of how to approach and foster supplier relationships is by no means easy to answer.
The traditional perspective: the supply chain as a sequential pipeline
Many Western as well as Japanese manufacturers in the past have purposefully tried to craft a hierarchical, ‘tiered’ supply chain with few first-tier suppliers on top (see Figure 2).
Fig. 2: The OEM determines specifications and assures suppliers’ compliance by actively exerting control in the network
With modular product designs, supply chain tiering and supply base reduction programs, the supply network is ultimately split up in a linear chain of loosely connected relationships (except for a few carefully selected long-term buyer-supplier relationships). Every relationship consists of two nodes (i.e. organizations) and a link (i.e. activities, resources etc.) that connect them, and most exchange relationships between two actors are one directional. When a system is sourced, likely benefits for an OEM of approaching the supply chain this way during new product development include:
– Possibilities to exert control (i.e. divide and conquer): Ensure suppliers’ adherence to rules and regulations, set supplier selection criteria, closely monitor information exchanged, etc.
– Greater supply chain predictability: Central coordination through several supplier tiers for critical parts in terms of labor divisions, budget restrictions, etc.
The network perspective: the supply chain as an aggregate of embedded, highly interconnected actors
In supply chains where more complex or dense network structures (e.g., platform collaborations) are emerging, the notion of a linear ‘pipeline’ does not work. Often these network structures cannot be depicted in clearly separated layers and branches as with the traditional network perspective. They rather look ‘‘like a spaghetti web of complex interconnecting relationships’’ (Cox, in Dubois and Frederiksson, 2008) based on embeddedness in multiple dimensions (Hakansson and Snehota, 1995).
Fig. 3: The OEM determines specifications and actively stimulates cooperation between suppliers in the network
The network perspective on supply chains allows us to see that underneath the surface it may well be that OEMs and their suppliers are actually becoming increasingly interdependent in terms of their prospective roles in new product development and manufacturing. When a system is sourced approaching the supply chain this way, likely benefits for an OEM include:
– More innovative inputs: Too much control can hamper suppliers’ capacity to innovate and organize themselves; autonomy is required for innovative ideas to prosper.
– Better leverage of common capabilities: Not all first-tier suppliers can handle the responsibility of integrating components into complex sub-systems and some actively seek support from suppliers in other parts of their network.
– Better use of the network’s capacity: The network perspective allows actors within the network to collaborate to better solve problems. With the traditional perspective, institutional barriers often restrict the level of collaboration possible.
In the end, procurement managers in OEMs need not just focus on their ability to intervene in isolated buyer-supplier relationships in order to ensure effective system sourcing. It may be more important to foster supplier interdependencies, while keeping in mind their relationships with other actors (e.g. the suppliers’ other customers) in the network. Therefore, procurement managers should think more critically about what to and what not to manage during new product development collaboration. In these instances applying the network perspective rather than the traditional perspective may be more helpful.
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