The world has changed. For many industries and companies, merely managing their own immediate suppliers is no longer sufficient. Someone has to step in and coordinate key activities across the supply chain. Some progressive companies are managing multiple tiers of their supply chain (e.g. their suppliers’ suppliers and further upstream suppliers) to ensure supply continuity, social compliance, and to gain competitive advantage. These Supply Chain Orchestrators tend to be brand owners whose reputation and competitiveness are on the line based on the performance and actions of the whole chain. They are the ones who have the power to influence and direct the whole chain. In some cases the brand owner hires a third party to act on their behalf to execute this function.
Multi-tier relationships can take different forms:
- Selecting Suppliers Across Multiple Tiers (‘Configuring the Chain’) — In some cases, the quality of a particular component or assembly is so critical, that the OEM not only selects their immediate tier 1 supplier, but also actively influences or actually selects tier 2, 3, or 4 suppliers for specific very critical materials and components. In addition, we are seeing more ‘project-based supply chains,’ especially in apparel, where an OEM creates a concept for the next fashion season then proceeds to select all of the players in the chain to deliver that concept; all the way back to selecting the right farms growing exactly the right cotton they need for this shirt, the mills that are best at weaving that type of cotton, and the cutter that is best with that cloth, etc. Logistics costs and location become part of the decision making process as well. Often these supply chains are assembled on a project-by-project basis.
- Buying on Behalf of Multiple Tiers — This is where an OEM buys materials for one or more of their suppliers. In some cases, an OEM is buying on behalf of one or more of its contract manufacturers either because the OEM has better purchasing and negotiating power, or because they want to ensure continuity of supply, or want to ensure transparency of pricing (i.e. avoid excessive markups by their contract manufacturer) or a combination of these factors. A rather different variation is where an OEM buys a specific material (e.g. steel) for their entire supply chain. In this case the aggregate multi-tier material requirements (not just for their own manufacturing operations, but also for their suppliers and whole chain) flows through a purchasing platform run by the OEM. This allows much stronger purchasing power than is possible by each small shop in the chain, and allows for consolidation of material specifications. This approach has been adopted in certain sectors (e.g. automotive).
- Education and Process Improvements Across Tiers — Some companies invest in strategic relationships not only with key direct suppliers, but in some cases with a few critical tier 2 or 3 suppliers, helping those suppliers learn about and implement process improvements such as 6-sigma or lean initiatives.
- Compliance Programs and Audits — Increasingly, brand owners and retailers are being held responsible for what happens throughout their supply chain, either by law or by the court of public opinion. This compels them to take a much more active role in making sure all the players throughout their supply chain are acting responsibly. It is much harder now for the brand owner to get away with saying “I didn’t know” or “that’s not my factory, not my responsibility.”
- Multi-Tier Supply Chain Risk Management — Many companies have some form of risk management program with their immediate suppliers to keep tabs on risks related to supplier financial viability, weather and geopolitical risks, sole sourcing risks, etc. Some OEMs have learned the hard way that they also need to pay attention to risks and constraints further upstream in their supply chain. A disruption at the supplier’s supplier can have a severe impact. The fact that some of these disruptions also affect a company’s competitors does not diminish the importance of managing these risks, as one firm may gain a large competitive advantage if they manage those risks better than the competition.
When someone is managing multiple tiers of the supply chain, we call that role Supply Chain Orchestrator. For example, Rolls-Royce Aerospace division has a Supply Chain Relationships team. Each manager ‘owns’ various key relationships throughout the chain and is responsible for addressing the issues. They also have a Supply Chain Masters education program, where they actually invite a small number of their major suppliers to participate to develop the relationship and address common problems. These are not just lectures, but also involve research teams that look at making the end-to-end supply chain work better.
In future articles in this series, we will explore some specific examples of supply chain orchestration in practice. In Part Two we discuss one type of orchestration, buying materials or components on behalf of suppliers in your supply chain.
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