Postponement points, optimized plans, constraints, and supply chain breakdowns are all discussions points-or accusations and arguments-in the dialogs between trading partners. The roots of dialog breakdowns happen at the very start of relationships when the design of supply chain processes begins. Cross-enterprise process conversations tend to focus on my views of the optimized universe. There are several fallacies that trigger breakdowns in interenterprise links, causing misunderstandings and poor performance.
While the buzz continues on the critical importance of trading partner business integration-the Links-it is also critical to recognize this simple reality: a firm is in business for itself. The interenterprise processes in which a company engages are the means to the end-serving customers and securing profits-that surely is the first, true organizing principle. However, each firm ultimately is focused on its own financial or other measures to justify its unique investments (such as a new plant, new product R&D budget, or new IT system). This is enterprise optimization.
The misconception continues through the concept that there is a single industry supply chain called, ‘high tech’ or ‘apparel’ and a single set of optimization requirements for that industry. For example the semiconductor industry is quite segmented: a firm can be very virtual with a fabless organization existing merely as an office staffed full of designers. Next generation product designs are the key to their success. They outsource asset-intensive manufacturing and logistics to trading partners. The foundry that supports the fabless firm must focus on maximizing capital or Return-on-Asset. Hot Topic, a store chain for teens, is the fasted growing retailer in the US (three year annual average growth rate of 49% a year) staying close to its customers by merchandising and supply chain prowess. It has the highest turns in the industry. Similarly in biotechnology, firms invest heavily in scientists and labs while licensing manufacturing and distribution to large pharmaceutical firms who must gain return on invested capital.
Figure one shows some examples of different optimization objectives within segments of various industries. Firms not only focus on their core competencies but also need to recover investments through the supply chain. These investment areas can be part of an overall virtual or vertically integrated chain.
The point is that there are unique roles and processes in the chain and therefore each firm has overriding optimization/financial objectives that must be met to maintain their life.
Expensive multi-year product development and the highly complex manufacturing processes required to support new products exist in some industries such as aerospace, semiconductors, oil exploration and refining, and construction. Engaging in sometimes-risky negotiations between the capital-intensive partner and the design firm can make or break careers. Some firms also simultaneously need to confront the customer’s need for highly configurable end products and services. Many firms enter into joint ventures, off-balance-sheet investments (probably not so popular at the moment), and other types of investments in order to account for these financial goals that may be discordant with the enterprise’s overriding core financial driver.
Beyond pure research and development (R&D), huge expenses can exist in launching new products into the consumer or commercial market. Drug companies for example, can reach investments over ten years in excess of $1B on research and development and drug trials – and another $50M on marketing, advertising, awareness, and lobbying. Cosmetic companies can spend years developing the latest anti-wrinkle creme and millions to promote and market it. The channel or retailer will allocate valuable shelf-space to this hot product. And they all want to recover that cost-somehow, someway!
Virtualization is seen as a way to reduce investment. But virtualization of an enterprise merely redistributes the costs across a multi-enterprise chain, unless you truly understand that you are dealing with these multi-optimization issues. If you are a retailer (which also includes direct-to-consumer firms like HP, Toshiba, and Dell ) you want to move merchandize as close to the customer as possible. Overly lean can sometimes be a risk, since lack of available product makes customers move on to the next alternative merchant. So inventory or flexible capacity allocations can frequently be a small price to pay for market share.
Link processes can and are being designed that account for these differences. It is critical when engaging in process design to understand that the person across the table may need to achieve very different objectives in chain and channel. Still embedded within the chain is the need for understanding that there are probably multiple postponement points-die bank for semiconductors, JIT warehouse for components supporting assembly plants, and channel partners in the retail chain for final configurations like loading software and other extras makes three postponement points in the typical high tech chain. And the retailer has to have some finished goods-as we said, we need to present merchandize in a visible way to consumers. A B2B chain probably can reduce the buffer zones, since the assembly plant will most likely produce the final configuration and ship directly to the end customer. Each of these ‘buffer zones’ has to create maximum value for the whole chain. N-tier suppliers frequently miss the retailer’s sensitivities. Conversely, the retailer tends to miss the responsiveness prowess of the supplier. The unique buffers serve their purpose, but should be designed with visibility so the chain does not go beyond appropriate costs.
Holding onto fallacies of a single industry ‘supply chain’, with an assumed focus around unified organizing principles, breaks down processes and conversations across trading partners who want to create high performing links and competitive chains. Designing in and understanding these issues first will create better links and winning chains.