Virtual vs. Federated Supply Chains: A Definition


Abstract needed here…


Recently, businesses have been entering a new cycle of innovation. As we migrated from vertical to virtual, many pundits declared the focus on core competencies or asset free models as the future. But that actually started ten years ago. And now, a new model—the Federated supply chain—is emerging and being implemented by leading innovative businesses.

Inspiration: Star Wars!

One wouldn’t think of George Lucas as a supply chain visionary, but check out the following excerpt from the Star Wars Data Bank. It is intriguing in its parallel for the Supply Chain evolution – and they put in the effort to think out the model, including a confederation of independent systems!

The Galactic Senate “The enterprise** had enjoyed centuries of growth and prosperity; it was inevitable that its wealth would foster those with greed to match. The varied instruments of trade and commerce banded together into galaxy-spanning organizations meant to aggrandize their profits. Coalitions such as the Trade Federation, Commerce Guild, Techno Union, and the Intergalactic Banking Clan consolidated their individual markets under governing bodies of such size that they exhibited pull on the actions of the Galactic Senate (see scene from the movie on left.)

The Trade Federation was a consortium of merchants and transportation providers that effectively controlled shipping throughout the galaxy. Under the rule of the scheming Neimoidians, it had attained enough clout to have full representation in the Senate, as if it were a member world.”

(**The real quote states “The Republic had enjoyed….”) While we took a flight of fancy here, the clout of the “Trade Federation” isn’t such a stretch given that of the 100 largest economies in the world, 53 of them are corporations!

Avoiding semantic gridlock

Getting back to our reality, the goal of this article is to present the concepts around the “Virtual” and “Federated” supply chains. Words can imply different things to different people. But it is important to emphasize that we not get hung up on semantics, and instead, create a focus for thought and innovation.

After all, a supply chain isn’t just about supply (it is also about demand), nor is it a chain (it is a network.) Nevertheless, as more and more people get educated, they do think the right concept when you use the term “supply chain.”

Similarly, we want you to get the concepts around “Virtual” and “Federated” supply chains. How you as an individual wish to communicate these concepts is up to you and your organization’s semantic preferences.

Vertical supply chains

Figure 1 depicts a Vertical or Enterprise-centric supply chain that used to be prevalent over a decade ago. During this time (pre-1990), few companies actually had a VP of Supply Chain role. As vertical firms grew and each unit expanded, the question of centralized vs. decentralized models was all the rage.

But it did not take much time for companies to grasp the need for aligning the demand, distribution, and productions functions –or at least the information– which at that time largely existed within the four walls of the unit and not generally across the enterprise. And subsequently, this label aptly describes the vast majority of SCM efforts of the past decade. Systems efforts focused mostly on enterprise cohesion.

Virtual supply chains

While most people would think of this as the end state, we think this label is more appropriate to describe the transitory nature of what has been happening within the enterprise and across the value chain. Consider the following definition:

vir·tu·al adj. Existing or resulting in essence or effect though not in actual fact, form, or name. Or existing in the mind, especially as a product of the imagination. Used in literary criticism of a text.

This definition alludes to the fact that the virtual object isn’t real. And it occurs to us that what is appropriate about this definition is that the reality is that we have been witnessing enterprise destruction (fragmentation?)(as we know it) for several years. And what’s to come has yet to be fully grasped by many companies. But more on that later.

The prime motivator of virtualization was about survival. This is key—moving assets off the books which shifted part of the supply chain processes to trading partners as shown in Figure 2 below. Public companies were praised by Wall Street for this maneuver. But this in itself did not leverage the creative range of the trading partners to create new products, methods and services to customers.

Companies today largely operate in a mental state that can be summed up as us versus them. But many fail to realize that critical decisions are being made by their business partners without their involvement – and these REAL decisions have significant impact on the welfare of the enterprise. This continues to be a risk in the virtual model. Enterprise can justly stand on the center of achieved financial performance. Various financial laws and standards require them to be decent custodians on their financial statement.

In contrast, when examining their relationship across the value chain through the 3Pe lens, we realize that true alignment of business objectives between trading partners requires a far greater level of collaboration to achieve any business objective. In other words, if there is no whole enterprise—in essence, not in actual fact—then collaboration is a must for a process to be completed successfully!

Therefore, upon delving into the semantics, we can justify using “virtual” to describe the second stage.

Federated supply chains

We are not in love with the word, “Federated”, but according to the dictionary, it comes closest to describing the concept. Consider the following definition:

fed·er·a·tion n. The act of federating, especially a joining together of states into a league or federal union; A league or association formed by federating, especially a government or political body established through federal union.

Federation – 1: an organization formed by merging several groups or parties 2: a union of political organizations [syn: confederation, confederacy] 3: the act of constituting a political unity out of a number of separate states or colonies or provinces so that each member retains the management of its internal affairs

We also found the following definition from Dr. Bipin Chadha’s paper:

A federation implies a loosely coupled system distributed across

the internet or an intranet, where the participants can join in and

leave the federation without breaking the federation.

It also implies that participants can function on their

own when they are not a part of the federation.

This represents the reality that organizations are trying to achieve in their relationships. Ironically, the goal makes them work at cross purposes. I want loyalty, customization, exclusivity or whatever, and yet want to hedge my bets, in case a new need comes along and I would desire a different partner for that! Well, who cares about these definitions? A clear distinction needs to be made between not only the structure and collaborations elements, but the purpose of the Federated Model.

Virtual models are awash with issues like uneven payment terms, inability to get inventory or other kinds of visibility about assets that have been allocated to support me (or have they), and challenges around determining liability and profitability.

In Federated, we are exploring technology enabled business ventures that develop new products and services with a higher level customer involvement. This model is well understood in the financial and healthcare industries, where many 3rd parties exist to service the needs of multiple peer entities: clearing houses to administrate hospital charges for insurance claims; reference services for patients looking for services; etc. etc. (Unlike virtual, where there is always the lead dog.) We see the emergence of these businesses in the supply chain today, addressing many of the financial challenges associated with reconciliations. But also, these models emerge in the best partnership strategies of the leading firms.

So achieving a Federated Model—a peer to peer network of trading partners who are enabled by technology linkages (web) to participate in joint business processes will require a rethinking of the governance model.

In conclusion

Virtual chains are a big problem for customers. There frequently is no chain of accountability, or sense of a chain of custody. (Remember that definition of virtual—in essence does not in fact exist?) This is due to poor process, outdated 3Pe thinking, and old systems models (linear views vs. synchronized views). For transparency and therefore ethical business conduct to exist, which truly serves the customer, a network model that includes the customer’s ability to configure the Federation must exist.

Our idealist mindset states that Federated models will be configurable by the customer. Those end to end processes will be understood and endorsed by the whole value chain—of which the customer is, in truth, the ultimate organizing force.

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