SUPPLY CHAIN MANAGEMENT - THE DE-INTEGRATED VALUE CHAIN OR VALUE ADDING SUPPLY PARTNERSHIP Supply chains are based

on linkages and co-operation between independent buyers and suppliers acting as partners within the de-integrated value chain. Strategic Purpose The strategic purpose of the de-integrated value chain or value adding supply partnership (VASP), based on the concept of mutual advantage, includes: - adding value. - generating competitive advantage. - optimizing such customer or outcome values and performance indicators as quality, cost, delivery, innovation, time to market, and customer or client satisfaction. At the same time, the value adding supply partnership may be used to optimize the creation and application of core knowledge, competence, and technology across the partnership, thereby obtaining the benefits of synergy, combination, synergy, and resource leverage described. How the De-integrated Value Chain or Value Adding Supply Partnership Works A received strategic wisdom of recent years has been for organizations to identify and to focus on their key capabilities as a means of optimizing the generation of value and competitive advantage. This implies concentrating on the issues of knowledge and technology management described in, and resource leverage. Core knowledge and competence underpin enterprise technology, operational process, market offer, or client provision. Increasingly, activities that are not considered to be core, or in which no advantage is possessed, are being outsourced to organizations in the supply chain. Such activities might include specialisms such as distribution or transportation, data processing, call centre operations, the economies of scale and experience effect, and exploited by the high volume based manufacturers. What is Outsourcing? Outsourcing generally refers to the practice by which one organization engages another to undertake certain services or to make particular products for it. Typically this is done when a company determines that it cannot be, or should not be involved in an activity that other firms can do better or at a lower cost. There is a realization that the value generation or the competitive advantage enjoyed by the organization may otherwise be eroded if it attempts to be all things to all people. Optimizing Supply Chain Outcomes There may therefore be a strategy of concentrating operational activity in the component of the supply chain that is most competent to perform that activity. Each component of the supply chain will represent one of the knowledge and technology resources, and one of the core competencies of that supply chain. Thus, in theory at least, the value adding supply partnership should be able to optimize the application of its knowledge, competence, and technology taken as a whole. In consequence: _ excellent or world class status may be achieved where all of the components of the supply chain possess (and operate to) excellent or world class levels of capability or competence; and

_ the excellent or world class suppliers in the VASP may be used as benchmarks up to whose operating standards other organizations in the supply chain may be brought. Suppliers who cannot (or will not) upgrade their competence and reputation will be dropped from the supply chain. The use of the de-integrated value chain or value adding supply partnership may lead to the supply chain becoming more substantial or dense in scope. For instance: _ it may encompass products, processes, or activities in which the final customer or original equipment manufacturer would never before have been directly involved. Car makers do not make sheet steel or plastic, nor do they make tyres. But they are dependent on the quality, specification, delivery, performance, and reliability of such key products. Hospitals do not make the drugs that they depend upon to treat their patients. _ it may increasingly include activities that were formally carried out inhouse but which decision-makers have chosen to outsource to external suppliers. For instance, some large scale UK brewers have outsourced the bottling, packaging, labelling, and physical distribution of their products. These brewers now concentrate only on the large scale brewing, marketing, and bulk supply of product, outsourcing what are now perceived to be all non-core activities. Once the supply chain is established, necessary knowledge and skills may be transferred from buyer or OEM to supplier. The purpose of this transfer is to make sure that suppliers understand and will be able to deliver their contribution exactly as specified by the customer. They may not otherwise, for example, have access to proprietary knowledge or skills that are required to complete some particular activity which has now been outsourced to them. Large manufacturers or service organizations may also find that they have to upgrade the management processes and quality systems of their much less sophisticated suppliers in order to make the VASP work. Recent experience shows that the dissemination of final manufacturer or OEM expertize has occurred in major programmes of cost analysis, cost reduction, quality and delivery improvement, project management, and process innovation. Such programmes focus on knowledge and competence related issues of supplier technology and operations management, production engineering, operational productivity, and cost efficiency. There have been a variety of examples in the automotive industry which is particularly sensitive to factors of cost and quality. UK companies such as Corus (formerly British Steel) and Marks and Spencer also have extensive experience of cost analysis and cost reduction programmes involving their suppliers. One result of the establishment of the de-integrated value chain or value adding supply partnership may be a reduction of the number of suppliers in the value chain. The fewer suppliers that remain are likely to be amongst the best in their field. Their weaker brethren, unable to cope with the increasing demands of their customers, will fall by the wayside; operating at the margins of the business or leaving it altogether. The reduced number of suppliers will receive larger, longer term orders from their customers in the supply chain. This may enhance final quality, and reduce the transaction costs of procurement. It may also increase the margin available to the supplier to re-invest in the process and product improvement, innovation, and management competence required to maintain the position of both themselves and their final customer in increasingly competitive markets. The more that the VASP becomes deintegrated, and the greater the inter-dependencies of its relationship

architecture, the more is the final customer or OEM dependent for its own success on (and exposed to) the effectiveness of the companies and organizations in that supply chain. The principle being described in this section may then be taken to its logical conclusion. There will be single or dual supplier agreements in which the buyer voluntarily becomes dependent on one or two only suppliers or outsources. In return it will (i) demand absolute guarantees on quality, delivery, price; and (ii) more generally monitor the management, reliability, and reputation of these suppliers at the highest level. Some Advantages of the De-integrated Value Chain or Value Adding Supply Partnership A variety of advantages of the co-operative de-integrated value chain or value adding supply partnership model are suggested. These include: Knowledge, competence, and synergy - the incremental development and build-up of experience through the value chain, the combination of knowledge and competence, and the access of supply chain participants thereto, have already been described above. Synergy was described in Chapter 4. The interaction between suppliers and the final customer or OEM forms a key part of the relationship structure of the whole value chain. Supply chain management, if conducted effectively, may create synergies between the partners. In this way, more can be done with the existing resources available; or more can be done with less. These concepts are discussed in Chapter 21. Interaction - the VASP may be characterized by frequent communication, interaction, and the build-up of experience between customer and supplier, at all stages of the procurement and supply process. People talk to each other, and facilitate rapid problem-solving at whatever level is required. Multi-disciplinary teams may be set up between partners, for instance on a project management or Six Sigma basis, in order to deal with issues that need resolution, to carry out joint specification and design activities or production engineering, and to solve emergent problems. Applying insight and creativity - organizations in a supply chain may bring fresh insights to bear on the issues at hand. This may reduce the potential impact of any self-imposed limitations in the final customers current installed base of thinking (a concept described in Chapters 19 and 20). The various supply chain participants may be able to introduce diversity into the processes of thought and conceptualization by which products or services are specified. This was the case for cycle manufacturers, who were able with the assistance of their component suppliers, to re-conceptualize the bicycle into such variants as the mountain bike or the lightweight racer. Differentiation - the features of the supply chain may permit the final customer more effectively to differentiate its product. Differentiation as a business strategy is analyzed in Chapter 24. Product or process differentiation may for instance be achieved on the basis of the quality of supplier outputs, particularly where those suppliers (such as the Cummins Diesel Engine company) are themselves excellent or world class in status.

Or the diversity of the supply chain described immediately above, may permit the final customer to market a variety of offerings superior in specification to anything else on the market. This is the case for example of world class suppliers of automotive and consumer electronics products; or of computer manufacturers who use Intel as a supplier of microprocessors. Quality - a co-operative supply partnership may be used to achieve an improving level of product or service quality. Benchmarks may be applied to participants, and those who cannot meet them will be dropped. Similarly, long-term supply contracts may provide the incentive and the resources required to meet the OEM or final customers needs for the rising input quality that is driven by the increasing expectations of global customers. Flexibility - the supply chain may be specified and assembled so that it is capable of speedy and flexible response to changing customer needs. The short life cycles of computer products or toys, for example, call for rapid changes to the specification of manufactured components. At the same time, the supply chain may be set up to operate on a justin- time or JIT basis. This has now become standard in the automotive sector. Cost - the achievement of cost reductions, cost-efficiency, and resource leverage has been a key driving force behind the development of the cooperative de-integrated value chain or value adding supply partnership model being analyzed in this chapter. This model of supply chain management is being used to achieve:increasing value generation per unit of supply; or decreasing costs; or both of the above. The supplier may be in a position to access the benefits of volume production and experience described in Chapter 23. Longer production runs will reduce costs, and eliminate the need for inventory (the supplier knows what it is going to sell and when this product is needed by the customer). If the customers demand is sufficient the supplier may set up a dedicated operation for that customer. This may be established to supply on a just-intime basis. Either way, the supplier may then be in a position further to reduce price. This is also a feature of the automotive industry. Risk - the final customer may be able to transfer some of its business risk backwards to its suppliers or forwards to its distributors. For instance, it may require some of its suppliers to get involved in the financing of new product or process development if they themselves are likely to benefit as a result. This is a feature of the automotive and aircraft industries. The final customer or OEM may make use of the specialist knowledge and experience of its suppliers in order to deal with issues with which it is unfamiliar. This lessens the risk of dealing with events (such as those associated with the technological changes described in Chapter 19) characterized by novelty, uncertainty, or unpredictability. The expertize of these suppliers will be regarded as a part of the total knowledge base of the VASP as a whole, available for transfer to companies throughout the deintegrated value chain. Advantages to the supplier - the establishment of a trust-based relationship between customer and supplier may mean that the supplier can look forward to some stability of demand, and can plan ahead. Where the relationship is based on the open book negotiation and agreement of supplier costs, margins and prices, the supplier will know how much finance may become available for re-investment in continuous improvement, innovation, and business development for instance as required by the customer. The customer wants

improvements or innovation from the supplier. The supplier now knows how much it can afford to invest in the foreseeable future in this process of improvement or innovation. Some Disadvantages of the De-integrated Value Chain or Value Adding Supply Partnership There appear to be two key disadvantages to the de-integrated value chain or value adding supply partnership concept. Firstly, the final customer will experience increasing dependence on, and exposure to a relatively small number of key suppliers. The effective operation of the supply chain depends on the efforts of these key suppliers, and on their continuing commitment and ability to meet the required (and probably increasing) standards required of them. Secondly, there may be a risk of losing control of proprietary knowledge, skills, capability, or competence (and their application potential) as these are disseminated to supply chain members. Where this knowledge or capability is a key source of value addition or competitive advantage it may be highly undesirable to give suppliers access to it. This may be tantamount to giving the secrets of your business away for nothing! The in-house monolithic value chain based supply process, described in an earlier section, may be necessary for the production of inputs that require such knowledge or competence. This is particularly the case in sectors (such as high-technology electronics or engineering, the creative or media industries, design, advertizing, consultancy, and accountancy) in which knowledge, technology, competence, human intelligence, ideas, and experience are the basis of the business.