Supply chain anorexia

Businesses are fast embracing new outsourcing paradigms which emphasize that every activity in the value chain can and must be externalized. These new paradigms, such as capability sourcing, recommend that the firm focus on a set of core capabilities alone that drive competitive advantage in its industry, and execute remainder activities through contractual arrangements and partnerships that represent best of breed solutions. However, in their relentless drive to reduce costs and improve efficiency, some companies are discovering a fine line between lean supply chains and anorexic ones. The perils of such interdependence are evident in the following examples drawn from a series of logistics surveys in the Economist which discuss the complex, interdependent nature of modern supply chains:

If one link of a company's supply chain snaps, the consequences can be grave. Ericsson and Nokia found this out when they both relied on the same supplier for a special chip in their mobile phones. After the chipmaker's factory was hit by lightning, Nokia swiftly locked up all the alternative supplies whereas Ericsson suffered a severe parts shortage and later quit making handsets on its own.

A company's best protection from its own supply chain is to expect failure, not to hide from it. Toyota last year narrowly escaped a parts shortage when an American supplier went bankrupt. The carmaker has now introduced an early-warning system in Europe to try to detect any looming problems with suppliers before they bring production lines to a halt.

Sometimes it can be worth paying more to make some things closer to the big consumer markets of America and Europe. Zara, a fast-fashion chain that produces clothes in small batches mostly around its Spanish base, can take just five weeks to get a garment into one of its stores. Stores sourcing from Asia can expect lead times of six months or so, by which time fashions can change. Not surprisingly, Zara ends up discounting fewer of its garments in clearance sales.

I don't think the above examples emphasize a vertically integrated business model as much as they do smart outsourcing. This, in turn, is reflected in the ability of the user or client firm to:

• Identify and proactively respond to weak links in the supply chain,
• Diversify the risk of interdependence through multiple preferred supplier relationships,
• Recognize that each outsourcing arrangement is different so that the coordination and control structures inherent to the arrangement reflect the unique nature of the outsourced value chain function, and
• Encourage information sharing between firms to enhance transparency in the value chain and better manage contingencies

Therefore, as supply chains get lean and leaner, the management of ensuing complexity may well dictate the rule of competition and engagement in industries. More important, the above capabilities may well define the limits to outsourcing in the firm, and on a broader level, to globalization as well.