Are supply ‘chains’ still relevant?

It's clear that the time has come to move beyond a simple "chain" concept

March 1, 2016
by Terry Volpel


When I started in supply management one of my first duties was to contact “my suppliers” and introduce myself. My predecessor had a working relationship with the supplier sales representatives and the communication stream was always linear, simply back and forth. I came to understand this linkage as a single “link” in a supply chain. My customers relied on my sales people, I relied on my supplier’s staff, and their buyers relied on the tier 2 suppliers, and so on. Regardless of how many links there were in the chain from raw material to final user/consumer, the supply “chain” was an accurate representation of how it worked. This came to be known as a Single Point of Contact (SPOC) model.

About 25-30 years ago I started noticing a shift. The changes (to me) started with the first time I heard “JIT”. The role of expediting purchases shifted from buyers (like me) to suppliers. The lines of communication opened up so that I was not only talking to my supplier reps, but also liaising with their production departments, logistics people, quality departments and the “supply chain” became more and more like a pyramid with me at the point.

I also noticed that in certain industries (particularly automotive and electronics) that the “manufacturers” were no longer manufacturing their own components. The big automakers had spun off their internal component manufacturing, creating companies like Delphi and Magna who started out with only one or two major customers. In the electronics field, companies like Flextronics and Foxconn did the circuit board assemblies. The branded manufacturer then (maybe) assembled the components into the final products, like the Ford F150 or Sony Walkman (remember those?). Often they farmed that function out as well so today often the only business the “branded manufacturer” does is marketing and keeping stockholders happy.

This was not a smooth transition and the learning curves were often costly and impacted share prices and reputations. Two classic examples of this happened in aerospace when Boeing and Airbus were years late to market with the 787 and A380. Suppliers had failed to deliver on time and at budget and there were quality and fitment issues which ended up delaying the time to market. Both Boeing and Airbus ended up taking back control of some suppliers beyond their tier 1 levels, often bailing them out financially and micromanaging the component sub-projects. Billions of dollars over budget and months or years late was the result.

Then we noticed that simultaneous “supply pyramids” started overlapping and touching. Often multiple tier 1 suppliers were using the same tier 2 suppliers and often they were using similar tier 3 suppliers, and so on. Competitors in a certain tier often joined forces to gain a large client due to the massive investment it took to tool up a particular component. It became vitally important that we got our suppliers talking with each other and the pyramid became more and more like a chain link fence with lateral, vertical and diagonal touch points.

Complicating this was the expansion of the design process to third parties. In electronics (for example) a contract manufacturer (CM) like Foxconn would go to a customer and pitch their in-house design expertise in order to save money in manufacturing the component. I have had these conversations with CMs and they did make a lot of sense at the time. The risk was that if the customer downsized or eliminated their internal engineering departments, their QA/QC departments lost valuable resources and the ability to quickly identify potential problems while the issue was minor and before millions of improper/defective components got assembled into finished goods. We rely more and more on our suppliers to make sure what they are supplying to us is functional and free of defects.

Today we have suppliers who supply most if not all of the branded manufacturers. Examples of failures include automotive sector suppliers like Japan’s Takata (airbags) and Ford’s issues with Firestone tires on SUVs earlier this century.

As a supply management professional our task now includes managing risks concerning our supply base. It is no longer enough to visualize a chain from raw material to processor to wholesaler to distributor to retailer to consumer. We need to know things like where the raw material came from (blood diamonds/ conflict minerals), who produced it (child labour/slave labour) and how it was produced (carbon footprint/RoHS/Reach). We also need to know how it is transported and the inventory costs of goods in transit.

To meet these goals we need to start thinking of supply management as more than a simple “chain”. One concept I like is a “supply management system” model. Think of the SMS as chain mail armor that one dons to go into battle (figuratively) with. We don the armor of good supply management and each link of the armor represents a supplier (every tier is represented) and an opportunity for failure. Our jobs now need to include examining the armor for any weak points or holes that failure can use to pop up. We occasionally have to replace links as they fail and if something happens to a particular link we may need to reinforce that area for a while. We need to know when a tier 3 supplier is having issues with financing or with another tier 3 supplier or a logistics provider or someone has poached a key employee from someone else and now the two companies are not communicating effectively on our project.

To accomplish this paradigm shift I submit we need to retire the concept of “supply chain.” It had a long and illustrious career in our lexicon but now it is time to move to a more modern vision of supply management. I recently heard that Gartner postulates that the model should be a “federation” of suppliers. Whatever we decide to adopt as lexicon, it is clear that the time has come to move beyond a simple chain concept.