The supplier and alliance market domain.
Capability to control the value chain from synthetic fibers to finished garments. Now, the emphasis is upon virtual integration, which is meant a confederation of organizations combining their capabilities and competencies in a closely integrated network with shared goals and objectives. Figure 3.1 brings together the concept of vertical supply relationships and horizontal alliance partnerships as a closely coupled network within the Six Markets model. It could be questioned whether there is a need to make a distinction between alliances and suppliers. Increasingly leading firms seek to create alliance-type relationships with suppliers and to manage in a spirit of partnership. Alliances have often been seen as a means of importing a capability or a resource into the business, for example, the strategic alliance that existed for some years between Rover and Honda which provided Rover with much-needed new.
For many years companies have bought goods and services from other companies and thus it might seem that there is little new in the idea of outsourcing. However, in the past, the tendency was to subcontract rather than to outsource. The difference is more than semantic. In the conventional model, organizations would seek to subcontract those activities that could be more cheaply or efficiently performed by others. There was little strategic thinking underpinning such decisions. Economists have sought to explain this behavior by reference to ‘transaction costs’.1, 2 Under this model, companies will retain activities in-house if the external price plus the transaction costs are greater than the internal cost of performing this activity. Transaction costs reflect any inherent risk, the need for specific assets, and the costs of negotiating and managing the subcontract arrangement.
Porter4 has suggested that the basis for competitive advantage comes through focusing upon that part of the value chain where the firm has either a distinctive cost or value advantage. A cost advantage implies that for one reason or another the firm can perform that activity at less cost than others can. A value advantage means that the firm can perform the activity in a distinctly different way and thus create superior value for customers. Hence the argument has been made that organizations that do not have either a cost or a value advantage in specific parts of their value chain should outsource those activities to firms that do have such an advantage.
The conventional arms’-length approach to suppliers often meant that customers were putting themselves at a significant competitive disadvantage. Firstly, it has to be remembered that the customer pays for the supplier’s costs. In other words, the price we pay for goods and services inevitably is impacted by the upstream costs. Furthermore, many of these upstream costs are incurred because of downstream actions! For example, a manufacturer who does not share information on the usage of parts with the supplier of those parts and who makes frequent changes in requirements at short notice and still expects just-in-time deliveries are going to create costs for the supplier. These higher costs are generated through the additional inventories that the supplier needs to carry to buffer against unpredictable customer demands and also the cost of ‘schedule instability’ in the supplier’s operations.
Supply chain management
As the critical role of suppliers and alliance partners comes to be increasingly recognized, the need for formal processes to manage the supply chain emerges. These processes are in effect an extension of the internal linkages that create the smooth flow of information and materials within a single organization into the other parties in the supply chain. Supply chain management has been defined8 as: ‘the management of upstream and downstream relationships with suppliers, distributors, and customers to achieve greater customer value at less cost’. The key to the achievement of this more responsive and cost-effective marketing process is buyer-supplier integration. What this means in effect is that rather than the separate decisions on critical issues such as production schedules, inventory levels, and distribution plans that typify the uncoordinated chain, there is instead a single ‘end-to-end’ plan to manage the pipeline as a whole.
The externally integrated company. This organizational state involves the externalization of the alignment process and the integration of the supply base with the demands of the consumer in a transparent system of materials and information exchange. The company seeks deliberately to manage the interfaces between companies to generate a flexible and responsive system of a long-term collaboration. At this point, the company has completed the restructuring of its internal supply chain and has recognized the importance of external supply-chain management strategies and the need to synchronize the supply process. The company operates internal cross-functional management structures, which may be product-related, and typically develop supplier networking groups.