Supply Chain Management: Context, Collaboration and Competition

Your supply chain: contextcompetitioncollabora

tion

Richard Farr

Turning “stuff” into “things”Your supply chain, in contextSupply Chain Positioning: “make or buy”?CompetitionCollaboration, andCooperation with competition

Questions at any time!

Contents

Turning “Stuff” into “Things”

“Everyone buys components,but sells systems.”

– Kamm, 1996

Even the simplest product or service may involve a great deal of complexity that you never see.

Adam Smith, on the manufacture of pins…“… a workman not educated to this business …

nor acquainted with the use of the machinery employed in it … could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire; another straights it; a third cuts it; a fourth points it; a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business; to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations…”

– Smith, 1776

“…they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day.”

– Smith, 1776Build a supply chain where you let people that you trust do what they’re good at.“Stick to your knitting”

Adam Smith, on the manufacture of pins…

Coping with Complexity

Consider a ‘focal company’

Supply Chain PositioningWhat parts of the the value addition process is it most appropriate for our company to...

Have control over (“value positioning”)Perform ourselves (“make vs buy”)

Let others add value, based on their expertise.

Your supply chain, in context…“Vertical Integration”

“Tier 1”“Tier 2”“Tier 3”

“Vertical Integration”Raw material extraction

Refining e.g. steel

Assembly

Distribution

Dealers and aftermarket

Component manufacture

“Vertical Integration”

Currenttransformation

Rawmaterials

Finishedgoods

Forwardintegration

Backwardintegration

Ownership of...Car assembly plantsDesign officesCoal minesIron ore minesTimber forestsRubber plantationsA railway network

Freighters

SawmillsBlast furnacesA glassworks... and more

Ford Motor Companyin the 1920’s

QuestionsWhy did Henry Ford want to own everything?What are the advantages and disadvantages?Is your business vertically integrated?Why don’t we see the same “fully integrated” strategy nowadays?

Ford had a supply network that wasn’t growing fast enough to keep pace.Raw materials were in short supply after the First World War.Inventory costs were too high to permit the holding of safety stocks for every material.Henry Ford’s strategy of vertical integration was very successful... although it isn’t fashionable nowadays:

Anti-competitive.Not concentrating on core competencies.

Supply Chain Positioning:Henry Ford Chose Vertical Integration

Understanding CompetitionPorter’s Five Forces

Porter identified the relevant variables and the questions that one must answer in order to develop a strategy tailored to a particular company’s situation. The five forces...

– Porter, 2008

Porter’s Five ForcesA supplier (for example, somebody upstream in your supply chain) has power if...

Few good alternative sources of supply exist.They own a patent on something that you need.Suppliers have solidarity (e.g. OPEC) – strongest when they are few in number, and highly concentrated.The cost of switching supplier is high.

Porter’s Five ForcesA customer (for example, somebody downstream in your supply chain) has power if...

The product is a standard, largely undifferentiated type.The customer’s business represents a major proportion of the supplier’s total revenue.The buyer has access to lots of information about alternatives (e.g. Internet access).There is a substitute product that might meet the customer’s needs.

Porter’s Five ForcesA substitute product or service is more of a threat when...

Consumer’s switching costs are low.The relative price of the substitute is low.The substitute is being marketed aggressively.

Porter’s Five ForcesNew entrants are unlikely when there are barriers to market entry, such as...

Large capital requirements, or the need to achieve economies of scale quickly. Strong customer loyalty, or brand preferences.Lack of adequate distribution channels.Lack of access to raw materials.

Porter’s Five ForcesInternal competition is highest when...

There are a lot of competing companies.Growth slows, or demand for the industry’s products declines.Fixed costs are high.Barriers to leaving the industry are high.

Summary ofPorter’s Five Forces

A business operates within a complex network, competing for customers, but also competing for raw materials.Threats to the industry come in the form of new entrants, and substitutes.As competition between businesses intensifies, it tends to drive down profits, until a balance is reached at a point where additional new entrants are discouraged by the low profit margins.

ActivityThink about your own business unit, or your own role. Consider each of the Five Forces:

The bargaining power of customersThe bargaining power of suppliersThe threat of new entrantsThe threat of substitutesInternal rivalry within the industry

Identify which forces are weak, or string, and whyCan anything be done, where you are not in a good position?

Who’s competing how?If we must compete in the marketplace, there are four main ways to differentiate ourselves…

QualityCostLead timeFlexibility... maybe some others?

How do these well-known companies compete?

Next ‘9pm’ Campaign

http://www.youtube.com/watch?v=4rtfM2KnPWI

Next ‘9pm’ CampaignWhat do you think…

of how the supply chain is portrayed?of their chosen basis for competition?

The Future of Competition?There is a widely-held belief that competition will

increasingly occur not between companies, but between supply chains.What do you think?

Supply Chain ‘A’

Supply Chain ‘B’

CompetitionConceptual Supply Chain

Competition doesn’t just meancompeting for customers

Conceptual Supply Networkfor Orange Juice

Where doescompetition exist?

Porter’s Five Forces: force number six?Coopetition

Cooperation and competition.In addition to businesses competing for suppliers and customers, there are providers of complementary products and services.Relationships in business don’t have to be win-lose: sometimes both parties can win.Coopetition occurs when companies collaborate in areas of their business where they do not believe they have competitive advantage and where they believe they can share common costs.Closely related to Game Theory.

CoopetitionThe ‘Value Net’

– Brandenburger and Nalebuff (1996)

Definitions in CoopetitionA business is your complementor if customers value your product more when they have a product from the other business. A business is your competitor of customers value your product less when they have a product from the other business.Simple examples:

Computer hardware and software; if you update one, you will find you have an incentive to update the other.Radios would be pointless without radio stations... and vice-versa.

War and Peace...

Two airlines are rivals: they compete for the attention of customers, and they compete for ‘slots’ at busy airports.When the same two airlines both order Boeing’s 787 ‘Dreamliner’ (or any other new aeroplane) they are complementors because they both pay towards Boeing’s development costs.

Main principle

Don’t just fight for a bigger slice of the pie.Work in partnership to make the pie bigger.Then fight for a bigger slice.

Effective CoopetitionHave a cooperative attitude. Be careful who you cooperate with, and the information you provide. Treat your partners like your customers. Get creative: be prepared to work in new ways. Be transparent: trust is a ‘two-way street’.Eat as much hay as you can!

Supply Chain CoopetitionCo-warehousing – make use of facilities that you share with another business.Load consolidation – transport your goods together with those of another business:

Reduce costs for partial loads.Increase power in negotiations.

Standardisation – make use of common components that you design in partnership with other businesses.Shared Research & Development costs.

Shared development cost

Having common components in their ‘city cars’ allowed Toyota, Peugeot and Citroën to drive supply chain costs down, and the lower retail price expands their market......but they still compete for their share of that market.

Can’t we all get along?

Apple and Samsung: often found locked in courtroom battles over patents…Samsung also make components for the iPhone: in some cases, more than a quarter of component costs went to Samsung.How does that work?

ActivityDraw a conceptual supply network that shows your own business unit as the ‘focal company’.Identify where competition exists – competition for resources as well as for money/customers.See if you can identify any opportunities for coopetition.How might you turn competitors into complementors?

Thank you!

More from Richard Farr on Capacify,the Sustainable Supply Chain blog:

http://capacify.wordpress.com

On Twitter: @Capacified

ReferencesBrandenburger, A.M. & Nalebuff, B.J. (1996)Co-opetition. London: Profile BooksKamm, L.J. (1996) Understanding Electromechanical Engineering: an Introduction to Mechatronics, New York: IEEE PressPorter, M.E. (1998) Competitive Advantage: Creating and Sustaining Superior Performance. New York: Simon & SchusterPorter, M.E. (2008) The Five Competitive Forces that Shape Strategy, Harvard Business Review, January 2008, p.86–104Smith, A. (1776) ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, London: W. Strahan and T. Cadell