To succeed in the future global economy, companies will increasingly compete based on the strengths of their extended network of partners and suppliers. However, companies are struggling to get a handle on how they will manage the necessary level of collaboration among these multiple enterprises. A quick exercise can help organizations develop a basic understanding of their current and emerging needs, providing them a baseline of where they sit on the maturity curve for multi-enterprise collaboration.
The following questions illustrate if your company is experiencing the dynamics that drive the need for a strategic approach to managing external supply networks. If your company answers "yes" to more than half of the questions, consider investing time and resources to understand your current and emerging external supply network needs.
Are we struggling in any way to adapt our revenue models to the changing economic needs of the marketplace (e.g., power by the hour, end of cost plus, etc)?
Dynamic changes in how customers prefer to do business are dramatically impacting manufacturers' revenue models. End-customers increasingly desire contracts (or at least structured payments) based on usage, not asset delivery. Commercial airlines, for example, are shifting toward purchasing flight hours, not aircraft engines. Railroads need "freight-miles pulled," not locomotives.
Whether it's factory equipment or software-as-a-service, customers want contracts to include uptime, performance and maximum utilization of the assets in service. The drive is toward variable, service-based expense, not capital investment. These changes drastically influence how manufacturers are compensated for their goods and services. In the new model, companies can no longer low-ball the original sale and make it up selling high-margin aftermarket parts, upgrades and service. These value streams will be included in the competitive source selection process for the original purchase. Ultimately, many manufacturers will be forced to alter their supply chains to deliver against both the original production of goods as well as full product lifecycle support.
Are our customers demanding increased flexibility (e.g., pricing, terms, lead-times, configurations, etc.) despite rising platform complexity? Are we now responsible for work previously done by our customers?
Customers are demanding unprecedented flexibility in how they purchase major platforms. One aircraft manufacturer, in fact, is offering options to change new aircraft configuration up to six months before delivery, an extraordinary level of 11th-hour customization. The "increase" in demand volatility may be laughable compared with retail, consumer or electronics industries, but in aerospace and defense (A&D), where demand is often locked in for 10 years or more, companies must be able to respond quickly and effectively to changes in the demand signal.
Vendor-managed inventory and outsourcing of everything from quality control testing to warehousing to customer service illustrate the increasing demands customers are placing on their suppliers. While this "flow-down" is a good business opportunity for suppliers and an effective cost reduction strategy for customers, a high degree of risk is involved.
For example, will a historically solid component manufacturer have the processes, technology and skills to become a systems integrator for its key customers? Or, how does the original equipment manufacturer (OEM) orchestrate a distributed network of best-in-breed providers of parts, services and logistics to delivery against customer expectations?
Are we sourcing from, selling into, and servicing our platforms in global markets? Are we managing inventory and/or working with another party (e.g., a 3PL) for global delivery?
If companies are not being driven to pursue low-cost countries of supply, then they are going overseas to pursue revenue opportunities. A company that wants to sell airplanes in Asia must have a strong economic presence in the region. If a business wants to grow successfully in Europe, it must consider sourcing, building and delivering its products in Europe. The reality is that leaned-out, global supply networks must be carefully managed to overcome inherent challenges of geographic distance and transnational borders.
Government regulations related to international trade and the flow of information add additional risk to doing business overseas. Export Control regulations cover not just the physical movement of goods, but also sharing sensitive data with colleagues on a global design team. The cost of inadvertent non-compliance is very high: The average fine related to International Traffic in Arms Regulations (ITAR) violations in 2005 was $16 million.
Do our suppliers play a key role in platform design?
Long-term, strategic relationships with suppliers result in numerous business benefits. Many companies rely on suppliers to design and deliver key components, but in the process OEMs can lose control of their core intellectual property. Companies that decide to competitively source sub-components every few years often find they no longer have the latest technical documentation in-house. Keeping control of core intellectual property such as technical designs while working with a global, multi-enterprise team will be an increasingly important issue for companies in the future economy.
Do we manufacture less than 50 percent of the parts and assemblies that go into our platforms?
For the first time in Boeing's history, the majority of a new airplane design will be fabricated by global partners. The 787 will be delivered as 11 major subassemblies, which Boeing will assemble and test at its facility in Everett, Wash. Boeing now operates as the final assembler of the airplane, coordinating the 135 structures and systems from partner locations spread around the globe from countries such as China, Japan and Poland. Boeing has to synchronize demand/supply and logistics information across multiple supply chain tiers so key components arrive at Boeing's Washington facility at just the right time for final assembly over a three-to-four-day period.
Many companies have, or are implementing, manufacturing strategies that rely on unprecedented outsourcing to strategic partners and suppliers. Companies must adopt the processes, technology and management skills needed to maintain visibility and control over these fragmented processes in order to ensure the final outcome meets customer expectations.
Could we make use of an early warning system to reduce supply risk and identify supplier issues (e.g., low inventory at a key point in the supply chain) before it becomes an issue?
To effectively compete in the global economy, manufacturers must leverage the combined strengths of their partners and suppliers. Going it alone is rarely a viable option. But, supply chain executives must face the reality that not only has supply chain risk increased, it has moved out of sight, off-shore and into the depths of their multi-tier supply base. And, non-performance anywhere in the chain can still strike at the heart of a company's operations, reputation and financial success. OEMs must gain commitment to common processes and effective flow of information so that potential risk can be identified before it impacts end-customer delivery.
Have we reached the limits that our internal systems (e.g., enterprise resource planning (ERP), materials resource planning (MRP)) can support in facilitating external collaboration across business processes (e.g., design, sourcing, operations, service parts management)?
Enterprise software is designed and deployed to manage information, processes and resources within the organization that owns the system. Therefore, these systems are rarely appropriate to manage processes that flow among the external partners of a particular value chain. A new breed of multi-enterprise collaborative solutions is evolving that allow data, information and processes to be commonly defined, implemented and managed across organizational boundaries. They leverage the investments in enterprise systems to gather information from different sources and create a single, common view of supply chain performance. The result: Each participating company receives the situational awareness to make the best business decisions possible.
Are we still looking for a C-level Executive to champion the business value that external supply relationships can bring?
According to a survey by the "European Leaders Network," a remarkable 90 percent of respondents said their procurement departments were now seen as a key function that enjoyed sponsorship from the company's board or senior management. This compares with fewer than one in five who said it was seen in this way in 2000.
Two thirds of respondents also said they now reported to their company's board, Chief Executive Officer or other top-level manager, compared with 41 percent in 2000. This very marked development is confirmed by another finding: The proportion of companies where procurement is regarded as an administrative function has decreased from 36 percent to a mere 1 percent.
As more value is outsourced to partners and suppliers, executives with responsibility for the performance of the extended enterprise will play an increasing strategic and important role in their organizations' management.
Would we classify our need to secure information both from an intellectual property (IP) and regulatory perspective as high?
The need to protect core intellectual property has never been greater. With aggressive outsourcing strategies, intellectual property related to core designs is often an OEM's primary competitive differentiation. Globalization is another contributing factor to secure IP concerns; developing countries are rapidly growing strong manufacturing capabilities, but they are also known as providing poor protection of intellectual property rights. This puts the onus on those doing business in the region to protect their IP.
Do we need to put programs in place to understand the total cost of ownership of each component we make or source in our extended supply network?
Economic growth has generated tight supply markets for many natural resources. Companies are proactively taking steps to secure key raw materials for both themselves and their suppliers, such as Boeing and Airbus securing major contracts for titanium in the last year. The next question is how do large manufacturers ensure that they are benefiting from these preferred contracts, when the purchase and consumption is happening multiple tiers down the supply chain? For example, how can Boeing and Airbus be assured that a supplier's titanium purchase is for a Boeing or Airbus project, and not for another competitor, with the supplier profiting?
As with any major change in the business landscape, the ability of companies to effectively manage their growing external networks of partners and suppliers will create winner and losers. Those companies that have the vision to understand the impact of these trends, as well as the flexibility and discipline to adapt their business faster than the competition, will emerge as leaders in their markets over the next five years.
About the Author: Peter Scott is vice president of Corporate Development for Exostar, LLC. He can be reached at [email protected].