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 / Fall 2004 / Issue 36(originally published by Booz & Company)


Building the Advantaged Supply Network

Of course, an advantaged supply network doesn’t develop overnight. Generally, companies have to restructure their existing supply base, which usually results in fewer but more capable supplier partners. And it can take time for some of the benefits of the network to show, even after a restructuring is complete. The results, however, are impressive. We have seen companies achieve upward of 20 percent net savings in the first two to three years after restructuring to create an advantaged supply network.

The competitive barriers the network develops are also formidable. Toyota created an advantaged supply network that has given it a significant edge in per-vehicle cost of production over U.S. rivals, half of which comes from reduced material, labor, and warranty costs. Because of its approach, Toyota has detailed knowledge of the costs of its suppliers’ technology and manufacturing processes, and a significantly more flexible global manufacturing system. Just as important, Toyota’s excellent record of new product launches and high product quality have given it the ability to charge higher prices for its cars, an advantage that will take a long time for its competitors in the mass-market automotive sectors to match. Interestingly, Toyota does not always get the lowest piece part price.

Often, when companies talk about extended enterprise networks, whether in the supplier realm or in other collaborations, building trust among partners is the central issue. But the advantaged supply network is not a management model built on trust for trust’s sake. This model pushes business partners both to collaborate with each other and to compete with others: to be the best at what they do, to accept that being the best is a moving target, and to work hard at managing trade-offs and making compromises.

The highest-functioning advantaged supply networks don’t just help create leaner businesses; they make stronger competitors that deliver better products. Several years ago, Frito-Lay, the snack food division of Pepsi and the largest supplier of potato chips in the world, canvassed its potato suppliers to identify those farmers willing to concentrate on cultivating a very limited number of potato varieties used to produce the most appealing potato chip for the consumer. Frito-Lay then extended long-term contracts to these farmers, which made it easier for the farmers to get financing and for Frito-Lay to achieve more efficient, profitable economies of scale in other areas of the value chain. Frito-Lay’s preferred potato supplier network has helped the company achieve a 59 percent market share in the salty snacks business, and some of the highest operating margins in the industry.

In aerospace, Boeing has recently started sharing its technology plans with its top suppliers in joint forums so that the suppliers can focus their R&D in technology areas favored by Boeing, their biggest customer. The aircraft giant also is adopting new ways to engage key suppliers earlier in the development process by first narrowing the field quickly to, say, two suppliers. Then, Boeing works with each supplier separately to protect the supplier’s proprietary data and get their best ideas on the table while the contract is still open. This also reduces the risk for everyone of missing cost and schedule targets. With this initiative, Boeing has made the shift from price-only competition to competition involving technology, total cost, and ultimately better performance for the end customer.

No matter what the product or industry, the logic of the advantaged supply network is premised on a powerful idea: With a more capable, efficient, and stable supply base, companies can not only lower costs but create better products, and achieve the right cost structure to grow market share and profits.

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  1. Ranjay Gulati, Sarah Huffman, and Gary Neilson, “The Barista Principle — Starbucks and the Rise of Relational Capital, s+b, Third Quarter 2002; Click here.
  2. Peter Heckmann, Dermot Shorten, and Harriet Engel, “Capturing the Value of Supply Chain Management,” s+b enews, 06/26/03; Click here.
  3. Tim Laseter, Kamalini Ramdas, and Dorian Swerdlow, “The Supply Side of Design and Development,” s+b, Summer 2003; Click here.
  4. Tim Laseter and Keith Oliver, “When Will Supply Chain Management Grow Up?” s+b, Fall 2003; Click here.
  5. Keith Oliver, Anne Chung, and Nick Samanich, “Beyond Utopia: The Realist’s Guide to Internet-Enabled Supply Chain Management,” s+b, Second Quarter 2001; Click here.
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