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


Building the Advantaged Supply Network

Once the suppliers were in place and the network began to operate under new principles of management, positive effects quickly became evident. Interactions among managers became more strategic. People began looking at reducing costs in the total supply system. Engineers and managers from the company finally met with their counterparts from the suppliers now that they had a supply base of an appropriate size.

No matter what the number of suppliers, the benefit of trust in an advantaged supply network comes from better communication and smarter interaction among the participants. For example, when the automaker restructured its supply base, it committed to provide the five suppliers joining its network with a volume of business sufficient to make it worthwhile for the suppliers to participate. In turn, suppliers committed to reducing prices over time.

The buyer plays a central management role in making the network effective. It takes the lead in building the network. Further, since the buyer must know best-in-class practices, it must put in place mechanisms to understand, measure, and drive suppliers’ continuous improvement. When appropriate, the buyer must be able to convince suppliers to invest in new equipment, build new plants, hire new personnel, or move manufacturing to low-cost countries. The buyer also needs to be proactive in balancing the interests of all network participants so that the needs of different suppliers are addressed. As a network grows stronger, the buyer should take the initiative to help suppliers find the root causes of problems — and to help solve them using the buyer’s resources. Finally, even though a buyer may commit to buying a certain volume of product from its network suppliers, it also has to make sure suppliers don’t become complacent. It’s easy for a supplier expecting multiyear guaranteed volume to ignore a customer’s changing requirements.

Guidelines for Success
Our experience in helping a number of large manufacturers restructure their overgrown supply chains suggests several questions a company can ask to determine if it is on the path to building an advantaged supply network. (See “Eight Benchmarks in Building an Advantaged Supply Network,” below.)

Eight Benchmarks in Building an Advantaged Supply Network

  1. Do your suppliers have lower operating costs than yours, and do you get low prices from suppliers?
  2. Do your suppliers provide you with product or process innovations?
  3. Do your suppliers have products and processes of the best quality?
  4. Do your suppliers reduce your costs and risk in product launches?
  5. Are your suppliers financially healthy?
  6. Do you formulate unique plans for each supplier to help you build competitive advantage?
  7. Does your supplier base enable you to take advantage of strategic opportunities to manufacture globally?
  8. Do you make appropriate investments to reduce operating cost, improve quality, and drive innovation?

There are also nine critical management principles buyers should follow, which underlie the success of an advantaged supply network:

1. Have a clear supply network strategy, and ensure everyone supports it. Companies will almost reflexively revert to arm’s-length bidding schemes if all internal managers don’t agree to, and live by, the new strategy. That means not only managers in purchasing, engineering, and manufacturing, but also those in other business functions, such as sales and marketing. There must be consistency in applying new management principles. A supplier that receives the same key messages from all its customer’s managers is more likely to make the long-term investments the network needs to succeed.

2. Commit to building an innovative supply base. Building an advantaged supply network makes it possible to introduce innovations that are two to three years ahead of the competition. With cost models and an information database of best practices available, knowledgeable people at the buyer can determine the costs for a specific best practice in manufacturing a part or component. However, the buyer must also know well the industry standards and technologies for the parts they procure.

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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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