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


Building the Advantaged Supply Network

8. Expect managerial change in the buyer and suppliers. Different managerial capabilities are needed in an advantaged supply network. The most successful purchasing manager in an advantaged supply network is someone who has the interpersonal skills to be a strong relationship manager and the ability to drive down costs. Overall change will happen if senior management commitment exists, but it is also important to reconfigure the purchasing organization as part of a large change management program. Opportunities to make meaningful changes will differ by commodities and components. Focusing on one area at a time also can make the transition easier. Often, when managing specific programs is no longer the only focus, a smaller purchasing department is required to manage the supply base for a particular group of commodities. Building and maintaining world-class pricing tables and cost models also requires new managerial skills and a thorough understanding of how costs change depending on such issues as the type of technology, location, scale, and so on.

Integrated design management means changing the way engineering works with key suppliers. One should expect increased interaction between the engineering groups at the two organizations and less interaction between the supplier and the customer’s quality group. Buyers also need new approaches by which they can involve suppliers earlier in the design process, new skills for conducting joint design reviews, and a better sense of when to provide high-level functional specifications versus detailed designs.

9. Maintain control of the supply network. The network first serves the buyer of parts and materials. That means the buyer must be the most knowledgeable one in the network with regard to manufacturing economics in the industry, its customer relationships, and its future needs.

Making Step Changes
We have shown that creating an advantaged supply network involves far-reaching and difficult changes in organizational structures and systems, and a fundamental modification of the managerial mind-set. For many companies, such change may impose significant short-term cost to achieve savings several years later. Sometimes the challenge seems so daunting, companies would rather stick with market pricing no matter what the costs. We don’t expect companies to impulsively change, but we do think that if the process is carefully handled, the immediate risks and costs of moving to an advantaged supply network can be mitigated, and good results can be achieved in the near term.

We know executives’ concerns about meeting current financial commitments while they are trying to give up the transactional model. We frequently hear senior executives say, “If our company requires x percent savings this year to meet its financial requirements, I have to demand this money from my suppliers today, even if I know this method is not in the company’s best interest long-term. Once a supplier knows I intend to drop it, how can I even get the savings I used to beat out of it? I know this is the direction I want to take the company, but I cannot change the way purchasing and engineering will act overnight.”

These worries should not be taken lightly. But we have seen that taking the first steps to build a better supplier network can save substantial sums immediately. Purchasing managers who can demonstrate that a shift to an advantaged supply network will yield immediate and substantial cost savings (using numbers they can show to financial analysts and shareholders) have a better chance of justifying their strategy. Both sides also need to take a long view. Suppliers will be motivated to take on the challenge of being part of a network if they understand the magnitude and enduring economic advantages. Likewise, the buyer needs to believe that the long-term advantages are worth the near-term dislocation.

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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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