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 / Third Quarter 1996 / Issue 4(originally published by Booz & Company)


Systems, Modules or Components? New Light on Purchasing

However, this bigger mandate could interfere with value-creation opportunities from other suppliers -- such as a brake system supplier that can integrate the functions of the foundation brakes with the actuation hardware and the increasing electronic content of anti-lock brakes.

As Exhibit IV illustrates, a brakes system supplier can create significant value by designing the system as an integrated whole. As this example shows, a major challenge is choosing between boundaries defined by "functional system specifications," like brakes, and those defined by "physical boundaries," which describe modules delivered to the customer as a single subassembly, like the rear axle.


Both options provide broader boundaries for suppliers, opening up more opportunities for value creation. However, the overlap between these boundaries creates confusion, and often "systems" and "modules" choices are mutually exclusive.

Conclusion: How to Move Forward

To avoid these pitfalls and move toward optimizing a company's extended enterprise of suppliers, our research suggests following a structured five-step methodology.

This robust, iterative process starts with:

1) The economic decision as to how to create the most value.

2) From there it defines supplier capability requirements.

3) It also identifies the appropriate suppliers that can manage the given scope.

4) To deliver the results, the methodology deals with the specific tactical decisions about how to structure the best working relationship with the suppliers.

5) To insure continued and sustained results, it provides a performance-monitoring system to drive improvement. (See Exhibit V.)


The methodology also has many feedback loops that force a revisiting of the scope boundaries question, based upon the current supply capabilities and strategic imperatives. A paper entitled "Suppliers in the Innovation Stream" (to be published later this year as a Booz-Allen & Hamilton Viewpoint) describes the methodology in more detail.

Scope boundary definition is complex, because of the difficulty in quantifying value creation and in managing trade-offs. Furthermore, the "optimal" boundaries are constantly shifting, as new functionality is added to the end product and new technologies provide innovative solutions.

Nonetheless, understanding and optimizing the boundaries are critical first steps in capturing the full potential of the extended enterprise of suppliers.

Reprint No. 96302

Timothy M. Laseter, [email protected]
Tim Laseter is a vice president with Booz Allen Hamilton in McLean, Va. He has 14 years of experience building organizational capabilities in sourcing, supply chain management, and e-business strategy in a variety of industries.

C.V. Ramachandran, [email protected]
C.V. Ramachandran is vice president in the operations practice at Booz-Allen & Hamilton and leads the firm's thinking on the impact of electronic commerce on buyer-supplier relationships.

Keith H. Voigt,

Keith H. Voigt is a senior associate in Booz-Allen's operations management group and has recently transferred from Cleveland to Lima, Peru. Mr. Voigt supports the firm's innovation and strategic sourcing teams. He holds an undergraduate degree in electrical engineering, summa cum laude, from Michigan State University; a certificate in nuclear engineering from the U.S. Navy Nuclear Power School, and an M.B.A. with distinction from the University of Michigan.

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