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Supply Chain Goobledygook

The Future of Supply Chain

(Published: 1 July 2011,http://www.businessworld.in/businessworld/businessworld/content/Future-Supply-Chain.html)

Supply chain operations’ has been an evolving science throughout the last century and the evolution continues.  Going forward, the supply chains of future will exhibit some key transformations.  Among others, these will be more transparent, geographically distributed but digitally connected based on equitable-sharing of risks/rewards, innovative and responsible.  The focus is gradually shifting  – from supplier secrecy to supplier transparency (e.g. HP makes public the list of all its key suppliers, from squeezing greater discounts from suppliers towards sharing profits with suppliers (e.g. Nicholas Piramal India and Eli Lilly’s risk reward sharing alliance for drug development) and promoting  innovation throughout the supply chains (For e.g. Nestle’s open innovation model)

Accelerated globalisation has made supply chains geographically distributed. A laptop you are using could be carrying a processor manufactured in Malaysia, display LCD manufactured in South Korea, Battery made in Japan and rest assembled in China running an American software suite. Even this level of distribution is also only a simplification given there are numerous lower level supply chains involved at each stage.

While the geographical distribution in itself does brings greater benefits but there is also a corresponding loss of information due to this distribution. This makes the supply chains opaque to both end manufacturers and customers. Opacity increases operational difficulties. According to Ford motors “Knowing what you have and where it is within the supply chain at any given time should be straightforward… But consider an enormous manufacturer, such as Ford Motor Company, which must manage tens of thousands of items, and suddenly the seemingly simple task of knowing what you have-and where it is-becomes staggeringly complex”.

Further supply chain opacity reduces accountability and allows legal and ethical violations within the supply chain. These violations can lead to financial losses. For e.g. the recall of cadmium contaminated children’s jewelry in 2010 caused a revenue loss of around $ 1.6 million to retailers in US which included Wal-Mart (based on LA Times report).  The use of cadmium in jewelry was tracked to the jewelry supplier’s supplier. The supplier’s suppliers were supplying the alloys- zinc-cadmium alloys containing predominantly cadmium- used in these jewelries. While zinc is not toxic, cadmium is considered toxic . For a business like Wal-Mart which depends on a large number of suppliers-100,000 in case of Wal-Mart as per them- keeping an eye on your supplier’s supplier is a long shot.

In 2010, McDonald’s was forced to recall 12 million ‘Shrek’ themed drinking glasses due to cadmium contamination in the glasses. While the glasses came from the firm ARC international which manufactured the glasses, the Cadmium was traced to the paint enamel used in the glasses. The paint used in glasses further came from the supply chain of ARC international . The supplier’s supplier of enamel probably had no visibility that the enamel is finally going to be used in jewelry that will be sold to kids. On the other hand the final retailers had no visibility of the environmental standards of enamel supplier.

Therefore greater transparency within supply chains will allow deeper visibility of supply chains to end manufacturer. This would equip them with information required to optimise supply chain and de-risk supply chains further.

Finally it is the consumers also who want to know more about the origins of the products they use. The outbreak of suicides at the Foxconn facility which manufactures products for Apple caught sudden headlines. It has been compared to the Nike moment in 1990s when the plight of shoe workers in Asian factories of Nike led to consumer displeasure for Nike products as Businessweek reports. Transparency will lead to greater accountability which will also minimise such branding risks. Responsibility within supply chains will also be improved as they become more transparent to customers.

The focus is also shifting from squeezing out lower costs from suppliers towards sharing risks and rewards with suppliers. According to a PWC survey 40 per cent of the CEOs globally expect most of their innovations to be co-developed with their suppliers. Co-development i.e. a collaborative effort between the supplier and end manufacturer inherently shares the risk and rewards of a deal. In fact the recent souring of a supply deal between telecom operator Telecom New Zealand and Brightstar over pricing issue has led to a renegotiated deal. The renegotiated deal brings risk and reward sharing into the contract as stuff reports. Co-development model also allows the end manufacturer to promote innovation throughout the supply chain. In fact some of the most cutting edge innovative product lines are being taken up by companies through co-development process with suppliers like Tesla motors and Toyota motors are cooperating on electric vehicles as msnbc reports. Ford co-developed with WhereNet a wireless vehicle inventory management system that will optimise Ford’s supply chain operations and save Ford $200,000 – $500,000 per facility as reported here.

Globally the companies have begun to realise these trends and are moving towards creating such future ready supply chains. There are both early movers and late movers. Movers like Nokia which discloses its supplier assessments and targets or Apple which recently came out with its supplier responsibility report have also figured in the top slots of Gartner’s top 25 global supply chain ranking.  It is important in this scenario that more and more companies figure out how transformations such as these can add more value going forward.

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About yash saxena

In this nothing lies everything

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