Key effective supply chains to delight customers and create value for stakeholders

Companies must focus on maximizing value in their supply chain, a series of interrelated activities to move a product or service from its point of origin to the customer. They are the links involved in delivering a product or service in the most productive way for the client and the company. It is vital to operations management and crucial to deliver consistent, high-quality products on time to customers and create value for the business.

Each link offers customer value

The chain’s activities range from access to raw materials or subcomponents, to delivery of the final product or service to the customer. Walmart is a wholesaler and retailer in a large supply chain. The more parties involved, the greater the likelihood of problems:

raw materials' manufacturers > components' manufacturers >

manufacturing and assembly plant > wholesalers > retailers 

Wherever you sit in the chain, it will depend on someone delivering your part or product to you at a certain time.
PrimeTime Co Ltd, (Prime), a component manufacturer in an auto industry supply chain, sat in the middle. The management agreed a contract with the assembly plant,
AutoCo, to produce and deliver 100 units daily. Prime’s contract included a failed delivery penalty clause. The units had to be delivered by 4:00 pm every day or Prime would pay AutoCo the cost of downtime waiting for Prime’s shipping downtime calculated based on a particular formula that includes AutoCo’s overhead costs.

Practical application

Prime provided AutoCo with two names to call anytime about any production and quality problems, including increased production and delivery rescheduling. By arrangement, AutoCo had its own quality specialist on site at Prime when Prime manufactured the part for AutoCo. That specialist had final approval on the acceptable quality of that item. This worked well due to the excellent transparent relationship between the two companies.

AutoCo gave Prime a tentative delivery schedule each month. At 6:00 am every day, Prime accessed AutoCo’s ordering system to see the actual requirements for the day. The system required precision and Prime monitored it every hour. Prime saw this as a huge challenge, so management provided the necessary resources and careful attention to people and the process. The system has worked well for several years with 99% compliance.

Answer three questions from the beginning: What to outsource, to whom and when? Next, make sure the chain has at least these four characteristics:

Necessary partner traits

1. Highly visible links understood by each participant: The system is only as good as the weakest link. You may be the wholesaler, but you need to be comfortable with each segment and understand the likely risks of failure on the different links. In some companies, this risk is more critical than in others. Delays can be too costly for clients to reap significant benefits from outsourcing.
2. Collaboration to deliver acceptable results in all: Collaborating is not easy. A fundamental issue is the alignment of incentives. Prime had a strong incentive to deliver on time due to AutoCo’s high cost of downtime. The ideal model for successful collaboration is profit sharing with partners. Collaboration becomes even more complicated when there are different countries, cultures, time zones, and other differences. However, cooperation is essential.
3. Focus on customer demand rather than production demand through the chain: The lead company (Walmart or AutoCo) should keep partners abreast of customer needs and encourage them to add value to the finished product. This awareness can improve the competitiveness of the entire chain and bring additional benefits to each participant.
4. Transparent and useful communication throughout the chain: Communication keeps members abreast of developments affecting their contributions to the chain. Additionally, meaningful communication enables members to respond quickly to opportunities and challenges.

Disruption risks could negate benefits

In the late 1990s, I became Vice President of Bauxite, Alumina, and Specialty Chemicals Marketing at my former employer, Alcan Inc. (now part of Rio Tinto), and explored outsourcing parts of our supply chain. However, the potential risks of disruption were too high, so we did not proceed. This decision produced a crucial lesson: Sometimes, we must ignore the significant benefits of outsourcing because the low probability of outage could be devastating to the overall system.