Supply Chain Configuration

Read this article, which examines the challenges western nation manufacturers currently face. Specifically, it covers firms in industrial products, toys, fast fashion, and designer furniture.

Methodology: A framework for network configuration

Case-study company 1 - Toys

The company is a producer of products characterized by high seasonality, volatile demand, and exposure to fashion trend fluctuations, creating an eminent challenge of balancing its capacity for demands, while constantly updating its product line. The company had traditionally been committed to its fully owned operations in its domestic base in Denmark. In spite of its global sales, very few production facilities of the company had been established abroad. However, with dropping sales accompanied by negative financial results, a new management group, which entered the company in 2004, urgently started rolling out plans for a design and implementation of the transfer to external suppliers in low-cost countries. A preparation stage included a comprehensive cross-functional analysis, which focused on the development function, sourcing, production, and distribution, leading to a number of initiatives. On the development side, the main focus was on reducing the complexity of products, which over the years had grown considerably with a growth in the number of suppliers, product variety, and component variety. The reduction in complexitywas not only meant to drive costs out of the supply chain, but also to prepare the company for quick response delivery.

While the reduction of complexity coming out of product development started right after the end of the analytical stage, it was decided to run a pilot study on offshore outsourcing. The major pilot project included moving a product line to an external supplier in Hungary. The supplier was selected after a careful multi-staged process involving initial screening of shortlisted companies, a number of rounds of negotiations, and on-site assessments. The case-study company's previous experience with offshore outsourcing was limited to low-volume complex specialty tasks and components for which the company had no internal resources. Now, the company was outsourcing the entire product line, something it had never done before. The economic benefits of the transfer were obvious. In addition, an important aspect of this pilot line was a learning experience, as it was the first outsourcing initiative of this caliber for the company. When the pilot project was half-completed and proved to be successful, the company started negotiations for outsourcing the rest of the supply chain with this manufacturing services provider, assigning it the role of a strategic finished goods supplier. However, the relative success of the test case proved to be more difficult to replicate than expected. The specific nature of the pilot line provided limited insight into the effects of interdependencies in a distributed production network. The test case was based on a single-site production set-up with its own internal component base while the other product lines were formed from components produced in multiple locations. The transition from the single- to multi-site set-up also revealed that documentation of products, processes, and technology was not sufficiently developed to make a clean shift. The documentation had been adequate for in-house and long-term domestic relationships. However, it appeared to be insufficient for the effective use by the new strategic partner. This meant that major tasks became documentation, process mapping, and data structuring. In addition to capturing tacit knowledge and creating a transferable repository of knowledge, there were many more challenges ahead of the transition team. A big challenge lied in coordinating the interfaces between the company and its strategic partner. With a very high employee turnover at partners' sites, getting stable reference points became an apparent difficulty. When the Danish company was ready to start transferring knowledge and to learn how to develop the strategic supplier relationship, all of a sudden a key person at the partner's side was leaving. Hence, a more coordinated approach to the transfer was lacking.

The very high speed and wide scope of the transfer constituted another challenge. The case-study company tried to deal with the situation by increasing the number of its own employees at the partner's sites as part of daily operations and making sure everything was done according to specifications; for example, senior quality engineers were based in the partner's sites in Mexico and Hungary. This approach incurred a hidden/unexpected cost, but according to the company's estimates these costs did not exceed 10% of cost savings generated by the outsourcing initiative. However, the challenge of absorbing the amount of knowledge transferred from Denmark represented only part of the problem. Another was in the lack of motivation to learn from the suppliers' side. Over time, it emerged that the supplier was reluctant and struggled to learn. On the one hand, the fragmented approach that the supplier had to organize its sites all over the world might have hampered the company's ability to learn and absorb effectively the inflow of new competencies. On the other hand, this could not be solely blamed on the supplier, as from the inception of the relationship the Danish case-study company, in its representative's opinion, focused more on its own goals rather than investigating what the suppliers' goals and motivations were.

Another area where the relationship was facing difficulties was in securing smooth operations when faced with a volatile market situation. The Danish company was used to tackling enormous market dynamics, seasonal fluctuations, and unpredictable demand; in addition, approximately 60-70% of the company's annual turnover is generated through continuous launching of new products. Such dynamics were completely in contrast to the much more stable operations the supplier was used to and prepared for. Besides creating another challenge for the transfer, this situation also caused a gap between flexible and market-responsive solutions the Danish company was looking for and what its partner could deliver. Eventually, the fact that neither dispatching nor receiving companies could reap all the benefits expected by both parties contributed to management's considerations of bringing the sites back in-house. The relationship was remarkably resilient against the individual challenges it faced. However, their concerted effect eventually led to the break-up of the relationship. At the beginning of 2008, the company announced its plan to 'backsource' or bring back in-house one plant run by its partners, followed by announcements in July, 2008 of further 'backsourcing' of two more plants.

It is obvious that the high rate of introductions of new products and the seasonal variation call for tight coordination, explaining the location of the company in the upper left corner of figure 3. The case illustrates, among other things, that outsourcing brought into the open the interdependencies between operations and the other functions primarily based on tacit knowledge. If the company had analyzed the strategic roles of supply chains, the course of actions and configuration decisions would most likely have been different. The network structure is likely to be changed in the future, as a new balance needs to be developed between specialized production processes and the need to be close to the markets. For example, an effort will be made to develop new technology for plastic molding, and regional assembly units will be established for low-volume products and parts with high unpredictability.