World Trade Magazine recently published an article by Dr. Sandor Boyson titled Supply Chain Globalization: The Era of Revitalized Command is Upon Us that wasn’t too bad, provided you could translate all of the academic-speak into everyday English. Since it’s slow reading for anyone not accustomed to such pretentious verbiage, and almost ten pages, I thought I’d summarize some of the more salient points.
It starts off by noting that the first era of supply chain globalization was the era of vertical integration, exemplified by the Ford Motor Company that organized its production and supply chain as a completely vertically integrated system in the 1920s. It owned the entire process: manufacturing and assembly plants, lumber camps, intermodal transportation assets, and even private airports. Its strategy was designed to ensure continuous availability and “the uninterrupted supply of raw materials of high quality free from market changes”.
The second era is defined as the era of virtualization that began in the late eighties and early nineties and consisted of a broad fabric of alliances for managing the entire value chain. Sun Microsystems exemplifies the virtual enterprise approach – it never touches 90% of the server computers it sells globally – rather, an outsourced Sun supply base receives Sun customer order signals directly and ships the orders to the global customer base via outsourced third-party logistic carriers. Information technology and pervasive outsourcing have enabled the pooling of assets and capabilities into multi-enterprise virtual networks well beyond the formal/traditional boundaries of any single enterprise.
However, according to the article: We are approaching the end of this headlong plunge into supply chain virtualization and dispersion. While this business model has driven cost efficiencies and operational flexibility across global enterprises, it has also led to a heightened perception of eroded strategic command and control and a loss of network coherence at the level of the corporate senior executive suite.
Furthermore, the emerging emphasis is on corporate risk management. Enterprises are re-calibrating their globalization strategies and strengthening the core of their organizations as the risks of the over-extended and over-outsourced enterprise have come into sharper focus.
Thus, according to the article, As we go forward into a third era of globalization – that of revitalized command – we are witnessing yet another metamorphosis in enterprise strategy and structure. The multinational enterprise is becoming more risk-averse and less likely to over-extend itself through alliances, and is showing an emerging bias toward more direct absorption and control over assets in its network.
Or, in plain English, companies have realized that the strategy of outsourcing every function but the function of outsourcing itself might not have been the best strategy. Although it’s true that end-to-end vertical integration is probably not the right strategy, because no company can do everything well, it’s also true that outsourcing too much is not a great idea either, because then you’re left with a shell that can’t do anything. Thus, companies are beginning to realize that the right approach is to find a balance somewhere in the middle – a balance that allows them to retain the functions that they are good at, and core to their, business and to outsource those functions that are not core, or that they are not very good at. Thus, the third era of supply chain will be the era of balance – where a nice equilibrium is found between the “vertical” do-it-all-yourself strategy of the past and the “horizontal” outsource-everything-under-the-sun strategy of the present.
The article then discusses what this might mean for the public sector, the varying impact by company size and scale, and the results of a survey designed to help determine the extent of supply chain management in the global marketplace. The study, which tried to assess a range of factors, found that the degree of supply chain collaboration between respondents and suppliers was moderate at best. Considering that failure to develop a supply chain management program that fully accomplishes integrated operations may result in poorly engineered products, product recalls, excess inventory costs, stockouts, and diminishing levels of customer satisfaction, I would hope that the sample size (of about 300 respondents) is not indicative of the vast majority of global multinationals, since this would indicate most companies still have a long way to go to get a grip on their supply chains and find the balance that is their key to success.