Sparked by new developments in information technology, the extended enterprise has replaced the traditional supply chain with a value network that creates unique challenges. Rooted in complex relationships among partners, these challenges require greater alignment between partner communities.
Managing SUPPLY CHAIN
INTERDEPENDENCIES
By Jeff Walter Over the past 25 years, information technologies have evolved from mainframes to desktop computing and client/server architectures to Webbased solutions. In the 1980s, computer systems helped manage data and reporting for accounting, sales and manufacturing applications with little information-sharing between departments. In the 1990s, enterprise systems began to emerge by connecting information to different departments. These systems optimized the value chain, but processes were still constrained by serial information and asset flow. These systems were hierarchical and rigid, depending on a push model to deliver assets and information from one stakeholder to the next. The responsibilities and sphere of control of different organizations were clearly defined at different stages of the value chain. Information technology optimized processes inside corporate boundaries. Today, Internet-based information technologies have extended productiv10
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ity increases to transactions and processes outside the enterprise. In the extended enterprise, areas of responsibility are less defined and the value chain has been replaced with a value network, where strategic advantage is achieved by leveraging added value from the network. The value network is a fluid-pull model that enables vertical and horizontal partnering and encourages more collaborative processes between partners. Managing Interdependencies The extended enterprise does not directly control partner processes or infrastructure. Because interdependencies operating across corporate boundaries can be complex, business process reviews become more necessary and more cumbersome. Aligning these processes with a value network through information technology solutions becomes more difficult due to differences and incompatibilities of business practices and systems among the organizations in the network. The
value network requires flexibility to manage partners according to their needs. In addition to the infrastructure and organizational issues, the “prisoner’s dilemma” poses additional challenges. Maximizing profits can be at a partner’s expense, so the partner may be reluctant to share data and information. The cost to find, contract and manage a vendor is high. To manage these challenges, the extended enterprise must segment the business partner communities in its value network and evaluate its level of engagement with each community. Next, the enterprise needs to develop an alignment strategy for each partner segment according to level of engagement and implement the strategies through process, technology and organizational infrastructure changes. When segmenting the communities, the enterprise should consider the following questions: I What functions does the community perform?
How complex is the relationship with the community? I How is the community engaged? I What visibility into the community exists? I What are the most important processes performed with partners that must change? I What types and frequency of interactions occur with these communities? An engagement matrix can provide a way to visualize the interactions with partners. The two axes of an engagement matrix are the frequency of interactions and the degree of workflow interdependency. Each quadrant of this matrix maps to four partner categories. To help understand these different partner relationships, think of each category as an individual rather than a corporate entity: 1) Acquaintance. An acquaintance can be a partner with whom you have low frequency and little workflow interdependency. 2) Office Buddy. Office buddies are characterized by high frequency and little workflow interdependency. 3) Visiting Relative. The visiting relative is a partner with whom you have low frequency, but high workflow interdependency. 4) Close Friend. The close friend is what you’d expect: high frequency, high workflow interdependency. For each segment, there is a corresponding alignment strategy that represents an appropriate investment to align processes with a partner and overcome the extended enterprise challenges. The technology investment required to achieve a successful resolution of each challenge differs with each partner category: I The acquaintance requires a minimal investment in technology. I The office buddy requires technology investments that reduce transaction costs. I The visiting relative requires investments that support joint team collaborative tools and processes. I The close friend requires more
I
significant investments that create seamless business processes. Investments should create common, transparent and interorganizational operations. These investments can also help support certification and incentive programs and performance tracking. Automotive Applications This process of evaluating and aligning partner communities can be applied to automotive manufacturers and suppliers. An automotive OEM has several different partner communities, including: I Dealerships (sales channel). I Indirect suppliers (office supplies, factory-floor tools and supplies, paper towels and other consumables, etc.).
prise that goes beyond the initial purchase of the vehicle and includes financing, service, aftermarket part purchases, and warranty and product feedback into the design of new vehicles. Similarly, an automotive supplier has an array of partner communities in its value network. The supplier has its own indirect, direct and Tier N suppliers, some of which overlap with its automotive OEM customer. In turn, the OEM has overlap with direct suppliers that also perform as contract manufacturers to reduce assembly time and effort on the main production lines. As the OEM and supplier evaluate their partner communities, they may draw similar conclusions about the level of engagement with each partner community and adopt similar alignment strategies. Both work with a set of direct
FREQUENT
Level of Engagement
FREQUENCY OF ENGAGEMENT
OFFICE BUDDY CLOSE FRIEND
INFREQUENT
ACQUAINTANCE
VISITING RELATIVE
WORKFLOW INTEGRATION
LOW HIGH
suppliers, which typically requires a high level of workflow integration as the OEM or Tier One supplier shares design and manufacturing resources with the supplier to meet milestones with dependencies on other suppliers. Depending on the frequency of engagement, the direct supplier may be considered a close friend or visiting relative according to the engagement matrix. If the direct supplier is engaged Continued on page 12
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Direct and Tier N suppliers. Contract manufacturers. Customers can also be considered a partner community. Through the dealership, the customer engages in a contractual agreement with the OEM, just as the other partners engage directly with the OEM or Tier N suppliers engage with the OEM through Tier One suppliers. The customer plays a crucial and continuing part in the value network of the OEM extended enterI I
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Managing Supply Chain Interdependencies
Continued from page 11 on a less frequent basis for more modular components that don’t change too significantly from year to year, the supplier would tend to fall in the visiting relative quadrant of the engagement matrix. As the OEM or Tier One enterprise outsources the design and manufacturing responsibilities to one of its direct suppliers, that supplier begins to move towards the close friend quadrant. Note that the indirect supplier most likely supplies some sort of commodity-based product. As a result, the indirect supplier operates in the office buddy or acquaintance quadrant, since transaction-based engagements require minimal workflow integration (simple order/inventory management) and frequency of engagement depends on how often the supplier’s product must be reordered. Promote Best Practices through Common Elements One partner community that the OEM and Tier One supplier may engage and evaluate differently operates on the demand side of the OEM’s or supplier’s value network. For the Tier One supplier, the demand side appears pipelike, consisting of direct sales to a relatively small number of OEMs. The demand side for the OEM appears fanlike, consisting of indirect sales to retail customers through dealerships. While they both have highly integrated workflow with each of these partner communities, the OEM has a much larger transaction frequency with its dealership community due to the large number of touch points with thousands of dealerships. According to the engagement matrix, the dealership lands squarely in the close friend quadrant. For the automotive OEM dealership community, the processes that it engages with the partner include sales incentives and promotions, parts tracking, customer service and inventory management. When alignment with the community does not exist, the infrastructure is geographically dispersed and the dealerships follow dissimilar business practices and host dissimilar business systems. To align 12
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with the dealership community, as indicated by the Extended Enterprise Challenges and Resolution table (see Table 1), the OEM needs to establish common operations, increase transparency into dealer operations, improve coordination of operations and establish incentive programs. By establishing best practices based on common elements across dealerships, the OEM can set a foundation for common operations. By launching a dealership portal, an OEM can provide a framework to build on that foundation and promote those best practices through business applications. A dealership portal can centralize workflow monitoring and control of data-driven transactions, such as sales, parts ordering and service visits. All of this transaction data is stored in centrally-locat-
tracking metrics, such as customer satisfaction index or service satisfaction index, and maintain performance accountability. Other applications can provide visibility into dealership operations, like parts tracking or salesincentive payments. Support from Organization and Process Changes Centralizing systems and information, as well as the increased visibility into operations provide the OEM and the dealerships with more accurate and relevant data that can help the OEM make better decisions and better coordinate integrated workflows. By applying appropriate levels of security to portal access, the OEM can provide local autonomy and individual empowerment to dealerships and their staff
CHALLENGE
No direct control over partner
RESOLUTION
Increased transparency leads to better decision-making and coordination with partner Common operations reduce time and expense required to add/remove partners. Incentive programs directly compensate partner. Cost to find, contract, and manage vendor is high. Common operations and improved coordination reduce costs.
Value network requires flexibility Prisoner’s dilemma
Table 1. Extended Enterprise Partner Challenges and Resolution
ed databases to ensure that all members of the OEM and the dealership community have access to the same data at the same time. More qualitative information (e.g., promotional and sales literature, technical bulletins, published best practices for running a dealership, etc.) can be broadcast to the portal. The dealership portal also establishes common business systems for the community by hosting hardware and software at OEM facilities. In addition to centralizing data and information, business applications in the dealer portal can provide more transparency into the dealers’ operations. For example, a dealer scorecard application can help establish performance measures and incentives by
organizations. Dealer training and certification programs, designed to ensure that customers receive consistent levels of high service from dealerships, can be implemented more efficiently at lower costs through portal applications that manage and deliver training online. A portal provides a technical solution to align the OEM its dealership community, but the solution must be supported by organizational and process changes. Workflows should be reengineered to take advantage of the portal’s capabilities, rather than imposing technology that makes workflow more cumbersome. Requirements to maintain and continually optimize the Continued on page 14
Managing Supply Chain Interdependencies
Continued from page 12 dealer portal may dictate organizational changes. These changes include: I Creating a corporate entity dedicated to managing and supporting dealership applications. I Creating business partner councils composed of a subset of dealerships, which pilot new dealership applications or significant enhancements before release to the entire dealer community. I Implementing contractual requirements (For example, an OEM takes hosting responsibility for business applications and charges a dealer.). Although we’ve focused our discussion on aligning a specific partner community on dealership communities, many of the proposed collaborative technologies and partner programs can also apply to similar communities. For example, from the supply side of the value network, the partner community of direct suppliers may resemble the fan-like structure of the OEM’s dealership community. Rather than a dealer portal, a supplier portal might help standardize business practices and systems and provide visibility into partner operations. Depending on which quadrant of the matrix best describes the supplier community, it might not be necessary or even advisable to launch a supplier portal that matches the scope of an automotive OEM’s dealer portal. A set of third-party, off-the-shelf online collaboration tools and corresponding processes may suffice to most effectively engage with the supplier on joint team projects. On the other hand, for a large supplier community involved in many different interrelated, interorganizational processes, a full-blown supplier portal maintained by the OEM or a Tier One supplier might be necessary to ensure that information and workflow operate efficiently among all suppliers and that all components maintain a consistent level of quality. Regardless of the stakeholder perspective, the extended enterprise has emerged from technology innovations, replacing the traditional value chain with a value network that creates unique challenges. Rooted in complex relationships that exist among partners, these challenges require greater alignment between partner communities. Jeff Walter is president of Latitude Consulting. Latitude Consulting has been an AIAG member since 2004.
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