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Reshaping the Supply Chains

We are in the midst of the second great revolution in the supply chain, according to Professor Morris Cohen and colleague Vipul Agrawal of the University of Pennsylvania's Wharton School. The first revolution, between 1870 and 1917, was the shift from small, local companies to large, vertically integrated corporations. That shift was driven by new technologies, including the continental railroad, telegraph systems and high-speed, continuous process production. These technologies allowed companies to achieve "economies of speed," shipping quickly to market, and "economies of scale," mass producing large quantities of products efficiently. This first revolution was based on the integration of mass production and mass distribution.

The Internet and flexible manufacturing are the technologies driving the second manufacturing revolution. In the 1990s, companies experimented with strategies such as postponement (creating finished products as close as possible to the point of customer demand) and mass customization. "One hundred years ago, we went from smaller firms to large integrated firms," Cohen said. "Now that has changed because of new technologies. Technology change drives supply chain structure, which drives industry change." Buyers and suppliers once connected directly or went through a distributor (as shown in the lefthand side of figure below). "The new model is that aggregators now aggregate information about the buyers and sellers," Cohen said. "It allows you to expand the reach of the markets."

The current trend is toward the creation of business-to-business exchanges in which groups of manufacturers (or neutral third parties) create an electronic hub linking suppliers and manufacturers. These exchanges promise greater efficiency, reduced design cycle times and other benefits for partners. One of the largest and most visible of these exchange experiments is Covisint, launched on February 25, 2000, by General Motors, Ford and DaimlerChrysler (and later joined by Renault/Nissan). Covisint creates a standardized exchange to link original equipment manufacturers (OEMs) and suppliers, which is designed to reduce costs in their respective supply chains and bring efficiencies to their business operations.

Aggregators Are Reducing Friction and Unbundling Services


The Virtual Hand: The Napsterization of the Supply Chain

What is the next step? Cohen foresees a time when hubs and exchanges may give way to portals that will allow manufacturers to link to the resources of suppliers in the way that teenagers dynamically tap into music libraries through Napster.

"Now the model of the future is that we become 'Napsterized,'" Cohen said. "The idea is to find the unique match between the customer and supplier." Instead of exchanges serving as mediators, suppliers connect directly to manufacturing through portals (as shown in figure below). Goods will flow directly between suppliers and end customers. The cost of changing suppliers will be zero. Products will become more customized without loss of efficiency.

Evolution from B2B to B2P

Supply chains are already moving toward this model, with the emergence of web-based exchanges, interactive trading mechanisms, and advanced optimization and matching algorithms to link customers with suppliers for individual transactions.

While this supply chain revolution is still in progress, Cohen and Agrawal note that the changes already taking place are substantial. "The structure of the industry . . . will not remain static," they write. "Just as in the first supply chain revolution at the turn of the last century, the implications for corporate organization and industry structure are profound."

During the first revolution in manufacturing, in the words of Alfred Chandler, the "invisible" hand of the market was replaced by the "visible" hand of corporate managers. If this vision of Napsterization of the supply chain comes to pass, we now may see the "visible" hand of managers replaced by the "virtual" hand of networks.

The image of manufacturing that captured the mind of the environmental community and has driven policy for three decades is in flux, and one of the primary areas of change will be in the relationships along the supply chain.

Reshaped Supplier Relationships: Exit vs. Voice

Other researchers point out that while such a "pure frictionless" system may work for PCs, it is less likely in an industry such as automobiles in which the product is complex and long-term relationships between manufacturers and suppliers have traditionally been more critical to success. Professor Susan Helper of Case Western Reserve University's Weatherhead School of Management notes that it is possible that "firms will develop technology so as to reinforce their current supply chain strategies."

Helper notes that throughout the history of manufacturing, relationships between suppliers and manufacturers have fluctuated between exit and voice. The "exit" model is an arms-length, transactional focus, in which companies solve problems with their suppliers by replacing them with other suppliers. The "voice" model is a longer-term relationship between the supplier and manufacturer, in which the manufacturer works with the supplier to resolve problems. Voice relationships allow for a richer flow of information but demand a greater lock-in to a particular set of suppliers. Exit relationships offer greater flexibility.

Between the 1930s and 1980s, most U.S. automotive suppliers made relatively simple parts, which helped the large manufacturers maintain power over suppliers using an exit strategy. In the 1980s, based on the perceived success of close keiretsu relationships of Japanese manufacturers (powerful networks of companies) , U.S. automakers moved increasingly toward voice relationships and suppliers developed greater design capabilities. Suppliers have pushed for even greater modularization, allowing them to source full modules such as complete interiors. But this trend toward modularization puts more power in the hands of suppliers and could be resisted by automakers.

The impact of exchanges such as Covisint on the trend toward exit or voice is uncertain. "There is now a little hybridization with a slight overall tendency, I think, toward voice," said Wharton Professor John Paul MacDuffie. "The latest development of electronic procurement and reverse auctions could have a chilling effect on voice relationships. But at least in the short-term, Covisint ought to support either mode being reinforced and being carried out more effectively."

Voice or Exit and Environmental Management

Relationships between manufacturers and suppliers can have a significant impact on their ability to develop innovative environmental solutions. For example, Motorola engineered itself out of a problem with chlorofluorocarbos (CFCs) by working closely with suppliers. More exit relationships may reduce opportunities for collaboration. "If you are going to be making a new investment, it will be expensive the first time, so the longer time horizons might in theory offer prospects for better communication and trust," said Helper of Case Western Reserve.

Arms-length relationships do create limits on sharing and collaboration. For example, Visteon's design engineers have developed sophisticated software that tests ergonomic impacts of steering wheel placement and the effect of the angle of windshields on glare and reflection. But while the company will share results with its manufacturing customers, it doesn't want to share its proprietary software directly with manufacturers. "They are worried that they will lose their advantage, so they may not be getting the most out of the tool," Helper said.

But Sturgeon of MIT said that, regardless of relationships, new Internet connections and collaboration tools are facilitating greater cooperation. "If someone from Sun Microsystems can't fix a problem without information about a Nortel switch, they can get access to Nortel's databases. One of the ironic things is that turnkey relationships are seen as a way to get a much less interdependent system, but what is flowing across all those interfirm linkages are huge amounts of data. There are ways this can be handled to let others see what they need to look at but build a firewall around everything else. Companies are sharing data they never shared before."

The companies that produce the software for collaboration also may offer another leverage point for environmental compliance. In electronics, the suppliers of equipment and software for design automation tend to be fairly concentrated. "These are companies that if they were pushed and cajoled to think about environmental implications might have a broad impact," said Sturgeon. "Some of the tools they make are de facto industry standards."

Next section: Think Globally, Manufacture Locally

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Manufacturing Anywhere: Front Page
Reshaping the Supply Chains
Think Globally, Manufacture Locally
Morris Cohen
Morris Cohen
Matsushita Professor of Manufacturing and Logistics at the Wharton Business School talks about the "napsterization" of the manufacturing supply chain.
Audio: Napsterization
Audio: Second Industrial Revolution
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Timothy Sturgeon
Timothy Sturgeon
Project Executive Director, Globalization Study, Massachusetts Institute of Technology's Industrial Preformance Center talks about the globalization of manufacturing.
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External Links
Technology Diffusion
A New Factory For a New Age
Print Your Next PC

Global Diffusion
MIT Globalization Study

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The Low-Tech King of High-Tech
Who really makes PCs?
Turnkey Production Networks: A New American Model of Industrial Organization?
Bulls or Bears? Outlook in Contract Manufacturing
Buildyourowncar.com: Where E-Business is Driving the Auto Industry
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