Background

In the New Economy, many formerly vertically integrated firms have broken up into supply chains of narrowly focused specialist firms. Firms as diverse as IBM, 3M, Dell, and General Motors now delegate many of the activities they once performed in house to a network of specialist suppliers.

For example, Hewlett-Packard, like many firms in recent years, has chosen an especially radical model of disaggregation by outsourcing everything except product integration.

Geoff Parker noticed the trend when interviewing Hewlett-Packard employees who had recently graduated from MIT’s Leaders in Manufacturing program. Many of these talented, highly paid managers, Parker noted, were being used not to oversee areas within the company but to coordinate the internal activities of the firm with the external activities of overseas suppliers and contractors.

“For the most part, they were being used as organizational glue,” says Parker, assistant professor of management at Tulane University’s A. B. Freeman School of Business. “It was very interesting to me that that’s how the company thought best to use them.”

The observation sparked a new line of inquiry. Over the past decade, firms as diverse as Applied Materials, Frito-Lay, IBM, General Electric and General Motors had begun to outsource many of the activities they once performed in house to networks of specialist suppliers around the world. That wasn’t news. What is news is that these firms are increasingly turning to overseas contractors not just for manufacturing but for product design and development as well, creating a thorny new challenge for many businesses: How can firms effectively manage the exchange of highly technical, highly interdependent information across a network of suppliers?

In conversations with many firms, operations managers have said that their existing models of supplier management are inadequate for this new business model. This is not surprising. The overwhelming majority of supply chain research and teaching concentrates on the coordination of logistics and manufacturing in the supply chain.

However, from studies performed by Nevins and Whitney in the 1980s, it is known that approximately 70% of total product cost is determined by decisions made during the product development stage. Thus, when product and manufacturing development activities are outsourced in addition to logistics, the importance of effective supplier management increases dramatically.

Integrating the supply chain

Edward G. Anderson Jr., Geoffrey Parker, and Alison Davis-Blake were recently awarded a National Science Foundation grant to explore how firms are integrating their supply chains in this new, rapidly evolving environment. Their study focuses primarily on firms that outsource product development, a trend that has not previously been the subject of intensive study.

“The bottom line is that we are not going to make as many things as we used to in this country,” Anderson says. “We’re just not in the business of setting factories up as much as we used to be. So you ask yourself the question, ‘Okay, what are we going to do?’ If the manufacturing is done by contract manufacturers who can be anywhere on the planet and the design is done in India or China, you’d better be really good at weaving the pieces back together or else you’re in trouble.”

Historically, mid-level managers were charged with maintaining a product’s coherence within a firm, but the powers of traditional managers don’t always work when you’re dealing with a power source supplier in Kuala Lumpur, a circuit-board maker in Taipei, a software designer in Bombay and a computer memory manufacturer in Shanghai. “Ironically, you need much higher level people to do this as you start to draw on a global supply base,” Parker says. “Your people may need to be higher bandwidth in the sense that they need to know more things and they need to have the ability to communicate on more levels. So you may be left with fewer people in an organization, but the ones who are left better be very good.”

One solution many firms have come up with, Anderson says, is the establishment of a new management and engineering position, the supply chain integrator, whose primary role is to maintain product coherence across multiple supplier—and geographic—boundaries. While Anderson says these supply chain integrators tend to have a working knowledge of systems engineering, information technology, operations management, and finance, they also tend to possess softer skills, like human resources and negotiations. “The problem in dealing with a supplier is that you don’t have as many tools at your discretion to manage them,” Anderson explains. “If it’s internal, a manager can harass you every day. You can’t really do that to your suppliers, so you end up needing people who can, basically, ask nicely. It sounds ridiculous because you’re the customer, yet you’re still at a mode where you have to be very friendly and very convincing. Your big leverage is to switch suppliers, but that is often unrealistic due to the high costs.”

For their investigation, Anderson, Davis-Blake, and Parker plan to interview supply chain integrators across industries to identify their skills and compile systematized data on their practices. Fifteen firms participated in the preliminary interviews and many more are scheduled to be interviewed over the course of the study. “The ability to coordinate the supply chain is really important,” Parker says in conclusion. “Being good at this matters. People can probably learn to do a good job at coordination eventually, but my suspicion is that firms will need to invest in this and they’ll need the help of universities to train effective personnel.”