Over the past decade there has been profound change in how manufacturing is done by modern high-tech companies. What used to be an important functional competence, such as assembling and testing state-of-the-art printed circuit boards, has transformed into the management and optimization of a process done by business partners.
In important ways this makes the manufacturing mission much crisper and relevant to the business while at the same time emphasizing the importance of understanding the dynamics of partnership much more explicitly. As such, we think it is an important metaphor for the broader partnering transformation underway today that anticipates how the new organizational models and functions can best be understood as well as anticipating some of the underlying issues that will have to be addressed.
Cisco manufacturing is an excellent example of the strategic value of partnership. Cisco began outsourcing manufacturing to contract suppliers many years ago because the return on equity for these functions was lower than the return for product design, marketing and sales, so this structural transformation raised Cisco’s valuation. Today that transformation is essentially complete. Cisco has no internal manufacturing or product logistics capability, instead performing these functions through an ecology of outside suppliers. Cisco’s ability to do this was enabled by a forward-looking, network-enabled reimplementation of its ERP system in the 1990’s that made it possible to interact with these suppliers as intimately as if they were internal functions. Cisco engineers are responsible for the functional design of the products, but significant aspects relating to manufacturability are designed by the contract suppliers (much of the design of modern laptops today is done by the contract suppliers, not the brand companies).
The result of this transformation is that the Cisco "Supply Chain Management" mission is much more pure and aligned to the success of the business. The Supply Chain Management team has the mission of delivering high-quality products in a business agile fashion at the lowest possible cost. Being excellent in some manufacturing technology is no longer something to fall back on unless that is directly differentiating at the business level.
Of course these goals aren’t really simple. "High quality" relates to both price and agility (the straightforward way of achieving product quality is a rigid manufacturing process that never changes). And the agility requirement is driven by the real (logistics) and regulatory (tariffs and tax forgiveness)aspects of being a global supplier, as well as the more obvious goal of rapid product introduction. The "lowest possible cost" is the simpler metric because it can be approximated by the multiplier that converts parts cost into product cost. Each year, the SCM team is tasked with a small but tangible improvement in this cost multiplier and each improvement drops millions of dollars to Cisco’s bottom line because of the volume of product sales. To some degree the improvements may derive from innovation or the application of new technology, but Cisco’s gain is always to some degree the partners’ loss, since otherwise the benefit could be accrued by them. The partners know that these ongoing improvements are important to Cisco and part of the competitive environment. But the process can’t be simple or fun.
It has been suggested that the modern supply chain is an excellent metaphor for understanding the impact of various forms of "Cloud computing[1]." Moving forward, IT functions and services can be obtained in a widening variety of forms other than running the servers, operating systems and applications yourself, just as a supply chain is a modern alternative to doing the manufacturing yourself. These cloud enabled alternatives gives a CIO much greater opportunity to take advantage of technology progress but at a price. There is no longer any real technical or functional competence to fall back on. The question becomes precisely whether you can deliver high-quality services, in an agile manner that doesn’t unnecessarily limit business agility, at the lowest possible cost. And again, there are many interesting devils in those details. For example, how you manage service levels for applications composed of these disparate pieces is not a well-understood science yet.
Industry giants like Cisco, Apple and Wal-Mart are examples of how well Supply Chain Management can work with a clear benefit delivered to the end-customer in terms of product cost and agility. But these successes may mask the underlying difficulties. In a recent book,[2] Paul Midler chronicles supply chain management as it must be for many companies trying to take advantage of Chinese manufacturing. Midler paints a realistic view of what happens when the buyer and supplier objectives are largely disjoint. The buyer wants to save money; the supplier wants to make money. Most of the actions that the supplier may take in pursuit of their objective (component substitution, quality reduction) hold the potential of very negative consequences for the buyer. The largest buyers can put in place processes to minimize this possibility, as well as representing huge buying potential. But for lesser buyers, Midler makes clear how different outsourcing is from internal manufacturing done as part of the same enterprise.
What I want to suggest here is that this "supply chain" metaphor (and more importantly, learning) may well be a valuable way of thinking about the much broader question of business platforms and partnerships. Modern manufacturing in many ways anticipate today’s broader opportunity. Cloud computing in many cases will be an essential element of how these partnerships are linked and operate. The question then is whether the same way to think about the mission is apropos: deliver a high quality service and a business agile manner at the lowest possible cost applies, and if it does the degree to which the learning from manufacturing and IT can be leveraged.
Ronald Coase won the Nobel Prize for Economics in 1991 for his early work explaining that corporations exist because coordination within the corporation less costly than external partnerships that must be defined and managed contractually. Our modern, interconnected world clearly significantly changes the cost of external coordination, and the impact of modern supply chain management in manufacturing hints at the broader impact. All that notwithstanding, experience with modern supply chains reemphasizes Coase’s observation of the cost of external transaction, and the diligence that may be required to align what are fundamentally disparate goals among the partners.
[1] I first heard this in a talk by Ajei Gopal in 2010 when he was Head of Products at CA Technologies.
[2] Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production Game (2009)