Companies must focus on maximizing value in their supply chain: a series of interrelated activities to move a product or service from its point of origin to the customer. They are the links involved in delivering a product or service in the most productive way for the customer and the business. It is vital to operations management and crucial to delivering consistent, high-quality products on time to customers and creating business value.

Each link offers value to the customer

The activities of the chain range from access to raw materials or subcomponents to the delivery of the final product or service to the customer. Walmart is a wholesaler and retailer in a large supply chain. The more parties involved, the greater the probability of problems:


raw materials' manufacturers > components' manufacturers >
manufacturing and assembly plant > wholesalers > retailers

Wherever you are in the chain, you are dependent on someone delivering your part or product to you at a certain time. primetime Co Ltd, (Prime), a component maker in an auto industry supply chain, sat in the middle. Management agreed to a contract with the assembly plant, AutoCo, to produce and deliver 100 units per day. Prime’s contract included a penalty clause for missed delivery. Units had to be delivered by 4:00 pm each day or Prime would pay AutoCo the cost of downtime pending Prime shipping downtime calculated based on a particular formula that includes AutoCo’s overhead costs .

Practical application

Prime provided AutoCo with two names to call any moment on any production and quality problems, including increasing production and rescheduling delivery. By arrangement, AutoCo had its own quality specialist on site at Prime when Prime manufactured the part for AutoCo. That specialist had final approval on the acceptable quality of that item. This worked well due to the excellent transparent relationship between both companies.

AutoCo gave Prime a tentative delivery schedule each month. At 6:00 am each day, Prime accessed AutoCo’s ordering system to see the actual requirements for the day. The system required precision and was monitored by Prime every hour. Prime saw this as a huge challenge, so management provided the necessary resources and careful attention to people and process. The system has worked well for several years with 99% compliance.

Answer three questions at the beginning: What to outsource, to whom and when? Next, make sure that the string has at least these four characteristics:

Required Partner Traits

  1. Highly visible links understood by each participant: The system is only as good as its weakest link. You may be the wholesaler, but you must be comfortable with each segment and understand the likely risks of failure in the different links. In some businesses, this risk is more critical than in others. Delays can be too costly for clients to capture the significant benefits of outsourcing.
  2. Collaboration to deliver acceptable results throughout: Collaborating is not easy. An essential issue is the alignment of incentives. Prime had a strong incentive to deliver on time due to the high cost of AutoCo downtime. The ideal model for a successful collaboration is to share the benefits with partners. Collaboration becomes even more complicated when there are different countries, cultures, time zones, and other differences. However, cooperation is crucial.
  3. Focus on customer demand instead of production demand along the chain: The lead company (Walmart or AutoCo) should keep partners aware of customer needs and encourage them to add value to the finished product. This awareness can improve the competitiveness of the entire chain and bring additional benefits to each participant.
  4. Transparent and useful communication throughout the chain: Communication keeps members abreast of developments that affect their contributions to the chain. Additionally, meaningful communication allows members to respond quickly to opportunities and challenges.

Disruption risks could negate benefits

In the late 1990s, I became Vice President of Marketing for Bauxite, Alumina and Specialty Chemicals for my former employer, Alcan Inc. (now part of Rio Tinto), and explored outsourcing parts of our supply chain. However, the potential risks of disruption were too high, so we did not proceed. This decision produced a crucial lesson: sometimes we need to ignore the significant benefits of outsourcing because the low probability of disruption could be devastating to the system as a whole.

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