Game-Changing Process Designs for Distributed Business Models
Companies can further leverage their network of customer and supplier relationships
by focusing on the development of process designs that fit distributed business
models. The goal is to develop shared processes with partner organizations to
manage strategic activities that have been traditionally contained within a single
enterprise, including product development, manufacturing, supply management, and
fulfillment. In the abstract, they promise additional value by better distributing
responsibility to the point on the network with the greatest competency to best
leverage expertise and scale.
At the operational level, these process designs should encompass a strategy that is core to your business model — at least one more closely matched than the frequently used examples from Dell and Wal-Mart. They require a specific outline of roles and tasks that enable value for your company by making it easy for your business network to participate in your business processes. We will explore two process designs in depth and then draw some conclusions of the shared themes that can be applied to your company's specific opportunities.
The New Challenges Introduced by Distributed Business Models
Let's set the stage by looking at the key challenges and opportunities that companies face in today's environment as they consider the impact of distributed business models.
- Starting with your core business. As many companies learned in the
late 1990s, it can be dangerous to extend into new opportunity areas that
are only loosely tied to the core business model. When considering strategic
decisions that increase the distributed nature of your business model, you
must consider your existing business and the state of your internal enterprise
relationships. For many companies, these internal relationships are still
fragmented along functional process boundaries. A typical example often seen
is the case where merger and acquisition activity has added scale to the balance
sheet, but where the merged entity is managed more as a collection of mid-market
companies than as a unified whole.
- Moving operations to low-cost regions, including China, presents
opportunities to reduce total costs and to develop the ability to serve rapidly
growing markets. But distance sourcing also adds costs that include increased
supply chain risk and more complex logistical requirements. It also makes
running a lean supply chain more challenging and has the potential to significantly
increase network inventory levels.
- Offloading strategic manufacturing, design, and supply management activities
to contract manufacturers and full service suppliers can complement core
capabilities, increase operational flexibility, and reduce fixed costs. But
these partnerships must be closely managed to ensure the optimal distribution
of responsibility and control. Many companies in high-tech, and more recently
in automotive, have recognized there are significant impacts from offloading
core responsibilities to their partners without maintaining some level of
visibility and control.
- Increasing pressure on the pace of design innovation requires companies to leverage supplier innovation while containing the proliferation of suppliers and materials. Balancing the tension between supply innovation and commonization is key to success, but it is challenging because these decisions span multiple companies across the supplier network.
Given these macro challenges and opportunities, what are some of the specific game-changing process designs that can be used today for competitive advantage?
Two Game-Changing Process Designs
The examples discussed here were developed from our experience with OEMs and suppliers within the automotive and industrial sectors, but can be easily applied to other discrete manufacturing industries including high-tech and CPG.
Coordinated Network Procurement
Improving How Goods Are Sourced and Procured
Evolving business strategies such as full-service supply, outsourced manufacturing, and global sourcing are increasing the opportunities available to procurement organizations — but they are also making it more difficult to coordinate decisions and execution across disparate enterprises and multi-tier supply networks. As companies offload key responsibilities to their preferred suppliers, they try to maintain control and visibility of key purchasing activities for which they have the greatest competency. The need for improved coordination of activities between fragmented organizations is key and is a theme that will be repeated throughout both examples.
Situation and Challenges
Consider a large industrial OEM that has outsourced the supply of its injection molded parts and metal stampings to specialist component manufacturers. While suppliers are responsible for the design and manufacture of the finished parts, the scale and sourcing expertise of the OEM makes it the most competent organization to buy the raw materials that go into those parts. In this case those raw materials are resins and steel.
While the OEM is best equipped to manage the raw material purchasing, it also recognizes that its part suppliers bring the greatest technical expertise for specifying the engineering requirements of the raw materials to enable their product designs and manufacturing processes. Many raw materials, including steel and resins, are highly engineered and require careful specification and sourcing selections to ensure their proper application and to ensure quality. By recognizing the distributed nature of this business model and applying a process design that can think across this network of relationships and roles, the OEM can distribute the engineering and manufacturing processes to its component suppliers, while maintaining control and visibility of the combined network's ability to purchase the raw materials.
The distributed business model is not new. Nor is the big picture process that envelops it. However, it is significantly underutilized in practice due to the limitations of traditional technologies, including the constraints of four-walls, enterprise-only architectures, or architectures that only model information as it cascades through a linear supply chain. Traditional applications do not consider multi-tier network processes, where the buyer of a material is not the direct recipient, or where the company that specifies the raw material is not directly sourcing the material.
Manual practices and tools, including spreadsheets and emails to query suppliers, are either performed too infrequently to be effective, or they are performed so often as to be intrusive and administratively overwhelming. With traditional approaches, the sponsoring company has limited ability to monitor performance of their network outside of its direct suppliers. Even though they control the raw material sourcing contracts, the OEM lacks visibility to how their suppliers are performing because that information resides only within the multiple operational systems owned by the direct suppliers.
What would this program look like with a process design that addresses the complexity of the distributed business model and provides the supporting infrastructure to consistently execute the process?
Process Design
The coordinated network procurement process described above involves activities that span functional groups across multiple tiers of a business network, including engineers at a finished part provider, buyers of raw materials and finished parts at the OEM, and materials management and sales people at the raw material source.
The process design should consider a holistic set of processes — from initial material specification through to procurement execution, payments and claims resolution — to enable outsourced spend management strategies. It should be designed to support interactions among a network of companies — not a cascading chain of companies — and must unbundle the financial and information flows from the linear material flow. This unbundling effect allows companies to interact across enterprises and tiers according to the unique requirements of each type of flow.
- Sourcing and material specification helps companies optimize early
material selection decisions between participants across functions and organizations.
It captures key material information that can be used downstream to facilitate
re-sourcing or inventory sharing opportunities.
- Procurement execution provides multiple buyers and suppliers access
to consistent pricing information — but only the information that is
necessary or available to each specific role in the process. In this situation,
the sponsoring company may not want to share the true purchased price of the
raw material with the direct supplier, but instead include a margin in the
price that is still lower than the cost the direct supplier would pay independently.
- Financial management processes enable companies to manage the cash
conversion cycles as material flows from the raw material source to the direct
supplier where it is transformed into a finished part. Financial transactions
can occur between all three of these organizations. Examples of financial
flows include rebates from the raw material source to the OEM; payments from
the finished part provider to the raw material source; and payments from the
OEM to the finished part provider for the purchase of the finished part. Better
management of the financial setoffs can aid the suppliers by reducing credit
risk and can allow the sponsor to better manage cash conversion cycles.
- Dispute management allows the raw material supplier and the finished
part supplier to resolve supply issues without the involvement of the sponsor.
This approach is key to scaling the program since oftentimes buyers can be
overwhelmed with these administrative activities.
- Network performance management leverages the information gained from a single, consistent set of procurement processes so that companies can analyze supplier performance and spend, and reward suppliers for their ability to reduce the total cost of supply. It also provides real-time network management to enable rapid response to sub-supply problems including the ability to dynamically re-allocate spend away from an under-performing or bankrupt raw material source. Also, a company can act as the sponsor in a coordinating role to gauge performance of the network.
This process design requires a technology approach that can manage business processes across a network of relationships. It must allow a sponsor company the ability to extend its own proprietary program out to multiple tiers of its supplier network, and share key information with only the right participants at the right time.
Figure 1: Unbundled Process Flows
Value Enabled
The coordinated network procurement process design focuses on reducing the total cost of supply by allowing companies to aggregate spend and production volumes with that of their suppliers, and then to consistently manage cost across these shared activities. It provides companies with the necessary framework to gain control and visibility of their outsourced activities, and to scale existing programs to include additional suppliers and commodity groups.
Product Sourcing
New Value Is Created When Products Are Designed for Supply
As markets become more specialized, a company's profitability remains a function of continuously doing more with less. In the context of product sourcing, "more with less" means commonizing suppliers and materials to reduce supply cost and complexity. Companies want to maximize supplier-led innovation when it contributes to the end customer value, but avoid locking suppliers into proprietary designs when it only adds redundancy and waste. Outsourcing product development activities adds a layer of complexity since engineers outside the company are responsible for making critical material and part selection decisions.
Simplification is key to enabling the product-sourcing process design. Simplification means making it easy for non-technical business people to participate in the early material specification and sourcing decision process. This theme is also seen as the effect of working with a rationalized set of materials and suppliers so that it is easier to strategically manage commodities during the sourcing process and to manage production once a product is introduced to the market.
Situation and Challenges
Let's consider a specific example of an OEM or large Tier 1 supplier that sources plastic parts from injection molding suppliers, who in turn are supplied by resin sources. Either the OEM or the Tier 1 has the responsibility to define the detailed resin specifications and sources that will be needed to manufacture the plastic parts. Since the engineering competence and sourcing competence for resins may not reside at the same company, a variety of approaches are typically applied to manage these decisions, including:
- OEM specifies the material and directs the source. Here, an engineer
at the OEM will specify the resin to be used for a finished part directly
on the part drawing. These specification decisions are often made by an engineer
and favor technical objectives over business objectives. For example, the
resins specification may enable the most sophisticated design solution, but
it may lock-in a new, high-margin supplier without adding value to the end
customer. Suppliers in this situation often comment that they could easily
reduce engineering and sourcing costs if they were given more responsibility
for specifying the best raw material to use in the part they are supplying.
- OEM specifies the material and does not direct the source. This is
often the worst case for a supplier because their sourcing decisions are limited
by a very specific material specification. In this case, the company may not
have preferred contracts with suppliers for these materials and the direct
supplier is penalized for using potentially high cost suppliers over which
they have only limited control.
- OEM lets its suppliers specify and source the material. Here, the OEM recognizes that it does not have the expertise to optimally define the material specifications and sourcing requirements, or it simply does not have staff to manage additional spend complexity. In this case, the OEM allows its finished part suppliers to make both material specification and sourcing decisions, and manage all of the operational procurement activities. The danger here is that the OEM may lose control of some of its sourcing visibility and leverage, including key decisions that will affect downstream costs and quality.
The problems associated with the approaches listed above exist in part because there is a lack of unified processes and applications to coordinate activities between product development, procurement, and the suppliers. Engineering-specific processes and applications maintain the true product definition but are too technically focused for operations audiences. Procurement and operational processes and systems do not recognize or contain the deep attributes required to define product specifications. These approaches typically do not share processes or metrics with each other and do not engage a multi-enterprise network of participants.
Figure 2: Material Transformation
Process Design
The focus of the product-sourcing process design is to allow companies to share new part introduction and material commonization decisions with their suppliers to balance supplier innovation with a company's own cost savings and commonization goals.
For example, is it possible to enable a fourth model that lets the finished part supplier introduce the material specification, then collaborate with the OEM to balance technical and business tradeoffs? The OEM can suggest ways to modify the technical parameters to reuse existing materials or to sourcing from a preferred supplier. Necessary elements of the design include:
- The simplification of complex technical information that is shared
with business users, so these decision makers can participate in the optimization
of material selection decisions.
- A shared and accessible definition of materials and parts, including
deep product attributes, accessible to all participants — inside and
outside the company — but on a need-to-know basis so that proprietary
information is not divulged to the wrong party. This ensures direct, unambiguous
tradeoffs between technical and business parameters of the design, and it
avoids the introduction of a redundant design from a poorly performing supplier.
- An analysis of spend, usage, and performance information by part at
the product attribute level to support intelligent rationalization of existing
parts and downstream inventory substitution.
- The management of cross-functional and cross-organizational initiatives such as part commonization, design-for-supply, VA/VE, and supplier rationalization. This allows you to reward suppliers for participating in these initiatives.
This process design requires a technology approach that can manage material sourcing information at the technical attribute level and can make the associated processes available to decision makers across multiple functions in multiple organizations.
Figure 3: New Part Introduction
Value Enabled
The product-sourcing process design focuses on helping participants across a network of business relationships. Armed with the appropriate information earlier in the cycle, these participants can avoid design decisions that introduce costs and inflexibility into downstream manufacturing processes. It allows engineers and suppliers to support part and sub-supplier rationalization objectives, and allows optimization |of material cost/performance tradeoffs. The process provides the framework to ensure that parts are not over-designed, or that unique suppliers are not unnecessarily locked in with proprietary specifications.
Recommendations
The game-changing process designs presented in the paper offer a compelling and new approach to unleashing value for companies. Unlike traditional approaches that focus solely on the organization or the enterprise, new network-level approaches align activities so that a company can more effectively participate in a distributed business model. Once a company chooses to externalize design, manufacturing or logistics, it must also embrace a process framework that provides the coordination and simplification to operate in this environment.
Look for symptoms, such as the ones listed below, to determine whether your process designs fall short of effectively managing the distributed aspects of your business model:
- Costs are trapped in your designs because sourcing professionals and suppliers
were unable to influence critical product development decisions. These costs
are difficult to fix downstream due to the high cost of recertification and
retooling.
- Unique supplier capabilities get locked into designs before the sourcing
process begins, leaving no alternative sourcing options.
- Suppliers make critical component selection and sourcing decisions without
your involvement — but that directly affect your cost of quality.
- You want to distribute responsibility and control of product development,
sourcing, and manufacturing to your key suppliers, but are unable to consistently
maintain visibility of these strategic processes outside your four walls.
Trusting your suppliers without the means to verify that they can deliver
has impacted your performance.
- You call your suppliers to find out what you're buying from them and how
they performed before each negotiation. You lack insight into the distinct
cost elements that comprise the parts that they supply.
- You believe you saved money by running sourcing events, but have difficulty
demonstrating the actual savings achieved during volume production —
and whether you actually reduced the total cost of supply.
- You buy similar commodities that your suppliers purchase, and could negotiate a better price if you combined your spend. But you do not know how much your suppliers buy, or whether you could buy it more effectively. Even if you could combine purchases, you don't have a system to manage and monitor a large number of shared transactions outside your four walls.
If you recognize that many of these symptoms exist in your current process design, consider further review of the processes described in this paper and look for ways to map roles and activities into a process framework that embraces coordination and simplification themes — and most importantly, one that drives realistic value for your company and trading partners.
