Strategic sourcing and supply network design
Following my last post about data and design for supply-chains, I received several questions about strategic sourcing as an approach.
I think it's super valuable, but I also think supply network design is more appropriate in many cases. Even better, we can apply both approaches together.
Strategic sourcing focuses on finding top-notch suppliers and partners with unique capabilities. This enables cost reductions and improved service, both internally and externally.
A useful example would be Tesla's partnership with Panasonic. Tesla effectively outsourced its battery production to a company with deep existing expertise. This collaboration allowed Tesla to benefit from Panasonic's innovation capabilities, at lower cost to themselves.
To make strategic sourcing work, you need to be on top of your strategic analytics, understanding spending patterns, supplier performance, and future demand. This analysis helps you identify the best suppliers, evaluate their offerings, and set performance goals, which in turn may be based on industry benchmarks and current market prices.
Supply network design
Supply Network Design is a little different: the goal here is to build the backbone of your business operations by consciously designing the physical layout and infrastructure of the supply chain. This includes making key decisions, such as the number, location, and size of manufacturing plants, warehouses, and their connections to retail outlets.
For example, Amazon's supply network design includes strategically placed fulfillment centers close to major metropolitan areas. This enables Amazon to deliver products faster, offering customers a competitive advantage with services like Prime same-day delivery.
Data analysis plays a significant role in supply network design. Managers can leverage analytics to make informed decisions about the location of facilities and minimize costs related to warehousing, shipping, and inventory.
Apple and Samsung: Integrated Strategies for Success
The structure of a supply chain has a profound impact on a company's performance, costs, and ability to adapt to changes. Combining strategic sourcing with effective supply network design can be very advantageous.
Apple is a compelling, if not untroubled, example. Apple's strategic partnerships with suppliers like Foxconn and TSMC, combined with a well-designed supply network, have allowed them to maintain a dominant position in the market. Apple's supply network design is characterized by some key elements:
Centralized Control: Apple maintains a high level of control over its supply chain by working closely with a limited number of suppliers. This allows Apple to better manage quality, timelines, and costs.
Strategic Partnerships: Apple forms long-term relationships with key suppliers such as Foxconn and TSMC, ensuring a consistent supply of components and manufacturing capacity. These partnerships enable Apple to maintain high-quality standards and protect its intellectual property.
Vertical Integration: Apple has increasingly moved towards vertical integration, designing its own chips and other components. This strategy allows Apple to differentiate its products and maintain tighter control over the entire product development process.
Geographical Diversification: Apple's supply chain spans across multiple countries, reducing the risk of disruptions due to geopolitical factors or natural disasters. For example, Apple assembles iPhones in countries like China, India, and Brazil.
Samsung's supply network design differs from Apple's in several ways:
Vertical Integration: Samsung has a higher degree of vertical integration compared to Apple. Samsung not only designs and manufactures its own components, such as chips and displays, but also supplies these components to other companies, including Apple. This strategy enables Samsung to have more control over its supply chain and capture additional revenue from component sales.
In-house Manufacturing: Samsung manufactures many of its products in its own facilities, allowing for better control over production timelines, quality, and costs.
Diversified Product Portfolio: Samsung offers a wide range of products across various price points and markets. This diversification requires a more complex supply network, with different suppliers catering to different product lines.
Geographical Concentration: Samsung's supply chain is more concentrated in Asia, with a significant presence in South Korea and other nearby countries. While this geographical concentration may provide cost benefits, it could also expose Samsung to risks associated with regional disruptions.
It’s all in the analytics
As you can see these approaches are highly contrasted. They do, however, have one thing in common: a thorough commitment to data analytics at the heart of supply-chain management. In particular, both focus on these critical analytics:
Demand Forecasting. Accurate demand forecasting is essential for both companies to manage inventory levels and production schedules effectively.
Supplier Evaluation. Data analysis plays a key role in evaluating supplier performance relying data-driven metrics to assess the quality, reliability, and cost-effectiveness of their suppliers.
Cost Optimization related to manufacturing, logistics, and warehousing is a very disciplined practice for both.
Risk Management needs to include basic commercial risks but also geopolitical factors and natural disasters.
Performance Monitoring. From what I have seen, both Samsung and Apple have countless KPIs constantly tracked, including big issues such as manufacturing lead times, quality levels, and on-time delivery rates.
Data analysis is essential to the success of any supply network design initiative. You don’t need to be Apple, Samsung, Tesla, or Amazon to take advantage of that.
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