For some years we have seen problems with supply chains in the news. Whether it is the shortage of salads or the question of working conditions in garment factories in Bangladesh, the supply chain is often identified as where the problem lies.
Businesses have always bought components from other firms, and food retailers have bought fresh produce from farmers, but the contemporary supply chain is more complicated than merely the relationship between a firm and its immediate suppliers. Supply chains are called chains for a good reason.
Outsourcing in supply chains
Up until perhaps the last 40 or 50 years, manufacturing companies mostly tried to directly control much of their production by having it on site. The model manufacturing plant during the first two thirds of the 20th century looked like the early automobile factories built and run by Henry Ford. This is why many refer to this integrated form of industry as Fordism. However, over the last half century the idea of ‘outsourcing’ has taken hold, promoted by business schools and economic consultants.
The key insight of an outsourcing approach is that any company is unlikely to be good at all aspects of the manufacture of its key product(s). By focusing on its ‘core competences’ and outsourcing those things outside its central expertise, a company can benefit from the efficiency and effectiveness of its own specialism(s) and, importantly, the effectiveness of its suppliers’ specialisms too.
Companies have a decision to make between making something themselves or buying it in: the make/buy decision. Growing adoption of outsourcing swung the balance in the economy from a preference to making in-house/on-site to a tendency to seek supplies from outside the company, and increasingly even outside the country. The expansion of the network of suppliers and sub-suppliers providing items for the manufacture of a company’s products, known as the company’s production network, has given supply chains a much more important place in our contemporary economic system.
A company’s supply chain is the associated companies through which intermediate goods pass as they are successively assembled into larger and larger sub-units of the final product before arriving at the central company for final manufacture.
For instance, we might see a specialist parts firm provide specific gears to a company that makes gearboxes, who supplies a firm that assembles automobile drive trains which are then supplied to a company building cars. Or, we might see a firm specialising in mobile phone screens supplying a similar screen to a range of phone manufacturers whose product value is based on the internal software, not on the generic touch screen or hardware.
Supply chain relationships
As supply chains have become more complex, so the relations between firms in the supply chain have become less uniform. They can vary from arms-length, where a company buys its components from a range of suppliers with no long-term relationship (purchases are made on the open market), to wholly owned subcontractors, where the lead manufacturer owns one or more of the companies involved in the supply chain.
To return to the automotive example; the gearbox manufacturer may be able to get various gears from a range of manufacturers and may choose between them on the basis of price, availability or quality. It might supply the gearboxes to a plant that builds drivetrains that is wholly owned by the main car company.
Across the supply chain, the relations between the main company and the participants may be very different. There has been a lot of research into these relations in the supply chain which suggests that there are three main forms of relations. The first is entirely mediated by the market; here firms contract with each other based on orders for (most often) generic parts which could be produced by a range of suppliers. The core company chooses a supplier largely based on price and immediate convenience.
When this market-based relationship does not deliver what the central company requires, it may enter some form of partnership with a supplier. This might involve close collaboration, sharing data for example about supply planning and ongoing supply issues. The relationship may deepen over time into a more formal arrangement involving some co-design, and (for instance) access to each other’s planning data to allow integration of production timetables.
Sometimes suppliers are ‘captured’. While remaining formally independent, they are so dependent on the core company’s business that they can no longer afford to break free to supply other firms, or even influence the buyer’s terms. This shift across relationship types reflects the frequent aspiration of central companies to control suppliers by taking a larger and larger proportion of their business.
A captured supplier may later be taken over by the central company. Conversely, the main company may ‘spin-out’ divisions so that while remaining in their original supply chain, they can also use economies of scale to reduce prices by entering other supply chains as well as that of the originating central firm.
So, the supply chain itself is patterned by various relations and differences in how those relationships are managed.
Who is in charge of the supply chain?
Therefore a key question, posed by activists such as those who seek to stop worker exploitation or lessen environmental impact of the production processes involved in the supply chain, is who is actually in charge.
The various relationships often appear to be mediated by the market and as such core companies enjoy some plausible deniability about their responsibility for any problems identified ‘upstream’ of their operations. The central company can argue that it is merely a purchaser in a market, and its suppliers are independent companies over which it has no formal or legal control. This position, however, has frequently been challenged by activists and governments.
The supply chain is often not so much a market-based environment, but rather one based on inter-firm relations, and the domination of the final manufacturer. These large central firms control the supply chain by setting production standards and requirements, by sharing data and information to ensure supplies into the central firm accord with its needs both in character and in timing. The central firm often has a high level of surveillance capacity all along the chain, whatever the formal relationship entered into by its contracting suppliers.
This reality is now widely recognised by those seeking to change practices in other countries. As such, the core or main firm has become the target of considerable political pressure to find solutions to problems among the firms with which it contracts, both directly and indirectly. The organisers of retail boycotts and organisers of Fair Trade certification have realised the core contracting company has considerable leverage over its supply chain.
Offshoring, reshoring and reintegration of production
Since Brexit there has been a move by some British companies to reverse the process of offshoring of supply chains that had taken place in previous decades.
When transport was slow and often expensive or unreliable, it made sense for firms to outsource to local or domestic suppliers. However the container transport revolution of the late 1970s both simplified and reduced the price of contracting with foreign suppliers. The rise of China and other East Asian countries as locations for labour intensive work reinforced the attraction of these and other locations for component manufacture where labour costs were a fraction of those in the UK or Europe.
Recently, difficulties in China, the frictions on trade caused by Brexit, and the impact of rising energy costs on international transportation have seen UK manufacturers start to ‘reshore’ their supply chains. Companies have looked for existing suppliers domestically, and may set up new supply chain firms for their production networks.
Alongside this move to reduce the distances covered by supply chains, there is also a slow move to reintegrate production, where the control of labour relations and environmental impacts, as well as control of valuable information or data, might be better undertaken in-house. This reflects both a shift in the perception of the risk to brands caused by problems in manufacturing and changes in the regulatory interest of states bowing to pressure from voters over human rights or green issues.
While the age of extended supply chains is hardly over, growing numbers of problems across some complex international production networks have led to a rethinking of how production is organised.
However, it is unlikely that supply chains will disappear from the news any time soon.
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