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The impact of ‘corporate virtualization’ on your supply chain

Guy Strafford
May 17, 2013 2:49:00 AM

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The FT recently ran a piece called “"Businesses unaware of supply chain risk" which followed on from the Bangladesh garment factory fire (killing over 600 people, spurring a fierce public reaction). And just this week, days after the FT article was published, news of a Cambodian shoe factory collapsing, killing at least two people, hit our headlines. These catastrophic events come just weeks after the horse-meat scandal and within memory of the Japanese earthquake disrupting car supply chains.

Why so many supply related scandals? Why now?

The FT article observed “"UK [and global] companies are risking serious disruption and reputational damage because they have so little visibility over their supply chains. Almost one in five businesses hold no data about their suppliers'’ suppliers, according to the poll of 131 directors”."

My initial reaction to the FT piece is anecdotal but I am very surprised that as many as four fifths of businesses said they DO have some data about suppliers'’ suppliers. From my own experience, numerous businesses simply do not have the visibility into who their suppliers are in general nor their expenditures with them.

My second reaction is that the events that are unfolding are the consequence of an accelerating trend towards ‘'corporate virtualization'’ which has occurred gradually over the last 20 years. This trend is happening on a global level too (as our forthcoming global study will show) with supply costs now accounting, on average, for a whopping 70% of revenues.

Clearly that number varies by industry; the banking world tends to spend about the same amount on labor as suppliers whilst the chemicals industry can spend more than 15x as much.

Nevertheless, the increasing complexity and disparity of global supply over the last few decades, has seen a gradual externalization of traditional company functions and areas -– from back office areas such as Finance, IT, HR to customer touch points such as Sales and Marketing.

This process of ‘'corporate virtualization’' has resulted in a significant change in not only the way companies are conducted and managed but how overall business is conducted. It has changed the very fabric of what a '‘company'’ is in the 21st century.

Why such a seismic shift?

The shape and size of global markets have vastly changed over the past 20 years, offering companies more opportunities to buy and sell goods and services that may not have existed in their home territories.

However there are four key factors that have shaped the markets as such:

1. Currency liberalization - from the early 1970s onwards, with the collapse of the Bretton Woods agreement, it became possible to buy things abroad more easily.
2. Open trade - the falling trade barriers between countries have also contributed to it being easier to buy from abroad.

Together these first two above changes meant it was now possible to purchase many more products from many more countries, then came:

3. The internet -– above and beyond transparency of pricing, the internet has made it much, much easier to find products and services from new suppliers, and access new customers.
4. Better distribution and travel - –it is now possible to get products and people to places which never used to be

Collectively, all four make the world more global and provide more choice.

Most importantly, they make more niches for products and services viable.  The company that once could not survive on servicing its locality with left handed scissors, can now supply the world (as a lefty this means something to me!).  The decision to make or buy has increasingly been able to be filled by buy, and the options to acquire things which you might never ever consider making oneself are even greater.

I do not believe that these factors will diminish for the foreseeable future and they mean that in every organization, more is going to be bought from an increasingly diverse range of other businesses. This is what specialization and progress represent.

The fundamental issue with all of this is that management techniques simply haven’t evolved at equal pace to these changing cost patterns –- resulting in loss visibility and control into the supply base, and thus increasing the amount of risk being brought into a business.  It represents an interesting challenge how to engage with this new world where risks are primarily outside the walls of your factory or office.  

If your business is a confluence of suppliers and related contracts, then what makes the remaining people more productive?

And in this change, lies opportunity. How well the supply base is mobilized, managed, listened to and aligned with corporate objectives -– can materially impact company performance and differentiate you in an increasingly competitive world.

This is what we all do.

* FT article can be found here 

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Guy Strafford

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