Harnessing the Power of Partnerships

M. Eric Johnson says that global supply chains demand more intimate partnerships between buyers and suppliers. Here are some ways to strengthen those ties.

By M. Eric Johnson

February 23, 2005 — CSO —

Product innovation is the life-blood of every business. However, developing and delivering new products to global markets is becoming increasingly complex. Once limited to fashion-driven products, constant product innovation, short life cycles and high cannibalization rates are becoming typical for many industries in today's business environment.

Increasingly, customers are demanding customized offerings while investors relentlessly drive managers to find lower costs and growth. From apparel to high technology, the dual forces of outsourcing and globalization have led to a rapid supply chain disintegration and increasing coordination complexity. Product designers, marketers and manufacturers that were previously located in a single facility are today spread over several continents in organizations with different cultures, languages and business objectives. Moreover, these global supply chains include emerging markets that add many new risks and often slow down the new product introduction process.

For example, not long ago, apparel brands such as Levi's did it all, operating their own U.S. production plants along with their core design and marketing activities. Now, the company has shuttered the plants that once dotted the south-eastern U.S. and outsourced much of that production and even design.

The same is also true for a host of other products, from PCs to lawn mowers. Ten years ago, Hewlett-Packard, the electronics group, designed and manufactured PCs for regional markets in Europe and the US. Now, designers, marketers and assemblers are scattered across different companies.

There is little doubt that this global migration has enabled consumers to obtain cheaper goods of higher quality. Consider apparel, which began moving to low-cost countries a long time ago. Over the past decade, the sector has consistently landed at the bottom of the consumer price index, although inflation during that period, as measured by the U.S. consumer price index, has hovered between 2-3 percent annually. Meanwhile, apparel has seen nothing but relentless deflationary pressures. Since 2000 alone, the sector has deflated at 2-3 percent every year. From computing power to horse power, consumers are living in the cheap decade.

The supply chain becomes more complex

For managers, the wonders of price deflation have come at the cost of increased supply chain complexity. In other words, with the supply chains of most clothing manufacturers now spanning the globe, increased supply chain complexity has strained every player in the industry - sometimes to breaking point.

When this happens, products fail to meet customer expectations or arrive too late for the intended season, requiring deep markdowns to liquidate inventory before the next set of goods arrives.

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