Supply network definition
/What is a Supply Network?
A supply network is a cluster of suppliers that assist a business in adding value for customers by manufacturing and delivering products. Besides manufacturing activities, a supply network also consists of the flow of information back and forth between the company and its suppliers to address such issues as the timing and amount of deliveries, as well as component designs for new products.
A supply network can be extended to include a firm’s customers. Those customers to which it sells directly are considered the firm’s first-tier customers. If those customers sell on to other parties, then these other parties are classified as second-tier customers. For example, a manufacturer of watches may sell them to a watch distributor (its first-tier customer), which then sells them to retail stores (which are second-tier customers).
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How to Improve a Supply Network
The structure of a supply network can be enhanced in a number of ways. We include several options below:
Outsource activities to suppliers. The company could elect to shift an in-house function to a supplier. This makes sense when management wants to concentrate its oversight on core competencies, or when a function has proven to be difficult to manage, or when the function represents too large an investment for the company. When outsourcing occurs, the number of top-tier suppliers increases, and possibly also the number of second-tier suppliers. However, doing so will place some company operations in the hands of outsiders, which could cause problems.
Take activities in-house. Management may elect to do the reverse and take a function back in-house. This is likely to be the case when no supplier has been able to supply the requisite level of service, or when management believes that a function represents a strategically-important or high-risk activity, and so wants more control over it. However, doing so will require some management time, which could result in the management team being stretched thin.
Concentrate suppliers. Management may choose to concentrate its business with a smaller number of top-tier suppliers, so that the company has to deal with fewer suppliers. This also makes sense when the company finds that a few suppliers are unusually good at coordinating the activities of second-tier suppliers, which means that some supplier coordination activities can be shifted over to them. However, this can be a problem when a major supplier is located overseas, and logistical or political issues interfere with deliveries.
Impact of the Supply Network on Strategy
The preceding decisions regarding suppliers, as well as any structural decisions regarding customers, are part of a firm’s strategic plan. As such, they should be discussed with senior management and only revised with their concurrence. Ideally, any supply network changes made should be driven by the requirements of the overall strategy.