Closed encounters with suppliers

The link between a cavernous factory in Japan making highly pure glass for television sets and a plant on a UK industrial estate turning out holiday caravans might seem rather tenuous. Both are examples, however, of a set of new trends that are reshaping the design of supply chains in global manufacturing.

In a more competitive world, manufacturers face a growing need to develop products that use new technologies to set them apart. To help them achieve this distinctiveness, companies are turning to “closed” rather than “open” supply chains.

“Making new products using closed supply chains is the dream of virtually all chief executives at major companies,” says Daniel Corsten, a professor at IE Business School in Madrid. “They can see how moving in this direction can deliver a huge competitive advantage.”

A closed supply chain is a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the system. A large proportion of the components made by key suppliers are unique to the final product.

In open supply chains – common in industries such as automotive, aerospace and many areas of consumer electronics – the emphasis is on standardised components that fit together in a modular fashion. In these systems, suppliers are generally encouraged to be the main innovators and sell the same components to a range of customers.

Perhaps the world’s most successful exponent of closed supply chains is Apple, the US consumer electronics business. It has set a new path for supply chain planning by using closed supplier networks – in combination with some open ones – to develop the technologies and parts for some of its best selling products, such as the iPhone and iPad.

Nestlé’s Nespresso coffee maker, made from many parts that fit no other type of drinks maker, is another example. Many German Mittelstand machinery companies – producing equipment for jobs from cutting wood to sorting letters – are long-time masters of the genre.

As other manufacturers try to set up their own closed supply chains, they need to consider a number of factors.

For a start, Prof Corsten warns that such systems can be extremely difficult to manage. The individual processes involved with different elements of these chains are often associated with complex technologies that involve interlinked subsets of components. In these instances, companies often need a “top-down” approach to drive the different processes – with the maker of the final product rather than the suppliers being in charge.

Closed supply chains can also leave companies more exposed to the risk of greater disruption caused by external events than an open system based on modular principles. If parts of the supply chain are disrupted in a closed system it can be much harder to find replacement suppliers.

This risk is compounded by the fact that many closed systems commonly operate with clusters of suppliers spaced close to a central “mother” factory which orchestrates the sequences of technologies being used in the system, and drives product changes.

After the recent earthquake and tsunami in Japan, for instance, the closed approach of many of the specialist machinery makers with component plants in the affected area was blamed for exacerbating the impact on manufacturers.

“With a closed system, perhaps even more than with an open system, companies have to build into their planning the idea that they need a level or redundancy to cope with extraordinary events,” says Prof Corsten.

Corning, the US maker of the special glass for flatscreen televisions, was fortunate in that one of the main hubs of its closed system – a giant $800m facility in Sakai City just outside Osaka – was unaffected by the disaster.

The facility makes the glass in sheets that are almost three metres square but less than 1 millimetre thick – the biggest sheets of glass for such applications yet devised.

Any human touch would either shatter the material or introduce unacceptable contamination. As a result, the sheets are handled only by robotic arms and air-pressure pads on their journey from the Corning factory to a plant next door run by the Sharp electronics company, where the glass is cut by automated equipment and assembled into fully-fledged display panels. To make the glass in this way has required roughly $5bn of investment over the past decade.

A much smaller company that has gone down the route of closed supply chains is Bailey, a family owned business that is a leader in making touring caravans for the British market. Based in Bristol, the company has spent about $6m in devising a new system for building caravans called Alu-Tech that borrows ideas from the aerospace industry and uses extruded aluminium struts.

To develop the product, Bailey not only had to collaborate with the University of Bath on the design but also work on a set of new parts with a group of about 15 suppliers. “We would not have done this without the co-operation of our suppliers,” says Stephen Howard, Bailey’s managing director.

Voestalpine, Austria’s biggest steelmaker, has used closed supply chains to make a range of special steels for products such as automotive parts and components for rocket engines. Wolfgang Eder, its chief executive, says that making products from a sequence of complex steps – many of which involve proprietary technologies and can involve in-house production as well as outside suppliers – can be a “key for survival and success” for many manufacturers in high-cost countries.

“If you can design complexity into your production processes and have the skills to manage these operations, you give yourself the power to make products that no one else can make,” he says. “You can also provide opportunities for cost reductions which can be a step ahead of what other businesses can do.”

Despite the potential pitfalls, the closed approach to supply chain management shows that – against the trend of the past 20 years to try to simplify manufacturing operations – complexity is a trait that can lead to good products and increased profits.