In the early days of the industrial revolution, manufacturers were forced to build their own supply chains. When Henry Ford was building large-scale automobile assembly plants, he also had to build steel mills, tire factories, etc. because they did not exist at the scale he needed to supply his needs. This business arrangement became known as vertical integration.
The “Field of Dreams” volume and stable nature of demand (if you build it, they will come) easily justified the investment. Vertical integration provides the highest level of control at the cost of flexibility. Once the investment is made, companies are understandably reluctant to make any changes that could make supplying plant operations obsolete or less efficient.
Fast forward to the second half of the twentieth century where global competition is keen, product variations are abundant , and product cycles are short as consumer demand is continually becoming more, well, demanding. Vertical integration becomes an anchor under these conditions. Therefore, manufacturers develop supply chains of independent or loosely related businesses that justify their investment in plant and equipment through flexible production capabilities and get their volume from a number of manufacturing industry customers.
Many of these supply chain relationships are close, collaborative, and on-going such that the supplier essentially acts as a subset of the manufacturer. And there’s nothing at all wrong with that. Collaborative relationships are the holy grail of modern supply chain management theory. But in today’s fast-moving markets, a different approach is emerging that is more flexible and responsive to changing market demands. Call it the Situational Supply Chain. It works much like making a Hollywood movie.
Most movie producers do not have studios and sets, cinematographers, screenwriters, actors, directors, and all the other resources needed to make the movie. They have an idea (think of that as a product design) and perhaps a few resources – maybe a script. The producer will then assemble the team it needs to actually make the film; rent the studio space and equipment, hire the director and actors, etc. And here’s the important thing: when the movie is completed, the movie’s “supply chain” ceases to exist as such. Participants move on to other projects. When the producer is ready to start the next project, a new team will be assembled that may or may not include some of the same actors, director, editor or studio.
The situational supply chain works much the same way. A company (that may or may not have its own final assembly plant) will come up with (or license) a new product. It will contract with suppliers for all the materials, components and services needed (perhaps even final assembly and distribution). When the next product comes along, the manufacturer will assemble a new supply chain for that product, seeking out the best qualified suppliers. Some of those suppliers may already be doing business with the manufacturer and some may be new to the relationship. Depending on the expected duration of the product (life cycle), it could be an intense, collaborative long-term relationship or it could be a spot buy; whatever is best for that particular product.
The situational supply chain is tailor-made for volatile markets, product proliferation, and short product life cycles. It requires more work and attention from procurement, quality, and logistics (supply chain) management but offers the utmost flexibility and agility. While long-term collaborative supplier relationships may be the most efficient and lowest risk way to do business, they cannot supply the flexibility that some fast-changing markets require.