Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, writer for Purchasing Today®.
May 2000 Purchasing Today®, page 47.

What do you do well? Who could do it better? Those are the questions organizations must answer to analyze core competencies and the best-suited suppliers.

One of the most leading-edge topics for purchasing and supply management professionals, the virtual supply chain allows organizations to connect, receive mutual benefit, and align business strategies for the prime amount of time.

Now you see it, now you don't. At the other extreme, far from the long-term strategic alliance that focuses on continuous improvement and increasingly integrated relationships, lies the virtual supply chain. Still directed toward the same ultimate goals of today's supply chains - satisfying the customer, efficiency, and cost-effectiveness - this virtual supply chain has a different look. It relies on relationships that can fill a need for a given moment of time and is structured in such a way that formation, practice, and dissolution are conducted with ease.

Sorting Out the Terminology

The word "virtual" might conjure up images of the latest high-tech equipment, simulated strategy games, or gadgets that alter reality with surprising ease. However, contrary to the concepts so prevalent in the entertainment industry, virtual organizations and virtual supply chains have different interpretations in the business and supply management world.

Most are familiar with the concept of virtual teaming, where several individuals get together for a project or discussion, although they're not together in the physical sense. Thanks to technology, people can meet via computer hookups and telecommuting phone lines. Taking this concept and applying it to purchasing departments, organizations, and supply chains can lead to the following models.

Virtual Purchasing and Supply Organization. A department takes on a virtual quality if portions of its responsibilities are shifted or assigned to other various business units within the same organization. Some organizations describe the transformation as taking a fragmented organization that had fragmented purchasing processes, and aligning the various departments so that all purchasing processes flow through common practices, but not a common department. The virtual aspect results in the actual purchasing procedures being handled not by an isolated purchasing department, but by a process steering group comprised of members from the various business functions.

Virtual Organization. Take this concept one step further and imagine a virtual organization, one that doesn't exist in a physical sense, but functions nonetheless. In this instance, an organization may be an umbrella for several outsourcing operations, but not necessarily a physical entity. The single organization is virtual in the sense that it is not traditionally "tangible." There may be figureheads and individuals facilitating all of the third-party relationships, but all core processes, whether manufacturing, service, administrative, or operational, are performed outside the "virtual" organization.

Virtual Supply Chain. "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," a recent study by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, discusses the virtual supply chain as a secondary trend facing the purchasing and supply management function in the coming years. (See the box on page 48.) If a virtual organization is one actually comprised of other entities, then the virtual supply chain is one where the links may not be what they seem. The concept, in terms of the study, is fairly futuristic, discussing virtual legal organizations that are commodity- or market-focused. These chains are formed to commit specific resources to meet a specific, temporal need, but not integrated in the long-term sense. Lead study researcher Phillip L. Carter, D.B.A., director of CAPS, explains, "Many new products have a short life span. Putting together a supply chain to meet this window of opportunity presents great challenges. One solution is to form virtual supply chains that exist only as long as the market demand for the product or service is there. The virtual chains will consist of temporary organizations with temporary resources and staff. Purchasing and supply management professionals will be challenged to manage very complex issues, such as cost sharing, profit sharing, intellectual property, and liabilities, under severe time pressures."

One example might be a retail store that has a mail order catalog operation. For specified orders - perhaps on a temporary basis for a specific product - an overnight shipper might actually field phone calls, process orders, and deliver shipments, without any "hands-on" involvement by the original organization. Although there is a traditional supply chain, each of its links operates "virtually" for this given opportunity. "Virtual supply chains also appear in the context of onetime or periodic events," says Carter. "For example, virtual chains are created to support the Super Bowl each year or the Olympics every four years."

How Virtual Can Become a Reality

Based upon the description above, it's clear that the concept of the virtual supply chain is not appropriate for all situations. Even in those circumstances that are conducive to the establishment of such a chain with untraditional relationships, there are limitations. Technology may be the largest. The virtual supply chain depends on information flow through an organization and between organizations that is expeditious, customized, and delivered to fitting parties. It may include customer information, real-time schedules, and customized specifications. The virtual supply chain that might exist for a onetime sporting event does not have the luxury of perfecting the process of the information transfer over time. Technological competence must be nearly guaranteed before abandoning more traditional communication models.

Also, even though information technology can bind together business processes, it is just a tool. The most complex computer programs and enterprise resource planning systems have little effect on process ownership and process improvement, which will always be linked to good human communication and solid working relationships. Stipulations on the technology required for successful virtual supply chains apply to both internal and external systems.

According to "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," one advantage of the virtual supply chain model is that organizations can enter into short-term alliances without the legal entanglements of long-term contracts. How does this prediction coexist with the other study results that predict an increase in strategic alliances, strategic sourcing, and more comprehensive supply chain partner interaction? The answer is that virtual supply chains are not meant to take the place of those purchasing models, but rather become an option for particular relationships, based on a very specific customer, target market, event, or product. In those situations, the supply partners will have a clear understanding and agreement of what is expected during the term of the relationship, exactly how the relationship will end, and what the parameters are for risks and rewards.

Of the trends listed in the NAPM/CAPS study, the virtual supply chain carries with it the most futuristic tone. Combining the latest in technology and the richest of supply partners for a targeted mission, this model may not yet be reality for every purchasing organization. But if implemented properly, it can provide the competitive advantage or be your strongest competitor.

Initiative #13:

Virtual Supply Chain

"Box page 48"

The 1998 study, "The Future of Purchasing and Supply: A Five-and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, details 18 future initiatives that will shape the purchasing and supply management function in coming years. This month, Purchasing Today® provides commentary on one aspect of the study: Initiative #13, Virtual Supply Chain. The study offers the following predictions:

  • Mergers will become more difficult, so short-term alliances, without the legal entanglements of long-term contracts, will become more attractive.
  • When products become competitive or the market changes, virtual organizations will be able to more easily dissolve, without realizing a loss on initial investment or capital.
  • Since virtual organizations can dissolve, third-party suppliers might be in a position to provide warranty or after-sales service to customers.
  • Prior to entering into a virtual supply chain, the organizations will clearly establish parameters for risk sharing, reward sharing, resource contribution, and a basis for ending the relationship.
  • Groupings of "system suppliers" will join together to coordinate the completion of the final product or service bundle under a joint agreement.
  • Resources and assets among the system suppliers will be contributed jointly under the direction of a supply chain captain and a coordinating team.