Compass and Vodaphone – two ends of the outsourcing phenomenon 3
4.4 Diagnostic question: What configuration should a supply network have?
‘Configuring’ a supply network means determining its overall pattern. In other words, what should be the pattern, shape or arrangement of the various operations that make up the supply network? Even when an operation does not directly own, or even control, other operations in its network, it may still wish to change the shape of the network. This involves attempting to manage network behaviour by reconfiguring the network to change the nature of the rela- tionships between its various parts. Reconfiguring a supply network sometimes involves parts of the operation being merged – not necessarily in the sense of a change of ownership of any parts of an operation, but rather in the way responsibility is allocated for carrying out activities.
The most common example of network reconfiguration has come through the many compa- nies that have recently reduced the number of their direct suppliers. The complexity of dealing with many hundreds of suppliers may both be expensive for an operation and (sometimes more importantly) prevent the operation from developing a close relationship with a supplier. It is not easy to be close to hundreds of different suppliers.
Disintermediation
Another trend in some supply networks is that of companies within a network bypassing cus- tomers or suppliers to make contact directly with customers’ customers or suppliers’ suppliers.
‘Cutting out the middle men’ in this way is called disintermediation. An obvious example of this is the way the internet has allowed some suppliers to ‘disintermediate’ traditional retailers in supplying goods and services to consumers. So, for example, many services in the travel industry that used to be sold through retail outlets (travel agents) are now also available direct from the suppliers. The option of purchasing the individual components of a vacation through the websites of the airline, hotel, car-hire operation and so on, is now easier for consumers. Of course, they may still wish to purchase an ‘assembled’ product from retail travel agents, which can have the advantage of convenience. Nevertheless, the process of disintermediation has developed new linkages in the supply network.
Co-opetition
One approach to thinking about supply networks sees any business as being surrounded by four types of players: suppliers, customers, competitors and complementors. Complementors enable one’s products or services to be valued more by customers because they can also have the complementor’s products or services, as opposed to when they have yours alone. Com- petitors are the opposite; they make customers value your product or service less when they can have the competitor’s product or service, rather than yours alone. Competitors can also be complementors and vice versa. For example, adjacent restaurants may see themselves as competitors for customers’ business. A customer standing outside and wanting a meal will choose between the two of them. Yet, in another way they are complementors. Would that customer have come to this part of town unless there was more than one restaurant to choose from? Restaurants, theatres, art galleries and tourist attractions generally all cluster together in a form of cooperation to increase the total size of their joint market. It is important to dis- tinguish between the way companies cooperate in increasing the total size of a market and the way in which they then compete for a share of that market. Customers and suppliers, it is argued, should have ‘symmetric’ roles. Harnessing the value of suppliers is just as important as listening to the needs of customers. Destroying value in a supplier in order to create it in a customer does not increase the value of the network as a whole. So, pressurising suppliers will
not necessarily add value. In the long term it creates value for the total network to find ways of increasing value for suppliers as well as customers. All the players in the network, whether they are customers, suppliers, competitors or complementors, can be both friends and enemies at different times. The term used to capture this idea is ‘co-opetition’.
The idea of the ‘business ecosystem’
4An idea that is closely related to that of co-opetition in supply networks is that of the ‘business ecosystem’. It can be defined as: ‘An economic community supported by a foundation of interacting organizations and individuals – the organisms of the business world. The economic community produces goods and services of value to customers, who are themselves members of the ecosystem. The member organisms also include suppliers, lead producers, competitors, and other stakeholders. Over time, they coevolve their capabilities and roles, and tend to align themselves with the directions set by one or more central companies.’ 5 One of the main differ- ences between this idea and that of the supply network generally is the inclusion in the idea of the ecosystem of businesses that may have little or no direct relationship with the main supply network, yet exist only because of that network. They interact with each other, predominantly complementing or contributing significant components of the value proposition for customers.
Many examples come from the technology industries. The innovative products and services that are developed in the technology sectors cannot evolve in a vacuum. They need to attract a whole range of resources, drawing in expertise, capital, suppliers and customers to create cooperative networks. For example, the app developers that develop applications for particular operating system platforms may not be ‘suppliers’, as such, but the relationship between them and the supply network that supplies the mobile device is mutually beneficial. Building an eco- system of developers around a core product can increase its value to the end customer and by doing so complements the usage of the core product. Such an ecosystem of complementary products and services can also create significant barriers to entry for new competitors. Any possible competitors would not only have to compete with the core product, but they would also have to compete against the entire ecosystem of complementary products and services.
Describing supply networks – dyads and triads
The supply network that was illustrated in Figure 4.2 is, of course, a simplification. Any real- istic supply network diagram will be much more complex. There are many operations, all interacting in different ways to produce end products and services. Because of this, and to understand them better, supply network academics and professionals often choose to focus on the individual interaction between two specific operations in the network. This is called a
‘dyadic’ (simply meaning ‘two’) interaction, or dyadic relationship, and the two operations are referred to as a ‘dyad’. So, if one wanted to examine the interactions that a focal operation had with one of its suppliers and one of its customers, one would examine the two dyads of
‘supplier–focal operation’, and ‘focal operation–customer’, see Figure 4.6(a). For many years most discussion (and research) on supply networks was based on dyadic relationships. This is not surprising as all relationships in a network are based on the simple dyad. However, more recently, and certainly when examining service supply networks, many authorities make the point that dyads do not reflect the real essence of a supply network. Rather, they say, it is tri- ads, not dyads, that are the basic elements of a supply network, see Figure 4.6(b). No matter how complex a network, it can be broken down into a collection of triadic interactions. The idea of triads is especially relevant in service supply networks. Operations are increasingly out- sourcing the delivery of some aspects of their service to specialist providers, who deal directly with customers on behalf of the focal operation (more usually called the ‘buying operation’, or just ‘buyer’ in this context). For example, Figure 4.6(b) illustrates the common example of an airline contracting a specialist baggage-handling company to provide services to its customers
4.4 Diagnostic question: What configuration should a supply network have ■ 133
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(a) Dyadic relationships in a simple supply network and example (b) Triadic relationship and example Dyadic
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Figure 4.6 Dyadic and triadic relationships in two simple supply networks and examples
Source: From Slack, N. Operations Management, 8e, © 2016 Pearson Education Limited, UK.
on its behalf. Similarly, internal services are increasingly outsourced to form internal triadic relationships. For example, if a company outsources its IT operations, it is forming a triad between whoever is purchasing the service on behalf of the company, the IT service provider and the employees who use the IT services.
Thinking about supply networks as a collection of triads rather than dyads is strategically important. First, it emphasises the dependence that organisations place on their suppliers’ per- formance when they outsource service delivery. A supplier’s service performance makes up an important part of how the buyer’s performance is viewed. Second, the control that the buyer of the service has over service delivery to its customer is diminished in a triadic relationship. In a conventional supply chain, with a series of dyadic relationships, there is the opportunity to intervene before the customer receives the product or service. However, products or services in triadic relationships bypass the buying organisation and go directly from provider to customer.
Third, and partially as a consequence of the previous point, in triadic relationships the direct link between service provider and customer can result in power gradually transferring over time from the buying organisation to the supplier that provides the service. Fourth, it becomes increasingly difficult for the buying organisation to understand what is happening between the supplier and customer at a day-to-day level. It may not even be in the supplier’s interests to be totally honest in giving performance feedback to the buyer. Finally, this closeness between supplier and customer, if it excludes the buyer, could prevent the buyer from building important knowledge. For example, suppose a specialist equipment manufacturer has outsourced the maintenance of its equipment to a specialist provider of maintenance services. The ability of the equipment manufacturer to understand how its customers are using the equipment, how the equipment is performing under various conditions, how customers would like to see the equipment improved, and so on, is lost. The equipment manufacturer may have outsourced the cost and trouble of providing maintenance services, but it has also outsourced the benefits and learning that come from direct interaction with customers.
Structural complexity in supply networks
Some supply networks are relatively straightforward, both to describe and to manage. Others are more complex. At a simple level, the three-stage dyadic supply relationship shown in Figure 4.6 (a) is less complex than the triadic supply network relationship shown in Figure 4.6 (b).
Put many triadic relationships together into an interrelated network and things become even more complex. This is especially true when customers have some degree of choice over how and when they interact with a network. An example of such structural complexity is the move towards what have been called ‘omnichannel retail networks’. The original relationship between a retailer and its customers was straightforward – the retailer expected custom- ers to collect goods from its stores, or delivered them later if requested by the customer.
When online retailers emerged as the internet developed, there was little overlap between conventional ‘bricks-and-mortar’ stores and online firms. Even when conventional retailers developed an online presence, they often kept their online operations separate from their high-street stores.This is the ‘single-channel’ model, as shown in Figure 4.7 .
As more methods of contacting retailers became available, such as mobile phones, apps and social media, most retailers struggled to manage and fully integrate the many
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Figure 4.7 Single-channel, multi-channel, cross-channel and omnichannel retail models represent in- creasing options for customers, but increasing operations complexity
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alternative ‘channels’ of communication. In fact, they often treated them specifically as independent entities so that they could align each channel with specific targeted customer segments. This is the ‘multi-channel’ model shown in Figure 4.7. Later came the first attempts to integrate high-street stores with (initially) web and other channels in order to enhance their cross-functionality that, in turn, allowed a better shopping experience for customers (see the ‘cross-channel’ element in Figure 4.7). Finally, the ‘omnichannel’ model (also depicted in Figure 4.7) is seen by many retail analysts as being one of the most impor- tant retail developments since the advent of online services. It seeks to provide a seamless all-inclusive customer experience by fully integrating all possible channels, so customers can use whichever is the most convenient for them at whatever stage of the transaction.
So, a customer could browse alternative products through social media, order their choice via an app, manage their account through a website, pay using their phone and return the product to a physical store, should they wish to. Obviously, this requires a degree of tech- nical sophistication as well as coordination between internal functions such as marketing, retailing operations, distribution and IT.