Business Integration Models: The Old and the New
River Rouge complex, the largest industrial complex in the world during the
1920's and 30's, is often cited as the prototypical example of vertical integration.
Iron ore came in one side and autos came out the other end. Contrast that with
the development of virtually integrated supply chains during the 80's and 90's:
thousands of suppliers dispersed across the globe, each with their own role
in the production of a single product. But this is also changing. I had a "back-to-the-future
experience" during a recent tour of Ford's first North American supplier park,
scheduled to start production next year. Located mile from Ford's 2.7 million
square foot Chicago Assembly Plant, the supplier park boasts another 1.6 million
square feet of manufacturing space1 . In this combined campus, sheet
metal and other raw materials are trucked into one side and finished autos roll
out the other end sound familiar?
Figure 2 - Ford's Chicago Supplier Park
this is very different than the Rouge-style vertical integration of the past.
11 suppliers are co-located on one campus, forming a physically integrated plant,
with different sections run by each different supplier2 . Bodies
stamped out by Tower Automotive and Sanderson Industries pass through a huge
door to have suspension systems added by ZF-Lemforder, fuel tanks and instrument
panels by Visteon, door parts by Brose, consoles by Summit Polymers, wiring
by S-Y Systems, molded plastics by Plastech, with automated assembly and tooling
and equipment provided by Comau Pico. Final assembly is done across the road
at the huge Ford plant.
The manufacturing floor space in the combined campuses is the equivalent of
87 football fields!
We also see divisionalized firms evolving to the federated models from the other
direction. Shared service departments, typically IT, must compete with outside
firms for the business of each division and additionally are allowed to offer
their services to other firms. Thus, the shared service department becomes a
highly autonomous unit, hard to distinguish from external suppliers.
What is striking here is the level of supplier commitment and integration. These tenants have long-term (e.g. 9+ years) triple net leases (tenants pay for all maintenance expenses, plus utilities, taxes, and insurance). Many have put significant investments into upgrading the buildings, and all are putting large investments into equipping these plants with state-of-the-art manufacturing lines. For example, Tower, in addition to a pair of massive 2,000 ton stamping machines and hundreds of sophisticated welding robots, has its own 30 Megawatt power substation to feed its welding operations.
The supplier park approach takes strategic supplier relationships to a whole new level—binding the OEM and suppliers into a new sort of "enterprise", not in the traditional legal sense, but through contractual and informal commitments, agreements, and physical processes into an integrated whole. While this is the first such supplier park in North America, there have been similar experiments in Brazil and Europe (Spain, Czech Republic, Sweden, Germany, and France). We expect to see more arrangements like this, particularly in automotive, but possibly in electronics and aerospace, which have similar driving forces.
big drivers here are JIT production, postponement/mass customization, and time-to-market
compression. The OEMs strive to become ever leaner, demanding ever-shorter lead
times, driving co-location of key suppliers. Mass customization, such as the
5-day car3, pushes postponement further back into the chain e.g.
waiting until you actually receive an order before painting the body and installing
options. This won't work if there is an extra day of transportation between
suppliers. As an example of the new time frames at the Ford supplier park, Brose
will produce and deliver a door assembly (adding wire-harnesses, speakers, window
regulators, etc.) within 120 minutes of receiving an order.
may be the biggest driver. Face-to-face interactions between engineers and production
personnel at the OEM and the various suppliers allow rapid transfer of knowledge
and debugging of problems. The Internet may be great for abstract design efforts
like distributed software engineering, but when it comes to working out the
kinks in manufacturing operations, there is nothing like walking someone over
and showing them the problem. This allows the development and continual improvement
of shared processes and practices. In addition, when suppliers are this tightly
synchronized via conveyor belts with lean buffers, problems become apparent
almost instantly and can be corrected before many incorrect parts are produced.
 The 5-day car goal/dream is delivering a custom
configured car within 5 days of the customer's order.
High Tech Contrast
The high tech industry has not (yet) embraced the supplier park concept, though it faces many of the same dynamics (JIT/lean, postponement, time-to-market pressures, etc.). High tech firms instead have A) aggressively outsourced manufacturing to contract manufacturers and B) implemented VMI hubs near the OEM or CM plant, typically demanding 2-4 hour lead times from the hub to enable JIT production in their plant.
Reasons for high tech's different path include highly modularized designs—that is highly standardized form factors and electrical characteristics of the major components, such as processors, memory, mass storage, motherboards, and connectors (enclosures are somewhat of an exception). This reduces the need for face-to-face interaction in manufacturing. Also, the much smaller size of high tech components, compared with automotive bodies, means transportation is not as much of an issue. In addition, high tech OEMs have not yet pushed postponement back to their suppliers as aggressively as in automotive.
Different industries and different companies within an industry evolve different approaches to supplier integration. Figure 3 illustrates some of the forces influencing the proximity of supplies and the manufacturers they serve.
course, proximity is only one of many dimensions in a business model. Table
1 illustrates some of the dimensions and varieties found in supplier parks.
Table 1 - Variations in Supplier Park Approaches
||Separate buildings with buffer stocks of inventory
vs. same building with suppliers’ operations directly
linked by conveyor belts
|Ownership, Investment, Commitment
||Supplier-owned vs. OEM-owned land and building. Varying
levels of investment by supplier, in equipment and customization
of the facility. Varying length and terms of lease.
||Unified HR policies/wages across the site vs. each
|Make vs. assemble
||Degree of actual manufacturing of the components vs.
final assembly. Light assembly may be done by a 3PL rather
than by the supplier.
the past, OEMs drove most of these relationship decisions. But suppliers are
taking an increasingly active role. As the fate of suppliers and OEMs becomes
more intertwined, new governance models emerge that involve increased joint
decisions. OEMs are finding the benefits of strategic integration are worth
the risks of getting locked in with specific suppliers. And suppliers are finding
the benefits of the long-term strategic relationships are worth the risk of
the huge investments they are making. We are witnessing the next big evolution
in business integration models, propelled by competitive pressures to become
leaner, faster, and more responsive.
"This article is from Parallax View, ChainLink Research's
online magazine, read by over 150,000 supply chain and IT professionals each
month. Thought-provoking and actionable articles from ChainLink's analysts,
top industry executives, researchers, and fellow practitioners. To view the
entire magazine, click
Bill McBeath, Chief Research Officer of ChainLink Research,
leads ChainLink's research efforts, as well as the procurement, strategic sourcing,
design collaboration, and online marketplaces practices. With more than 20 years
of experience in a variety of roles as a business and technology researcher
and consultant, high tech executive, and software architect, Mr. McBeath is
recognized as a leading expert in extended-enterprise business models.
Research is a bold new supply chain research organization dedicated
to helping executives improve business performance and competitiveness. ChainLink
was founded on the premise that supply chains are market driven and that the
management of the links between companies has become the key determinant of
the winners and losers.