However, they cannot produce the raw materials for these, where will they get the rubber for the tires, the small parts for the circuits, the oil for the batteries? Furthermore, the technologies and skill set required to best produce the subcomponents of an automobile are often highly specialized. The costs of producing and acquiring the required number of machines and personnel needed to create all of these subcomponents would be enormous. Even if they tried, they still couldn’t meet 100% vertical integration.
Instead, companies should specialize in their various competencies. After all, anything that others can produce cheaper, faster, and better must be outsourced to outside vendors. Meanwhile, the company itself can specialize in a smaller number of processes that are specific to its core competency and grow from this specific niche that it fills. Therefore, an organization cannot compete on its own; rather, it competes with its entire provider network behind it. A product or service cannot be delivered until the raw materials have been delivered on time and have gone through the required processes.
Upstream Supply Chain Supply Chain Management (SCM) recommends identifying your direct suppliers, your suppliers’ suppliers, and their suppliers, etc. The supply chain consists of levels. Tier 1 suppliers are those from whom your company buys directly; Tier 2 represents those who supply your Tier 1 suppliers; level 3 supplies level 2; and so. This creates a bottom-up supply chain: and an interlinked network of direct and indirect suppliers that support a company’s operations through inbound logistics.
Managing this upstream supply chain is considered an important strategy. With the right strategies, your supply chain can contribute significantly to your competitive advantage. If not, it will become a big disadvantage. Any failures in direct or indirect providers would lead to failures in their operations if not corrected or improved.
Take, for example, the Toyota company. Toyota works on a Just-in-Time (JIT) principle, in which raw materials are delivered to Toyota factories only when they are needed. Toyota does this by creating long-term contracts with its suppliers. In the contract, Toyota would provide its suppliers with a schedule of its operations, which car will be produced, when and where, as well as the materials they expect to obtain from their supplier for that particular operation. The supplier would deliver the materials to the Toyota factory at the agreed time, and these materials will be promptly transferred to their points of consumption. This strategy allowed Toyota to significantly reduce inventory costs to almost zero while ensuring that supply was always available. However, this also exposes them to the risk that suppliers will not meet target quality standards or miss deadlines, causing production delays.
So how does Toyota avoid this? In addition to implementing severe penalties, Toyota actively helps its supply chain improve its processes and become more competitive. Remember, “the chain is only as strong as its weakest link.” The links are interrelated and interdependent: any change in one of the links is reflected in the rest of the chain.
Both to prevent and solve supplier deficiencies, supplier development projects are created. You, as a customer, create such projects for your Tier 1 suppliers. These projects should help them identify and work on their weaknesses, creating improvements in their working relationships, as they can produce high quality products more often, at acceptable rates. and at lower costs. If they experience any problems, you should also be ready to help them get out of a rut. This produces a greater sense of supplier loyalty to you. In turn, Tier 1 providers are expected to train and develop their Tier 2 providers, and so on. In this way, the entire supply chain prospers and your company will reap these benefits exponentially.
Supply chain management is primarily concerned with ensuring that the right quantity of the right inputs arrives at the right quality/specification, price, and location to meet internal and external customer requirements.
Due to the importance of the supply chain to guarantee the competitiveness of a company, its management becomes a strategic rather than a tactical concern. Therefore, it requires a long-term perspective. Some things will have to be done even if there are no immediate results, and even if it is more expensive today. At the same time, some actions should be avoided despite the possibility of short-term gain due to future damage that could be inflicted on the entire supply chain and your business.