The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

We call reader attention to a rather insightful article, Closed encounters with suppliers, published in the July 7 print edition of the Financial Times (paid subscription required).  In the article, author Peter Marsh articulates the differences between closed and open supply chains, along with their implications for corporate and supply chain strategy.

March defines the differences of closed vs. open as follows:

A closed supply chain is a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the system.”

“In open supply chains- common in industries such as automotive, aerospace and many areas of consumer electronics- the emphasis is on standardized components that fit together in a modular fashion. In these systems, suppliers are generally encouraged to be the main innovators and sell the same components to a range of customers.”

Open supply chains came about from the efforts of lean and just-in-time initiatives where efficiency, cost control and overall return on assets was the overall corporate objective.  Later, quicker and more timely response to customer and market trends also became a motivator. Differentiation in products are governed by time-to-market and global volume and scale considerations, where common components can be shared across various product families or design platforms. The article makes an argument that rather than simplicity, the pendulum may be swinging back to complexity.  Of course, industry and corporate strategy are other considerations.

The article cites examples of closed supply chains as being Apple’s consumer electronics offerings, the Nestle Nespresso coffee maker and Corning’s flat screen glass. Supply Chain Matters would add Boeing’s 787 Dreamliner supply chain to the category of closed. The article points out that closed supply chains have come to the forefront as a result of corporate strategy needs to develop more innovative products that provide an industry edge or cannot be easily copied by competitors. Also noted is that in a closed supply chain, the hub company often requires supplier facilities to be closely situated to orchestrate design and coordinated supply needs. A closed supply chain often requires a more “tops-down” approach for supply chain business processes.  The article also points out that closed supply chains are far more exposed to the risk of greater disruption caused by external events. The March devastating earthquake and tsunami that occurred in Japan was the most recent example of the effects of this disruption on certain closed supply chains.  A recent news posting in Procurement Leaders notes that Boeing is considering a new supplier sourcing strategy to reduce the impact of certain disruptions, such as the recent Japan earthquake had on the 787 Dreamliner supply chain. Similarly, other closed supply chains have had a wake-up call to risk mitigation.

Supply Chain Matters would add other considerations, not covered in the FT article.  Organizations considering a shift more towards closed supply chains need to especially focus on the people skill, risk and systems implications of managing a closed supply chain.  From our observations, closed supply chains are managed by a more centralized supply chain organizational structure where critical functions of product management, supply chain planning, strategic sourcing and procurement are better coordinated.  The people skill requirements are also higher.  For instance, sourcing and procurement needs to have skills in understanding product technology and individual vendor capabilities.  As noted by FT, there is also a need for a coordinated strategy and focus related to identification and mitigation of potential supply chain risks.

Information systems are another important consideration.  Many closed supply chains tend to shy away from “generic” backbone software applications, in favor of those that provide broader and deeper supply-chain wide visibility and control.  Flexibility to adapt and quickly respond to constantly changing business needs as well as broader supply chain wide collaboration and business intelligence capabilities tend to be the requirements of choice.  Larger enterprises may consider adoption of more agile and less burdensome applications to support innovation required from smaller subsidiaries operating in growing emerging markets. Incorporating social media strategies to gain real-time customer insights and response to newer or updated products is also something to consider.

A closed supply chain may or may not be appropriate for every enterprise or mid-sized business. However, if it is a consideration, insure that your supply chain team evaluates the organizational skill, risk and IT requirements of this model.

Readers who have experience in closed supply chains are invited to add their observations related to organizational skills, risk and IT requirements to this commentary.

Bob Ferrari