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The Manager's Guide To Supply Chain Management: Do Not
The Manager's Guide To Supply Chain Management: Do Not
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by Indiana University
ers to be extremely cautious in forming supplier he strategic objectives in outsourcing an Kelley School of
partnerships and alliances, and to continue to input are relatively straightforward. Basi- Business. For reprints,
rely on competitive markets for their outsourcing cally, firms are interested in how they call HBS Publishing
needs. Conversely, partnership and alliance con- can either significantly reduce product costs or at (800) 545-7685.
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practical to maintain expertise for them in-house. learly, fulfilling these two distinct strate-
The science base may be changing too rapidly, gic objectives requires quite different
making it risky to be a player in that field. Or it forms of supplier relationships. Once a
may be too expensive to maintain technological firm understands its primary objectives for differ-
competence. Or the product may be too complex ent types of inputs, it can develop distinctive and
for any firm to manage all aspects internally. In suitable supplier relationships. We classify the
each case, outsourcing the technology becomes two basic types as competitive tension and strate-
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an alternative—but one that entails risks, espe- gic alliance. However, not every supplier tar-
cially if suppliers provide critical proprietary ca- geted for either type is necessarily prepared for
pabilities and technology integration skills. “Most it, necessitating a special kind of transition rela-
companies I interact with,” says Bob Drennan, tionship—the cooperative partnership—designed
Director of Corporate Materials at Tektronix, “are to prepare them. Each type has advantages in
facing a fundamental issue as to the best use of meeting specific objectives.
money—invest in resources to design and manu-
facture products or invest in ways to grow faster Competitive Tension Relationships
without adding infrastructure.”
Technology outsourcing leverages resources. When seeking suppliers primarily for supply cost
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To use it, however, firms must manage supplier reductions, North American firms traditionally
relationships effectively to fully exploit suppliers’ split purchases for a particular item among two
process and product design expertise while at the or more competing suppliers—in effect, playing
same time controlling the risk of relying on an one off against the other(s). But such an approach
outside source for critical inputs. For long-term reduces scale economies, drives up transaction
advantage, a firm must not only manage its cur- costs, and tends to build suppliers’ resentment
rent critical technology suppliers but also look to rather than loyalty.
future technology needs and possible impacts on In contrast, competitive tension relationships
current suppliers. Just as a firm might have an use a single supplier—called “sole-sourcing”—for
evolving R&D portfolio, it should also plan its each item. Developed in the Japanese auto indus-
technology sourcing portfolio with an eye to the try, this approach typically allocates all demand
future. for a particular component over the product’s life
Figure 2
The Contingency Model for Supply Management Decisions
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Technology
Forecast
No
Make No Yes
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Yes Supplier
No Supplier Yes development
development to build
necessary competency trust
Maintain/develop
internal
capability Supplier
Establish development Develop goodwill
competitive to build trust and share
tension competency and proprietary
goodwill trust information
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J. Kluge, “Simply Superior Sourcing,” 5th International Academy of Management Executive, February 1992,
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