Hi folks,
I hope you are having a good week!
This post is the second of my series on Supply Chain Design. In this post, I delve into a crucial and strategic supply chain decision: the choice between a vertical or a lateral supply chain design.
Towards the end, I share a quote that caught my attention this week!
I hope you enjoy this newsletter. Happy reading!
Supply Chain Design-II: Vertical vs Lateral Supply Chain Design
Vertical Supply Chain
A vertical supply chain operates in a traditional tiered structure. This means that the OEM/Client/Lead firm has a contract with the supplier in tier-1 of its supply chain, and the tier-1 supplier would have a contract with tier-2 and so on. Most complex products needing ‘system integration’ and ‘assembly’ are delivered through this system.
For example, Toyota is an assembler and has tier-1 suppliers for engines, seats, brakes, etc. The engine supplier owns the risk of manufacturing and delivering the engine to Toyota’s assembly line. The engine supplier will have its tier-1 suppliers (who would be Toyota’s tier-2s) delivering parts to put the engine together. Those suppliers will have their tier-1s, and so on, down to the nuts-and-bolts suppliers in the tier-n.
This supply chain design works well if the product has ‘Detail Complexity’, i.e., the distinct number of components or parts that make the system. This means that the higher the number of components, the higher the detail complexity.
Where this supply chain design doesn’t necessarily work is where the system has dynamic complexity, which means that it’s not just the higher number of individual components, but how those components are put together, how they need to behave, and how the management of interdependencies of the components would influence the outcome.
I strongly believe that one of the reasons the construction industry has supply chain and productivity problems is that it has a lot of Dynamic complexity yet operates like an industry that only deals with Detail complexity.
Lateral Supply Chains
Lateral Supply Chains come together to deliver a diverse set of capabilities required to deliver a complex product-service system. There could be a host of interdependencies between various ‘components’ of work (dynamic complexity?), and it is only through coordinating through those interdependencies that you would end up with a meaningful product-service system.
In this type of supply chain design, the Client or the OEM would enter into a tier-1 contract with an alliance of suppliers, who would have either a collaborative agreement or an alliance/partnership contract with each other. Under the auspices of the tier-1 contract, the alliance would usually be responsible for coordinating among themselves and delivering the end product to the Client.
You can’t have three parts of the roads delivered to you, and you be responsible for integrating them. You can’t have a blockchain-enabled solution by someone, be one supplier delivering the code, and the other supplier delivering the application, leaving you to ‘integrate’ them. And you certainly can’t direct a movie with every actor recording and sending their scenes to you individually, and you being responsible for ‘assembling’ them?
It’s a classic need for the whole to be more than the sum of its individual parts. This is where the client needs to move from being an integrator to an orchestrator.
Over the past few years, I have seen a few examples where lateral supply chain design has worked very well. For instance, in Hinkley Point C, a group of suppliers came together to deliver an end-to-end catering solution for HPC. They were all Tier-1s for HPC and had a collaborative agreement with each other. On the other hand, HPC signed a single contract with all 5/6 suppliers to deliver one catering contract. This group of suppliers went on to become a big success and is now incorporated as Somerset Larder.
If you are considering a vertical vs. lateral design for your supply chain, or even a part of your supply chain, there are quite a few factors to consider. Here’s a table that provides a comparison of a few of them.
As you see, there is no one clear solution. But as a strategist, understanding the level of complexity you’re dealing with, the level of risk that you’d like to own, and your capacity and capability to coordinate is a good place to start.
I wish you good fortune in the wars to come!
A quote to calm the overthinking mind!
“Take therefore no thought for the morrow: for the morrow shall take thought for the things of itself. Sufficient unto the day is the evil thereof.”
- Matthew 6:34
I hope you enjoyed this newsletter. If you liked this edition and want more content like this, please subscribe to my newsletter; if you think this would be of interest to someone, please share it with them.
Until next week,
Cheers, Jas
Great content Jas, thank you for sharing!