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V O L . 4 8 N O. 3
Gabriel R. Bitran, Suri Gurumurthi and Shiou Lin Sam
The Need for Third-Party Coordination in Supply Chain Governance
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REPRINT NUMBER 48309
have divested some of the most cost. for example. Asia has come to dominate textile and apparel exports. at the expense of producers in Europe.MIT. global competition has shifted most of the apparel manufacturing away from developed countries to developing countries. and it is particularly dramatic in apparel and textiles. (See “The Disintegration of the Supply Network. Bitran. A fundamental reorganization is underway throughout the automotive supply chain. it is not clear how sustainable the fragmented supply chain will be — particularly for small and midsize enterprises.EDU/SMR . Suri Gurumurthi and Shiou Lin Sam he last few decades have brought dramatic shifts in the manner in which business is conducted around the world. As economies around the world become more integrated and geographical boundaries fall. The same pattern is being repeated in many other industries. In the electronics industry. as companies everywhere radically revamp their approaches to system management with lean manufacturing and just-in-time inventory. vertically integrated companies chosen to outsource or send portions of their supply chain offshore?2 Part of the reason is that capital and investments currently are being so closely managed that investors question the validity of noncore assets. 33. has become an increasingly major consumer of imported textiles and apparel. and General Motors Corp. there is an emerging and compelling need for “maestros” — neutral third parties that can coordinate the entire network and align the incentives for all the participating players. Suri Gurumurthi is a doctoral student at Duke University’s Fuqua School of Business.edu.1 In the past two decades. Many businesses are struggling to compete in the new landscape. In recent years. Comment on this article or contact the authors through smrfeedback@mit.O P E R AT I O N S The Need for Third-Party Coordination in Supply Chain Governance As companies rely increasingly on external suppliers. Gabriel R. thus contributing to reliance on third-party specialists. Bitran is a professor of management science at MIT’s Sloan School of Management. The United States. integrated supply chains in favor of fragmented networks of strategic partnerships with external entities. and in electronics manufacturing and service.” p. developer and marketer. 30 MIT SLOAN MANAGEMENT REVIEW SPRING 2007 SLOANREVIEW. Companies have moved away from hierarchical. However.and labor-intensive parts of their manufacturing processes as semi-independent or wholly independent units. meanwhile. Following the period of disintegration. the short product life cycle makes it challenging for a single company to remain on the technology forefront of all components and products. T Forces Behind Fragmentation Why have so many large. Many of the starkest changes are visible in the fragmentation of supply chains. both Ford Motor Co.) This transformation has caused ripples throughout the old supply network. it will be only a matter of time before there is a compelling need for reintegration. it is not surprising that we are witnessing massive changes in the way business is conducted. Gabriel R. its role in this sector has largely evolved to that of designer. In the automotive industry. Shiou Lin Sam is a doctoral student of electrical engineering and computer science at MIT. which for many companies will have to be coordinated and facilitated by independent third parties.
cost differentials by themselves do not fully explain the outsourcing and offshoring trend.4 The transformation over the past two decades has been significant: Data storage costs have plummeted. as opposed to a revenue stream or strategic know-how. they are beginning to compete directly with their own suppliers. This positive feedback cycle results in the strengthening of the supply bases and partially explains the outsourcing and/or offshoring phenomena.higher-quality products and the ability to manufacture at lower cost and higher margins. retailers. logistics and speed of innovation. notably in the automotive and electronics manufacturing sectors. suppliers are taking the lead in developing new production technology and designs for end products. Increasingly. which in turn led to Feasibility of the Disintegrated Model At first glance. Such collaboration is also common in the computer products industry. Our research points to several other contributing factors as well.and assetintensive operations to contract manufacturers. With the emergence of retail powerhouses such as Wal-Mart Stores Inc. The changes in IT (particularly business communication technologies) have played a critical role in enabling companies and supply chains to operate on a global scale. and improved information technology. including the positive feedback cycle between better product quality and lower cost. and the volume of data available for business analysis purposes has increased dramatically. wholesalers and distributors. Product Proliferation Given the risks and the costs of product proliferation and mass customization. the rise of retail powerhouses. Retailers. In some cases. elsewhere in Asia and in the United States provide design and manufacturing services to OEMs. If a company’s SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 31 . These factors. usually develop products in partnership with their major suppliers. the emergence of new markets and the availability of skilled labor and reliable supply routes from Asia have combined to create a business climate where companies of all sizes and across many industry sectors have seen economic advantages in fragmenting their supply chains. Transaction costs and networking and communication costs within supply chains have fallen as well. larger original equipment manufacturers. Competition among retailers is now centered on cost. in turn. where companies based in Taiwan. choosing to focus their own efforts on creating and sustaining their brands through design and marketing activities. managing a complex supply network would be inconceivable. However. Without IT as an enabler. Partnerships between global suppliers and U.) Product Quality and Cost The gradual relaxing of trade barriers. which brand the end product.S. Enhanced Information Technology Over and above enabling more reliable production processes. Supply channels need to respond more quickly and efficiently to customer demand patterns. the processes and functions become more of a cost factor.. giants have led to the ability to create better processes and technologies. large manufacturers of consumer goods have found incentives in outsourcing cost. 32. are having enormous impacts on the supply channels that feed the retail channels. product proliferation. it appears that the disintegrated supply chain offers clear advantages over the integrated model.” p. are working to change their business models. while the proliferation of new products and IT in general have increased considerably. frequently taking the lead in the design of products. Inexpensive labor costs in China and elsewhere in Asia have made the incentives of shifting production offshore all the greater. along with the changes in the retail landscape. information technology is driving fundamental changes in supply chain behavior and corporate governance structures.3 As the technology becomes more stable and the manufacturing processes more commoditized. Emergence of Retail Powerhouses The consolidation of retail channels has had a profound impact on supply channels and has also redefined the traditional roles of manufacturers. (See “About the Research.
as vertical supply chains break apart. The research was performed in collaboration with Sloan Fellows (midlevel executives in a one-year MBA program at MIT’s Sloan School of Management). The costs of coordination — often with external entities — make it more challenging for companies to exert the same level of control and influence on their supply chains. In our research. Danzas Inc. Pratt & Whitney. identifying customers who they do not have access to and finding new sources of capital.. which have airport facilities for warehousing clients’ products for rapid shipment to end customers. Qualcomm Inc. In addition. research analysts. When customers submit orders. we summarize our findings and comment on the emerging opportunities in the newly disintegrated landscape. we believe a high degree of disintegration cannot be sustained. Boston Fuel Cells Inc. In practice. In short. the question emerges: Who is responsible now for the coordination of activities and for setting the appropriate incentives for the supply chain agents?5 In the new network configuration. Two examples of this type of role already present in the electronics industry are United Parcel Service Inc.6 As supply chains disintegrate. SLOANREVIEW. Global Gillette. Agilent Technologies Inc. many companies decide to fragment their supply chains for the wrong reasons — to address problems of incompetence and inefficiencies. academics. General Motors. suppliers and logistic players. Although a globally dispersed fulfillment model may be cost-efficient. Artsana Group. The broad goal of the program is to understand the different roles that third-party logistics companies can play in a more complex supply chain. software providers and logistics providers from entities including Bose Corp. OEMs need to find ways to manage the flow of goods both inbound from outside suppliers and outbound to distributions and customers. the requirement for interaction and coordination increases substantially. and FedEx Corp.. (See “Flow of Goods From Contract Manufacturers to Retailers. They will operate as value networks in which all players will need to work collaboratively to acquire. General Electric Co. we found that smaller OEMs had to pay particular attention to the logistics side of the business because they tended to have significantly less leverage with suppliers than larger OEMs. coordinating communication and other activities among players to meet overall objectives.. enabling or sustaining the heterogeneous models of collaboration among the decentralized supply chain agents. ownership and control of the assets and functions changes hands.EDU/SMR 32 MIT SLOAN MANAGEMENT REVIEW SPRING 2007 ...O P E R AT I O N S decision to outsource is based primarily on cost. who did extensive fieldwork with business managers. Nortel Networks Corp... In this article. one capable of aggregating suppliers from various locations around the world) could contribute significant value. Many were willing to share information about capacity. Companies had clear financial incentives to play this role.. They absorb a disproportionate amount of the uncertainty created by supply chain disintegration. Eventually. DHL Express and MIT Sloan School of Management. Nokia Corp. companies were responsible for coordinating their own value chains and ensuring proper alignment of incentives for supply About the Research This article summarizes the result of two years of research conducted with United Parcel Service Inc. in some cases. process and distribute information to maximize productivity and efficiency. and for delivering the end products to customers. selling excess production capacity.. and uncertainty created by the complex supply network. the fragmented model might offer significant benefits. but will be more dynamic and malleable. The Consequences of Disintegration Prior to the disintegration and fragmentation of supply chains.”) A neutral third party (for example.A. Exiros S. aggregate players need to emerge to manage a subset of the disintegrated value network. Additional examples of institutions consulted are Color Kinetics Inc. MIT Center for Transportation and Logistics and Gartner Inc. however.MIT. the products are sent directly from the airport. These changes present new challenges. as part of a sixyear research program. which operate on the periphery of networks dominated by the larger agents. Emerging Opportunities in the New Landscape The clamor for experienced outside help presents opportunities for those able to meet the needs. SAP America Inc. repairs are handled at the airport as well. including enabling the coordination and governance of supply chain segments in keeping with the objectives of the larger supply chain.. they wanted assistance with almost every aspect of their operations. chain agents. and paying special attention to the needs of small and mid-size enterprises.. facilitating rapid integration of new partners into existing supply chains.. frequently leading to a subdivision or redistribution of responsibility for handling and transforming materials. including how to manage a large number of supplier and distributor relationships and how to allocate resources among multiple entities. and if there are obvious players that can assume responsibility for the strategy. Future supply chains will no longer consist of serial interactions between buyers. planning and control of the operations. We were able to distill the challenges into two major categories: management of the flow of goods. even though the number of layers in the overall supply chain may remain the same. inventory positions and capabilities. and they were open to having a third party assist them in managing inbound sourcing. However.i The fieldwork exposed challenges faced by original equipment manufacturers and small and mid-size enterprises. i.
SLOANREVIEW. C C C C C C C S F S S F S C C S Supply Chain Disintegration C C S F C S S F F Finished Product S Subsystem C Component Company Boundary Flow of Goods From Contract Manufacturers to Retailers The needs of small OEMs are concentrated on inbound logistics while the needs of large OEMs are more concentrated on outbound logistics. LPs must help companies terials. By moving deeper into the value chain rather than repurchase orders.MIT. (See subsystems so that transparency and visibility can be achieved “Listen-Check-Deliver. Working capital The past 20 years have seen numerous strategies for freeing up working capital and increasing liquidity — among them.”) They must learn to communicate in across the entire network. companies need to manage a complex matrix of material management issues on the inbound side of their businesses. but also the ability to modularize and reconfigure collect. But with fragmented value chains. coordinate production strategies and set pricing strategies based on available information about supply and demand.Our field research identified three main drivers that support the concept of value networks: working capital availability. order fulfillment and maining as a peripheral player. visibility and velocity. just in time. companies also need visibility into the inventories of other players in the value network.EDU/SMR SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 33 . production processes. today’s challenges have become more complex. Logistics providers need to find ways to make the supply chain more flexible and lean by offering enhanced services that leverage the relationships they have with other players in the real time with players throughout the supply network to facilitate chain. total quality management and customer relationship management. making it difficult for them to conceptualize the whole value network Inbound for Outbound for Small OEMs large OEMs from the perspective of their customers.7 While these drivers are by no means new. Rather than simply managing their warehouses. designed so that all players not only have the power to trace maIn order to succeed in this new role. Players in the value network Retailers Distributors need to be able to exchange pertinent information on CM Original Equipment R D a real-time basis and adjust as necessary to a new marManufacturer ket environment. it is important to understand them in the context of the new landscape. LPs are in a unique position to movement of goods among players. Visibility In addition to knowing the location of necessary materials at all times. The Disintegration of the Supply Network The serial interaction in the network is being replaced by parallel relationships between different layers in the network. Contract Velocity Visibility has little value unless the information Manufacturers can be put to use swiftly. This allows them to monitor overstocking and understocking of component parts. The new system needs to be assume the new role of facilitator. process. interpret and use information effectively. Although the value drivers we have identified adCM dress an important set of market needs. In that role. we found OEM R D widespread industry disappointment in the current capabilities of logistics companies. which might involve keeping tabs on hundreds of suppliers across several continents. This may reflect CM their historic strategic focus on moving goods from point A to point B. logistics providers R D CM have had limited visibility into the internal processes of other players in the value chain.
a Hong Kong-based company that serves private-label apparel firms in Europe and North America. China. Listen/Demand Purchase Order Supplier Customer Sales Order Goods Check/ Inventory Logistics Provider Deliver/ Transportation The Mini-Maestro Model The company. Large companies are not likely to surrender control of all their suppliers to a maestro. coordinate the production process and manage subsequent product delivery.10 Using its buying power and the trust it has developed with its supply base. spin and weave the yarn in Shanxi. Although it maintains a network of 10. producing all the components needed for the final system assembly. it does not own any of them. As part of its global strategy. often coordinates the first-tier suppliers. dollars in 2005. factory sourcing. This allows customers to make purchases closer to their target completion dates. The parks also integrate Listen-Check-Deliver The role of the facilitator requires the logistics provider to listen to each purchase order. it is helpful to examine the Li & Fung Group. Over the years. developed its Xbox by working closely with 34 MIT SLOAN MANAGEMENT REVIEW SPRING 2007 Flextronics. shipping consolidation. at the center of the network. they are capable of managing suppliers themselves. engineering and manufacturing services that are vertically integrated with component capabilities to optimize its OEM customers’ operations and time to market. it has evolved from a trade broker between the West and China into a multifaceted coordinator of manufacturing.000 suppliers in 40 countries.EDU/SMR .” A mini-maestro controls a portion of the supplier network while the company retains control over the remaining suppliers. Li & Fung divides the process into two subprocesses: the front end (sales and design) and back end (logistics and banking). Flextronics International Ltd. It may source the flax from France. The front and back ends are often performed in Hong Kong. 3 2 3 2 3 2 1 3 2 3 2 1 2 3 3 3 2 3 2 3 1 Company 3 2 1 2 3 First Tier 1 2 2 3 3 3 3 2 Second Tier 3 Third Tier SLOANREVIEW.S. offers another model for the integrator role. (See “Comparing Li & Fung and Flextronics. before transporting them to their final destinations. as exemplified by the shaded region in the figure. it is a leading electronics manufacturing services company.9 Li & Fung coordinates each process in the supply chain: raw material sourcing. customs clearance and local forwarding logistics. dye the fabric in Quangzhou. with revenues of $7 billion in U. in many cases. for example. while the mini-maestro takes control of a portion of the supply network at the peripherals. Each park functions as a manufacturing center. we anticipate a brand-new role in the value network for a neutral third party — a “maestro” that can coordinate the entire network and align the incentives for all the participating players. produce the garment in Dongguan. (See “The Mini-Maestro Model.” p. operates what might be called a “smokeless” factory.MIT. Microsoft Corp. manufacturing control. Li & Fung can shrink the delivery cycle for time-sensitive products considerably. The company provides complete design. China.”) In order to appreciate how a mini-maestro operates. providing them with substantial savings in the form of fewer inventory markdowns and quicker reaction to shifts in demand. 36. headquartered in Singapore. For the middle portion. However. where the necessary skills are usually available. many companies embrace a modified version of this role — something we call the “mini-maestro. operating in 32 countries and five continents. which had complete responsibility for manufacturing the end product.O P E R AT I O N S The Maestro Model Drawing from the set of capabilities we have outlined for LPs. and then inventory the finished goods in Hong Kong.8 Upon receipt of an order. Flextronics operates in six industrial parks in low-cost regions around the world. and will not need to rely on an outside party.. dollars. Li & Fung..S.) With 2005 revenues of $15 billion in U. Li & Fung uses its knowledge and experience to select the best factory to perform each function. and the middle portion (which is made up of the more labor-intensive activities). China.
recognizing that business processes changes can impact some players more than others. Li & Fung. Players such as Li & Fung and Flextronics offer insights into what a coordinated supply network can accomplish. and maintains “high competency centers” in North America and Europe that specialize in high-tech services. issues of supply chain governance and leadership become critical for mini-maestros. In formulating these networks. players tend to focus on a small but core set of activities — those in which they have developed truly distinctive capabilities. network players that enhance network performance through innovation need to be rewarded for their contributions. a pure pull network has limitations as well. and strive for optimal resource allocation among nodes in the network. Implications of the Mini-Maestro Model As with any model. whose success hinges on support from network players.MIT.strategic suppliers on-site to reduce material procurement costs and accelerate new product introductions. it is critical to understand both the potential and the limitations. Successful coordination requires maturity. on the other hand. The mini-maestro must find ways to compensate the distribution center for the additional expense. Players that consistently outperform others get rewarded with steady work. coordinates independent suppliers using financial incentives and an elaborate benchmarking system. As a result. which allows Li & Fung to track the performance of each player in the supply network. We explore here some of the main implications of the mini-maestro model. is able to coordinate using traditional means. Allocation of Costs and Benefits Given the fragmented and competitive nature of the supply chains. patience and deep knowledge of network operations. In the current supply environment. However. For example. Flextronics operates two “super sites” in Asia. a pure push system is not likely to be optimal: It initiates production without much coordination among the various suppliers in the network. Similarly.11 In addition.EDU/SMR SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 35 . Thus. corporate managers can begin to move away from the push and pull mentality. by owning portions of the supply chain. those that underperform can use the feedback to make improvements. the decision to postpone manufacturing in one location may mean that a distribution center has to carry more inventory. diverse players within the network need to align themselves with the objectives of the supply chain and the end customer. A mini-maestro can design and coordinate networks where push and pull mechanisms coexist. The mini-maestro must develop ground-level mechanisms for allocating and sharing the net costs and benefits of partnering.12 Mutual Dependence and Trust The mini-maestro needs to cultivate mutual dependence among network players and foster a sense SLOANREVIEW. Flextronics. with access to established local resources and suppliers.
Flextronics has responded by moving away from being simply a contract manufacturer to designing products and. it has become an increasingly versatile intermediary. By contrast. In recent years. 36 MIT SLOAN MANAGEMENT REVIEW SPRING 2007 SLOANREVIEW. Li & Fung tries to consume 30% to 70% of its suppliers’ production capabilities. emphasize centralized information technology and business processes across all units to achieve quality control and seamless integration of the supply network and manufacturing processes.i As such.EDU/SMR . Flextronics International Ltd. This information and knowledge are critical in the company’s work allocation decisions and in the feedback mechanisms used to maintain quality among its suppliers. testing and selling their products. it has great flexibility in the long run. has moved beyond its early role as a trade broker between China and the West. To begin with.MIT. Flextronics cultivates trust differently because of its structure. Most electronics companies. Li & Fung has highly privileged access to the capacity and schedules of its factory partners.” Harvard Business Review 80 (October 2002): 68-77. a more careful study of the organizations reveals significant differences. Systems. as companies have shed inefficient processes in order to remain competitive. ii. and Li & Fung Group share many common operating principles. in some cases. During the design and prototyping phase. E. “Leveraged Growth: Expanding Sales Without Sacrificing Profits. The nature of the organization and delegation of responsibility among divisions generates a high degree of trust and responsiveness. The biggest difference between Li & Fung and Flextronics stems from their distinct origins and the relationships each has cultivated with its suppliers and clients. In recent decades. Network players are analogous to divisions within a company. Flextronics representatives are located in their customers’ sites. to ensure that product quality is at par. in anticipation of the backlash from the expiration of the World Trade Organization quota.S. Standards and IT One of the dangers of pulling together a final product from different sources within the network is a lack of uniformity. adopt global manufacturing as an important component of their strategies of selling services in different regional markets.13 The first visit occurs prior to the start of production. Other visits take place during and after manufacturing. It remains to be seen how well Flextronics will be able to manage the brutally short product life cycle with its present organizational structure. MIT Sloan School of Management. for example. the players should be “hotswappable” — weaker players should be easily swapped out with the Comparing Li & Fung and Flextronics At first glance. The network itself also needs to be extremely malleable. To guarantee uniformity. being less mature than companies in the textile and apparel industry. up-to-date view of supplier performance in a wide variety of contexts. Its growth strategy hinges on having a skilled orchestrator who manages the network at a macro level but does not meddle in the day-to-day operations of the service providers. a range that allows it to get priority while avoiding complete dependence on the suppliers. textile and apparel companies has mushroomed. Flextronics owns all its factories and facilities while Li & Fung has a leveraged growth strategy. However. To an extent. Both companies organize their teams around customer accounts. fabricating. and back-end manufacturing in lower-cost regions. Recently. Kooi. and organize according to skill sets that are deployed at the regional facilities. reflecting their respective asset-ownership strategies and the contrasting nature of the two industry sectors. Likewise. competing with its own clients. connecting and coordinating many different segments of the apparel supply chain. June 2006). “An In-Depth Study of the Emergence of the Mini-Maestro in Supply Chain Governance and Their Influence to Logistics Industry” (MBA thesis.O P E R AT I O N S that they need one another to be successful. Flextronics’s ownership strategy exposes it to the old risks of vertical hierarchies. See J. the interfaces between players in the supply network need to be well defined. as demand for outsourcing from U.ii i. they site higher-technology services in higher-cost and higher-skill regions. Li & Fung. Further. but are based on its knowledge of the apparel market and a deep understanding of the supplyside issues. and the respective team members collaborate on a daily basis. Mutual dependence helps build enduring relationships. Li & Fung has advised its clients on diverting sourcing away from China to other regions. Li & Fung’s suppliers receive continuous training to develop the knowledge and skills required to succeed. Li & Fung maintains a highly granular. There is a high level of dependence between different divisions. reinforcing the notion that Li & Fung is committed to the network players. to inspect raw materials. Li & Fung’s assets are not capital based. rather than own factories.C. are still heavily involved in designing. for example. Li & Fung cultivates supplier trust by visiting them several times during the production process. for its part. Flextronics’s approach is built on controlling the production process and having tight relationships with its corporate customers. Hagel III.
it does not own any of them.html. “Supply Chain Risk: Deal With It. This manifests itself in two ways: First.. “Flextronics. Copyright © Massachusetts Institute of Technology. Kumar. Memedovic. D. and G. Georgia Tech and the National University of Singapore. REFERENCES 1. there is a commitment to allowing people to take initiatives and maximize their potential. Meredith. and senior management creates or eliminates divisions in response to the market. “Birth of a Sweater. June 2003). 2004. Reintegration Calls For Well-Managed Networks As the process of disintegration and reintegration continues. “The Automotive Supply Chain: Global Trends and Asian Perspectives” (Manila: Asian Development Bank. Sharafali. D. 2003).15 Li & Fung has several dozen divisions.EDU/SMR Reprint 48309. Such players can bring innovation and efficiency to their networks by orchestrating the flow of goods. Li & Fung manages the network at a macro level but does not manage the day-to-day operations of the network players. J.” International Journal of Services Technology and Management (IJSTM) 20. which is compounded by a lack of authority and control. Their size and distance from the end customer subject them to a great deal of variability. 1-2 (2000): 156-175.com. 5. “Supply Chains and Value Networks: The Factors Driving Change and Their Implications to Competition in the Industrial Sector” (MBA thesis. there is an emerging need for entities that have the knowledge and skill to manage functionally diverse and geographically dispersed supply networks. “Governing Decentralized Production: Institutions. 14.” Forbes Asia. Innovation and Supply Chain Structure.MIT. for example. M. All rights reserved SPRING 2007 MIT SLOAN MANAGEMENT REVIEW 37 .H. Stauffer. V. Raman. there is a sense of equality within the various ranks.com/home_asia/global/2006/0109/036Asidebar. R. Barnes. www. 3. Dai. defines the requirements that partner companies must meet in order to become part of the network. 9. no. Whitford and J.M. See P. Ibid. stronger ones.” Electronics Design Chain 1 (fall 2002): 12-16. Ferry. 2000.F. Bassetti with G. “Electronics Manufacturing Service Industry.forbes. Down. Deng.“The Global Apparel Value Chain: What Prospects for Upgrading by Developing Countries” (Vienna: United Nations Industrial Development Corporation.” Proceedings of the 25th International Conference on Information Systems (ICIS).html. J. Ibid.000 suppliers in 40 countries.” Forbes Asia. Although it maintains a network of 10. SLOANREVIEW. Sherman. www.Li & Fung has evolved from a trade broker between the West and China into a multifaceted coordinator of manufacturing. J. how they are governed. no. and J. It is important to understand the critical impact these aggregators will have on their industries — determining how the networks are designed. MIT Sloan School of Management. Manufacturing. and the Prospects for Inter-Firm Collaboration in U.” HBS Working Knowledge. Public Policy. and second. “Flextronics: Staying Real in a Virtual World. “Information Technology. and each is encouraged to pursue opportunities wherever they exist. 4. Lau and M. In this loosely coupled network. F.C.14 Li & Fung.M Stroeken. Hitt. 11. April 28. January 2006: 40-41.G. Ferry. most of the negative effects fall on the smaller entities in the lower tiers of the supply chain. 13. information and funds among multiple entities.” Strategy+ Business 37 (winter 2004): 64-73. “Aligning Incentives in Supply Chains. January 2006: 37-38.lifung. customer-focused divisions are small and entrepreneurial. without disrupting the network.” Harvard Business Review 82 (November 2004): 94-102. 8. G.com/home_asia/global/2006/0109/036A.forbes. Goh. It also defines each service provider’s role and specific job allocation. the service providers can focus on their tasks and capabilities without costly intervention from the orchestrator.” Industry and Innovation 11. H. R. “Microsoft Doesn’t Play Games With Xbox Design. and E. All the business decisions that go into coordinating a production program for the customer get made at the division-head level. See discussions in D. Zeitlin.” The Logistics Institute-Asia Pacific. At Li & Fung. 15. 2003. Social Contract The disintegrated supply network needs to operate without the traditional top-down hierarchy. 10. 1-2 (March-June 2004): 11-44. Narayanan and A. at Flextronics.S. and R. 2007. Ibid. This constant reconfiguration leads to optimal productivity and responsiveness. 2. “Commercial Crossroads. Romano.C. Similarly. 7. “Information Technology and Product Variety: Evidence from Panel Data. Ibid. and each is managed by a lead entrepreneur who receives financial resources and administrative support. Veloso. S. Although disintegration can have a huge impact on all the players in the network. 2002). Washington. Meredith. and E. how suppliers are evaluated and rewarded and how networks continue to meet new competitive challenges over time. The resulting social contract is one that encourages individual players to reach their potential. 6. and by dynamically reconfiguring how networks are organized.” 12. Gao and L. Gereffi and O. See www. the dynamic and flat corporate structure ensures that a “we all think and we all do” mentality permeates the organization. The company has a similar approach toward its suppliers: They are part of a network that is highly malleable.
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