5 Reasons Why You Need to Know Your Supplier's Supplier

Multi-tier supply chain visibility is no longer just a pipedream -- market leaders in every industry segment have visibility not just into their important tier 1 suppliers, but at least a limited cross-section of their tier 2 and tier 3 suppliers as well. This article will discuss why organizations, especially those who outsource manufacturing operations, can improve operational capabilities with better connectivity with and visibility into all tiers of their suppliers in the business network.

Outsourcing is increasingly becoming a key strategy to lower costs, reduce capital assets and get products to market more efficiently than the competition. According to IHS Isuppli, the total electronic contract manufacturing market continues to hold in 2012, after posting a solid growth in 2011. Industries such as pharmaceuticals are leaning towards outsourcing clinical trials and manufacturing.

But at the same time, outsourcing has led to increased complexity and less visibility and control over the manufacturing process -- as the key planning and execution data resides outside the four walls of the enterprise. Electronic connectivity with suppliers alleviates this issue by providing critical visibility and control that OEMs need. But why not just connect with the first tier of your supply base and then let them manage their suppliers? 

Below are five key reasons why manufacturers need multi-tier connectivity:

Well-coordinated Product Launch and Wind-down

Two critical areas of focus in certain industries such as consumer products and technology are product launch and product retirement. In industries such as high technology where products have short lifecycles, most profits are made in the early weeks of the product launch before competition moves in. Coordination within the supply base is critical for ensuring that the production ramp-up goes smoothly (and is cost effective) in preparation for a product launch.

Similarly potential write-off liability can rapidly accumulate in fast-moving industries if wind-down is not planned well. Multi-tier supplier connectivity provides the foundation for an OEM to coordinate closely with key suppliers (whatever tier they are at) and successfully execute these two product lifecycle stages for every product in a repeatable and predictable manner.

Better Day-to-day Coordination of Activities to Improve Key Operating Metrics

During on-going production, OEMs want ongoing visibility into availability of key components to ensure smooth production. Some of these components may be in short supply (such as flash chips in the high technology industry that may be coming from lower tier suppliers, or some automotive components being supplied in 2011 from plants in areas affected by the Japanese tsunami), or may be under allocation, so visibility is often very critical.

Multi-tier visibility provides OEM visibility into such components and enables them to proactively identify imbalances, errors and shortages and address them. It also alleviates the need for expensive shipment methods to meet delivery dates.

Finally, due to better coordination, cash-conversion metrics improve. According to analyst firm Aberdeen Group (see Table 1), by taking advantage of B2B collaboration, best-in-class companies show significantly better operational performance.