Supply Chain Frontiers issue #1. Read all articles in this issue.
There is wide agreement that supply chains are becoming more complex, but relatively little consensus on how to govern them. That situation needs to change. The competitive climate is shifting, and companies cannot afford to lose control of the extended supply chain networks that are becoming key players.
Supply chain governance is an urgent issue because trading organizations are fragmenting. "Companies are atomizing," said Dr.Gabriel Bitran, Chair Professor at the MIT Sloan School of Management. The intricate corporate structures that businesses have constructed over recent years have become unwieldy and inefficient. As Bitran explained, the trend towards building expansive conglomerates is reversing, and the emphasis now is on divesting non-core activities and creating lean companies. In some ways the pendulum's counter swing "is being carried to an extreme," Bitran believes. Add globalization to the mix and it is clear that that the corporate universe has many more stars than it did a few years ago.
Those stars are forming constellations that will redefine the laws of competition. Said Bitran, diverse groups of enterprises are coming together, replacing product-to-product competition with inter-network competition. If these supply chain networks are to be the trading organizations of the future, it is crucial that they are organized around an effective governance model. "If they (companies) were difficult to manage when they were all under the same roof, imagine the governance problems when they are not," Bitran pointed out.
A number of important issues have to be addressed. For example, which incentives and performance measures will be used in these extended enterprises, and how will the benefits be shared among members? The traditional model of a supply chain revolving around a few, dominant channel masters may not hold in this emerging trading environment.
Another issue is what type of entity is best suited to fill the role of network governor. One suggestion is third-party logistics services providers, since they already occupy a central position in supply chains. "The question is what kind of metamorphosis 3PLs would have to go through in order to evolve into this role," Bitran said. For instance they would have to change from being risk-averse organizations to ones that actively share risk with trading partners.
"We are not totally in the dark," Bitran said. Some well established commercial entities offer clues as to how a new governance model can be developed. These include agricultural cooperatives and healthcare facilities such as hospitals that have come together in risk-sharing pools. Also "a lot can be learned from organizational dynamics," he noted.
In some ways today's challenge--to design a better governance model--is not the right one. Rather, it is necessary to go back to the drawing board and design more effective supply chain networks. "Ultimately, we need to design to govern," Bitran said.
This article is based on research work carried out by Dr. Gabriel Bitran. A new joint research project between the MIT Center for Transportation & Logistics Supply Chain 2020 Project and the MIT Sloan School of Management will build on this work and explore the future of supply chain governance. For more information contact: Dr.Gabriel Bitran, Chair Professor at the MIT Sloan School of Management, email: gbitran@mit.edu