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The Hollow Enterprise and Supply Chain Visibility

Developments from the 1980’s onward have lead to increasingly hollow enterprises. That is to say, enterprises who effectively divest themselves of all secondary value-adding activities and even many primary ones and yet maintain control over the end-to-end process using arm’s length management. In-sourcing, outsourcing, and other forms of partnering have taken practices outside the organizational boundary and resulted in an agile enterprise which is, nonetheless, essentially hollowed of the ability to “do things” without coordinating external parties. This blog looks at this trend and then addresses how it relates to supply chain visibility.

The emergence of hollow enterprises

This article was prompted by a reading of Naomi Klein’s book “No Logo”, in which she documents global brands’ moving towards a conceptual nirvana of value without assets. This process, which started in the eighties and escalated powerfully through the 2010’s, involved divestment of economic production (fixed assets, workers, offices, etc.) in order to focus greater investment power into branding and brand management. During this period the revenue and value of major consumer-goods corporations grew while their employee count was being cut, along with fixed assets and operations. Naomi Klein astutely observed that the outsourcing wave was not a “job flight” story, as the jobs were not actually landing anywhere. In other words, somewhere over the Pacific Ocean the jobs were transforming into Purchase Orders and service contracts. By the time the job landed in Taiwan (and then later South Korea, China, Vietnam, Laos, Bangladesh, etc.) the original organization had hollowed out its enterprise and another organization was filling that value-add activity.

Outsourcing started with tangent activities, such as maintaining copiers or high-volume air conditioners. But the economic advantages to the enterprise, along with better management tools and expertise for controlling the multi-organization enterprise, caused a migration to activities closer and closer to the core of value-creation. Eventually, computer manufacturers were outsourcing the entire computer-assembly and quality assurance process (Dell), and apparel lines owned only front-end branding and design while their partners sourced, built, delivered, and handled returns.

In-sourcing likewise took away core responsibilities from the organization by having those activities rendered as a service. Mailroom functions, for example, stayed in the corporate headquarters but were now off the balance sheet (in terms of assets and headcount) because Pitney Bowes or FedEx was providing the operation as a turn-key service. In-sourcing includes some activities which are very deeply tied to value-creation, and can cover intellectual property that is fundamental to the organization’s success. Pharmaceutical supply chains and high-tech (Google, Microsoft, Apple, etc.) supply chains are examples where the internal/external staffing divide is arbitrary when mapped against value-creation.

The image below shows how I conceptualize these trends. Enterprises, which had been largely single or several organizations, are now massively multi-organizational. They are also generally hollow, in the sense that each organization’s capacity to execute economic activities is limited. That isn’t to say that each organization doesn’t provide value, just that no single organization is well positioned to deliver value without support from others. It also isn’t to imply that because an organization “needs” its partners that the partners are not replaceable. On the contrary, the hollowing process was conducted as it was proven that the service providers could be designed as modular and could be replaced when competition made it favorable.

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Hollow enterprises and supply chain visibility

I believe that a major professional role for today’s supply chain leader is the management of extended supply chains on behalf of the “anchor” organization, in other words the management of our hollow organizations and the partners we’ve selected to complete our value-creation strategy. As discussed in another post on supply chain governance, there has been a trend towards supply chains with an anchor organization whose power and influence largely sets the supply chain agenda. Visibility plays a part in this management task.

Supply Chain Visibility and Risk in the Hollow Enterprise

Hollow enterprises rely on a greater count of external organizations, and rely on them in deeper ways. Perhaps one of the most important tasks of supply chain visibility today is simply to provide transparency to what partners are doing in an effort to identify, quantify, and mitigate risks. The visibility of production location helps manage risks of quality, security, public relations exposure for partner labor practices, sensitivity to political or environmental disasters, etc. Visibility to product location among partners helps organizations deal with disasters (such as volcanoes erupting in Iceland and shutting down airfreight traffic for a week). Seen from the point of view of a hollow enterprise, supply chain visibility will be on a supply chain leader’s agenda because it reduces their net expected impact from the uncontrollable.

Supply Chain Visibility and Modularity in the Hollow Enterprise

Hollow enterprises generally rely on the services or products of partners, but abhor long-term reliance on a specific provider of the service or product. In other words, supply chain leaders will want the ability to divert from one partner to another in order to manage risk, cost, and to fine tune service. In another article I discuss how the supply chain can be imagined as a zero-sum game, especially when relationships are ending. So, it shouldn’t really be a surprise that partner organizations generally oppose being made replaceable. A service provider may gain business through being modular at the onset and easily plugging in where a partner was removed, but they then try to develop “sticky” processes that will make them less likely to be dropped in the future by raising the costs to exit. In this situation, modularity is generally good for one party and bad for the other.

Visibility plays a role on both sides of this arrangement. For the party who is trying to have commodity-like providers who can be managed modularly and switched at will, the supply chain visibility practice is there to reduce the value of informal expertise and to maximize the extraction of this expertise into formal (and transferrable) intelligence. Was that too theoretical? Here is an example…

  • I’m a supply chain director at company ABC. Shanghai Widget is my supplier.
  • I’m pretty sure that Shanghai Widget isn’t competitive compared to Suzhou Widget, so I’d like to switch suppliers
  • But Shanghai Widget works in informal ways with my company. I’m not sure who they contact about each purchase order. Sometimes the process is very complicated, with five or more departments involved. Furthermore, I’m not sure what their overall service levels are because we don’t have that kind of data on hand or in central repositories.
  • My handicap in visibility is an advantage to Shanghai Widget… if I knew everything that they did, I could make my decision with less risk of failure. During negotiations for ongoing business, this lack of visibility is costing me money and reducing my options.

This example is very realistic; I’ve seen or experienced it many times. What it illustrates is that the manager of a hollow enterprise’s supply chain will add supply chain visibility to their agenda because it increases their capacity to make partners modular. An interesting note is that the partner will do just the opposite. Again, here is an example:

  • To the example above we could add China 3PL
  • China 3PL is willing to provide me visibility to the supplier performance and processes, perhaps even without additional cost
  • The hope is that the visibility services are adopted by decision makers (such as the me as the supply chain director)
  • Although not earning additional revenue, the adoption of their visibility services makes their participation the supply chain “sticky”, and less likely to be considered modular. The more the visibility service is used (not just by the client but also by suppliers or downstream customers) the stickier China 3PL becomes.

Supply Chain Visibility and the Information Economy in the Hollow Enterprise

One of the other fundamental changes that happen when an activity is split between separate organizations is that an information economy emerges. For example, consider a military supply chain where two armies are working in the same theatre of operation. If they belong to a single central command they have no natural incentive to not share information. Essentially, they are one organization and any further leveraging of captured data is to their benefit. In corporate supply chains you might draw an analogy with in-house production at Zara’s at their Spain and Portugal factories. There would be no value for the parent Zara company if the sub-organizational units without information from each other.

Now consider what happens if the two armies are actually reporting to different commands and have engaged in a limited-time partnership. This goes back to topics raised in the article on cooperative term-length. Depending on the arrangements, the two armies now do not always have aligned interest in sharing information. Similarly, if Zara spins-off its production organization and has it work independently with the product development organization they now have divergent incentives to share information. In short, an information economy emerges between the separate entities. Part of the supply chain management paradigm is to manage this information economy, and visibility plays a major (perhaps central) role in that endeavor.

What this means is that supply chain leaders in hollow enterprises may add visibility initiatives to their agenda because they correctly identify that information now has a value and that supply chain visibility taps into that value. In its relationship to the supply chain’s information economy, visibility is a value-creation activity. And the value of the information will tend to grow as the enterprise is hollowed-out and independent organizations join the supply chain, replacing in-house activities.

Monday-Morning Wrap-Up:

As usual, I’m closing this article with a wrap-up that helps position this strategic discussion into a useful tool for Monday-morning life. As supply chain leaders start up their laptops and meeting-room projectors I’d suggest they note the following:

  • Trends in preferred organization structure have led to thirty years of “divestment”, where organizations are considered “best” when they are hollowed of all but their most proprietary value-creation activities
  • As these organizations hollow-out, new management tools and methodologies emerged to empower the hollow enterprise to manage its extended enterprise effectively. These focused on maintaining control at arm’s length, especially as it relates to the supply chain.
  • Supply chain visibility is a major toolset enabling hollow enterprises…
  • Supply chain leaders in hollow enterprises should consider visibility initiatives for these specific business drivers:
    • Supply chain visibility is a risk management & mitigation tool for hollow enterprises
    • Supply chain visibility is a driver of modular partnerships… being the owner of the visibility solution helps determine the modularity of the various partnerships
    • Hollow enterprises create information economies, and supply chain visibility directly taps this source of value

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