DIGITAL SPECIAL ....Could your supplier become too powerful?

Could your supplier become too powerful?

By Calin Buia, Christiaan Heyning, and Fiona Lander

In the digital age, companies must balance the advantage of outsourcing a segment of the value chain to suppliers with the risk of foreclosing their strategic options.

Armed with data and the capabilities to analyze them, suppliers are offering their services in ever greater chunks of the value chains of energy and materials companies. Customers could find the offer tempting given the promise of quick efficiency improvements. But they also risk handing over the keys to the business if they don’t tread carefully.

Outsourcing is not new to the sector. Big companies have long outsourced low-value functions such as payroll, but most higher-value ones deemed central to the business, such as exploration and operations, have been kept in-house. Digital, however, is forcing a rethink. In a data-rich world, suppliers might be able to outperform their customers, so why not harness their capabilities? A fair question in this new, more porous environment, which is requiring companies to re-evaluate which data and digital capabilities are at the heart of their business.

A global manufacturer of turbines, for example, will have more data on their performance than even the largest customer and so could, potentially, maintain them better. It might make sense, therefore, for the customer to outsource their supply and maintenance rather than purchase them. Some mineral companies already use technology specialists to track and improve productivity in their processing plants using the Internet of Things, and a company like Amazon could perhaps transfer its logistical might to the energy industry. In theory, a miner could eventually outsource its entire operations—blasting, extraction, haulage, processing, freight, and marketing—to contractors who had the data and accompanying expertise to drive down costs and raise productivity and safety.

With technology shifting so quickly and value chains so fragile, it’s unwise to predict the future. Ultimately, energy and materials companies may need to redefine what constitutes a core business function (exhibit). But in the meantime, some ground rules will help them capture the short-term gains of outsourcing without limiting future strategic options, or walking away from the many classic truths about supplier management that still apply.

·         Flexibility is more important than ever. Make sure you can exit a contract or change the terms without fierce penalties. Cost reductions might be today’s agreed-upon goal in a contract to outsource logistics, for example, but the overnight delivery of spare parts could become more important to you once predictive-maintenance technology is implemented. Or you may decide you only want a stopgap partnership—perhaps to supply and operate a drone to interpret the images, or to leapfrog your radio-frequency-identification capabilities—while you build your own know-how. That’s likely to be a wise course, given how logistics could be profoundly disrupted as technologies evolve.

·         Your data are your most valuable asset. Share them carefully, but don’t give them away. You will find it harder to build your own advanced-analytics skills if, for example, the data generated from your machinery are owned by a supplier. And all the while the supplier could be using the data to strengthen its own market position or, worse still, your competitors if the data are used to train models sold to others.

·         Don’t cede control of your IT and data architecture. It can lock you out of new technology solutions offered by other vendors.

·         Maximize competitive tension. In theory, the more closely a company works with a supplier, the better for both. But some efficiencies, such as the costs saved and lessons learned from deep collaboration with a single supplier, may have to be sacrificed to avoid lock-in. A network of suppliers might be a safer choice.

Make no mistake. Outsourcing more of the business to suppliers could have a big upside thanks to the power of their data-driven insights. And every company will need to participate in the digital ecosystems that are forming around every industry. Still, companies also need to be alert to new wrinkles—value-chain trade-offs beyond the data-rich outsourcing we have described. Location-agnostic robots, for example, hold the promise of markedly reducing labor costs for many industries, allowing incumbents to shift production away from low-cost venues or to bring some activities in-house.

For most companies, keeping the entire value chain intact won’t be a winning approach. But outsource with your eyes wide open, avoiding irreversible choices while chasing short-term gains.

https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/shaking-up-the-value-chain?cid=other-eml-alt-mkq-mck-oth-1808&hlkid=59dae826dfaf4b4d980f635dcb7e2f0c&hctky=1627601&hdpid=de80038e-ea08-4016-afab-8b99cef9545c