opportunities need to be assessed and aggressively exploited as well.
teammates, and resuming the competition.
Looking both ways will involve unusual and innovative alliances with not only suppliers and partners, but also competi- tors. In this age of enlightened competition, it’s no longer simply one football franchise playing another; it’s an ad-hoc alliance of players playing another such alliance for a few quarters, then stepping back, trading
• Canada’s two largest brewing companies, for example, share distribution facilities, which allows them both to sharply reduce warehousing and shipping costs. Meanwhile, however, they compete fiercely in brand marketing.
• Cisco Systems farms out the manufacture and assembly of most of its products — often- times to its competitors — while
Case Study: Frito-Lay
Several years ago, Frito-Lay reengineered its potato chip value chain. A major whole- sale purchaser of potato crops and the largest potato chip maker in the world, the com- pany identified value in exercising even greater control over upstream elements in the chip production process.
Over the previous decades, consumers had developed an overwhelming prefer- ence for chips made from a very limited set of potato varieties. Acquiring enough of these potatoes was difficult, requiring relationships with almost a thousand farmers across the United States, many of whom were also producing for other markets. Transaction and coordination costs were high and the average farm’s operational scale was low.
Frito-Lay decided that there were two tiers of functionality in its value chain — those that were knowledge intensive, which should be kept within the Frito-Lay fold, and those that were asset intensive, which were best outsourced.
To ensure the most efficient production of the particular potato strains it needed, the company invested in the advanced breeding of potato seed stocks, the development of potato growing and harvesting best practices, and the implementation of optimal chip manufacturing processes. To address the logistical challenges of dealing with hundreds of suppliers and lock in their supply, Frito-Lay canvassed its farmer-suppliers to identify those who would be interested in concentrating on Frito-Lay bred potatoes and expanding their acreage significantly. These farmers, armed with long-term contracts, were able to to gain financing and achieve efficient, profitable scale in other areas of the value chain. Frito-Lay partnered with a logistics management firm to handle other asset-intensive operations, such as shipping.
Using these strategies, Frito-Lay eventually reduced its supply base to fewer than a hundred farmers and one logistics partner and optimized asset utilization in its potato chip value chain. Moreover, it retained control over the knowledge value drivers that have helped it achieve a 45% share in salty snack foods and some of the highest operating margins in the business.
it retains the innovation, supply chain management, and customer sales and servicing links in its value chain.
Companies like Solectron and
Jabil Circuit build partnerships with suppliers and distributors to gain access to specialized capa- bilities and favorable factor costs, as well as to maintain focus on their core business.
It’s important, however, that you manage your relationships with these partners to squeeze out all unnecessary cost. Make sure that your partners have the information they need to do their jobs most effectively and inex- pensively. Suppliers, for example, should know what sort of demand is coming their way, so they can prepare without holding high inventories.
As mentioned, a given chain includes many different types of businesses (e.g., R&D- oriented companies, product developers and marketers, com- ponent suppliers, contract manu- facturers, distributors, retailers). Each of these companies cooper- ate with each other to create and deliver valuable products and services to the end consumer. But as a customer of one or more links in the chain, and a supplier to others, each also competes to capture for itself as much of the full value created from the chain’s activities as it can.