The virtual integration that gives Dell the lead over PC competitors heralds the future, says Robert Heller, yet suppliers remain wary about mating with customers
Suppliers face the hardest squeeze ever - from customers, competitors and the internet. The old order changeth and so doth supplier strategy. If you want to beat 'em, join 'em, all three of 'em.
The would-be winners are merging with their competitors (as Lucas wed Varity). They are linking with purchasers in cyberspace (via extranets and round-the-clock web sites) and uniting with suppliers in the partnerships, blessed by every guru, that transform business systems.
In this brave new world, seller and buyer, no longer adversaries, unite intimately from design to final manufacture. As just-in-time computer maestro, Michael Dell, told the Harvard Business Review: 'You're basically stitching together a business with partners that are treated as if they're inside the company.'
The 'virtual integration' that gives Dell its flying start over all PC competitors is the wave of the future. But it's too rarely the present. In automotive components, first-tier suppliers (such as LucasVarity) draw and lean on second-tier suppliers. In a survey of suppliers in the West Midlands, KPMG found that only a third of the second-tier suppliers even co-operate with customers to improve performance - a failure that is neither virtual, virtuous nor viable.
The second-rankers (and particularly the second-raters) are under mounting pressure. The vehicle manufacturers insist on price cuts averaging between 3 % and 10% from first-tier suppliers. They, in turn, squeeze the second-tier, lesser beings that face deselection if they can't respond - a fate that could strike a third of West Midlands suppliers in the next three years.
This depressing picture is consistent with other data, such as the bizarre fact unearthed by Company Reporting that more than half the FTSE-100 companies invested not a penny in research and development last year. Such Neanderthals have zero chance of winning business in the best virtual style, that of innovative suppliers who are leading their customers into new technologies and applications.
Yet some powerful suppliers are notably cautious about mating with customers. In the US, the Sears retail chain wanted to send management consultants into Johnson Controls, its battery supplier, to help generate price cuts from state-of-the-art productivity. When the supplier refused, Sears deselected it. Although Johnson is an $11 billion giant, it felt real pain from this loss.
The benefits of productivity gains achieved through Sears-style programmes, or Dell-type integration, are supposed to be shared. …