A more efficient, profitable supply chain might result from the complexity introduced
by larger product, supplier, and customer portfolios. Claudia Rosales, professor of supply chain management at the University of Arkansas, found that companies
in the automotive component industry with wider portfolios tended to see greater returns
on assets and sales than peer firms with narrower offerings and options.
In “Supply chain horizontal complexity and the moderating impact of inventory turns: A
Study of the automotive component industry,” Rosales and coauthors Hugo DeCampos and Sriram Narayanan argue that a more horizontally complex supply chain allows a firm to more efficiently
turn inventory over. Horizontal supply chain complexity is a measure of “how many
unique entities exist at a given level of the supply chain.” As such, a more complex
supply chain is a more diversified supply chain.
Certainly, when the whole automotive industry and its global supply chain has been hobbled by the microchip shortage, leveraging multiple products, suppliers, and customers to ensure stable supply and
demand may seem nostalgic. Yes, automakers may be forced to reduce product offerings
temporarily if shortages increase in severity. The question remains, though, of what
to do when these shortages subside? Firms must then decide whether or not to produce
a large variety of models. When shortages subside, Rosales’s research can help firms
navigate this choice.
Rosales’s research thus offers a strategic opportunity for firms eyeing an uncertain
future where supply chains may need to be diverse in order to survive. And this survival
is about the entire supply chain’s diversification, not just about one link in the
chain. Rather than looking at one spot along the supply chain, then, the researchers
tested the benefit of upstream and downstream complexity to provide a better sense
of the benefits offered by the whole ecosystem.
It’s Not Just About the Portfolio
Earlier research suggests that a larger, more diverse supply chain can insulate a firm from the shocks of variable supply and demand, but firms face a tradeoff. A more complex supply chain also costs more to operate
and maintain, and excessive complexity will eventually overwhelm a firm and its ability to manage its supply chain. Drawing on this research, Rosales, DeCampos,
and Narayanan argue that increasing the scope of a supply chain should improve firm profitability, but these investments will eventually have diminishing returns.
By reducing the variability of supply and demand, firms turn inventory over at a higher rate. Achieving higher rates of inventory
turnover requires more coordination within and across firms. This level of coordination probably also signals firms’ competency in maintaining
more supplier and customer relationships. That is, success amid complexity both creates
and supports the skills necessary to reap more rewards from said complexity.
The researchers found that the number of suppliers and customers does not have a direct
impact on a firm’s financial performance in the automotive component industry. Instead,
high rates of inventory turnover strengthen the correlation between the firm’s product
portfolio and its performance. They suggest that to capture the benefit of a larger product portfolio, a firm should first improve
its operational efficiency.
Having both these pieces in place creates positive effects. When a firm is operating
efficiently with high rates of inventory turnover, it can take advantage of a larger
product portfolio. The firm can then expand its supplier portfolio to further increase
its profitability. That is to say, by achieving a high inventory turnover, the firm
chews through more input materials, so by widening the sources the firm pulls those
materials from, it can consistently manufacture its product offerings and continue
to be itself a reliable supplier.
But there’s a catch – achieving a high rate of inventory turnover is imperative for
this relationship to work out. Rosales, DeCampos, and Narayanan observe that when
turnover is low, increasing the size of a firm’s product portfolio has a negative
effect on their profitability.
Unlike the size of the supplier portfolio, which the data suggests has an indirect
effect on a firm’s profitability, the researchers did find that the size of the customer
portfolio had no significant impact upon profitability. Nor does the customer portfolio
size interact with inventory turnover. So long as the current customer portfolio
is sufficient for inventory turnover, there is no need to prioritize expanding it.
Investment can do more good elsewhere in the supply chain. Indeed, looking downstream
a bit, automobile manufacturers do not need every dealer to carry their offerings,
just a group of individuals dedicated to the brand. If bicycle dealers are any indication,
it is more important to keep your current dealers happy with transparent communication rather than endlessly increasing their numbers.
Supplying More
According to their data, Rosales, DeCampos, and Narayanan recommend that firms in
the automotive component industry put forth a two-pronged effort. Firms should improve
both the size of their supplier and product portfolios and invest in their operational
efficiency to enhance their inventory turnover. These improvements offer greater yields
together than separately.
The researchers are careful to note that their study only applies directly to the
automotive component industry. In fact, they hope that their research shows the importance
of industry specific analysis of the benefits (or detriments) of supply chain complexity.
Moreover, they are aware that suppliers up and down the supply chain may experience
these pressures differently, so their research applies most directly to original equipment
manufacturers.
Nevertheless, Rosales, DeCampos, and Narayanan found strong evidence that the efficient use of a firm’s assets correlates with increasing net income. Consistent inventory turnover positions your firm to capitalize on using more suppliers
and offering more products.
Despite the apparent profitability of supply chain complexity, the researchers found
significant reluctance among industry executives to embrace a more complex supply
chain. Their research does not of course diminish the challenges of expanding portfolios
and improving inventory turnover, but it does uncover the measurable benefit just
waiting to be unlocked by an enterprising manufacturer. Perhaps your firm is up to
the challenge?
Post Researcher/Author:
Claudia R. Rosales is an Assistant Professor of Supply Chain Management at University
of Arkansas. Her research interests include healthcare operations, risk management,
inventory management, cross docking/logistics, optimization, simulation modeling,
and analytics. Prior to her academic career she worked in manufacturing holding several
engineering positions such as productivity, process, and packaging engineer at Colgate
Palmolive, C.A. She obtained a Master of Science in Quantitative Analysis and a PhD
in Operations Management from University of Cincinnati.
Mitchell Simpson is a doctoral student in the Department of English at the University
of Arkansas. His research focuses on the Global Middle Ages and cross-cultural communication
in the European Medieval and Early Modern Periods. When his nose isn't buried in a
book (usually a Japanese textbook right now), he can be found hiking the Ozarks or
at the gym improving his grappling. He lives with his wife, Rachel, and their small
menagerie, two cats, Hildi and Winnie, and a goofy dog, Birch, in Fayetteville.
