The Internet is changing the rules on dealing with suppliers. Before the Internet it was advantageous to have everything — and everyone — under one roof. It kept costs down. But with today’s technology vertical manufacturers risk becoming too slow to compete with companies that espouse virtual supply chains.

Transaction Costs Drop With Virtual Supply Chains
Transactions with suppliers are expensive. First you must establish a relationship with a third party. Then you have to verify quality, negotiate costs, draft an agreement regarding intellectual property rights and plan for joint investments. These issues alone can be dealbreakers.

Once a supplier is on board there are additional transaction costs. You need buyers to oversee purchases and logistics personnel to manage the flow of materials between the manufacturing plant and the supplier. Even vertically integrated manufacturers have these costs, but they’re buried in overhead, which may give the erroneous impression it’s cheaper to produce in-house than to buy from the outside.

Virtual or digital exchanges reduce these transaction costs significantly. The exchanges gather disparate pieces of information and package it for users. Many digital exchanges have even promised greater savings by pitting suppliers against each other in virtual auctions. In addition, these digital exchanges have further reduced supply chain costs by making it more attractive to buy from outside suppliers. They do this by supporting buyers every step of the way through the procurement process from finding vendors to developing requests for proposals to running the auction site on bidding day.

Information Advantage Goes to the Virtual Supply Chain
The timing and availability of information have traditionally kept supply chains cemented together. But the Internet’s ability to move massive amounts of information at a very low cost is changing that model. For example, point of sale (POS) data from cash registers can now go directly — and very quickly — to manufacturers. This makes forecasting more accurate and reduces inventory requirements throughout the chain. These POS tools are easily accessible at Web portals.

Another reason the traditional vertical supply chains worked well was because they eased the job of managing complex relationships between various departments. When the product engineers had a question they would stroll down to R&D for the answer. Single-site supply chains facilitated that spontaneous flow of information between different departments. In highly dispersed supply chains it was difficult to create that informal flow of communication without enormous expense and infrastructure.

With the Web everyone has equal access to shared information. The reams of product content information manufacturers need — such as bills of materials; lists of approved suppliers for each component; and process information for building, testing, and customizing the product — now are available through Web-based portals for a monthly fee.

With virtual supply chains it’s easier than ever before to push responsibility and accountability for the final product further down the pipeline. Web-based portals make it possible for all the partners in a manufacturing venture to play a role in the success of the finished product. And that allows disparate suppliers to begin thinking of themselves and  their customers as a single manufacturing entity.