Editor's note: Robert M. Monczka Ph.D. is the Director of Strategic Supply Chain Strategy Research at the Center for Advanced Purchasing Studies (CAPS). James P. Morgan is Editorial Director Emeritus for PURCHASING Magazine. Their commentary is based on findings from the CAPS Project 10X (description below), which Monczka is leading.

By the year 2006, the business community—especially the part associated with supply management, sourcing, and purchasing—will be deeply influenced by a number of macro trends that are already at work in the economy. The most significant of these trends:

• Companies are facing rising pressures to improve long-term financial performance. Supply chain performance will be a critical contributor to this.
• Suppliers' value chains are being reformed into customer-focused virtual networks where physical organizations no longer require physical proximity to function well. In the other direction, some traditional channels and supply chains are looking at how inside work might be done better outside, how new partners might provide products to customers, and how supply areas can be moved closer to companies' operating businesses.
• Due to increased costs and globalization, many companies are finding they need to create innovative processes and technologies to deliver new products and services at faster rates. For many firms, this means providing customers with "total solutions" as opposed to discrete products or services.
• Global competitiveness depends increasingly upon the ability to obtain cross-enterprise information in real time on a worldwide basis.
• Skilled human capital is becoming more of a differentiator among firms. As companies reform themselves they are relying less on physical assets and more on supply chains built around research, development, and intellectual capabilities where people are increasingly flexible and innovative.
• Competitive advantage in 2006 will depend greatly on better and faster implementation of innovation in terms of technology, processes and business approaches.

Over the same period in which these general business trends are taking hold, there will also be some very radical changes in customer and competitor characteristics that will drive business strategies, especially sourcing and supply strategies. Most changes will be the direct result of increased customer sophistication, which means that companies will need to become better at recognizing early on what customers truly want and need. Doing this properly will entail focusing, with different levels of emphasis, on such disparate factors as quality, technology, global reach, assurance of supply, and ontime delivery. Industrial customers, for example, will demand much more emphasis on reducing production costs, increasing total value, and expanding the range of total solutions being provided to the marketplace.

The result is that many supply chain management organizations are moving from being competent providers of specific products or services to being providers of total solutions. Already, companies are selling total solutions to meet the needs of the buying public in such areas as energy conservation and productivity improvement. Many companies, such as IBM, are promoting global services, combining diagnoses of what companies need to improve their performance with software, hardware, and consulting services. Behind much of this is a drive to avoid becoming "commoditized." The end result for many firms is that they are becoming a bit of everything, providing products and services at the same time that they are providing total solutions, all of which have different kinds of supply chain requirements.

In any case, firms will need to collaborate more with customers and suppliers, increase their global reach, and be more effective in their use of e-business tools.

Sourcing and supply chain strategies can be grouped, for the most part, along the following levels of perspective:

• Commodity/supplier leveraging. This represents the traditional approach to sourcing and buying. Price and volume are at the forefront, while adding product and supply chain value is usually of secondary importance.
• Supplier integration. At this level, select suppliers are integrated more deeply into development of new products and provision of services.
• Value-chain integration. This level goes to the core of a business itself. It makes sourcing and supply management a key part of business strategy and looks for ways to better integrate specific customer segments with different suppliers' contributions to total solutions. It represents a whole new level of complexity and sophistication.

Businesses in recent years have begun shifting their emphasis from supplier and commodity leveraging to supplier integration and then on to value-chain integration. Supply management and sourcing functions have been moving up in terms of their importance to corporate success, which tends to underscore the validity of earlier moves focusing on globalization, disintermediation, and core strengths. As these insights mature, a number of emerging strategic sourcing models can be organized into the following categories: commodity, technology and service leadership, and total solutions provider.

Commodity models are most common and associated mostly with leverage. These models focus typically on such things as cost of quality, delivery, volume leverage, emerging markets for cost reduction, use of e-sourcing tools, dock-to-stock processes, and supplier-held inventories.

Models in the technology and service category cover most of the things commodity models do, but they also view strategic sourcing and supply chain strategies as core competencies. They tend to place less relative emphasis on price leverage and more stress on integration of suppliers into supply chain solutions.

Total solutions models tend to stress economic value add. They place less relative emphasis on leverage and reflect deeper integration with suppliers and with the demand side of the business. Total solutions models tend to be more concerned with the need to manage risks more professionally than in the past and to be deeply involved in outsourcing decisions. They also stress leadership, management of the external value chain, and focus on contributions to the firm's revenue generation.

As supply chain strategies mature, a major part of a business will involve managing the external value supply chain. Important will be the need to manage costs strategically at all levels of the supply chain. Supply managers will find they are doing more business with outside suppliers than inside ones. They will be working much more with Tier 1 and Tier 2 suppliers to take costs out of products. They will require ongoing development, cost reduction, and innovation on a collaborative basis among all participants in the supply chain.

Many supply chain managers will be deeply involved in building e-sourcing and supply portfolios. Many will be forced to make more informed decisions about whether to use industry-sponsored consortia, build private exchanges, or use markets. Many will need sophisticated assortments of e-sourcing, supply, and collaboration tools. They will need to do more in the way of building value-chain models to understand both product and logistics costs as well as technology. They will need to decide where research, development, and design will occur in the value chain.

Supply chain leaders over the next five years will also need to decide the extent to which their companies create unique designs or standardize, and at what levels in the product or service they do these things. Creating entirely unique designs risks creation of production difficulties and/or features that don't mean anything to customers. The ideal will be to standardize—at the right level—and make unique only what is important to the customer. Most companies have a long way to go in making this work on a consistent basis.

There are a number of actions that need to be considered as big-impact supply chain strategies begin to kick in. The most significant—

• Continue strategic outsourcing,
• Enhance integration and cooperation among customers and suppliers,
• Increase significant high-level information sharing and transparency with customers and suppliers,
• Achieve much more supply and demand integration internally in a business,
• Focus on deeper integration with strategic customers and strategic suppliers in new product development and product performance work,
• Demand higher quality and formal commodity and supplier strategies that include information about the total value chain,
• Ensure the adequacy of critical Tier 1 suppliers' supply strategies,
• Provide more focus on consistent metrics across the value chain,
• Provide for building a portfolio of applications for electronic sourcing and supply management,
• Provide development of more centralized strategies that are coordinated with decentralized execution of strategic sourcing and supply chain activities,
• Provide for use of dedicated personnel in identifying, hiring, and developing highly talented, flexible, and globally oriented strategic sourcing and supply chain professionals.

There are a number of strategies that can lead to some significant performance breakthroughs. Some of the most important:

• Working with customers and suppliers to identify the largest costs in the value chain, and then focusing efforts to reduce those costs jointly.
• Integration of the value chain through information sharing, decision making, and collaborative planning.
• Pursuit of volume leverage across the value/supply chain. Looking for more opportunities that will require cost and value mapping.
• Customer-focused internal supply and demand integration, that is, providing customers with what they want as the result of improved supply activities.
• Leveraging suppliers to jointly create solutions and opportunities.
• Asset sharing between organizations.
• Early development and acquisition of new product and service technologies and shared revenue generation.

To be considered world class by 2006, firms will need to have adopted and implemented the strategies named above that are most critical to their businesses. Project 10X will continue to provide emerging strategic sourcing and supply chain strategy insight to research donor companies.

CAPS Research is a nonprofit, independent research organization cosponsored by Arizona State University College of Business and the Institute for Supply Management (ISM). More information on CAPS Research is available from Mr. Rick Boyle, Director of Development, the Center for Advanced Purchasing Studies ( CAPS Research), 2055 East Centennial Circle, P.O. Box 22160, Tempe, AZ, 85285-2160, Phone: 480-752-2277, FAX: 480-491-7885, E-mail: HYPERLINK mail to: rboyle@capsresearch.org.