Operations Practice

Overcoming barriers to
multitier supplier collaboration
Digitally integrated supply chains could generate billions in new value—if
industries find ways to manage perceived risks, realize the value at stake, and
distribute it fairly among partners.

This article was a collaborative effort by Eike Ebel, Tarek Kasah, Bodo Koerber, Niko Mohr, Daniel Müllerklein and
Matthias Roggendorf.

© Getty Images

July 2021
 The COVID-19 crisis has disrupted production and of one another’s data. That makes it difficult for
logistics activities across the world, leaving many organizations to agree on the terms and incentives
organizations struggling with uncertain delivery for data sharing projects. And it can make them
times and critical shortages of parts and materials. reluctant to integrate external data into their own
Recent shortages of semiconductors, lumber, and management and planning systems.
steel are a reminder of how vulnerable today’s
globally integrated supply chains can be—and of
technology’s strategic value in revealing potential The value of integration
disruptions along the n-tier supply chain. In one McKinsey survey of more than 100 large
organizations in multiple sectors, companies that
The pandemic may have pushed supply chains to regularly collaborated with suppliers demonstrated
the top of the corporate agenda, but the topic was higher growth, lower operating costs, and greater
already on the rise. Ambitious environmental, social, profitability than their industry peers. To offer a
and governance (ESG) targets require original- more granular view of the potential impact of highly
equipment manufacturers (OEMs) and suppliers integrated supply chains, we modeled the supply
to track, manage, and communicate data on their chains of one major industry: the automotive sector.
carbon emissions and labor practices across all The car industry provides an informative test case
tiers of their supplier networks. And, with suppliers because its supply chain is complex, and industry
responsible for 80 percent of total product value in players have already worked hard to drive efficiency
industries such as automotive, supplier cost, quality, and squeeze out waste to increase their usually-low
innovation, and delivery performance remain critical margins.
to business success.
Our analysis took a deliberately narrow view of the
Companies know that closer collaboration with their supply chain, looking at the potential efficiency
suppliers is a powerful way to drive improvement gains generated through the integration of day-
across all these dimensions. But the vision of a to-day activities: supply-chain planning and
truly integrated supply chain has proved difficult execution, logistics planning and execution, and
to realize. OEMs and suppliers seeking to increase quality management. We modeled the impact of
data sharing and collaboration across their supply integration across the end-to-end value chain from
networks have faced three principal hurdles. “tier-n” suppliers through vehicle OEMs to dealers,
including the role of the logistics-service providers
Technology. The current technologies used to that manage and execute the flow of materials,
exchange data between supply-chain participants components, and finished vehicles (Exhibit 1).
tend to be relatively unsophisticated. The electronic
data interchange (EDI) standard widely used in the For the global automotive industry, we found that
automotive sector, for example, allows only limited integrating those activities could save OEMs and
information on forecasts, orders, and delivery their suppliers between €40 and €65 billion per year.
schedules to be shared between two companies. At the 5 to 7 percent margin typical in the industry,
that represents a 50 percent profitability boost.
Operating model. Participants have not yet
developed standards for the exchange of more The largest benefit we identified came from greater
complex data, from the carbon footprint of parts production efficiency at supplier sites. Integrated
to the real-time location of products as they move planning helps suppliers run stable operations, with
through logistics networks. fewer schedule changes, changeovers between
products, and extra shifts. The process also works
Trust. Trust is an important issue for participants the other way. If upstream suppliers cannot meet
from two perspectives. First, some data is a customer request, early warnings may allow
considered too sensitive to share with external downstream players to adjust their schedules,
partners. Second, participants often lack a minimizing disruption and maintaining output. In our
common understanding of the value or accuracy

2 Overcoming barriers to multitier supplier collaboration

Exhibit 1
End-to-endsupplier
End-to-end supplierintegration
integration could
could create
create €37€37 to €65
to €65 billion
billion in value
in value just just
in in
theautomotive
the automotivesector.
sector.

End-to-end supply-chain planning and synchronization opportunities, starting from customer order
up to tier-n
Estimated maximum overall impact
Supplier OEM and supplier (joint planning) OEM Dealer Estimated minimum overall impact

Inbound Outbound Dealer

Product ware– Quality Production ware– integration
develop– Supplier housing, manage– and housing, and
ment production inventory Transport ment assembly inventory logistics

Estimated Typical
impact for Industry ~3–4 ~40–65
suppliers ~2–4 ~1–2 4.0 levers ~1–2
~6–8
and
~25–50
original–
equipment Total summarizes the efficiency
manu– gains realized along the entire
facturers supply chain (ie, efficiencies
(OEMs), Not in realized through OEM but also
€ billion1 focus tier-n suppliers)
Example Integrated Integrated Integrated Integrated Integrated Integrated Integrated Cumulative
use case supply– supply– logistics quality supply– logistics supply– value for
chain chain planning manage– chain planning chain OEM and
planning planning ment planning planning suppliers
(at least
partial)

1
Estimated based on public information and expert analysis
Source: McKinsey analysis

model, planning improvements accounted for €25 to The third largest impact came from improvements
€50 billion in benefits. in transportation efficiency. Increasing the overall
utilization of transport assets and reducing the
Another large benefit came from reducing number of emergency deliveries is expected to
inventories across the supply chain. High save the industry €2 to €4 billion. Better transport
inventory levels are often the result of unreliable utilization also improves the industry’s carbon
or uncertain forecasts, or lack of communication footprint, allowing it to keep components flowing
about production-schedule changes that will with fewer truck journeys and less airfreight.
affect material call-offs in a just-in-time operating
environment. Addressing these issues through Finally, integration would help companies manage
collaborative, end-to-end planning could save the quality in their production operations. Linking data
industry a further €6 to €8 billion on inventory costs, on production process parameters, test results,
freeing up capital. and transport and storage conditions to parts as
they move through the supply chain will aid the
identification of quality issues, accelerate root-
cause problem solving, and allow suspect parts

Overcoming barriers to multitier supplier collaboration 3

 to isolated when problems occur. In the automotive identified in our analysis cannot be captured by any
sector, that could be worth around €1-2 billion every single party operating alone; they require collaborative
year. action by multiple players. Furthermore, the benefits
of supply-chain integration initiatives don’t necessarily
accrue to the organizations that put in the most work.
Building a truly integrated supply Better medium-term forecasts and commitments for
chain parts subject to highly variable demand help suppliers
How would organizations capture all this value? Our optimize their production capacity—but the cost of
modeling is based on the introduction of systems building and updating those forecasts falls to the
that allow multiple data streams from supply-chain OEM. To make such arrangements work, participants
participants and external sources to be integrated will want to align on a mutual and fair mechanism for
in a single platform. That platform would be used the sharing of efficiency gains, while incentivizing the
to exchange demand forecasts, jointly optimize information exchange for both parties.
production and logistics schedules, and track
operations and asset information in real time across A data-governance and operating model to facilitate
the end-to-end value chain (Exhibit 2). successful data-based collaboration includes
awareness on the relative value of data internally
Beyond the technical challenges of establishing and for partners, the ability to manage data along
such a system, supply-chain participants also its lifecycle (consistent ontology, data quality
need to find a fair way to run it. The opportunities assurance), the ability to extract value through

Exhibit 2
An integrated, end-to-end supply chain of the future promises seamless
An integrated,and
collaboration end-to-end supply chain of the future promises seamless
transparency.
collaboration and transparency.
Supply information
Demand information
Plannning information
External Product flow
data
Collaborative Competitor
forecasting data
Plan
Full downstream
transparency Demand Supply Performance and
Forecasting S&OP1
review review risk management

N-tier Tier-1 supplier

suppliers Supply-chain
Fully digitized Backup
spend control tower;
tier-1 operational
analytics supplier
and procure- nerve center
to-pay
processes
Agile capacity
allocation

Always know exact Dealer, sales

location and condition companies
of each shipment OEM2
assembly
Quality control

1Sales and operations planning

2Original-equipment manufacturer
Source: Konsentus; Open Banking Europe; Open Banking.org.uk

4 Overcoming barriers to multitier supplier collaboration

application and analytics (analytics capabilities, developed systems used to share maintenance and
use-case identification), and the ability to share asset-performance data throughout the value
data securely and stay in control (data-sharing chain, through to asset owners and service
standards). providers.

The technology is ready Overcoming the barriers to collaboration

Many companies are already using technology The development of suitable technologies has
and analytics internally as part of their Industry been an important step, but platforms alone are
4.0 vision. The requirements of Fourth Industrial insufficient to enable deep integration between
Revolution implementations have, to a large supply-chain participants. Industrial IoT platforms
extent, been mapped to solutions for most of the work nicely to drive efficiency within companies, but
technology challenges. The technology stack collaboration along the supply chain requires further
for the Internet of Things (IoT) platforms used to enablers. For example, players will need to agree
coordinate manufacturing operations is becoming as to how those platforms will be used, align on
well defined and widely used. standards for data exchange, agree on rights over
data access and ownership, and establish common
And a number of technology players provide conventions for the naming of objects, products,
systems that enable near-real-time sharing of data and events in the supply chain. Moreover, since in
between entities and supply-chain partners. These many industries suppliers serve several customers,
cloud-based platforms can link to a wide range these standards and conventions should be as
of IoT and enterprise resource-planning (ERP) open as possible, so companies can easily integrate
systems, offering off-the-shelf solutions to data their own systems with those of multiple partners.
management, security, access rights, and control Defining open standards for data exchange, as well
challenges. They also provide an environment in as a joint ontology for data, is only just beginning
which participants can apply machine learning and and will mean close collaboration with technology
advanced analytics tools to extract insights from and cloud providers.
shared supply-chain data.
To put the necessary infrastructure and standards
Manufacturing players and software companies in place, we foresee the need for a collaboration
have developed the ability to create digital twins of “orchestrator” within the supply chain. The
components, complete machines, entire factories, orchestrator would work with supply-chain
and even supply-chain relationships—modeling participants to foster agreement on appropriate
all relevant parameters in near real-time. These standards and protocols, and build the digital
digital twins contain all relevant data points and platform for data exchange. In some supply chains,
relations to model the production system and such as in the automotive industry, the OEM might
optimize its performance using analytics and perform this orchestrator role, using its scale and
artificial intelligence. strong relationships with tier-1 suppliers to do
the heavy lifting required to get digitally enabled
Recognizing the potential of these new supply-chain collaboration off the ground. In other
technologies, several large manufacturers have sectors, the orchestrator could be a third party,
started to implement cloud-based platforms to funded or supported by multiple OEMs and major
support internal Industry 4.0 developments and suppliers.
provide improved connectivity with suppliers,
customers, and other stakeholders. In the A supply-chain technology orchestrator can help in
automotive sector, several leading tier-1 suppliers overcoming technology and resource challenges—
have worked with OEMs to create joint platforms but they may not be able to resolve the trust issue.
with the goal of supply-chain optimization. Where the orchestrator is also a major customer
Likewise, players in the aerospace sector have in the supply chain, other participants may be

Overcoming barriers to multitier supplier collaboration 5

 concerned about sharing sensitive data. And where high value, high demand fluctuation, and high
the value created by integration projects is to be criticality for the manufacturing process).
shared among participants, suppliers need to be
confident that calculated improvements are derived — Engage with suppliers to identify today’s
from accurate data and a fair baseline. largest pain points, and potential data-driven
solutions.
In cases such as these, supply participants may wish
to appoint a “trustee”—an impartial third party that — Pinpoint critical enablers for realizing the
can review potentially sensitive data from multiple potential, such as the exact data that needs to
participants and help them establish equitable be shared, the data’s cyclicality, the required
incentive arrangements. Modern technologies such level of data protection, and the types of
as blockchain or homomorphic encryption may analytics that are needed.
provide the necessary toolkit to run a cross-industry
data-sharing platform while ensuring trust from all — Synthesize and generalize use cases so that
parties involved. they form a scalable platform, with common
data formats, standards, ontology, and
Steps towards impact interfaces that enable it to be extended readily
Solving the inherent challenges of supplier to other use cases and suppliers.
collaboration is always a bilateral discussion,
requiring a joint understanding of the potential and — Define the platform’s operating model and
commitment to closer collaboration. Such efforts governance structure, creating data-sharing
require a first mover to initiate the discussions, mechanism and clarifying critical roles, such as
however. This could be a leading OEM, a major those of the platform orchestrator and operator
player elsewhere in the market (perhaps one facing and the data-sharing trustee (if needed to
significant cost pressure), or a group of like-minded protect highly sensitive data).
stakeholders.

We see a clear separation between first assessing

the impact at stake and the required capabilities, If participants can work together to overcome
and then building the technology infrastructure and barriers–including common operating standards,
governance to realize the potential. To prepare, a trust, and appropriate gain sharing–they could
company can take several initial actions that are significantly reduce costs and improve resilience.
largely under its own control. Greater integration will also serve as basis for
an end-to-end focus on sustainability. It is one
— Identify leading suppliers within its own supply key enabler for the fast, flexible, sustainable and
chain and the products or components with efficient supply chain of the future.
optimization potential (ideally components of

Eike Ebel is a consultant in McKinsey’s Frankfurt office; Tarek Kasah is an associate partner in the Dusseldorf office, where
Bodo Koerber and Niko Mohr are both partners; Daniel Müllerklein is a consultant in the Munich office; and Matthias
Roggendorf is a partner in the Berlin office.

Copyright © 2021 McKinsey & Company. All rights reserved.

6 Overcoming barriers to multitier supplier collaboration