SUPPLY CHAIN
BOOM AND BUST
SUMMER PROJECT
TOM KOPLYAY
CARLOS BLANDON
SERGIO REVELES
AUG 29,2001
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
I. EXECUTIVE SUMMARY
An efficient and responsive supply chain can be one of the organization’s most effective
competitive advantages. Supply chain decisions are enterprise strategic decisions that
have a profound impact on how any organization allocates resources.
Business strategies are becoming connected with supply chain and information strategies.
Companies are using advanced data systems and supply chain management techniques as
a means of harmonizing organizational efforts and achieving ambitious long-term
strategic initiatives. As a result, supply chains have evolved from the vertical integration
in which asset ownership was the means to control the different stages in the process to
virtual integration in which alliances, agreements and partnerships are the means to
secure supply.
Outsourcing supply functions to appropriate non-core outside service providers is a
feature of the best of these networks, as firms learn that they cannot be all things to all
customers and they can benefit by concentrating on core competencies. In the high tech
sector, this asset transfer from the OEM (Original Equipment Manufacturer) to the CEM
(Contract Equipment Manufacturer) has happened as OEMs redefine how they are going
to add value for the customer and what core competencies they want to concentrate on.
However, the current economic slowdown has provided evidence that supply chains
(following the very common outsourcing strategy) are far from perfect. High inventories,
unutilized capacity, unmet forecasts, profit warnings are some of the most important
effects of a chain that was not able to adapt to the new level of activity.
The purpose of our paper is threefold. First, it is to simply explain to those who have not
previously dealt with Supply Chain Management, the fundamentals involved with this
area. These fundamentals include definition, history, evolution and the classification of
supply chain excellence through four levels of optimization: first level being sourcing and
logistics, second level being internal excellence, third level being network construction
2
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
and fourth level being industry leadership.
The first two levels occur within the
organization and represent the position of most business organizations seeking
improvements in their supply chains. The last two levels occur when businesses join
forces with external firms to seek network savings.
The second purpose of this paper is to explore the current situation in the high tech
industry where it is increasingly competitive and fast paced. Most of the supply chains in
this industry face challenges such as complex chain network, complex product structure
and process, integration among partners, pressure for customer service and assets
utilization and multiple sources of uncertainties.
Most of the companies have
concentrated its strategy on two trends. First trend is pushing new products into the
market as fast as possible and having them available in volumes great enough to satisfy
demand. The second trend is outsourcing and sharing timely and accurate manufacturing
information among supply chain partners so everyone in the chain can be certain that
parts will be available when and where needed and product changes are executed without
delay. In our search to clarify the problems and causes, we analyze what happened in the
supply chain of some of the companies in the industry from an external and internal point
of view.
Finally, our paper is intended to help managers, executives, and other organizational
leaders in the supply chain industry by establishing a series of general recommendations
to create a deliberate and actionable supply chain strategy and making it the driving force
behind the companies’ business strategy. For these purposes, our recommendations refer
to five main issues: supply chain configuration, enabling practices, strategic relationships,
organization and strategic application of information technology. We also establish a
series of actionable plans to formulate strategy and implement them internally as well as
externally along with measures of performance target such as growth, cost minimization,
working capital efficiency and fixed asset utilization.
In short, companies must keep in mind that key questions must be addressed to assess its
particular situation. Examples of these questions include: Has your supply-chain strategy
3
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
kept pace with your business strategy? Is it aligned with your business strategy? We find
through our research in the high tech industry, given the economic slowdown, that many
supply chains were never cautiously configured, much less reconfigured as necessary to
capitalize on geographical expansion, new partnerships, new organizational structures,
and new assets. They were never reorganized to consolidate inefficient or redundant
assets and processes. And they were never rethought in the context of today's rapidly
evolving technologies, shifting market segments, and compelling new channel
opportunities.
By not readjusting their supply chains strategies and objectives to current events, many
companies have turned their backs on a vast opportunity to make integrated, end-to-end
supply-chain management an engine for their business strategy. They are out of line with
the trend toward more integrated, agile, and responsive supply chains. We certainly hope
that with this paper we will answer some of the issues relating to decisions that comprise
a supply-chain strategy, and how the strategy's operational effectiveness is determined.
4
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
II. INTRODUCTION
Supply Chain Management is today one of the most discussed topics in general
management. The implications of the decisions made in how an organization runs its
supply chain will affect how the whole organization is run. In this project we will
address the Supply Chain Management of the OEM (Original Equipment Manufacturer)
in the high tech sector.
The challenge is to create a competitive advantage in an uncertain environment in which
enhancement of supply chain management must be driven by the corporate strategy to
increase shareholder value. The supply chain strategy must address collaboration and
alignment of objectives among supply chain partners. Technology plays an important role
in achieving operational efficiency. This is a need that cannot be considered an option if
sustained, long-term success is one of the goals of the organization. The message is
strategies for supply chain evolve toward supporting corporate strategies.
In the case of the OEMs in the high tech industry, extraordinary pressures are created to
turn market opportunities into profits. Companies supply chains are racing one another to
bring market continual streams of new products with new features. Balancing to this
development is the looming shadow of shorter product life cycles, meaning that greater
volume of new products must be developed, introduced, manufactures, and sold, just to
keep the supply chain pipeline flowing.
Innovative strategies such as outsourced
manufacturing and supply chain collaboration help to alleviate the mentioned challenges.
However, these same strategies have posted some problems due to lack of vision and
misalignment within the chain, which has created the current problems in the industry.
For this purpose we will present mandate and scope. Then, we will proceed to explain the
current effect of the economic slowdown in the supply chains of the average OEM in the
High Tech sector. We will identify the problem statement and causes of problems. And
5
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
finally we will finish with recommendations, plan of action and future trends in an
attempt to draw conclusion on the use of strategy on the supply chain.
The true is that effective supply chain management is a very complex and difficult than it
is recognized. Companies have a tendency to over rely on the technology and structure
and control establish that they forget to have a solid understanding of the real issues and
how they are to be addressed strategically. As a result, the lack of vision is making them
worse off by not been able to develop meaningful metrics.
6
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
III. MANDATE & SCOPE/APPROACH
The mandate of this project is to come up with general strategic recommendations for
potential best practices in dealing with supply chain partners in the High Tech sector,
given the current external and internal challenges and trends that industry confronts.
Under this mandate we will concentrate on the strategic part of the supply chain to align
functional activities with business objectives. We will try to match supply chain
strategies to real needs. We plan to do this by taking a case analysis approach of the
current situation in the supply chain of the High Tech sector, which includes
recommendations that deals with corporate strategy, collaboration, outsourcing,
organization and technology.
As scope of the project, it is our intention to cover the overall supply chain. For that we
have had interviews and sent questionnaires to supply chain professionals. In both
methods of collecting information we have stated that we want to cover the strategic
overall aspect of the topic.
Surely our mandate as strategic logisticians is not to seek to maximize service, but
optimize service levels, taking into account the overall profitability of the enterprise, and
the overall performance of the supply chain.
7
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
IV. DATA RESEARCH
Data was collected from 4 different sources:
Interviews
The interviews were done with supply chain management professionals of high tech
companies. The purpose of the interviews was to have input on the most current topics
like, inventory management and long term plans.
The format of the interview was an open conversation with fixed elements mentioned
above.
Questionnaires
The questionnaires had 7 questions and the intention was to get the supply chain
management professional to state his/her opinion on what he/she considered to be the
extent and scope of a supply chain and on decisions about who to choose as supply chain
partner.
Internet
We obtained the most current information on hot topics from www.supplychaintech.com
and www.manufacturing.net/scm and others.
Books and Magazines
For the theory basis and current events we used publications that explain us the main
issues and challenges in the supply chain of the High Tech sector and other industries.
8
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
V. UNDERSTANDING S U P P L Y C H A I N
In the last years, supply chain management has emerged with great importance in the
strategy side of the business environment to increase sources of competitive advantage.
The term supply chain refers to the entire network of companies that work together to
design, produce, deliver, and service products. In the past, companies focused primarily
on manufacturing and quality improvements within their four walls; now their efforts
extend beyond those walls to encompass the entire supply chain.
Why do this? Most of the gains achievable from an internal focus have been realized,
while the opportunities that exist through cooperation and collaboration are the new
frontier.
We find it important to describe the definition of Supply Chain and the history and
evolution of the supply chain to grasp an understanding of how a company’s chain reach
to be label an Advance Supply Chain. For these purposes we will use the four phases
established by leading expert Charles Poirier on his book “Advanced Supply Chain
Management” 1
WHAT IS SUPPLY CHAIN?
According to Charles Poirier, supply chain management is “the means by which firms
engaged in creating, distributing, and selling products can join forces to establish a
supply network with unbeatable competitive advantage.”
Others definitions of supply
chain management were given by leading professionals in NORTEL on supply chain
management based on our research. For example:
“The flow of products, from our customer’s customer to our supplier’s supplier”
by Steve Smith
Regional Supply & Demand
9
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
“The Complete flow of materials from supplier through to the end customer including all
activities and processes used to provide a product/service to the customer”
By Valerie Marina
Senior Manager
SCM
Wireless. Nortel
“The supply chain covers the complete flow of product from raw material (including
extraction where appropriate) to the end customer”
By Doug Knox
VP - Nortel
The notion of the value chain concept is one that relates to the set of activities through
which a product or service is created and delivered to customers. When a company
competes in any industry, it performs a number of discrete but interconnected valuecreating activities, such as operating a sales force, fabricating components, or delivering
products, and these activities have connection with the activities of suppliers, channels,
and customer. So, It is very important to have a clear definition of supply chain to see if
its compatible to your partners in the chain in order to build up a framework for
identifying all these activities and analyzing how they affect a company’s costs as well as
the value delivered to buyers.2
EVOLUTION OF SUPPLY CHAIN
Under the traditional model of supply chain it is presumed that these activities are all
performed internally in the firm.
The evolution of supply management begins with early attempts to reduce cost through
improvement of purchasing, logistics, and distribution functions and progresses to
advanced stages in which alliances with key partners and extensive use of interactive
10
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
technology become the secrets to success.
In today’s business, organizations have
formed networks for sourcing raw materials, manufacturing products or creating services,
storing and distributing the goods and ultimately delivering the products and services to
costumers and consumers. The name of this effort is supply chain management, and the
focus is moving internally as well as externally.
Early efforts concentrated on improving only the internal efficiency of an individual firm
in the supply network. Today, the forefront companies seek ways to change, redesign
and reengineer towards specific markets and customer segment.
The initial efforts included rudimentary process of mapping, displaying the flow of
primary products and services to a few key market segments and customers. It expanded
them to reduce warehouse cost, the consolidation of facilities, and the introduction of
third party organizations to perform some or all the logistical functions.
The effort quickly expanded to purchasing, followed by supply sourcing, the process of
buying and having products and services delivered to a firm, for conversion into goods
delivered to a customer. Firms realize that 50 to 70 percent of their cost could be related
to purchasing. Unfortunately, most of these early saving were passed on the retailer or
end user in a effort to gain a larger volume position near the back of the supply chain.
The retailer was equally quick to pass the saving on to the consumer, and the net effect
was a loss of savings in the delivering network supply. What should have become big
savings an impressive gain in earning per share for the manufactures and retailers
disappear as the efforts of everyone involve in the value chain depleted. However,
attention shifted to improvement in internal mechanisms as a source of savings
channeling capital fund towards projects to increase the operational efficiency. The
emphasis shifted from satisfying the customer to cutting cost.
Once internal capabilities were achieved, then firms started think outside of their
companies by taking advantage of partnering opportunities with a very select group of
11
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
suppliers, distributors, and customers in order for benefits to be extended and enlarged.
Actually, leaders in supply chain management have created a supply chain interaction
model, in which optimization of operating efficiencies is approached. At this point, it set
the stage for the leaders and allows these pioneer companies to reach an advance supply
chain management.
Not all firms chased all these initiatives, but in the end a combination of these initiatives
should let a company determine and react to actual consumer buying behavior. Cash
flow increases for firms finding the right answers because of significant reductions in
inventories and faster billing and payment.
In sum, the evolution of supply chain management for a particular company can be
though in terms of four stages towards supply chain advancement or excellence.
According to Charles Poirtier, the progress toward the highest stages of excellence occurs
through four levels of supply chain optimization: first level sourcing and logistics,
second level internal excellence, third level network construction and fourth level
Industry leadership. The first two levels occur within the organization and represent the
position of most business organizations seeking improvements in their supply chains.
The last two levels occur when the business join forces with external firms to seek
network savings.
Internal integration occurs within the organization and represents the position of most
business organizations seeking improvements in their supply chains. External integration
occurs when the business joins forces with external firms to seek network savings. Both
levels together describe the evolution of supply management and become the foundation
to reach operational efficiencies along with a strong strategy to achieve some degree of
differentiation.
According to Poirier, 80% of businesses are trying to develop their internal capabilities
and only 5% have been able to develop both, internal and external capabilities, and the
rest of the pack been in the middle.
12
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
However, under several factors such as new competition, suppliers and economic cycles
it is likely that companies will partner to perform value-adding activities and through
cooperation one company can better leverage the unique skills and competencies of
another firm. This led to an advanced supply management which is the practice used by
leading companies to improve a total system of supply, especially high tech companies,
linked directly to current demands in chosen markets, so that efficiency savings are
accrued and shared across the network. It is also important to think about a strategy that
will drive towards supply chain excellence to drive interlink among partners of the chain
by choosing together an overall strategy, core activities and value proposition.
STRATEGY VIEW OF SUPPLY CHAIN
ENVIRONMMENT ANALYSIS
The distribution of chain value in any industry is shaped to a considerable degree by
forces that are beyond the control of any single company and that often play out over the
course of many years. To understand those forces you can’t just look at a snapshot of the
present. You have to look into the future. Particularly in the high tech industry, supply
chain is increasingly competitive and fast paced. For this purpose, lets analyze the high
tech industry supply chain by using Diamond-E analysis and Porter’s five competitive
factors to gather the potential growth, competitive pressures, profit potential and risk
associated with the industry:
Diamond-E analysis of the market
Environment linkage
Globalization: with this phenomenon leading companies are forging future supply
and demand networks that circle the globe with an integrated delivery system.
Electronic Commerce: it is becoming increasingly important as enabler of sourcing
and marketing through Internet capabilities
13
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Cycle Demand Forecasting: Analysis of the supply chain began with demand and not
with the supposed starting point of supply.
Resources Linkage
Resources are channeled to achieve operational efficiencies
Resources are used for process capacity management and quality improvement
Management Preferences Linkage
Managers given responsibility for implementing improvements must have a sincere
desire to implement them.
Supply chain team have been a targeted improvement tool to breakdown the internal
barriers inside an organization due to change resistant corporate bureaucracies.
Organization Linkage
Supply chain improvement efforts, by their nature, have to cross division,
department, function, and location and turf boundaries. The people within those
boundaries will initially endorse any effort designed to significantly improve
processes, reduce operating cost, increase revenues, and bring the firm into modern
era.
Michael Porter’s Five Competitive Factors in supply management are generally driven
by technological changes that improve company’s operational effectiveness. We will use
the model to analyze the position of the supply chain for the high tech industry
Threat of substitutes products: Technological advances in today’s environment can
change a company’s strategies and force it to redesign its structure. It can also
change the size of the market by making the overall industry more efficient.
Suppliers: Procurement tends to raise the bargaining power over suppliers and give
access to more customers; all competitors have access to the same capabilities.
Buyers: improves bargaining power over traditional channels; shift power to the
consumers, reduces switching cost.
14
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Rivalry among existing partners: Reduce differences between competitors as
offering remain the same in term of operating efficiencies; migrates competition to
price; widens the geographic market, increasing the numbers of competitors; lower
cost increasing pressure for price discounting.
Barriers to entry: Reduces barriers to entry such as the need for sales force, access
to channels and physical assets; technology is very difficult to keep from entrants
This enables to categorize the supply chain for a particular high tech company. Supply
chain are unique, but it is possible to classify them generally by their stability or
uncertainty on both the supply side and the demand side. Consider the following matrix
where would your company fit in?
(Presentation – Slide #20)
On the supply side, low uncertainty refers to stable processes, while high uncertainty
refers to processes, which are rapidly changing or highly volatile. On the demand side,
low uncertainty would relate to functional products in a mature phase of the product life
cycle, while high uncertainty relates to innovative products.
Once your chain has been categorized, you can select the most appropriate tools for
improvement.
For example, if your chain is in box 4, with a dynamic demand and highly uncertain
supply, then creating a “virtual supply chain” like that of Cisco would make sense. On
the other hand, if your chain was in box 1, with stable demand and stable supply, you
would like to avoid demand variability of economic cycles and would use strategies to
counter demand fluctuation among partners.
STRATEGIC NATURE OF SCM
Beginning in the 1980’s the critical role of value chain in achieving competitive
advantage led firms to think strategically about supply chain management. So, they
began developing and assessing operations strategies. These strategies, or pattern of
15
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
decisions over time, should consistently support and enhance the competitive advantage
sought by the firm’s business strategy.
Indeed, each of the firm’s functional strategies (operations, finance, marketing, R&D,
etc.) must be aligned with the vision of the business unit strategy for the firm to achieve
the full potential of that strategic vision. According to Michael Porter “Supply chain
strategy must go beyond the pursuit of best practices and meeting competition in
implementation of the latest and greatest improvement programs.” Operation efficiency
in chain value gives strategic leverage to a firm when efforts are focused on building
capabilities in specific processes or activities that the firm does better than competitors.
Thus, the selection and building of capabilities is the core of supply chain management.3
These capabilities create opportunities for the firm to succeed in a dynamic, changing and
competitive environment. According to the web site of the supply chain today, the
overall strategic objectives in today’s high tech companies evolves around the following4:
Profits
Cost Reduction
Time to market
Product Quality
Customer Satisfaction
Growth rate
Sales Volume
Market Share
When asked how to plan long-term business goals in a supply chain, Doug Knox, VP of
Supply Chain at Nortel, responded that “ it is essential that the company have an overall
strategic plan covering at least the next three years. The next step is to identify the areas
that require additional focus and resources, which are not within the company’s area of
expertise or those in which disengagement would allow greater financial or business
focus on more mission critical elements. A process to identify, select and engage suitable
partners is then developed to achieve the plan.”5
16
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
From the same site, once the strategic objectives are in place, there are some perceived
benefits in key areas of Supply Chain Management that companies in the high tech sector
equally pay attention to gain competitive advantage, these includes:
Demand forecasting
Marketing
Sales
Product Development
Warehousing
Transportation
Inventory Management
Purchasing
Manufacturing
In sum, considering the competitive environment along with long-term goals and
objectives and focus on areas where maximum benefit can be achieved in the areas of
quality, productivity and customer service, helps companies develop a strong strategy to
gain a competitive advantage. Key questions must be asked:
Where do we need to change?
Which changes are the most important
Which are the easies to implement
Which are the most cost effective
Which will meet the least resistance?
Which will bring the earliest result?
Which will meet technical obstacles or limitations?
Which are consistent or inconsistent with existing culture and norm?
THE INTERNET AND THE SUPPLY CHAIN
According to Michael Porter on his article Strategy and the Internet on the March issue of
Harvard Business Review: “the special advantage of technology in the value chain is the
17
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
ability to link one activity with others and make real time date created in one activity
widely available, both within the company and with outside suppliers, channels and
customers.”
He further expands that “by incorporating a common, open set of
communications protocols, technology provides a standardized infrastructure, a tool for
information access and delivery, bi-directional communication, and ease connectivity –
all at much lower cost than private networks and electronic data interchange or EDI. 6
Porter further expands on the issue by classifying the evolution of information technology
in the supply chain in terms of five stages, each of which evolved out of constraints
presented by previous generation:
I Stage: Information Technology system automated discrete transaction such as order
entry and accounting.
II Stage: Involved the fuller automation and functional enhancement of individual
activities such as human resource management, sale force operations and product design.
III Stage: It is about the Internet, it involves cross-activity integration, linking sales
activities with order processing. Multiple activities are been link together through such
tool as customer relationship management (CRM), supply chain management (SCM) and
enterprise resource planning (ERP) systems.
IV Stage: It is the beginning stage that enables the integration of the value chain and
entire value system, encompassing those tiers of suppliers, channels, and customers.
SCM and CRM are starting to merge, as end-to-end applications involving are the main
players link orders to manufacturing, procurement and service delivery. Soon to be
integrated is product development, which has been largely separate. Complex product
models will be exchanged among parties, and Internet procurement (e-procurement) will
move from standard commodities to engineered items.
18
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
V Stage: Information technology will be used not only to connect the various activities
and players in the value system but also to optimize it’s working in real time. Choice will
be made based on information from multiple activities and corporate entities.
He explains that “production decision will automatically factor in the capacity available
at multiple facilities and the inventory available at multiple suppliers. Early on, it will
involve simple optimization of sourcing, production, logistical, and servicing
transactions, deeper level of optimization will involve the product design itself.” He adds
that “product design will be optimized and customized based on input not only from
factories and suppliers but also from customers.”
However, he argues that technology is only a strong tool to achieve operational
efficiencies; conventional factors such as scale, the skills of personnel, product and
process technology, and investment in physical assets also play important roles.
The fact is that the Internet is already having a major effect on supply chains and there is
more come. One way to capture its effect is in the following framework:
The Framework for Internet Impact
Within an Enterprise: Better Cost, Speed, Accuracy and Communication
Across the Chain - Information Exchange: Visibility, Collaboration on Inventories and
Design
Across the Chain - Restructuring: Compressing the Chain, Changing Roles; “Virtual
Resources”
Across Multiple Chains or Nets: Auctions, e-Procurement, Exchanges, Communities
New Business Opportunities: New Channels/Markets, Mass Customization and New
Products
The purpose of the Internet is to create network solutions to the interrelated process
problems that constitute the inter enterprise network. The important factor is that any IT
19
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
initiative to improve supply chain must fit with the intentions of the overall business
strategies. However, as Porter said, it is important not to let IT be the center of the
strategy because it will be difficult to achieve any competitive advantage as your
competitors can easily copy your model based on technology.
From the web site www.supplychainonline.com, we found some good examples of
companies that use of the Internet to gain operational efficiencies such as Cisco and
Dell.7
Cisco
Cisco has done a remarkable job of making use of the Internet in its own supply chain.
Most of Cisco’s products are manufactured by contract manufacturers (CM’s); Cisco has
integrated well with both its CM’s and its component suppliers. Cisco communicates a
single forecast through both levels of suppliers, reducing the bullwhip effect. They also
display their product and component requirements to their entire chain.
They have eliminated paper purchase orders (PO’s) and invoices, and they communicate
engineering change (ECO’s) electronically to all partners. About 90% of their sales are
made over the Internet, which should not be surprising when one considers that their
products are internet-related and technical, and the buyers are likely to be technologically
sophisticated.
They have reported the following benefits:
•
$875 Million annual Internet Savings (less than 50% due to supply chain
inititatives)
•
25% faster time to market
•
Lead times reduced 75%
•
Flat manufacturing headcount with rapid growth
•
Costs/year down 20% - 28%
20
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Dell
Dell has created “Virtual Integration” with both their upstream partners (CM’s and
component suppliers) and their downstream partners/customers (large companies for the
most part) so that the entire supply chain acts like a single integrated company.
Dell builds computers to order; a customer, typically someone who works for a large
company like Boeing, goes to a private web page available only to Boeing employees,
and can order and configure a computer online. Dell’s suppliers maintain a two-week
supply of components near Dell factories; this inventory belongs to the supplier, not Dell.
Dell shares information with suppliers on inventory levels, sell-through (rate of product
movement through a node), and forecasts. They maintain long-term relationships with
key suppliers for design collaboration.
They have reported the following benefits:
•
Dell & Suppliers work together as a “Virtual Enterprise”
•
BTO benefits – low inventory
•
Dynamic Pricing – change prices rapidly in response to demand and availability
•
Strong links to corporate customers
•
Favorable Cash Conversion Cycle of 18 days
21
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
VI. SUPPLY CHAIN IN THE HIGH TECH SECTOR
This section is divided in three: the history of the supply chain since the eighties up to
today; the current situation of the supply chain in the high tech sector with its internal and
external environment looking as examples companies like CISCO, Compaq and Nortel;
and we will finalize with a series of quotes from CEO’s of other companies reflecting on
the current issues that impact the performance of their supply chain and their own
organizations.
HISTORY
In the eighties the big electronic equipment suppliers were vertically integrated. Big
OEMs used to own the sheet metal shops, paint shops, printed circuit board shops, cable
and wire plants, assembly plants and depending on management preferences on what was
considered a priority, they used to own and run specific component manufacturing sites
like specialty connectors and semiconductors.8
These were the days where management thought of controlling the supply chain via asset
ownership. The companies were organized by commodity or by product with some kind
of matrix reporting system to the executive team.
Each component or sub-assembly division had it own financial goals driven by the
internal business unit that was the recipient of the goods.
The intent was to satisfy internal company demand and in some cases management
allowed the component or sub-assembly division into the external market but this were
not part of what was considered the core business of the division.
The fact that the big OEMS owned and operated a good portion of the supply chain gave
them the power to make decisions affecting those assets. Increased capacity and
22
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
inventories were among the results of decisions to gain market share. The financial effect
of these decisions was not properly analyzed, the net effect of a decision affecting a
business unit was not as important as the expected result for the whole organization.
Another issue was that, sometimes other organization for which a component or specific
subassembly was the core competency had advantages that were reflected in better
technology, lower costs and a better qualified pool of human resources.
In the nineties, big OEMs started the process of “divesting” what they thought was
available in the market, the reasons for this divestiture process was to concentrate in the
core competencies and to free up cash to fund the rest of the activities of the corporation.
More and more cases of divesting happened and then big OEMs started to formulate
specific manufacturing strategies.
The new trend was to pass from a vertically integrated organization to a virtual set of
entities that would contribute with a portion of the whole product. The concept of supply
chain meant all the activities from start to finish in order to finish a product.
OEMs would start to consider Supply Chain decisions as strategy decisions. They would
start to outsource what ever was not considered part of the core competency.
In the late nineties, the concept of outsourcing came as a widespread phenomenon in the
electronic equipment industry transferring assets to the EMS from the OEMs.
The OEMs are in the way of becoming brand managers that use the EMS to put together
the product. The degree of outsourcing will depend on the management ideas about what
will be the future of the company.
23
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
CURRENT SITUATION
Today’s high tech manufacturing industry is more dynamic and competitive than it has
ever been, and it is safe to predict that both characteristics will continue to increase
markedly for the foreseeable future. E-commerce and the Internet are supercharging a
rush to introduce product variants and options to offer customer more sophisticated
products and choices than the competition.
From the web site www.ascet.com, we identify two strategic trends are at play in the high
tech marketplace. Issues surrounding these trends are so important that companies that
do not take aggressive steps to address them put their very corporate existence at risk9.
The two strategic trends are these:
The product Profit Cycle in the marketplace is shrinking
Speed based competition is driving shorter product profit cycles as competitors strive to
outdo each other in delivering the latest and greatest products to customers. Given
weekly erosion of more than one percent in product selling prices and much slower rate
of decline in component costs, the length in time that a product can be profitability
manufactured and sold is a fraction of its total sales life. Where five short years ago a
high tech product could reasonably have been expected to have 18 months to two years of
viability in the marketplace, the norm now might be six to twelve months. In particularly
hot product areas, an even shorter profit cycle might be expected. Getting new products
to market fast and having those product available in volumes great enough to satisfy
demand are the keys to market share and maximum profitability.
Outsource Manufacturing is on the rise
In 1998, only 15% of all manufactured electronics products were outsourced. By early
2000, a cant two years later, the proportion had increased to a hard to overlooked 40%.
24
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
By 2002, industry analyst predict that as many as two thirds of all electronics products
will be manufactured by EMS providers, not by the Original Equipment Manufacturer
(OEM’s) whose names those products bear.
Many established OEMs are often
outsourcing their manufacturing capabilities in order to focus on core competencies such
as product development, marketing, Customer Relations Management, or distribution.
New OEM’s are often established from the outset to operate as virtual manufacturers,
outsourcing their entire supply chains to third parties. Thus the high tech manufacturing
landscape is rapidly evolving from one discrete, monolithic organization to a fabric of
interconnected suppliers in collaborative manufacturing networks.
SITUATION IN THE HIGH TECH SECTOR
During 1990’s outsourcing was the cure for high-tech supply chains. From the article of
Strategy and Business by Bill Lakeman, Darren Boyd and Ed Frey “Why Cisco Fell:
Outsourcing and its perils”, Third Quarter 2001, we captured the supply chain situation of
some of the high tech companies during the present economic downturn.10
Companies such as Nokia and Nortel, made their revenues by understanding distribution,
design and customer needs, not necessarily by their manufacturing. Because of product
demand fluctuations and inability to meet these variances, there were many pressures to
remove manufacturing assets that were not making a profit.
The contract equipment manufacturers (CEM) executed buying these assets to gain
greater market share in the long term through industry alliance even if it meant shortterm losses. Manufacturing being their core competency made the CEMs believe they
could make these operations profitable through consolidations.
This in turn would
increase purchasing power and economies of scale.
“Higher asset utilization” the outsourcers proclaimed. “Improved scale and scalability,”
they promised.
Securities analysts readily accepted these claims, running up the
25
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
valuations of eight major CEMs by 2,600 percent over the second half of the past decade.
(pp. 57).
Fast forward to today. High Tech has been rocked by a series of earnings announcement
that have cut the NASDAQ index by as much as 68% from its March 2000 peak.
“Growth hasn’t materialized” the same voices shout.
“The supply chain has been
clogged with gobs of capacity and inventory,” they confess. Participants in this great
experience of outsourcing have been hit with lower total earnings and with lower
margins. (pp 57).
Companies like Sony and Cisco had problems with the fact that their internal production
capabilities were no longer part of their competitive edge. The focus at one time was not
assets and people it was on high value products and bringing these products to market
was more important. This is why the only solution became "outsourcing". The strategy
with outsourcing was to allow for specialists to focus and emphasize their skillsets on
project management and further lead in making changes.
In a studied of eight major CEM’s – Solectron, Flextronics, SCI Systems, Jabil Circuit,
Celestica, ACT Manufacturing, Plexus, and Sanmina – that together represent 92% of the
Standard Industrial Classification market cap. From 1996 to 2000, capital expenditures
grew 11-fold, revenue increased almost 400 percent, and market capitalization
experienced an exhilarating compound annual growth rate of 87%. (pp 57).
The Solectron Corporation itself is a lesson in CEM expansion. In 1997, it extended its
presence with just one new acquisition. In 1998, it picked up another five; in 1999, 10;
and, in 2000, it surpassed the total number of acquisitions in the previous three years with
27. (pp 58).
Deal after deal, the partnership announcements were the stuff of headlines: in 1998,
Silicon Graphics Inc. signed a five-year supply deal with Celestica Inc. The following
year SCI systems Inc., entered into outsourcing arrangements with the NEC Computer,
26
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Marconi, and Dell Computer corporations. In 2000, the five year, $30 billion agreement
between Motorola Inc. and Flextronics Corporation made a four-year, $10 million pact
between Nortel and Solectron seem slight by comparison. (pp 58).
Wall Street followed by rewarding the CEMs and OEMs with bigger market caps while
praising their abilities to:
Deliver better economics: The consolidations that occur minimize downtime,
decrease overhead and allow CEMs to buy parts in bulk at reduced costs.
Improve Scalability: Accessibility to assembly lines, more material in inventory and
setting standard processes allowed for better reactions to product manufacturing
schedules and huge demands.
Reduce Inventory: Manufacturers involved were able to combine their inventories
(parts and boxes) to reduce inventory levels and still deal with the fluctuations in
demand.
Create Distribution Benefits: Finished products would be delivered directly to the
end users and purchasers.
Sharpen Focus: Outsourcing meant that OEMs would focus on innovation and
customer needs whereas CEMs would concentrate on product development.
CEM’s did everything possible to be able to outsource. They increased their facilities and
production contracts, they provided more services, and they set out to become important
in the manufacturing process.
The CEM industry’s total market was estimated at $120 billion in 1999, or 15% of the
$800 billion potential market for contract equipment manufacturing identified by the high
27
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
tech market research firms IDC and Forester Research. Analyst predicted that CEMs
would capture more than 40% of this outsourcing market (primarily computing and
communications hardware products) by 2004. (pp 59).
THE ECONOMIC DOWTURN
The stories of the fall are proving that outsourcing is not being accepted. Today’s stories
are more often about lower revenues, problems with process and layoffs.
Compaq announced that it would miss first quarter earnings estimates by as much as onethird. Ericsson SpA posted first quarter loss of $485 million. Motorola, reporting its first
quarterly operating loss in 15 years, was short by $206 million. Nortel announced a
layoff of 10,000 employees in February. Dell announced a layoff of 1,700 in February,
and an additional 3,000 to 4,000 in May. And the CEMs haven’t been spared either. In
April, Solectron announced that it would close a plant and lay off more than 1,000
employees, and Flextronics announced a layoff of 7,000. (pp 59).
There were many warning signs that supply chain was not scaling up for both OEM and
the CEM business. Initially, OEMs encountered difficulties with day-to-day performance
i.e. demand forecasts were not accurate.
implementation services.
CEMs missed deadlines for delivery and
OEMs had to cut forecasts; decreased revenue and customer
service became huge issues. There were too many indicators that the OEM/CEM model
was just not working11
When the OEMs were bruised, CEMs felt the pain as well.
Solectron held on to
inventories more than two weeks longer in the second quarter of 2000 than in the fourth
quarter of 1999 to cover its uncertainty about component availability. As its customers
stocked up to ensure their own ability to meet delivery commitments, Solectron incurred
inventory-holding penalties and obsolescence costs associated with the inventory bubble.
Solectron makes its money by marking up parts. When it is forced to hold on to extra
inventory, it can’t make money. Solectron doesn’t have a lot of margin to give away to
28
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
its customers; even a bit of incremental cost significantly affects the bottom line. CEM
margins are generally thin – often just 3 to 4 percent. (pp 59).
The sum of the pieces create a frightening whole: the aggregate market value loss of 12
major OEMs – Cisco, Dell, Compaq, Gateway, Apple, IBM, Lucent, Hewlett Packard,
Motorola, Ericsson, Nokia and Nortel – over the period from March 2000 to March 2001
exceeded a staggering $1.28 trillion. (pp. 60).
The benefits of outsourcing seemed to be exaggerated. It became harder to accept this
new way of doing business.
CISCO’S CASE
Let’s look at Cisco and see how this company fell from its laurels. Last year, Cisco was
poised to become the world’s first trillion-dollar enterprise, wielding a market cap greater
than that of General Electric Company in pursuit of annual revenue growth projected at
30 to 40%.
Two of the things that gave Cisco its glow were its development of a virtual supply chain
with limitless capacity and its ability to provide extraordinarily high reliability to its
customers. Another apparent strength was its approach to manufacturing: It didn’t build
most of what it sold.
John Chambers, president and CEO, once explained, “Our approach is something we call
‘global virtual manufacturing’. First, we have established manufacturing plants all over
the world. We also developed close arrangements with major CEMs (contract equipment
manufactures). So when we work together with our CEM’s – and if we do our job right –
the customers can’t tell the difference between my own plants and my CEMs in Taiwan
and elsewhere.”
29
EMBA 2001
BLANDON09/18/2001 & REVELES
As
a
specialist
in
creating
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
network
infrastructure
hardware
for
data
and
telecommunications companies, Cisco prospered as the Internet pioneer. Between 1998
and 2000, its revenues grew by a compound annual rate of 49%; gross profit rose 48%;
net income increased 42%.
By all outside appearances, Cisco was the picture of health and prosperity. But hidden
problems were mounting. Early last year, shortages of memory and optical components
began paralyzing one path of production.
For the first time, Cisco’s supply chain began to experience the kind of growing pains
that affected its earnings. When the telecommunications infrastructure experiences a
severe downturn, customer orders began to dry up and Cisco neglected to turn off its
supply chain. Orders went out, parts began to pile up.
Its raw parts inventory ballooned more than 300% from the third quarter of 2000.
Cisco’s problems culminated in a $2.25 billion write-down. In short, Cisco simply
wasn’t able to scale up or down as quickly as it though it could.
Cisco is not alone in its sudden confrontation of problems in the supply chain. Other
include:
The Sony Corporation: a shortage of Playstation 2 Graphic chips in September
2000 meant that it could ship only half the consoles it wanted for its US launch
Apple Computer Inc.: Because supplier Motorola was unable to provide enough
G4 chips is late 1999, Apple’s ability to fill orders was sliced in half.
Philips Electronics: Supplier’s inability to produce sufficient flash memory chips
threatened to disrupt production of 18 million telephones in 2000.
Palm Inc.: Recent revenues might have been 10 to 40% higher if palm had had
access to all the liquid crystals displays (LCD’s) it needed.
The Compaq Computer Corporation: Starting in 1999, an inventory less strategy
led to shortages of LCD’s capacitors, resistors and flash memory – and unfilled
orders of 600,000 to 700,000 handheld devices.
30
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
All these companies had one thing in common: they had outsourced their manufacturing
of essential components without a full understanding of the changes required in their
business models. They didn’t translate the old practices that had made them successful
into their new business relationships.
They hadn’t adequately codified informal
communications practices and channels within their supply chain.
They didn’t align incentives through contract terms and agreements, which rendered it
almost impossible for the supply chain to scale up in relationship to hit a product, or scale
down in response to declining demand.
How well did outsourcing work in delivering the promised benefits in Cisco’s case?
Cisco over committed to inventory and capacity as the market was taking off and forecast
were rosy. As the forecast vaporized, the company was unable to rid itself of the excess12
It couldn’t fix its virtual production system with inventory, and it couldn’t take out
capacity when it most needed it to. The poor utilization of assets drove the company to
announce its first ever-quarterly loss last spring. Cisco fell to recognize macroeconomic
factors and fell to scaled down base on the demand and process variability.
COMPAQ’s CASE
Looking at another company, in late 1999, Compaq decided it needed to revive its
lagging commercial PC sales. The company announced a hot new product line: the I-paq
series of handheld devices, with full color screens, multimedia capabilities and
unmatched portability.
The pocket PC, introduced under a direct sales/inventory less strategy, quickly became
the company’s biggest hit.
Demand for the device outpaced supply 25 times, and
Compaq executives were enthusiastic about its market potential.
Michael Winkler,
executive vice president of the Compaq’s Global Business Units, told Fortune last March
31
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
“…If you take the units, accessories, and some of the services that go along with it, it’s
larger market in the services that go along with it, it is a larger market in 2005 than the
traditional PC Market.”
After the 2000 second quarter, however, demand for handheld devices in general was
outpacing supply and most companies, including Compaq, Palm, IBM and Ericsson, were
losing customers and orders. Compaq’s CEO. Michael Capellas, captured the industry’s
sentiments “…The supply problems have had more to do with unexpected demand. We
expected sales of about 7,000 per month but are not a lot closer to 100,000.” A shortage
of LCDs, and basic components like capacitors, resistors, and flash memory, had crippled
the entire handheld devices market. Securities analysts estimated that Palm’s revenues,
for example, might have been 10 to 40% higher if it had been able to get its hands on as
many LCDs as it needed. Compaq, whose inventory-less strategy led it to outsource
manufacturing of the handheld to the Taiwan-based High Tech Computer Corporation
was hit just hard. “We have unfulfilled orders for 600,000 to 700,000 devices,” a Compaq
vice president told Bloomberg News. Any time her wanted a reminder of that shortage,
that vice president could log on to auctions at e-Bay and Amazon.com, where Pocket PCs
were selling for $700 to $800, well above their $499 retail price.
Suppliers who had their eye only on their own margins concentrated on producing only
those components that gave them the greatest return on their manufacturing investment.
Capacitor manufactures did respond to the shortages, running their plans three shifts a
day, seven days a week. Although production capacity is starting to expand, the pace is
hardly breakneck. At pennies a piece and with tiny commodity margins, capacitors and
resistors need to be sold in major quantities to support the kind of growth necessary to
underwrite a fully responsive new factory.
Soon after the parts shortage started, most PC and electronics manufacturers missed their
2000 year-end quarterly earnings and revenues and revised their 2001 outlook, blaming
the general downturn in the US economy. Compaq itself missed forth quarter 2000
32
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
earnings and revenues after a record third quarter, and later in March cut 5,000 jobs.
Compaq in this case fell to scale up production and when the economic downturn arrived,
they have a mounting excess of inventory.
NORTEL’S CASE
From the mid-1970’s until recently, Nortel produced switches and other electronics
hardware that long-distance carriers and local telephone companies used to route voice
calls over copper wire. Then, a few years back, Nortel’s senior management had an idea
that the future was a fiber-optic networks, which transmit data as pulses of laser light
over optical fibers, rather than as electrical currents over copper wires.
As
telecommunications companies raced to build out the Internet, Nortel saw an opportunity
to steal a lead in this emerging market.13
Due to fast moving competitor’s, exemplified by Cisco, who were outsourcing heavily,
and rapidly acquiring companies and capabilities to fill out their product portfolios.
Nortel decided it had to become more like its competitors. This meant swapping vertical
integration for virtual integration and using acquisitions to maintain a technological edge
over competitors.
Nortel began aggressively selling off its production facilities to contract manufacturers
like Solectron Corporation, essentially revamping its entire production and supply chain
management processes and building direct communication and response links from
customers to suppliers.
However, like Cisco, Nortel fell to scale down. They also failed to establish a strategic
purpose to their process because the company was trying to compete to Cisco
strategically supply chain optimization.
As result, they also became victims of the
economic downturn in a big way.
33
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
GOOD PRACTICES IN DOWNTURN!
Although most of the companies are suffering from the downturn, there are some whom
are applying some practices that can be categorize as good practices during down turn
such as the case of Intel and Sun Microsystems Inc. Let’s examine their case:
INTEL’S CASE
Intel is at the heart of the PC value chain.
Hundreds of raw materials suppliers,
component manufacturers, assemblers and resellers depend on its continued success. In
the past, Intel’s success was clearly attributable to its relentless product innovation – a
factor that remains a paramount to PC industry prosperity. Lately, however, Intel ‘s
supply chain practices with both suppliers and customers have taken a much more
conspicuous role in the PC value chain.14
In the PC chain the enemy of an efficient supply chain is excess inventory, and in the fast
changing PC market almost any inventory seem like too much. A PC maker’s worst
nightmare is an overstock of yesterday’s PC du jour languishing on warehouse shelves.
Such situations force PC makers to sell their dated models at discount prices and forfeit
profits.
Before INTEL could satisfy its customer’s just-in-time demands, it needed to make its
own production capacity responsive to demand fluctuations and tighten links to its
suppliers. It assessed the strength of its supply chain at the product development level by
analyzing each supplier’s ability to provide requisite quality and quantities of materials
and equipment.
INTEL customers – for the most part PC makers known (OEM’s) – number in the
thousands, and many do business globally.
Because they assemble their finished
products from many components with limited shelf life, OEM assume the highest risk
34
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
associated with inventory obsolescence. In order to avoid being saddled with outdated
PCs, OEMs are moving toward build in order systems that allow them to configure PCs
according to individual orders. Such systems demand access to accurate, specific and
timely details of Intel’s inventory, pricing and shipment schedules. To accommodate
OEM needs, Intel uses the Web to disseminate the vital inventory and production data
that forges sturdy links with its customers.
SUN MICROSYSTEMS INC.’S CASE
On an article from Business Week, August 20-27, 2001, Joseph Weber describes Sun
Microsystems Inc’s practices during economic downturn, as company that does not rely
on long-range forecast in its purchasing but instead tries to buy supplies as needed. They
try to ensure that partners don’t get left in the in the lurch when demand goes down
For example, twice last year, Sun asked supplier Celestica Inc. to delay deliveries of
memory devices that Sun ordered, but when it came time last April 2001 for Celestica to
either take a charge for the goods or deliver, Sun took them.
In sum, the problems that these companies supply chain confronted can be summarize in
some main points from the internal and external point of view:
External Factors
1. Demand Variability: e.g. Difficulty forecasting sale. Small fluctuations in demand
at the customer level are amplified as orders pass up the supply chain through
distributors, manufacturers and suppliers. A good example of this is Cisco and its
Suppliers.
Order fluctuations invariably become considerably larger as one
moves upstream in this supply chain. Also anticipated demand (forecasts) versus
actual demand (firm orders) is also part of the problem of demand variability. In
most supply chains, the upstream activities respond to forecasts, while somewhere
on the downstream side the chain waits for orders to be placed.
35
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
2. Process Variability: e.g. Unexpected downturn and yield losses. Most supply
chain management improvements are cross-functional in nature, companies
require cooperation and integration between many different (and often
unexpected) areas).
For example, organization “Silo” mentality can create a
significant barrier to SCM improvements.
3. Supply Variability: e.g. Suppliers deliverables are late. When demand surpass
supply and there is not enough inventory stock in chain to fulfill the demand. A
good example is Compaq.
Internal Factors
1. Old Vertical Thinking: Lack of communication, lack of trust and lack of problem
solving methodology are some the factors that creates a problem inside the supply
chain as a way to increase the effectiveness of the chain
2. Misalignment of agendas between partners: partners have different set of goals
and different ways of achieving these goals. OEM are more concern with
flexibility, full inventory capability and profits through gaining market share,
while CEM are more concerned with predictability, necessary inventory and
reduction of cost as a way to make profit.
COMMENTS FROM OTHER COMPANIES IN THE INDUSTRY
Looking at other companies during this period we have collected the following
statements and ideas related to the effect of the current economic situation on the supply
chain management of most of the high tech companies.
John S. McClenahen on his Internet article from supplychain.itoolbox.com
“Confronting Demand’s Downside”, captured the following comments.15
36
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
According to National City we are “digesting a two year binge of buying, that
economic theory says, should have been spread over three or four years”(end note 15).
The elements of the supply chain at different stages seemingly entranced by the lure
of unlimited demand in the new economy and frustrated by a shortage of
semiconductors and other electronic components that had been delaying shipments.
Big name OEMs in telecommunications and Internet related equipment last fall “got
overly aggressive in ordering to assure themselves the quantities they [thought]
needed”. Adds Pamela J. Gordon, president of Technology Forecasters Inc. An
Alameda, California based management consulting firm, (end note 15).
One contract manufacturer states “as demand for telecommunication equipment and
high tech electronics began dropping late last year, the information flow from OEMs
to contract manufacturers –was not very good-. The fault is due to human nature.
Salespeople kept insisting they were still going to make their numbers. And sales
driven OEMs did not want to accept signs that orders were slowing, nor did they want
to pass on the information. They were, it seems, in a kind of denial”, (end note 15).
Other supply chain professionals place the blame elsewhere, they claim serious
management systems shortcomings. While both OEMs and contract manufacturers
want to talk about their kanban systems and inventory replenishment, what they do not
recognize is that they need to look and make sure there is actually demand flowing
through the entire supply chain. “ We have heard a lot about investments in ERP
systems and WEB enabled communications collaboration, but the fact is that we’re
sitting here looking at the car wreck of inventory”. Adds W. Petersen, CEO of a
privately held third party procurement firm, (end note 15).
The effect of different production equipment, software packages, and cultures,
flexibility has been hindered somewhat. As contract manufacturers have increasingly
been purchasing plants from their OEM owners, Pamela Gordon from TFI states
“Some of the large contract manufacturers claim the transition period occurs in less
37
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
than two months, which is astonishingly quick”. Equipment and software can be
changed relatively fast but cultural changes take longer, (end note 15).
Contract Manufacturers and OEMs – and anybody who relies on them – “have to
understand that ERP systems are fundamentally flawed when it comes to driving
material flow. W. Petersen, CEO of ThreesCore states “Contract manufacturers and
their sub-suppliers are going to have to deploy technology in the future, and employ
sourcing techniques in the future, that allow them to signal to their suppliers based on
actual demand – as opposed to ERP push-like capacity planning, (end note 15).
Jennifer Balijko Shah on her Internet article from www.buyernews.com, “Supply Chain
complexity said to breed confusion” mentioned the following. 16
The correlation between increasing supply chain complexity and the proliferation of
outsourcing activities is on the minds of many people in the electronic equipment
industry. That was made evident at a six hour forum in Anaheim, California, where
nearly 3 dozed executives from OEMs, EMS providers, distributors, component
suppliers, solutions providers, consultants and analysts, (end note 16).
“There seems to be a divorce between the financial decision to outsource and the
impact that it will have on the operations side. OEM’s spend a great deal of time
crunching numbers and deciding to sell assets and hand over manufacturing, but they
spend little time looking at the operational impact of those decisions” (end note 16).
The round table discussion posed questions with no easy answers: Who controls the
approved vendor list? Who assumes liability when forecasts are wrong? Who takes
responsibility for inventory? Is there disconnect between the financial decision to
outsource manufacturing and the operational requirements? How does the supply
chain deal with the emerging power imbalance between OEM and EMS companies?
(end note 16).
38
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Another executive expressed: “The channel is continuing to expand and the cost of
managing the supply chain and inventory is going higher”, (end note 16).
One of the executives commented, “I am very alarmed at the lack of responsibility
and ownership we see regarding not just a small blip of inventory, but what has
become a large, massive pool of inventory”, (end note 16).
It is not just suppliers who are wondering how to handle that the inventory build-up at
every stage of the supply chain. Many executives are surprised by their feelings of
ambivalence towards who has ownership of that inventory, (end note 16).
While inventory issues and related forecasting problems have caused considerable
grief in the supply chain and are likely to be major headaches going forward,
ownership around design is becoming another gray area, (end note 16).
“As manufacturing is no longer a core competency for OEMs, the competitive
differentiator for them hinges on how well designed a product is. A major part of the
equation is how early suppliers and EMS partners involved in the design process and
how well is information about OEM communicated down the line”, (end note 16)
The following is a set of quotes from the article, “Inventory excess draws SEC scrutiny”,
from Bolaji Ojo17
“This is a critical subject in light of the current economic slowdown. As electronics
companies report second quarter results over the next few weeks, many will find
themselves trading perilously close to the fine line between a necessary business
decision and a potential illegal one” (end note 17).
39
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
“The US Securities and Exchange Commission is wading into the gray area of
inventory management in a fervent effort to hold manufacturers accountable to
investors for their purchasing decisions” (end note 17).
“The SEC first served notice of its intent to hold manufacturers’ feet to the fire
earlier this year, when companies bogged down by excess inventory and capacity and
weak sales began measures to clean up their balance sheets and cut operating costs.
The main concern was that some manufacturers were allegedly lowering the value of
their inventory with the aim of using it later to boost earnings”, (end note 17).
Contract Manufacturers, networking equipment OEMs, and communications IC
suppliers in particular have acknowledged carrying excessive inventory and have
taken steps to slash component levels in the supply chain. However, the industry still
appears resigned to its boom and bust inventory cycle, (end note 17).
VII. PROBLEM STATEMENT
The misalignment of objectives among partners has created impediments in
the supply chain that prevents them to achieving operational efficiency
and from increasing shareholder value. Given the current economic
slowdown, supply chain in the high tech industry have revealed weaknesses
due to the inability of the partners to scale down or up when needed.
VIII. CAUSES OF PROBLEMS
Design of Supply Chain based on the overall strategy
40
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The natural tendency in a business organization is to seek a level of equilibrium in which
players pursue their normal roles without pressure for big leaps forward. Companies
must be aware to have a vision and make continuous emphasis on process improvement
at the highest levels to have continued progress.
Some basic factors need to be
considered such as demand forecasting for a product and effective inventory
management.
From the Hardvard Business Review Book on “Managing the Value Chain” we have the
following on the topic of design of supply chain18:
“Never has so much technology and brainpower been applied to improvising supply
chain performance. Point-of-sale scanners allow companies to capture customer’s voice.
Electronic data interchange lets all stages of the supply chain hear that voice and react to
it by using flexible manufacturing, automated warehousing, and rapid logistics. And new
concepts such as efficient consumer response, accurate response, mass customization,
and agile manufacturing offer models for applying the new technology. But the
performance of many supply chains has never been worse. In some cases, costs have
risen to new levels because of adversarial relation between chain partners as well as
dysfunctional industry practices such as an over-reliance on price promotions. And
supply chains in many industries suffer from an excess of some products and a shortage
of others because of an inability to predict demand”
Why haven’t the new ideas and technologies led to improved performance? According to
Marshal Fisher: “companies lack a framework for deciding which ones are the best for
their particular situation”. Fisher offers such a framework to help managers understand
the nature of the demand for their products and devise the supply chain than can best
satisfy that demand.” (end note 18)
This quote stresses the fact that no matter how technically advanced we are, the gap
towards efficiency is due to mismatch between the supply chain design and management
and the demand patterns of the product.
41
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
For companies to be sure that they are taking the right approach, they must first
determine whether their products are functional or innovative. Most supply chain
designers already have a sense of which products have predictable and which have
unpredictable demand
The table below shows the Functional versus innovative products: Differences in
demand.
FUNCTIONAL VERSUS INNOVATIVE PRODUCTS: DIFFERENCES IN DEMAND
Functional
Innovative
Product life cycle
More than 2 years
3 months to 1 year
Contribution margin
5% to 20%
20% to 60%
Product variety
Low( 10 to 20 variants per High
Aspects of
Demand
(often
category)
millions)
10%
40% to 100%
Average stockout rate
1% to 2%
10% to 40%
Average force end of period
0%
10% to 25%
6 months to 1 year
1 day to 2 weeks
Average margin of
Error in the forecast at the
Time
production
is
committed
Markdown as % of full
Price
Lead time required for
Made-to-order products
42
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Another important point in the supply chain design is inventory management. The
economic gain from reducing stock outs and excess inventory is so great that intelligent
investments in supply chain responsiveness will always payoff for themselves.
In the below table we will see the important point of Operational Efficiency versus
Market Responsiveness.
PHYSICALLY EFFICIENT VERSUS MARKET RESPONSIVE SUPPLY CHAIN
Physically
Market Responsive
efficient
Process
Process
Primary purpose
Supply
Respond
predictable
Unpredictable demand in
demand
order
efficiently
lowest
at
possible
cost.
quickly
to
to
minimize
stockouts,
forced
markdowns
and
obsolete
inventory.
Manufacturing
Maintain
Focus
average
high
Deploy
excess
buffer
capacity
utilization rate
Inventory
Generate
strategy
turns
high
and
minimize
Deploy significant buffer
stocks
of
parts
of
finished goods
inventory
throughout
the
chain
Lead-time focus
Shorten lead time
Invest
as
ways to reduce lead time
long
doesn’t
as
it
aggressively
in
increase
cost
Approach
to
Select
primarily
43
Select primarily for speed
EMBA 2001
BLANDON09/18/2001 & REVELES
choosing
for
suppliers
quality
Product
strategy
design
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
cost
and
Maximize
flexibility, and quality
Use
performance
and
minimize cost
modular
design
in
order to postpone product
differentiation as long as
possible
The point on supply chain design is that for an organization to have an efficient market
responsive it must match its supply chain with products.
Matching Supply Chain with products
Functional
Innovative
products
products
Efficient supply chain
Match
Mismatch
Market responsive supply
Mismatch
Match
chain
In sum, it is important to mention that functional products (commodities) offer companies
predictable demand in exchange for a good product and reasonable price. The challenge
is to avoid actions that would destroy the inherent simplicity of this relationship. Many
companies go astray because they get hooked on overusing price promotions.
They start by using incentives to pull demand forward in time to meet a quarterly revenue
target. But pulling demand forward helps once. The next quarter, a company has to pull
demand forward again just to fill the hole created by the first incentive.
44
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The result is an addiction to incentives that turns simple, predictable demand into a
chaotic series of spikes that only add cost.
Another problem related to the design of the supply chain is the strategic actions of
outsourcing manufacturing process by high tech companies.
As we mentioned
before, at the end of the 90’s the big OEM’s started to get rid of all the assets involved in
manufacturing. Big manufacturing plants were not the place where they could add value
for the customer. The Contract Equipment Manufacturers (CEM) believed they could
make these operations profitable because manufacturing was their core competency, and
because consolidation would allow greater purchasing power, increase economies of
scale, and less exposure to market variability.
The promise of outsourcing has not materialized. The OEM/CEM model looks pretty
much like the old vertical model, except it is not as efficient. OEMs had difficulty
forecasting demand, CEM shortages made them miss deliveries, and systems
implementation took longer than expected. The promise of scalability did not materialize
OEMs could not slow down their supply chains when it became evident that demand was
vanishing. Also communication problems and the fact that OEMs had not changed their
business model for the new reality have had a great impact on the supply chains
performance.
Lack of the right practices
It is often the case of organizations that do not have the correct processes in place to
respond to the challenge they must face.
The example that we have is the transformation that has happened after the outsource
trend among OEM’S. The big electronic equipment companies have been selling assets to
the contract manufacturers as they redefine how to add value for the customer.
45
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The OEMs have not changed the way they run their supply chains after the asset has
changed ownership. They still believe that they can “control” the different stages of the
chain the way they have always done it. It is the same practices for a new reality.
Lack of focus in the strategic relationship
Strategic relationships are built on trust. There are occasions in which two companies
might call themselves strategic partners. However the link between them does not have
the genuine commitment and flexibility required. Organization with different goals will
never be good strategic partners.
Companies that are not clear of the scope of their supply chain might not select all the
right strategic partners.
Organization
This point is very important in an environment that keeps changing constantly.
Companies take longer than needed to adapt their organizations to the different ways of
working. The example is again all the impact that the outsourcing trend brings and the
length of time it takes a company to reflect in the groups that will support the supply
chain.
Applying Technology without a strategic purpose
The tendency to apply technology reactively results in poor information technology
alignment.
When an organization goes through its changes to increase its internal
capabilities a lot of the cases for some of these companies revolves around what should
happen first, the installation of new information systems or the redesign of processes for
higher efficiency.
46
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The greatest gains occur when the redesign of the process is logistically tested and
aligned properly with the IT application.
For a company looking to improve internal process of its supply chain the tendency is to
develop process improvements and technology enhancements in vacuums, with any real
integration. To progress to better supply chain requires the functional groups and the IT
department to co-design the new process with what will be the best IT format.
In sum, higher levels of progress involve technology solutions that proactively support
the new process design.
47
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
IX. RECCOMENDATIONS
This section covers the overall recommendation that addresses the causes of the problems
presented above. Rather than presenting several solutions that would only cover part of
the total problem. Herewith, we present what we consider are the key points to be
addressed by the high tech companies whose supply chains have not reached the
efficiency needed to obtain the competitive advantage within the overall enterprise wide
strategy.
We have decided to provide recommendations around 5 main strategic areas related to
the general Supply Chain Management. But before we mentioned these areas we would
believe it is important to define supply chain strategy.
Definition Supply Chain Strategy
Bill Helming and Jan Paul Zonnenberg on their article “The 5 Fulcrum points of a supply
chain strategy” observed that a lot of companies’ supply chains “just happened”. Their
supply chains were never consciously configured, much less reconfigured as necessary to
capitalize on geographical expansion, new partnerships, new organizational structures,
and new assets. They were never reorganized to consolidate inefficient or redundant
assets and processes. And they were never rethought in the context of today’s rapidly
evolving technologies, shifting market segments, and compelling new channel
opportunities.19
By leaving their supply chains to happenstance, many companies have turned their backs
on a vast opportunity to make integrated, end-to-end supply chain management an engine
of their business strategy. They are woefully out of step with the trend toward more
integrated, agile, and responsive supply chains”.
48
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Supply Chain Configuration
Strategy: the company should do an analysis of the demand patterns to determine how
the aspects of demand will be affected and what changes are needed to reflect the new
reality of an outsourcing model.
RECOMMENDATION #1
Companies need to consider the degree of fit between the supply chain and the demand
pattern of the product.
Plan of action
When we talk about aspects of demand we are referring to Product Life Cycle,
Contribution Margin, Product Variety, Average margin of error in the forecast, Average
stock-out rate, Lead time required for made to order products.
The organization must analyze and understand at what stage of its life cycle the product
is because this will have implications on the resource allocation that could be either
investment in inventories, manufacturing capacity, etc. The Contribution Margin is
important because it will let the organization what objectives are more important per
family of products, these could be either market share, profitability, building brand
awareness, etc.
The product variety will have the effect to impact the complexity in the execution of the
supply chain activities. There is the trend of using modules to build a whole product
family (i.e. the auto industry that uses the same chassis to build several models).
49
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The organization will have to analyze what is the market requirement for different
options and configurations and understand that there is a trade-off between variety and
profitability.
The average margin of error in the forecast point is something that the organization must
clearly understand.
The seasoned supply chain professional is aware that forecasts will always be wrong and
that looking for and expecting accuracy will be an endless wait. The average margin of
error in the forecast will provide the main guideline for the level to drive internal
operations and the supply chain partners. The supply chain management professional
with management approval will make a judgment call on how to drive the business.
The lead-time will have a great impact in the inventory management strategies to be
implemented and in the liabilities with the supply chain partners.
RECOMMENDATION #2
Identify the location and ownership of the assets and resources for managing the supply
chain
Plan of Action
The other very important point in the design of the supply chain is the degree of
transformation that happens in-house.
The following guidelines should help when dealing with outsourcing and how to manage
the supply chain partners that have been chosen to supply a portion of the product.
Active Capacity Management: The organization should think of capacity as a portfolio,
and manage it in such a way that you maintain capacity for a minimum acceptable level
as well as the surge when (optimistically speaking) the product takes off.
50
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Progressive Supplier Relationships: The organization must build relationships with
suppliers that allow you flexibility over time. We call this rolling commitment (reserving
aggregate capacity in the long term and then specifying exactly what that reserved
capacity will be used for closer to the actual production date).
Coordinated Production Planning: Use a “federated” approach; this is based in the
collaboration among independent entities. It is a strategic collaboration process that
begins with the alignment of business objectives. Through an iterative process of
objectives-driven discussions around cost and service trade-offs, supply chain partners
can understand critical constraints and cost drivers in the supply network and achieve
agreement on performance levels, incentives, rules and boundaries. 20
This approach is used to planning the product and linking the production system, an
approach that allows for alternatives instead of insisting on precise commitment (old
approach).
There are three differences between the federated and the old approach. The federated
planning does not attempt to dictate supply chain solutions for the extended enterprise,
but relies on negotiations among supply network partners to define and manage the
supply network.
The second difference is that collaboration is achieved through alignment of business
objectives, not through the exchange of detailed data.
The third one is that the federated approach does not attempt to generate a one-time
solution, but instead is an iterative process that is designed to shift with changing market
conditions.
51
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Flexible Product Configuration: Identify some room in the configuration to allow for
variations in availability. There are always trade-offs in the design that you can make to
help manage around part shortages.
Iterative learning. View the aligning of the supply chain for each particular product as a
“design, launch and learn” effort. No organization can afford to paralyze itself while
seeking the perfect solution.
Practices
RECOMMENDATION #3
Companies need to establish a benchmark of best of practices in the industry.
Plan of Action
Here is where the leaders step ahead of the competition, and where new and innovative
practices can emerge to provide a powerful competitive advantage. One major appeal of
seeking advantage through implementing best practices is that the necessary change can
often be implemented quickly and with little reliance on costly or time consuming capital
or information systems projects.
A few examples of emerging practices should clarify the concept.
Emerging Practices
Planning
Expanding planning to include customer
and suppliers with joint objectives for
customer services, flexibility, cycle times
and inventory
Sourcing
Joint Development and Sharing the rips
benefit.
Automated
vendor-managed
rapid
replenishment of inventory to point of use
and time use
Make
Pull vs Push approach to manufacturing
52
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Deliver
Centralized
response
to
safety
stock
market
with
rapid
demand/inventory
deployment.
Strategic Relationships
RECOMMENDATION #4
Companies will gain maximum competitive leverage from integrating customers and
suppliers, whenever their supply chain strategy binds all the partners tightly to their
organization, allowing each partner to leverage the others capabilities.
Plan of Action
On the source side, these relationships may range from close collaboration and extensive
information sharing to an outsourcing relationship in which a partner performs a major
process, such as manufacturing, on your behalf. On the deliver side, your objective
should be to become your customer’s preferred supplier/partner.
Constructing and
maintaining such strategic relationship takes time, patience, flexibility, and genuine
commitment on both sides, since these relationships are ultimately built in trust. Once
established, they can endure and become key elements in a dominant supply chain. Only
those companies that have clearly articulated their business strategy and determined their
core competencies have the courage and self-confidence to establish truly strategic
relationship with their supplier and customer.
For example Dell Computer has successfully integrated Sony screens as a supply chain
partner. Sony products are shipped directly from the factory to Dell’s end customer.
53
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Organization
RECOMMENDATION #5
It is necessary that the organization that attempts major transformation of their supply
chain configurations, practices, strategic relationship and IT to think on how they
associated decision-making process and cross functional task will be accomplish.
Plan of Action
The first organizational challenge most companies face is that of overall supply chain
ownership. Our main recommendation is to consolidate the accountability and authority
for the entire supply chain whenever possible.
There is no one best organizational structure for a supply chain. The key to successful
supply chain organization is to align and balance performance objectives and decision
making authority from end to end (plan/source/make/deliver), consistent with the supply
chain’s configuration. A place to start is to apply standardized, linked, and consistent
supply chain performance metrics across the organization. Ensure that the performance
metrics for each function complement and support the metrics for other functions, and
root out conflicting metrics.
Information Technology
RECOMMENDATION #6
Companies must adopt Information Technology as a primary tool to accelerate the
velocity of the supply chain at most companies.
54
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Plan of action
In order to develop the digital strategy the organization, companies should answer the
following questions:
What new business opportunities and capabilities, are being offered by the World
Wide Web, the Internet, and digital commerce?
What are the benefits the organization can get from using the Net?
What operational, strategic, and policy issues should be addressed?
How does the organization protect confidential information?
How do we share the costs of development?
What are the key cultural differences between the current markets and the
emerging digital market?
Which consumers of choice can be reached through the Web?
What impact will the growth of the Internet have on the information technology
used today by the elements of the extended supply chain?
Are parts of the existing system already obsolete?
This other set of questions is oriented towards market participants.
Who are the organization’s specific targeted consumers, and how do they use the
Internet?
What demographic information is available to guide development?
How does the organization use the Net to maintain and enhance the image of the
supply chain?
How can the organization expand its reach to new markets and customers?
How global should the organization’s reach become?
How are competing supply chains using these new capabilities?
What current information can be accessed?
55
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
How can the organization use the Internet to gather intelligence on competitors
legally?
In what ways will advertising and branding strategies be affected by the Internet
culture?
The purpose of information technology is to create network solutions to the interrelated
process problems that constitute the inter enterprise network. The important caveat is that
the Information Technology plans must fit with the intentions of the overall business
strategies.
As information technology becomes increasingly indispensable component of business
success, leaders need to synchronize their plans their plans with strategies directing the
overall network of firms constituting the extended supply chain. In the years to come,
technology will play the central role, making it possible for allied companies to define
differentiating strategies for their supply chains.
56
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
X. IMPLEMENTATION
We will recommend a general plan of implementation as start jump to building the
strategy for an optimal supply chain in the high tech sector.
The number of potential barriers to success within any organization may be unknown, an
understanding of the nature if these difficulties will prove invaluable to any
implementation effort.21
There is no standard implementation strategy that will lead all Supply Chain Planning
implementation project to success. Post-implementation analyses, however, have pointed
to four critical activities that are common to successful projects. (refer to end note 20)
1.
Crafting the Project Vision, Developing the Business Case, and Ensuring
Executive Commitment
Supply Chain Planning activities focus on the interdependence of all functional areas
within the supply chain, from sales and marketing through to purchasing, manufacturing,
logistics and finance. With this in mind, it becomes critically important to develop the
Project Vision so that visible improvements in the organization’s key performance (such
as shareholder value or return on Investment) can be achieved.
In support of the vision, a strong case for change must be developed, detailing attainable
business benefits versus implications of retaining the status quo. The business case must
also consider the project timeline and successive staging of the project deliverables ( such
as percentage decrease in finished goods inventory or increase in the use equipment).
From the objectives outlined by the project vision and the benefits detailed in the
business case, an organization wide commitment to the project must be cast.
57
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The selling the business case is often one of the most difficult tasks with in the Supply
chain plan solution implementation project. A change to traditional thinking is required
to appreciate the benefits of the project, as potential cost savings in one functional area
may need incremental costs elsewhere in the supply chain. The key message is that the
project will provide a reduction of overall costs of the Supply Chain as a single entity.
Also, a strong Supply Chain Management requires the cooperation of all functional areas
that comprise the Supply Chain, and thus it becomes critical to stress the business benefit
of a collective effort to individual executive members early and often during the project.
Our research has shown that in most implementation projects, most than 40% of the
project manager’s time is spent performing stakeholder management, especially at the
executive level – ensuring that all individuals are aware of the project benefits and
timeline, and managing their expectations of the project.
You must voice support for the project along all the departments within the supply chain
in order to ensure project success.
2. Managing Organizational Change and Redesigning Business Processes
In most Supply Chain solutions implementation project, business process redesign is
required to fully exploit the functionality of the new information system. Increased
interaction between all functions within the supply chain is desired, resulting in the
creation of a single supply chain entity with multiple, interdependent functions:
Sales and Marketing: for demand planning, product pricing and promotion strategies)
Purchasing: For vendor management and procurement planning
Manufacturing: for capacity planning and schedule optimization
Logistics: for inventory and distribution planning
Finance: for financial impact analysis and profitability
58
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
The redesigned business processes are often quite different form those that were in place
in the pre-implementation organization.
Major differences frequently take form as
increased measurement, record keeping and tracking processes. Previously repetitive
task will become automated, being replaced by more proactive, analytical processes.
3. Choosing the Appropriate Implementation approach and methodology
There are different approaches to SCP solution implementation.
Just as project
objectives differ from one organization to another, so should the creation of an
implementation strategy. The decision of one approach over another often rest on two
fundamental questions:
Is the organization ready to commit to changes proposed for the post
implementation business environment??
Do the proposed changes represent a significant departure from the current
business environment???
Two general implementation methodologies exist: the big Bang approach, and the Staged
Implementation approach.
The Big Bang approach, in which the entire suite of SCP
tools is rolled out in one concentrated effort, is often suited to those organizations that are
very capable of managing significant change. These organizations usually have had
some previous experience with similar projects, in which the project scope is significant.
This approach tends to be capital intensive, and requires significant resources both
internally and externally from software vendors and external project partners.
The second general approach is the Staged Implementation. Applicable to large-scale
projects that represent significant organizational change, this approach manages the
change effort over a number of project phases. Project deliverables are prioritized by
required capital expenditures, available resources and return on investment, such that
benefits are phased in over the life of the project. This approach is often used is
situations where the proposed change is simply not manageable in one large roll out
59
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
phase, or where the capital required to implement the full solution has to be augmented
by early savings from the project.
4. Managing Technical challenge before they become a problems
Technology solutions always bring with them significant technical challenges that must
be addressed during the implementation project.
Though these challenges may be
unavoidable, some advanced warning of what to expect greatly minimizes the effect that
difficulties may have on successful and on-time project completion:
Technology Architecture: SCP solutions run on a variety of different platforms,
using various system architectures. The organization must select an architecture
appropriate to its overall IT strategy, which also addresses specific needs of the
business.
While software functionality often drives system selection, technical
considerations, such as system response time, may prove to be important decision
factors as well.
Interfacing Multiple Systems: Whether integrating existing legacy or ERP systems,
or implementing SCP and ERP systems concurrently, interfacing multiple systems is
often a significant challenge. Once again, a strong communications strategy will
ensure that the appropriate information is made available to project team members
early enough to work around potential difficulties.
Data accuracy and Integrity: Prudent implementation team will highlight key data
requirements early, to ensure that data validation, and in some cases data cleansing,
will not adversely affect the project’s timeline or ultimate effectiveness.
Successfully implementing an SCP technology solution is a challenge that many
organizations will pursue in upcoming months and years. Project methodologies must be
customized to meet the individual requirements proposed by unique business
environments. A solid understanding of the challenges and barriers to project success
60
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
will reduce the risk of projects running over budget or over time. Paying close attention
to these four key elements outlined above, will help to ensure that project difficulties are
expected, understood and resolved in a quick and efficient manner.
For example, Cisco successful factors for implementation of its strategy to establish an
IT system in their Supply Chain are the following22:
•
Executive Sponsorship is an essential foundation
•
Have a vision and the passion to achieve it
•
Start with the right team of people dedicated to the project
•
Open communication and collaboration are the project’s lifeblood
•
Demand data integrity
Looking at the implementation of a strategy initiative, it is important to consider
Michael Porter’s six principle of positioning a company for distinctive competitive
advantage. Based on these principles we will proposed some guidelines to build the
strategy in the organization and in the supply chain
According to Michael Porter on his article “Strategy and the Internet” from Harvard
Business Review, March 2001, to establish and maintain a distinctive strategic
positioning, a company needs to follow six fundamental principles:
1. First, it must start with the right goal: superior long-term return on
investment. Only by grounding strategy in sustained profitability will real
economic value be generated
2. Second, a company’s strategy must enable it to deliver a value proposition, or
set of benefits, different from those that competitors offer. Strategy defines a
way of competing that delivers unique value in a particular set of uses or for a
particular set of customers
3. Third, strategy needs to be reflected in a distinctive value chain. To establish
a sustainable competitive advantage, a company must perform different
activities than rivals or perform similar activities in different ways.
61
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
4. Fourth, robust strategies involve trade-offs. A company must abandon or
forgo some product features, services or activities in order to be unique at
others. Such trade off, in the product and in the value chain, are what make
the company truly distinctive.
5. Fifth, strategy defines how all the elements of what a company does fit
together. A strategy involves making choices throughout the value chain that
are interdependent; all company’s activities must be mutually reinforcing. Fit
not only increase competitive advantage but also makes strategy harder to
imitate.
6. Finally, strategy involves continuity of direction. A company must define a
distinctive value proposition that it will stand for, even if that means forgoing
certain opportunities.
Without continuity of direction, it is difficult for
companies to develop unique skills and assets or build strong reputations with
customers. Continuous improvement is a necessity, but it must always be
guided by a strategic direction.
With these principles, Porter argues that as it becomes harder to sustain operational
advantages, strategic positioning becomes all the more important. It requires a strong
focus on profitability rather than just growth, an ability to define a unique value
proposition, and willingness to make tough trade off in using what not to do. Finally,
Porter argues that a company must stay in course, even during times of upheaval, while
constantly improving and extending its distinctive positioning. (refer to end note 6)
On following Michael Porter’s six principles to maintain strategic distinctive positioning,
we have come out with some guidelines on implementing this strategy:
Process of developing Strategy
1.
Option Generation: As a first step management should objectively assess
current conditions. From really knowing the “as-is” condition you have the
first fundamental building block, which is where you are starting from. This
62
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
includes brainstorm on threats and opportunities from optimal supply chain
management such as e-commerce technology, inventory current activities and
initiative, and identify options for new initiatives to fill in the gaps.
2.
Option Assessment: Secondly, determine the “should be” condition that will
put you in a position to outperform your competition
3.
Strategic Option decisions: answering key questions along with an
appropriate risk assessment is an absolute prerequisite.
Along with it,
companies need to have a go-forward plan to achieve the necessary
management commitment and support. Business leaders are responsible for
deciding which options to pursue and which to delay or drop; but top
management is the ultimate decision maker.
4.
Resources in Place: Major investments are require in changing how things
are done versus the way the company have been operating.
Process on Developing the Structure
5.
A senior business leadership team needs to be responsible for this new
strategy
6.
Another team or VP should be responsible for the research and evaluation
7.
Need to have the skills and staff on place
63
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
XI. SUPPLY CHAIN PERFORMANCE EVALUATION
In order to determine supply chain effectiveness, the performance measurement process
will need to provide a reliable indication of the contribution of supply chain operations to
these four areas: growth, cost minimization, working capital efficiency and fixed asset
utilization 23
Growth:
Key growth measures related to demand and supply management processes often include
customer service level (order fill rate), measured as the percentage of orders filled during
first attempted completion (no backorders) and perfect order rate, measured as the
percentage of completed orders for which no errors occur during order fulfillment.
Growth measures for sourcing/procurement activities typically include percentage of
materials that arrive just in time for production and lead times, measured by raw material
requisition to receipts cycle time, which may include planning, receiving, kitting and
supplier lead time.
Manufacturing related growth measures are likely to focus on quality.
Key growth measures for logistics are to include on-time delivery, measured as the
percentage of orders delivered to customers on the promised date compared to the total
number of orders delivered. Order accuracy is another common performance measure,
calculated as the percentage of orders delivered correctly compared to total orders
delivered.
Cost minimization
64
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
A key measure is inventory turns and measures of excess/obsolete inventory. Inventory
turnover is also a leading metric for working capital efficiency.
Procurement related cost minimization measures are likely to focus on the cost of
purchased materials and services. Total cost of purchased items as a percentage of
revenue or cost of sales is often utilized as an aggregate measure of procurement
effectiveness for cost minimization. Inbound transportation expense.
Key cost minimization measures for manufacturing include total direct costs. Indirect
costs and scrap rate.
Logistics related cost minimization, typically focus on freight and storage costs as a
percentage of cost of sales or revenue. Other would be fleet operating costs and return
logistics costs.
Working capital efficiency
Inventory turnover is a primary measure of demand/supply planning effectiveness,
particularly as it relates to working capital efficiency. Inventory is typically one of the
largest components of working capital such as high tech companies.
Procurement related are also likely to focus on inventory. Most manufacturing firms
utilize some metric related to the absolute amount of WIP (Work in Process) inventory,
as well as the percentage of WIP inventory to total inventory.
Working capital efficiency for logistics are likely to focus on finished goods inventory
turns and order fill rates at distribution centers and other storage points in the distribution
network.
Fixed asset utilization
65
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
Key fixed asset utilization performance measures for demand/supply planning would
include fixed production/distribution infrastructure investment as a percentage of revenue
or total assets. Capacity utilization measures are also utilized.
Manufacturing related fixed asset utilization focus directly on investment on the plant,
property and equipment related to production as a percentage of revenue.
Asset utilization performance measures for logistics are likely to focus on large
investments initiatives
In sum, companies must set measures to see if their supply chain performance is
leveraging opportunities to create further competitive advantage.
Effective metrics
should not only provide an indication of current performance, but should also spotlight
those areas requiring further efforts.
66
EMBA 2001
BLANDON09/18/2001 & REVELES
XII
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
CONCLUSION
Supply chain decisions are enterprise wide decisions. The way a company is run will
depend in how its supply chain is configured. Management should understand the
consequences when making decisions affecting the supply chain configuration. The
executive team in the organization must lead to drive how a supply chain is configured
and not let it happen without the proper planning.
The way that the high tech industry continues to evolve is that individual entities do not
compete against each other but supply chains against supply chains do.
Of great importance is the decision of who to partner with. In order to succeed
organizations will have to make a conscious choice of which organizations are the ones
that will contribute to their own success. This has to consider the operational and research
and development aspect.
The asset ownership decision will be a result of what the organization considers its core
competency. Supply chain decisions will be driven directly by the corporate strategy and
will be aligned to it. Technology investment will be a key factor to achieve operational
efficiency.
Some final points for High Tech companies supply chains to remember in today’s
uncertain environment are the following:
Break Organizations Barriers
Build visibility
Manage Supply chain metrics
Reduce the decision cycle process (demand and supply aligment)
Encourage collaborations
Reduce Problem resolution latency
67
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
XIII. END NOTES
1
Poirier, Charles C., “Advanced Supply Chain Management” How to build a Sustained Competitive
Advantage, 1999
2
Copacino, Willian C., “Supply Chain Management” The Basics and Beyond, 1997
3
Patore, Richard. “Competing Interests” Q&A: Michael Porter. CIO Magazine, Oct. 1, 1995
www.cio.com/archive/100195_porter_content.html
4
www.supplychaintoday.com
5
Knox, Doug. Questionnaire on Supply Chain Management. July 4, 2001
6
Porter, Michael. “Strategy and the Internet.” Harvard Business Review, March 2001 pp.62-78
7
www.supplychainonline.com
8
9
Kelly, Dan Interview with a Commodity Manager, Strategic SCM in Nortel. July, 2001
www.ascet.com/
10
Lakeman, Bill, Boyd, Darren, Frey, Ed. Why Cisco Fell: “Outsourcing and its perils” Strategy and
Business, Third Quarter 2001, pp 54-65
11
Weber, Joseph “Management: Lessons from the Bust” Business Week, August 20-27, 2001, pp 104-110
12
Berinato, Scott “What Went Wrong at Cisco” CIO Magazine, Aug 1, 2001, Case Study Cisco
www.cio.com/archive/080101/cisco_content.html
13
Fisher, Lawrence M. “From Vertical to Virtual” How Nortel’s supplier alliances extended the
Enterprise. Strategy + Business, 200,1 www.strategy-business.com/research
14
Fabris, Peter “ Intel: Outside” Profile Manufacturing. CIO Magazine, August 15, 1998
www.cio.com/archive/081598_mfrg_content.html
15
John S. McClenahen. “Confronting Demand’s Downside” Internet article from
www.supplychain.itoolbox.com
16
Jennifer Balijko Shah . “Supply Chain complexity said to breed confusion” Internet article from
www.buyernews.com
17
Bolaji Ojo. “Inventory excess draws SEC scrutiny” Internet article from www.buyernews.com
18
Fisher, Marshall, “Managing the Value Chain” Harvard Business Review, Boston, Ma. 2000, pp127154
19
Helming, Bill and Zonnenberg, Jan Paul “The Fulcrum Points of a Supply Chain Strategy” Supply Chain
& Logistics Journal, Winter 2000, www.infochain.org/quarterly/W00/Fulcrum.html
20
Oliver, Keith, Chung, Anne and Samanich, Nick “Beyond Utopia: The realist’s Guide to InternetEnabled Supply Chain Management” Strategy + Business, 2001, www.strategy-business.com/strategy
68
EMBA 2001
BLANDON09/18/2001 & REVELES
SUMMER PROJECT
SUPPLY CHAIN MANAGEMENT
21
Anderson, Jill, Lino, Casalino and Woloviec, David “A practioner’s Guide to Implementing Supply
Chain Planning solutions” Logistics and Supply Chain Journal, Spring 1998, www.infochain.org
22
Grosvenor, Frank and Austin, Terrence “Cisco e-hug Initiative” Aug 1, 2001,
www.manufacturing.net/index.asp
23
O’ Brien, Kevin P. “Value Chain Report – Measuring Supply Chain Performance” Industry’s Weeks,
The Value Chain, Jan. 1, 2001, www.iwvaluechain.com/columns
69