Value Chain Dynamics:
Business and Supply Chain
Chain
Strategy in a Fast-Cl
t Clock
kspeed
dW
World
ld
Professor Charles Fine
Massach
husetts Instiitute off Tech
T hnollogy
Sloan School of Management
Cambridge,
g , Massachusetts 02142
September 2010
1
Supply Chains and Value Chains
Value
Chain
Supply Chain
Design
gement
Manag
Order fulfillment
Reaction & Anticipation
-Inventory
-Quality, cost & service
-Flexibility
-Response times
-Logistics
-Distribution
-Procurement
-Forecasting
portation
-Transp
“The Physics of Flow”
S t
System
D
Design
i
Static
-Core
Core competences
competences
-Make/Buy
-Relationship Design
-Strategic
Strategic Intent
Intent
Dynamic
-Fast Clockspeed
-External Forces
-External
Forces
-Disintegration
-Dependence
-Capability development
-Capability
-Disintermediation
“The Biology of Evolution”
2
The Three Chains of Enterprise Design:
3
Fulfillment, Development, & Capability Chains
Capability Supply Chain
Developme
ent Chain
Design
Supply
Develop
3-D
Concurrent
Engineering
Supply
Produce
Launch
Distribute
Voice
of the
Customer
Sell
Fulfillment Supply Chain
Customer
3-D Concurrent Engineering &
4
the imperative of concurrency
Product
(or Service)
Detailed
D
t il d
Design
Specs
M t i l
Materials
Functions
Product/
P
d t/
System
Architecture
Modular/
Integral
Life Cycles
Process
(for production
& delivery)
Unit
Processes
Technology
E i
Equipment
t
Production
P
d ti
System
Objectives
Systems
People
Capacity
Value Chain
(Partners/S ppliers)
(Partners/Suppliers)
Value
Chain
Architecture
Sourcing
Selection
Relationship
Logistics
g
& Coord
System
Information
Inventory
Integration
Develop
pment
Fulfillment
& Capab. Chains
Supply Chain
Fulfillment
Architecture
Technology
5
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Customer
Preference
Dynamics
Regulatory
Policy
D
Dynamics
i
Technology
& Innovation
Dynamics
Gears differ by size/speed
Each has an engine & clutch
Capital
Market
Dynamics
Industry
Structure
Dynamics
Business
Cycle
Dynamics
MANUFACTURING STRATEGY FORMULATION
1. DRAFT MISSION STATEMENT (ADVISED BY BENCHMARKS)
2. SET OPERATING OBJECTIVES
--QUALITY
--COST
--COST
--LEAD TIMES
--FLEXIBILITY
--CUSTOMER SATISFACTION
--INNOVATIVENESS
3. DEVELOP POLICIES & INVESTMENTS
STRUCTURAL
INFRASTRUCTURAL
CAPACITY ACQUIS.
FACILITIES
EQUIPMENT/TECH.
VERTICAL INTEG.
HUMAN RESOURCES
QUALITY ASSUR.
PDTN. PLAN/CONT.
PRODUCT DEVELOP.
PERF. MEAS/EVAL
CAPITAL ALLOC.
ORG. STRUCTURES.
6
7
Major Manufacturing Decision Categories
Categories
1. FACILITIES
• size
• location
• focus
2. CAPACITY
• amount
• timing
• type
3. VERTICAL INTEGRATION AND SUPPLIER
MANAGEMENT
• direction
• extent
• interfaces
• collaboration
4. PRODUCTION TECHNOLOGIES AND
PROCESSES
• equipment
• automati
t
tion
• interconnectedness
• scale
• flexibility
5. WORK FORCE AND MANAGEMENT
• wage policies
• security
• skill levels
6. INFORMATION TECHNOLOGIES
• use and level of investment
• parity or differentiation
7. SUPPLY CHAIN AND MATERIALS
• logistics facilities and methods
• inventory policies
• vendor relations
• production planning
8. ORGANIZATION AND INCENTIVES
• structure
• reporting levels
• degree of centralization
• role of staff
• control/reward systems
• costing systems
9. BUSINESS PROCESSES
• product generation
• interfaces
• responsibilities
• vendor development
• order fulfillment
• service and support
• quality management, flexibility, and
other cross-cutting capabilities
SAMPLE MANUFACTURING STRATEGY TEXT
8
MANUFACTURING VISION
MANUFACTURE WORLD-CLASS QUALITY AUTO COMPONENTS
IN THE PRESCRIBED VOLUMES, ON SCHEDULE, AT THE LOWEST
COST
MANUFACTURING MISSION
ACHIEVE WORLD
WORLD-CLASS
-CLASS STATUS (BY THE YEAR 20xx) IN
QUALITY COST, TIME, AND FLEXIBILITY WITH PEOPLE WHO
HAVE A SHARED VISION AND OBJECTIVES THAT ARE BASED ON
A CULTURE
UL URE OF CONTINUOUS
ON INUOUS PROCESS
RO ESS IMPROVEMENT
IM ROVEMEN
PERFORMANCE METRICS
1.
2.
3.
4.
QUALITY: PRODUCT& PROCESS
COST/PRODUCTIVITY
TIME
FLEXIBILITY
9
SAMPLE MANUFACTURING STRATEGY FRAMEWORK (CONTINUED)
PROCESSES
PEOPLE
-TECHNOLOGY
-CAPABILITY
-CONTROL
CONTROL
-FLEXIBILITY
-STD. OPER. PROCS.
-SKILLS, TRAINING, HIRING PRACTICES
-KNOWLEDGE, EXPERTISE, EMPOWERMENT
-PARTNERSHIP
PARTNERSHIP W/ ACCOUNTABILITY
-FLEXIBILITY
-ENVIRONMENT
VALUE CHAIN
INTERNAL
-PROCUREMENT/SUPPLY
-ENGINEERING
-MARKETING/SALES
-DESIGN
DESIGN OFFICE
-FINANCE
-LABOR RELATIONS
EXTERNAL
-WORLD-CLASS BENCHMARKS
-CUSTOMERS & DEALERS
-SUPPLIERS
-GOVERNMENT
GOVERNMENT
-UNIVERSITIES
10
Value Chain Dynamics as an Operati
tions Strat
St tegy Lens
L
Value Chain
Architectures
Architectures
Outsourcing
T
Traps
Value Chain R d
Roadmapping
i
(motivating strategic (refining strategic (implementing strategic
value chain desig
gn)) value chain design) value chain design)
g )
Corporate
National
Personal
Policy
Dynamics
Technology
Integral vs.
Dynamics
Open vs.
Modular
Closed
(Commercial
Business
(Communications)
Aircraft)
Dynamics
11
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Regulatory
Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i
D
Dynamics
i
Preference
Dynamics
Interdependent sectors
represented
d as
intermeshed gears
Capital
Market
Dynamics
Business
Cycle
Dynamics
12
The Strategic Impact of Value Chain Design:
(Who lett Int
(Wh
I tell Insid
I
ide?)
?)
1980: IBM designs a product, a process, & a value chain
Consumers/
Users
Distribution
Channel(s)
OEM
Subsystem
Suppliers
Intel
IBM
Intel Inside
Microsoft
The Outcome:
A phenomenally successful product design
A disastrous value chain design (for IBM)
LESSONS FROM A FRUIT FLY:
13
THE PERSONAL COMPUTER
1. BEWARE OF INTEL INSIDE.
INSIDE
(Regardless of your industry)
2. TACTICAL MAKE/BUY:
MAKE/BUY:
IT MAY BE A LITTLE BIT CHEAPER OR FASTER
TO OUTSOURCE VERSUS INSOURCE.
3. STRATEGIC SOURCING:
VALUE CHAIN DESIGN CAN DETERMINE
THE FATE OF COMPANIES AND INDUSTRIES,
AND OF PROFIT AND POWER.
4. THE LOCUS OF VALUE CHAIN CONTROL
CAN SHIFT IN UNPREDICTABLE WAYS.
14
Vertical Industry Structure
with Integral Product/System Architecture
Architecture
Computer Industry Structure, 1975-85
IBM
DEC
All Produ
ucts
ducts
Alll Prod
BUNCH
BUNCH
Microprocessors
Peripherals
Applications Software
Network Services
Assembled Hardware
(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)
Alll Prod
ducts
Operating Systems
15
Horizontal Industry Structure
with Modular Product/System Architecture
Architecture
Computer Industry Structure, 1985-95
Microprocessors
Intel
Intel
Operating Systems
Peripherals
Applications Software
Network Services
Assembled Hardware
Mac
Moto
Microsoft
HP
IntelEpson
Microsoft
Mac
ac
Mac
Seagate
Lotus
Novell
AOL/Netscape Microsoft
C
HP Compaq
IBM
D ll
Dell
(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)
TI
etc
etc
AMD
Unix
TIetc etcetc
etc
EDS etc
etc
etc
etc
t
THE DYNAMICS OF PRODUCT ARCHITECTURE,
STANDARDS,AND VALUE CHAIN STRUCTURE:
16
“THE DOUBLE HELIX”
NICHE
COMPETITORS
INTEGRAL PRODUCT
VERTICAL INDUSTRY
PROPRIETARY STANDARDS
MODULAR PRODUCT
HORIZONTAL INDUSTRY
OPEN STANDARDS
HIGHDIMENSIONAL
COMPLEXITY
ORGANIZATIONAL
RIGIDITIES
INNOVATION &
TECHNICAL
ADVANCES
SUPPLIER
MARKET
POWER
PRESSURE TO
DIS-INTEGRATE
INCENTIVE TO
INTEGRATE
PROPRIETARY
SYSTEM
PROFITABILITY
E
Examples:
l
IBM,
IBM A
Autos,
t
E
Embraer/Boeing,
b
/B i
Nokia,
N ki Small
S ll Firms
Fi
Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
What Drives Clockspeeds?
17
technology
gy/innovation push,, customer pull,,
system complexity, and regulation
Consumer
Handset or PC
Applications
Handset or PC
Platforms
Communications
Equipment
and Networks
Semiconductor
Components Semiconductor
Manufacturing
Equipment
ALL COMPETITIVE ADVANTAGE IS TEMPORARY
18
Autos:
Ford in 1920, GM in 1955, Toyota in 2000
Computing:
IBM in 1970, Wintel in 1990, Apple in 2010
World Dominion:
Greece in 500 BC, Rome in 100AD, G.B. in 1800
Sports:
Red Sox in 2007, Celtics in 2008, Yankees in 2009
The faster the clocksp
peed,, the shorter the reig
gn
Value Chain Evolution in a Fast-Clockspeed World:
Study the Industry Fruitflies
Evolution in
in
the natural world:
Evolution in
in
the industrial world:
FRUITFLIES
evolve faster than
MAMMALS
evolve faster than
REPTILES
INFOTAINMENT is faster than
MICROCHIPS is faster than
AUTOS evolve faster than
AIRCRAFT evolve faster than
MINERAL EXTRACTION
THE KEY TOOL:
THE KEY TOOL:
Cross-SPECIES Benchmarking
Benchmarking
of Dynamic Forces
Cross-INDUSTRY
Benchmarking
g
of Dynamic Forces
19
20
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Regulatory
Policy
y
Dynamics Industry
Technology
Customer
Structure
Preference & Innovation
D
Dynamics
i
D
Dynamics
i
Dynamics
Interdependent sectors
represented
d as
intermeshed gears
Capital
Market
Dynamics
Business
Cycle
Dynamics
Innovation along the Value Chain:
21
How (& why) do Autos & Electronics Differ?
Sales/Marketing
/Distribution
Consumers//
C
Users
AUTOS
ELECTRONICS
Core
Production
Technology
Suppliers
Subsystem
S
b
t
Product
Suppliers
Concept
Lean
Minivan,
Add-ons Internet
Production
SUV,
SUV
Crossover
iPod, X-Box,
Palm,
C
Contract
Office,
Napster, Amazon, Digital Photog.Manufacturing
Dell
Apple I
Mobile Phone
Hybrid
Aluminum
Eng
gine,,
Bonding,
g,
Active Carbon Fiber,
Suspension CAD tools
H l
Html
C++
Microprocessor,
Hard disk drive,
Photolithography
Innovation Dynamics can be Perfo
orman
nce
RADICAL (disruptive) or INCREMENTAL (sustaining)
Maturity
Takeoff
Disr ption
Disruption
Ferment
Time
How to measure
performance?
How to know
where y
you are
on the “S”?
Where in the
value chain?
Worse before
better?
Disruptive Process Innovation in Autos vs. Disruptive Product Innovation in Electronics Perfo
orman
ce
Lean Production
Mass Production
Craft Production
Time
Process Innovators
--Ford
--Dell
Dell
--Wal-mart
--Southwest Air
--Toyota
Toyota
THE CASE OF APPLE iPod/iPhone
24
Creative
Artists
Applications
pp
Content
P bli h
Publishers
Closed to nonApple apps;
then explosive
A St
App
Store
Growth
Content
Marketing
Open, then
license
Content
Closed to all
but one
carrier per
region; slowly
opening
Closed to
non-MP3,
non-Apple
f
formats
iTunes
homepage
Content
Sales
Listening
accessories
Networks
App
Stores
iTunes
iTunes
Content
Distrib.
Retail
Stores
Content & HW iPod/
C
Consumption iPhone
What makes an innovation disruptive?
Performance Push
an overwhelmingly superior technology/process
(penicillin, mass production)
Customer Pull
new customers care about different measures of
performance
(
(wireless
phones, personal computers))
Org
ganizational Comp
petencies
incumbents cannot do what the innovators can
(Dell supply chain, Southwest Air)
25
26
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Regulatory
Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i
D
Dynamics
i
Preference
Dynamics
Interdependent sectors
represented
d as
intermeshed gears
Capital
Market
Dynamics
Business
Cycle
Dynamics
CUSTOMER PREFERENCE DYNAMICS:
P&G Value Prop
position:
Premium Products at Premium Prices
Controlling the Channel Through Closeness to Customers:
consumer research, pricing, promotion, product development
Customers
Retailer
Retailer
P&G
R t il
Retailer
Wh t is the
What
th rolle off brand
b
d names vs. product
d t features?
t
?
Laundry Detergent; Mobile Phones; Motorcycles
27
CUSTOMER PREFERENCE DYNAMICS:
Walmart Value Proposition:
p
Large Selection of Products at Very Low Prices
28
Controlling the Channel Through Closeness to Customers: Chain Proximity
Consumers
WalMart
Retailer
Retailer
P&G
Retailer
Private Labels
Walmart Brands
Vertical Growth on the Double Helix
Brand vs. Brand vs. Channel vs Channel:
Competing on fast-clockspeed
fast clockspeed retail
Consumers
WalMart
Best Buy
Sony
Samsung
29
30
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Regulatory
Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i
D
Dynamics
i
Preference
Dynamics
Interdependent sectors
represented
d as
intermeshed gears
Capital
Market
Dynamics
Business
Cycle
Dynamics
Cisco’s End-to-End Integration
f its Fulfillment
for
f
Supply Chain
C
Customers
Cisco
Early investment in
Internet based
communication for
speed and accuracy of
order information
Early
E
l investment
i
t
t in
i
logistics supplier
partnerships for speed
and accuracy of
product flow
Contract
Manufacturers
Componentt
C
Suppliers &
Distributors
31
Cisco’s Strategy for Technology Supply Chain Design (I.e., Capabilities)
32
1.Integrate
1
I t
t echnol
h logy around
d the
th router
t to
t
t
be a communications network provider.
2 Leverage acquired technology with
2.
- sales muscle and reach
end-to-end
to end IT
- end
- outsourced manufacturing
- market growth
3. Leverage venture capital to supply R&D
Basic Design Principle: Acquisition Relationship with Technology Chain Partners
Volatility Amplification in the Supply Chain:
33
“The Buullwhip
p Effect”
Eff
Customer
Retailer
Distributor
Information lags
Deliveryy lags
g
Over- and underordering
Misperceptions of feedback
Lumpiness in ordering
Chain accumulations
Factory
Tier 1 Supplier Equipment
SOLUTIONS:
Countercyclical Markets
Countercyclical Technologies
Collaborative channel mgmt.
(Cincinnati Milacron & Boeing)
34
Supply Chain Volatility Amplification:
Machine Tools at the tip
p of the Bullwhip
p
% Chg. GDP
% Chg. Vehicle Production Index
% Chg. Net New Orders Machine Tool Industry
“We are experiencing a 100-year flood.” J. Chambers, 4/16/01
80
% Ch
hange, Year to Yea
ar
60
40
20
0
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
-20
-40
-60
60
-80
"Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study,"
E. Anderson, C. Fine & G. Parker Production and Operations Management,
Vol. 9, No. 3, Fall 2000, pp. 239-261.
35
Volatility in the Electronics & Semiconductors Supply Chain 100.00
% Change, Year-to--Year
80.00
60.00
40 00
40.00
20.00
0.00
1961
-20.00
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
Year
-40.00
-60.00
Worldwide Semiconductor Manufacturing Equipment Sales
Worldwide Semiconductor Shipments
Electronics, Computing and Communications Equipment Output
GDP World
GDP USA
LESSONS FROM A FRUIT FLY:
CISCO SYSTEMS
1. KNOW YOUR LOCATION IN THE VALUE CHAIN
1
2. UNDERSTAND THE DYNAMICS
OF VALUE CHAIN FLUCTUATIONS
3. THINK CAREFULLY ABOUT THE ROLE
OF VERTICAL COLLABORATIVE RELATIONSHIPS
4 INFORMATION AND LOGISTICS SPEED DO NOT
4.
REPEAL BUSINESS CYCLES OR THE BULLWHIP.
Bonus Question:
How does clockspeed impact volatility?
36
INDUSTRY CLOCKSPEED IS A COMPOSITE:
37
OF PRODUCT, PROCESS, AND ORGANIZATIONAL
CLOCKSPEEDS
Mobile Phone INDUSTRY CLOCKSPEED
THE
Mobile Phone
product technology
THE
Mobile Phone
PRODUCTION
PROCESS
process technology
t h l
THE
Mobile Phone
MANUFACTURING
COMPANY
organiizatiion
Mobile Phone System CLOCKSPEED is a mix of Transmission Standards,
Standards Software and Handsets
Mobile Phone System
TRANSMISSION
STANDARD
slow clockspeed
SOFTWARE
APPLICATIONS
HAND SET
medium clockspeed
OPERATING
SYSTEM
slow clockspeed
SERVICES
SERVICES
fast clockspeed
fast clockspeed
ISSUE: THE FIRMS THAT ARE FORCED
TO RUN AT THE FASTEST CLOCKSPEED
ARE THE MOST LIKELY TO STAY AHEAD
OF THE GAME.
38
Automobile CLOCKSPEED IS A MIX OF 39
ENGINE BODY & ELECTRONICS
ENGINE,
ELECTRONICS
Automobile
ENGINE
slow clocksp
peed
BODY
medium clockspeed
ELECTRONICS
fast clockspeed
ISSUE: MOST AUTO FIRMS OPERATE AT
ENGINE OR BODY CLOCKSPEEDS; IN THE
FUTURE THEY WILL NEED TO RUN
AT ELECTRONICS CLOCKSPEED.
40
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Customer
Preference
Dynamics
Regulatory
Policy
D
Dynamics
i
Technology
& Innovation
Dynamics
Interdependent sectors
represented
d as
intermeshed gears
Capital
Market
D namics
Dynamics
Industry
Structure
Dynamics
Business
Cycle
Dynamics
y
Projects, Strategy, and Value Chains
Clocksp
peed drives
Business Strategy Cadence
CAPABILITIES enable & constrain PROJECTS;
PROJECTS build CAPABILITIES
CORE
CAPABILITIES
Leonard-Barton, Wellsprings of Knowledge
PROJECT
DESIGN
(New projects,
new processes,
new suppliers)
41
Projects Serve Three Masters:
apab l t es, Customers,
ustomers, & Corporate
orporate Profit
rof t
Capabilities,
CORE
CAPABILITIES
PROJECT
DESIGN
(New products,
new processes,
new suppliers)
42
VALUE CHAIN DESIGN:
Three Components
1. Insourcing/OutSourcin
Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)
2. Partner Selection
(Choice of suppliers and partners for the chain)
3. The Contractual Relationship
(Arm’s
(Arm
s length
length, joint venture,
venture long-term
long-term contract
contract,
strategic alliance, equity participation, etc.)
43
3-D Concurrent Engineering &
44
the imperative of concurrency
Product
(or Service)
Detailed
D
t il d
Design
Specs
M t i l
Materials
Functions
Product/
P
d t/
System
Architecture
Modular/
Integral
Life Cycles
Process
(for production
& delivery)
Unit
Processes
Technology
E i
Equipment
t
Production
System
Objectives
y
Systems
People
Capacity
Value Chain
(Partners/Suppliers)
(Partners/S
ppliers)
Value
Chain
Architecture
Sourcing
Selection
Relationship
Development
& Capab. Chains
Fulfillment
Architecture
Logistics
& Coord
System
Information
I
Inventory
t
Integration
Fulfillment
Supply
S
l Chain
Ch i
Technology
45
IMPLEMENTATION OF PROJECT DESIGN:
FRAME IT AS 3-D
3 D CONCURRENT ENGINEERING
ENGINEERING
Product
(Deliverable
Product
/
System
Architec
Specs
ture
Materials Modular
Functions /Integral
Life
Cycles
Detailed
Design
CORE
CAPABILITIES
PROJECT
DESIGN
Process
(Project Plan)
Unit
Proces
ses
Techn
T
h
ology
Equip
ment
Production
System
Objectives
Systems
y
People
Capacity
Value Chain
(Partners/Suppliers)
Value
Chain
Architecture
Sourcing
Selection
Relationship
Development
Chain
Logistics
& Coord
System
Information
Inventory
Integration
Fulfillment
Supply
S
l Chain
Ch i
46
Do you have to think strategically
about every project?
project?
CORE
CAPABILITIES
PROJECT
DESIGN
(New products,
new processes,
new suppliers)
ARCHITECTURES IN 3-D
INTEGRALITY VS. MODULARITY
IIntegral
t
l product
d t architect
hit tures feature
t
close coupling among the elements
- Elements perform many functions
- Elements
El
t are iin close
l
spacial
i l proximity
i it
- Elements are tightly synchronized
- Ex: jet enggine,, air plane wing,
g, microp
processor
Modular product architectures feature
separation among the elements
- Elements are interchangeable
- Elements are individually upgradeable
- Element interfaces are standardized
- System failures can be localized
Ex: stereo system, desktop PC, bicycle
-
47
48
VALUE CHAIN ARCHITECTURE
Integral value-chain architecture
features close proximity among its elements
- Proximityy metrics: Geograp
phic,, Orgganizational Cultural, Electronic
- Example: Toyota city - Example: Ma Bell (AT&T in New Jersey)
Jersey)
- Example: IBM mainframes & Hudson River Valley
Modular value-chain architecture features multiple,
i
interchangeable
h
bl supplier
li and
d standard
d d iinterfaces
f
- Example: Garment industry
- Examp
ple: PC industry
y
- Example: General Motors’ global sourcing
- Example: Telephones and telephone service
ALIGN ARCHITECTURES ACROSS SYSTEMS AND VALUE CHAINS
SUPPLY CHAIN / VALUE CHAIN ARCHITECTURE
PRO
ODUCT / SYSTEM ARCHIT ECTURE
(Geographic, Organizational, Cultural, Electronic proximity)
INTEGRAL
Microprocessors
M
Mercedes
d
& BMW vehicles
MODULAR
Lucent
Nortel
Chrysler (90’s)
Nokia
Digital Rights/
M i Di
Music
Distribution
t ib ti
P la id
Polaroid
Cisco
Dell PC
PC’s
s
Bicycles
49
TPS Dynamics between Continuous Improvement &
Respect for People (Stakeholders)
Motivated People
Drive faster Improvement
Continuous
Improvement
Respectt
R
For
People
Profits
P
fit gett shared
h
d
to reward and incentivize alignment
50
51
The Evolution of Business Ecosystems
Operations (or “quantity”) Loop Ted Piepenbrock, MIT
Firm
Output
Integral
Enterprises
Product
markets
Capital
markets
Firm
15
Customer
markets
Capital
markets
Labor
markets
Firm
Enterprise
which
Competitive
drive…
Dynamics
Labor
markets
Supplier
markets
Short-term Speed
& Flexibility
10
5
Long-term Speed
& Stability
Supplier
markets
Maximization of
Stakeholder Surplus
1950
Growing Markets
Stable Markets
Growing Markets
(Economies of Scale)
1925
1950
1975
2000
Industrial
Dynamic
Evolution
which
shapes…
shapes
Integral Enterprise
(Economies of Scale)
Modular 2 Modula
M
ar 2
create…
Mod
dular 1
Firm
Long-Term
Long-T
Term
erm
Performance
(Economies of Scope)
1900
1980
which generates…
Enterprise
Architectural
Forms
Industry
Output
1970
1960
Modular 1
Maximization of
Shareholder Value
Modular 3Modular 3
M
Modular
Enterprises
Market Capitalization
1990
Dell Supply Chain
Global \
Regional
Procurement
Continuity of Supply
Demand/
Supply
Management
52
Demand
Management
Sales
Build to customer
ssss
pecifications
ssspecifications
Supplier
Dell
SLC
I
Customer
I
Supplier
Materials ordering cycle
10-180+ days
Customer fulfillment
2-5 days
Modular Product Architecture enables Modular Supply Chain
HP/Flextronics vs. Dell Supply Chain
53
Supplier
Flex
Flex
Retailer
Retailer fulfillment
f f
2-5 days
Retailer
inventory
30+ days
I
Customer
Supplier
Materials ordering cycle
10-180+ days
Customer
f lfill
fulfillment
t
30 min
Supplier
I
SLC
I
Dell
Customer
Supplier
Materials ordering cycle
10-180+ days
Customer fulfillment
2-5 days
Modular Product Architecture enables Modular Supply Chain
54
Demand-Supply Chain Management @ Dell
ƒ
ƒ
ƒ
Demand
D
dM
Managementt:
Forecast = Buy = Sell
Buy to Plan, but Build to Order
• Inventory Velocity is a wonderful thing …
• Customers have immediate access to the latest
technology
gy.
• Suppliers get their products to market quickly
• Quality is improved with fewer touches.
• Cash is generated through negative cash cycle.
• Model efficiencies drive Market Share gain.
Can “Dell Direct” Work for Autos?
• Appealing to OEM
OEM’s
s on Many
Dimensions
– Satisfy
y customer need for Speed
– Reduce Supply Line Inventories
g
– Reduce mismatches and discounting
– Direct OEM-Customer Relationships (&
Data!)
– Information Transparency
Adapted from Prof. J.P. MacDuffie, IMVP & The Wharton School
55
BUT,
A Car is not a Computer!!
• P
Personall
Computer
• ~50 components
p
•
8-10 key parts
• 40 key suppliers
• 24 hour burn-in
• 100 design
•
variations
• Modular
•
A hi
Architecture
• Car
C
•
•
•
•
•
•
•
•
~ 4000 components
100 key
y subsystems
y
300 key suppliers
12 month validation
1,000,000
,
,
variations
Integral
Architecture
Adapted from Prof. J.P. MacDuffie, IMVP & The Wharton School
56
In/Outsourcing: Sowing the Seeds of Competence Development to develop 57
dependence for knowledge or dependence for capacity
capacity
Independence
Dependence
+
Amount of
Work
Outsourced
knowledge
+/or supply
Supplier
Capability
+
+
Amount of
Supplier
Learning
Amount of
Work
Done In-house
+
Internal
Capability
+
knowledge
+/or supply
+
Amount of
A
Internal
Learning
Technology Dynamics in the Aircraft Industry:
LEARNING FROM THE DINOSAURS
+
Japanese
p
appeal as
subcontractors
U.S. firms’
appeal as
subcontractors
+
+
Boeing outsources
Japanese
Industry
Autonomy
to Japan
(Mitsubishi Inside?)
+
Japanese
industry
size &
capability
+
-
U.S.
industry
size &
capability
58
SOURCEABLE ELEMENTS
PROCESS ELEMENTS
ENGINEERING
ASSY
TEST
CONTROLLER
VALVETRAIN
BLOCK
SUBSYSTEMS
I4
V6
V8
PRODUCTS
59
60
Strategic Make/Buy Decisions: Assess Critical Knowledge & Product Architecture
ITEM IS INT
TEGRAL IT
TEM IS MO
ODULAR
DEPENDENT FOR
KNOWLEDGE
& CAPACITY
A
POTENTIAL
OUTSOURCING
TRAP
WORST
OUTSOURCING
SITUATION
INDEPENDENT FOR
KNOWLEDGE &
DEPENDENT FOR
CAPACITY
BEST
OUTSOURCING
OPPORTUNITY
CAN
LIVE
WITH
OUTSOURCING
INDEPENDENT FOR
KNOWLEDGE & CAPACITY
OVERKILL
IN
VERTICAL
INTEGRATION
BEST
INSOURCING
SITUATION
Adapted from Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
DEPENDENT FOR
CAPACITY ONLY
DEPENDENT FOR
KNOWLEDGE & CAPACITY
Clockspeed
Fast Slow
Few
w Many
Few
w Many
Fast Slow
Fast Slow
Fe
ew Many
Su
uppliers
Fast Slow
Clockspeed
Su
uppliers
Fe
ew Many
y
Clockspeed
Clockspeed
Suppliers
Watch
it!
Fe
ew Many
y
Fast Slow
OK
INDEPENDENT FOR
KNOWLEDGE & CAPACITY
Clockspeed
Su
uppliers
Fe
ew Many
y
Su
uppliers
Clockspeed
Su
uppliers
INTEGR
RAL
DECOMPO
OSABLE
(Modular)
Strategic Make/Buy Decisions: Also consider Clockspeed & Supply Base Capability
Adapted from C. Fine, Clockspeed, Chap. 9
Fast Slow
Slo
61
Qualitative analysis of strategic importance uses five key criteria
criteria
Value chain elements with high customer
importance and fast clockspeed are generally
strategic (unless there are many capable
suppliers)
‹ Competitive position is seldom the
primary consideration for strategic
importance, rather it serves as a
“tie-breaker” when other criteria are
in conflict
Competitive
‹
Customer
Importance:
• High
• Medium
• Low
Technology
Clockspeed:
• Fast
• Medium
• Slow
Position:
‹
‹
When many capable
suppliers exist, knowledge
may be considered
commodity and
development should be
outsourced
• Advantage
• Parity
• Disadvantage
Architecture is considered a
constraint for the sourcing decision
d l controls
t l the
th level
l
l off
model,
engineering that must be kept in
house for integration purposes
Capable Suppliers:
• None
N
• Few
• Many
Architecture:
• Integral
• Modular
Model developed
by GMdifferently
Powertrain,
PRTM, &than
Clockspeed,
Inc.
Criteria are applied
for Products
for Subsystems
Possible Decisions
(Knowledge & Supply):
• Insource
• Outsource
• Partner/Acquire
• Partial Insource
• Partial Outsource
• Invest
• Spin Off
• Develop Suppliers
62
63
Every decision requires qualitative and quantitative analy
q
ysis to reach a conclusion
High
Knowledg
ge
Supply
Qualitattive
Value
Qualitative Model
Improve
Economics
Strategic
Importance
Divest/
Outsource
Customer
Importance:
¥ High
¥ Medium
¥ Low
¥Fa st
¥M edium
¥Sl ow
Harvest
Investment
Low
w
Technology
Cl ockspeed:
Clocks
peed:
Invest &
Build
Competitive
Co
m petiti ve
Posi ti on:
Position:
Low
¥A dvantage
dvantage
¥Pa rity
rity
¥Di sadvantage
sadvantage
Quantitative
Value
Capable Suppl i ers:
¥N one
¥Fe w
¥Ma ny
Possible Decisions:
¥In tegral
¥ Modular
¥In source
¥Ou tsource
¥P artner/Acquire
¥P artial Insource
¥P artial Outsource
¥I nvest
¥S pin Off
¥D
¥Develop
l Suppliers
li
Engine A
EVA
PBIT
Revenue
AS-IS
NOPAT
AS-IS
COGS
Engine B
EVA
BIC
AS-IS
Capital
Charge
Net Assets
BMK
WACC
AS-IS
BMK
BIC
AS-IS
Working
W
ki
Capital
+.
BMK
BIC
X
AS-IS
−.
AS-IS
AS-IS
Taxes
.
.
.
Transmissions
EVA
BIC
AS-IS
BIC
AS-IS
BMK
GMPT
EVA
EVA
−.
BIC
AS-IS
Engines
EVA
BIC
Architecture:
High
Fixed
Assets
Quantitative Model
(Financial)
Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.
64
Value Chain Mapping
pp g
Org
ganizational Supply
pp y Chain
Chrysler
casting
supplier
Eaton
clay
supplier
Technology Supply Chain
engines
g
valve lifters
casting
manufacturing
g
process
clay
chemistry
Capability Chain
Supply Chain
Management
Quality assurance
NVH engineering
R&D
Underl
U
d lyiing Assumpti
tion: You have to draw the maps before you can assess their dynamics.
65
VALUE CHAIN DESIGN IS
THE ULTIMATE CORE COMPETENCY
COMPETENCY
Since all advantages are temporary, the only lasting competency is to continuously build and assemble capabilities chains.
KEY SUB-COMPETENCIES:
SUB COMPETENCIES
1. Forecasting the dynamic evolution of market
power and market opportunities
2. Anticipating Windows of Opportunity
3. 3-D
D Concurrent
C
tE
Engiineering:
i
Product, Process, Value Chain
CAPABILITIES
PROJECTS
Fortune Favors the Prepared Firm
66
PROCESS FOR VALUE CHAIN DESIGN
DESIGN
1. Benchmark the Fruit Flies
DOUBLE
HELIX
2. Map your Value Chain
-Organizational
Organizational Value Chain
Chain
BOEING
-Technology Value Chain
-Competence Chain
3. Dynamic Chain Analysis
at each node of each chain map
4. Identify
y Windows of Opportunity
pp
y
5. Exploit Competency Development Dynamics
with 3-D Concurrent Engineering
CAPABILITIES
PROJECTS
In-depth Exercise 2: Value Chain Analysis
Analysis
67
Consider these five industries or an industry of your choice:
-Food
-Defense aircraft
-Automobiles
Automobiles
-Handheld electronic organizers/communicators
-Music
At each table, pick ONE industry:
What are the key dependency relationships in the value chain?
Whatt are the
Wh
th opporttunities
iti
for outtsourciing?
?
What are the windows of opportunity in the chain?
68
“Takeaway
ys” from the day
y
1.Value Chains are dynamic
-industry
i d t structure
t t
d
i
dynamics
-technology & innovation dynamics
-customer
t
and
d channel
h
l dynamics
d
i
2.Innovation happens along the value chain
and
d in
i th
the value
l chain
h i model
d l itself.
it lf
3.All advantage is Temporary
key lleverage
4 Strategic
4.
St t i S
Sourcing
i is
i a k
point for supply chain design.
5 S
5.Supply
l Chain
Ch i organizations
i ti
h
multiple
lti l
have
strategic roles to play.
69
All Conclusions are Tempporaryy
Clockspeeds are increasing almost everywhere
Value Chains are changing rapidly
Assessment of value chain dynamics
dynamics
Roadmap
Construction
70
71
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics
Customer
Preference
Dynamics
Regulatory
Policy
D
Dynamics
i
Technology
& Innovation
Dynamics
Interdependent sectors
represented
d as
intermeshed gears
Capital
Market
D namics
Dynamics
Industry
Structure
Dynamics
Business
Cycle
Dynamics
y
A long, long time a go in an
industry far away . . .
72
Share of Revenue
Freight Railroads vs. Trucks
The Dynamics of Industry
Economics
and the Optimal Timing of Deregulation
Deregulation
73
Railroads
“In the Zone”
Too early
Too late
Trucks
1880
Regulation
reins in
“monopoly”
1910
Shocks happen;
Environment
changes;
Substitutes
mayarise
1950
Regulation
constrains
response;
deregulation
timing is critical
1980
2000
If deregulation is SLOW LATE
SLOW,
LATE, &
&
PIECEMEAL; then
Economic Dislocation;
Incumbent
Collapse
74
Histories: Dynamics of Regulation
Regulation Shocks
Reins in
Happen
“Monopoly”
Environment
E
i
t Regulation
Constrains
Changes;
Substitutes response
arise
Mistakes
Deregulation
harm
timing is
incumbents,
Critical
consumers &
taxpayers
RailRoads Rockefellar Autos &
& Morgan Highways
”Robber
Barons”
Trucking
arises
Prices,
Exit,
Innovation
1958
vs.
1980
Weak rail
capabilities;
Trucking
dominant
Natural
Gas
”Natural”
Monopoly
Gas
Demand
Explodes
Low prices
inhibit
new
supply
Long lag
for new
sources
(1978 v 1989)
Shortages;
price swings;
LT consumer
costs of take or
pay contracts
t
t
Banking
Bank size Inflation
in the
limited to
limit power 1970’s
Money
Market
Funds
Deposits
1978
Shrink;
vs.
Riskier
1989
i
investments
t
t
Telecom
AT&T
”natural”
monopoly
l
Oil
Embargo;
Fall of
I
Iran
Internet &
Moore’s
Law
TELRIC
Wireless
Broadband pricing;
entry & exit;
VOIP
access fees
Wireless,
BB, & VOIP
less
constrained
than ILECs
S&L’s died;
$160B+
Bailout
Wireless
success;
ireline TBD
wireline
Conceptual Model: The Dynamics of
Regulation and Deregulation Processes
Perception
off Monopoly
M
l
Deregulation is
TOO EARLY and
not well thought out;
Electricity (Calif),
CATV (1984)
Costly mistakes;
re-regulation;
Try,
y try,
y again.
g
Regulation
Reins in
“Monopoly”
Shocks
Happen
Regulation
constrains
incumbent
response
Deregulation is
RAPID, TIMELY, &
COMPREHENSIVE;
Airlines(1978),
Airlines(1978)
Wireless (1993)
Robust competition;
Large jump in
consumer welfare
75
Environment
changes;
Substitutes
may arise
Deregulation is
SLOW, LATE, &
PIECEMEAL;
Railroads(1958 80)
Railroads(1958-80),
Gas (1973-93),
Banking (1978-99)
Economic
Dislocation;
Incumbent
Collapse
Full, but Late,
Deregulation
Collapse of the railroads
76
• number of Class I railroads dropped from 230 Æ 7 between 1907
1999
• railroad mileage declined from 254
•
254,000
000 Æ 99,000
99 000 between 1916
1999
• by the 1970s, every major Northeast railroad filed for bankruptcy
• By the 1970s,
1970s 21% of track
track-miles
miles were operated by bankrupt railroads
• deferred maintenance and delayed capital expenditures amounted to billions of dollars
• rate of accidents due to track or structure defects quadrupled from 1966 to 1976 • BY 1976, 15% of track (50,000 miles) was operated at reduced
speeds (as slow as 10 miles per hour)
• standing derailments (when a train falls over when not moving) became prevalent
• terminal facilities deteriorated
77
Deregulation improved performance
•
•
•
Inflation-adjusted rail
rates have plunged 60%
from 1981-2001
By 1999, railroads were
generating 58% more ton
miles than in 1979
In the 1990s, railroads
stopped the erosion of
market share.
share From 1996 through 1998, the
railroad’s market share
actually exceeded 40%
Class I Railroad Performance: 1964-2001 (1981 = 100)
300
250
Productivity
200
Volume
150
Staggers Act passed October 1980
100
50
0
1964
Revenue
1968
1972
1976
1980
1984
Price
1988
1992
1996
2000
Image by MIT OpenCourseWare.
“Gear Model” to support Roadmapping of
Value Chain Dy
ynamics (VCD))
Corporate
Strategy
Dynamics
Regulatory
Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i
D
Dynamics
i
Preference
Dynamics
Gears differ by size/speed
Each has an engine & clutch
Capital
Market
Dynamics
Business
Cycle
Dynamics
78
Gear Teeth Dynamics
Business Industry/
Regulatory
cycles
Organization Policy
Structure
Business
Cycles
Industry/
Organization
Structure
Regulatory
Policy
Technology
Consumer
Preferences
Corporate
Strategy
Clockspeed
Technology Consumer Corporate
Preferences Strategy
79
Clockspeed
Gear Teeth Dynamics
Business Industry/
Regulatory
cycles
Organization Policy
Structure
Business
Cycles
Downturns
trigger
disintegration
Technology Consumer
Preferences
Corporate
Strategy
downturns
stifle
R&D
investment
Downturn
triggers
outsourcing;
Search for
smoothness
Integration Integration/
Industry/
Organizationbuffers
Disintegration
downturns
Structure
regulation
slows
incumbent
innovation
Regulatory
Policy
Technology
innovation innovation
Attacks
can
incumbentsobsolete
& supports regulations
integration
80
Wrap
services
around
commodities
integrality
slows
clockspeed
deregulation
speeds
innovation
technology
gy
innov drives
clockspeed
Integration/
innovation
Disintegration slowdowns
drive brand
investment
Consumer
C
Preferences
Corporate
Strategy
faster
innovation
Clockspeed moderates
downturns
branding
slows
disintegration
customer
power drives
clockspeed
Clockspeed
Capability
life drives
project
frequency
branding
slows
disintegration
project
frequency
drives Capab.
life
Mother Nature strikes
The Cell Phone Supply Chain
Chain
81
8:00 pm, Friday 17 March 2000: Lightning Strikes an ASIC
semiconductor plant of Philips in Albuquerque, New Mexico, USA
8:10 pm: Fire is exting
guished. Plant will be down for months.
Ericsson Cell Phones
Nokia Cell Phones
Image by MIT OpenCourseWare
Philips
Chip Factory
LESSON: RESPONSE SPEED
Image by MIT OpenCourseWare
Mother Nature strikes
The Cell Phone Supply Chain
Chain
NOKIA
Shipment discrepancies noticed within 3 days.
Philips is pushed hard.
hard
New supply sources.
New chip design.
Global capacity grab. ERICSSON
Problem undiscovered for
weeks.
Slow chain of command.
Slow response.
Capacity already taken.
taken.
$400M revenue loss.
Exits phone manufacture.
Ericsson Cell Phones
Nokia Cell Phones
Image by MIT OpenCourseWare.
Philips
Chip Factory
LESSON: RESPONSE SPEED
Image by MIT OpenCourseWare.
82
RFID tags push
the boundaries of the Edge
83
(Research Assistant: Natalie Klym)
1. DoD wartime needs will prime the pump
for RFID technology and applications.
2. Walmart will add to this effect: box & pallet.
3. Pharmacies will do the same for item tagging.
RFID tag
g
5¢
10B/yr
Mobile phone chip
$20
1B/yr
Microprocessor
What disruptions will be driven by the explosion of the edge? $800
40M/yr
84
VALUE CHAIN MAPPING Exercise
Exercise
For each business:
Energy
gy
Key elements in the chain?
Who has power in the chain?
Who makes the profits
in the chain?
Sources of power & profits
(technology, brand, etc.)?
Key dynamic processes
influencing chain power?
Locus of innovations?
Clockspeed Drivers?
Automotive
Consumer Products
Telecoms
Financial Services
Construction
Health Care
Food
Chemicals
Transistors
a s sto s pe
er c
chip
p
85
Moore’s Law
109
?
8
108
Pentium 80786
Pro
o
107
106
80386
80286
105
104
80486
Pentium
8086
8080
4004
103
1970
1975
1980
1985
1990
Year
Source: Joel Birnbaum, HP, Lecture at APS Centennial, Atlanta, 1999
1995
2000
2005
2010
Roadmap for Electronic Devices
N b off chip
Number
hi components
t
1018
Classical Age
1016
Quantum Age
295oK
77oK
1014
4oK
2010
SIA Roadmap 2005
Quantum State Switch
2000
1995
1012
1010
108 Historical Trend
1990
6
10
1980
104
86
CMOS
1970
102
101
Horst D. Simon
100
10-11
Feature size (microns)
10-22
10-33
Semiconductor
Industry
R&D & CapEx
Equipment
Industry
R&D
+
+
+
Electronics
El
t
i Industry R&D
+
-
Equipment
Industry Profits
+
-
An Industry 87
Value Chain
Model
Semiconductor
Industry
Profits
+
+
-
Electronics
Industry Profits
+
+
+
Electronics
Prices
+
+
Equipment Prices
Electronics
Industry
Innovation
+
Equipment
Industry
Volumes
+
+
Semiconductor
Semiconductor
Industry
Volumes
Electronics
Industry
Volumes
+ +
-
Equipment Productivity
Applications
Demand
(e.g., Toys,
Automotive)
© C. Fine, MIT
+
- Transistor
-
Costs
World
W
ld
GDP
-
-
+
+
Capital
& Labor
Productivity
-
Transistor
Prices
+
+
W f F
Wafer
Fab
b
Productivity
(Trans/month/$)
The Outsourcing Trap: A Novel of Four Families
• Navy Pilot: Crash, Investigation, SC education, “Columbo”
•
•
•
•
– Visits, Toyota, Dell, Zara & aircraft supply chain
Pilot’s
Pilot’s
Pilot’s
Pilot’s
sister: MIT grad; laid off; discovers entrepreneurship
wife: Policy analyst for Senator;
son: outsources homework;; outsource capacity,
p
y, not knowledge
g
daughter: business student; Zara shopper
• Chinese Entrepreneur: (e.g., Morris Chang/Terry Gou)
– “Benevolent
Benevolent Father:”
Father: Chinese coexistence; Henry Ford; HongSing
•
• Ultimately brokers cooperation
Warrior Daughter: Chinese domination; aggressive growth
• Defense contractor: Three Generations
–
Grandfather (England), Father (USA), Grandson (affair w/Chinese daughter)
– Makes avionics systems; lobbies senator; Outsource to HongSing
– losing commercial business to Chinese
•
U.S. Senator: Loses son in crash, orders investigation
•
3rd tier supplier: illegal outsourcing of circuit board
–
–
–
–
–
Pork to military contractors; but cost pressures as well
How to keep good jobs in USA?
Campaign contributions from Americans & Chinese
“Caused” the death of his son
Ultimately works on collaboration with Chinese CEO & Gov’t
– Tells senators: “you made me do this”
88
89
All Conclusions are Tempporaryy
Clockspeeds are increasing almost everywhere
Value Chains are changing rapidly
Assessment of value chain dynamics
dynamics
Supply Chain Strategy
Development
MIT OpenCourseWare
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15.769 Operations Strategy
Fall 2010
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