Technology as a Competitive Weapon in the Supply Chain The National Industrial Transportation League Information Technology Advancement Committee Meeting (ITAC) November 10, 2004 Dr. Nancy W. Nix Associate Professor of Supply Chain Practice Director, Supply and Value Chain Center M. J. Neeley School of Business TCU Agenda • Setting the Stage -Technology as a Competitive Weapon? • Supply Chain Management – The Big Picture • Defining the Opportunity for Competitive Advantage • Keys to Supply Chain Success • Summary and Wrap-up © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 2 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 3 “IT Doesn’t Matter” As availability of IT has increased and its cost has decreased, information technology has become a commodity. “IT Doesn’t Matter” by Nicholas G. Carr, HBR At Large, May 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 4 “Does IT Matter?” Cost of Processing Power Per MIPS $500 Cost $400 $300 $200 $100 $1975 1980 1985 1990 1995 2000 Year “IT Doesn’t Matter” by Nicholas G. Carr, HBR At Large, May 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 5 “Does IT Matter?” • What makes a resource truly strategic – what gives it the capacity to be the basis for sustained competitive advantage – is not … its availability …. but its scarcity. • Has the strategic importance of technology as a competitive weapon diminished? “IT Doesn’t Matter” by Nicholas G. Carr, HBR At Large, May 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 6 Growth in IT Investment IT Spend as a % of Capital Expenditures 60% 50% 40% 30% 20% 10% 0% 1960 1970 1980 1990 2000 2010 “IT Doesn’t Matter” by Nicholas G. Carr, HBR At Large, May 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 7 Impact of IT Investment on Productivity • 2001 McKinsey study found a significant positive correlation between IT investment and improved productivity in only six out of 59 industries • In each of those six sectors, one or more companies introduced significant innovations in business practices to leverage IT capabilities “Does IT Matter? by John Seeley Brown and John Hagel III, Harvard Business Review, July 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 8 Supply Chain Technology Performance The McKinsey Quarterly, Number 1, 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 9 Factors Influencing IT “Failures” • Focus on automating existing processes • Patching with obsolescent technology • Not learning from experience • Unrealistic expectations • Misalignment of technology and business strategy • Lack of accountability for results © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 10 Impact of IT Investment on Productivity • 2001 McKinsey study found a significant positive correlation between IT investment and improved productivity in only six out of 59 industries • In each of those six sectors, one or more companies introduced significant innovations in business practices to leverage IT capabilities “Does IT Matter? by John Seeley Brown and John Hagel III, Harvard Business Review, July 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 11 The Opportunity for Creating Competitive Advantage? • While IT may be readily available and increasingly less expensive, the insight and ability required for it to create economic value are in very short supply.” “It’s the combination of IT and innovation that helps companies outpace rivals.” “Does IT Matter? by John Seeley Brown and John Hagel III, Harvard Business Review, July 2003 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 12 Effective IT Planning and Implementation • • • • • • • Top management involvement and support Alignment of business strategy and technology strategy Use technology to enable innovation and business processes Cross-functional teams Well-developed implementation plan Clear guidelines on performance measurement Clear guidelines on how to work with consultants and transfer knowledge • Well-developed plans for training employees “Enterprise Resource Planning Systems: Common Myths versus Evolving Realities,” Mabert, Soni, and Venkataramanan, Business Horizons, May 2001. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 13 Supply Chain Management The Big Picture © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 14 Fundamental Objectives of Supply Chain Management Integrating Supply and Demand Management Match Supply Management With Demand Management To Maximize Profits and Support Corporate Objectives © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 15 The speed of travel across time 1992: World Wide Web Atomic boats, high speed railway, auto & rocket jets Steamships, railways, auto, jet & rocket aircraft Steamships, transcont. Railroad, autos & airplanes Steam boats & railroad Big sail boats w. Compass Larger boats, horse carriots, pack animals Canoe w. Sail and paddle Foot & canoe Man on foot 1969: Internet 1965: Transcontinental Television (Early Bird Satelite) 1950: National Television 1920: First commercial radio broadcast 1895: Marconi telegraph 1876: Bell telephone 1863: rapid print newspaper press Prior to 1441 a.d.: - word of mouth - drums - smoke - relay runners 10000 5000 1441: Gutenberg printing press 1000 BC 500 1000 1500 1600 1700 1800 1900 ‘50 ‘70 ‘90 AC Source: Buckminster Fuller © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 16 Drivers for Supply Chain Management Why Important, Why Now? Speed of Change High Levels of Uncertainty Intense Competition Supply Chain Collaboration Accelerates Innovation and Adaptation Outsourcing Technology Complex, Interdependent Networks © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 17 Defining Supply Chain Management Supply Management Focal Firm Demand Management NPD Procurement Production Distribution Customer Service Performance Measurement Customers Integrated Forecasting and Planning Customers Suppliers Suppliers Supply Chain Strategy and Supporting Processes Information Systems Product, Service, Information and Financial Flows NPD = New Product Development © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 18 Complex Supply Chain Networks Tier 1 Suppliers Tier 1 Customers Tier 2 Customers 1 1 2 2 n 1 1 2 2 Tier 3 to Consumers/ End-Customers n 1 n 1 2 3 n 3 n 1 1 2 n Tier 3 to n customers n Consumers / End-Customers Tier 2 Suppliers Tier 3 to n suppliers Initial Suppliers Tier 3 to Initial Suppliers n 1 n Focal Company Members of the Focal Company’s Supply Chain © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 19 The Triple-A Supply Chain “The best supply chains aren’t just fast and cost effective. They are also agile and adaptable, and they ensure that all their companies’ interests stay aligned.” “The Triple-A Supply Chain” Harvard Business Review, Hau L. Lee, Oct. 2004 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 20 Defining the Opportunity for Competitive Advantage © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 21 Defining the Opportunity for Competitive Advantage • Focus on your most important customers. • Understand the value you bring to their supply chains. • Focus IT innovation on: – helping your target customers achieve supply chain success, – improving relationships and performance across the supply chain, and – doing both at a reasonable profit. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 22 Redefining Marketing and Customer Relationships • Under the old marketing concept, the objective was to make a sale. • Under the new marketing concept, the objective is to develop a customer relationship, in which the sale is only the beginning. • The customer is a long-term strategic business asset. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Long-term Trends Old Economy New Economy Goods Services Transactions Relationships Attracting Customers Retaining Customers Product Focus Customer Focus Product Profitability Customer Profitability © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 24 The New Reality • Products come and go • Customers remain © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 25 The Customer Pyramid Most Profitable Customers Platinum What segment spends more with us over time, costs less to maintain, spreads positive word of mouth? Gold Iron Lead Least Profitable Customers What segment costs us in time, effort and money yet does not provide the return we want? What segment is difficult to do business with? Source: Zeithaml, Rust, Lemon (2001), California Mgt Review, 43, p. 125. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 26 Customer Profit for Physicians 70,000 Profit 50,000 30,000 10,000 -10,000 -30,000 1 42 83 124 165 206 247 288 329 370 411 452 493 534 575 616 657 698 739 780 821 Customers Source: Mulhern (1999), Journal of Interactive Marketing, p.32 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 27 Frequency Distribution of Customer Profit for Physicians 200 150 Frequency 100 50 0 -15,000 -5,000 5,000 15,000 25,000 35,000 45,000 55,000 More Profit Ranges ($2000 groups) Source: Mulhern (1999), Journal of Interactive Marketing, p.33 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 28 What is Customer Equity? A firm’s Customer Equity is the total of the discounted lifetime values of all of its customers. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 29 Lifetime Value of a Customer 5 4.17 4 Lifetime Value 3.49 3 2.74 2 1.91 1 1 0 1 2 3 4 5 Planning Horizon © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 30 Driving Customer Equity Customer Equity Value Equity Quality Price Convenience Marketing Actions Drive Each of These Brand Equity Brand Awareness Brand Ethics Relationship Equity Loyalty Brand Programs Perceptions Marketing Actions Drive Each of These © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Affinity Community Knowledge Building Marketing Actions Drive Each of These Page 31 Driving Customer Equity Customer Equity Value Equity Quality Price Convenience Technology Decisions Drive Each of These Brand Equity Brand Awareness Brand Ethics Relationship Equity Loyalty Brand Perceptions Programs Technology Decisions Drive Each of These © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Affinity Community Knowledge Building Technology Decisions Drive Each of These Page 32 Defining the Opportunity • Focus on your most important customers. • Understand the value you bring to the supply chain. • Focus IT innovation on: – helping your target customers achieve supply chain success, – improving performance across the supply chain, and – doing both at a reasonable profit. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 33 The Uncertainty Framework Low Demand Uncertainty High Demand Uncertainty Low Supply Uncertainty Grocery, basic apparel, food, oil and gas (Walmart, Barilla, Case) Fashion apparel, computers, pop music (Dell, HP, Benetton, Sports Obermeyer) High Supply Uncertainty Hydro-electric power, some food produce (Frito-Lay, Coors) Telecom, high-end computers, semiconductors Source: Hau L. Lee, 2002 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 34 The Uncertainty Framework Low Demand Uncertainty High Demand Uncertainty Low Supply Uncertainty Efficient Responsive High Supply Uncertainty Risk Hedging Agile Source: Hau L. Lee, 2002 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 35 The Uncertainty Framework Low Demand Uncertainty Low Supply Uncertainty High Supply Uncertainty High Demand Uncertainty Efficiency – Information Sharing and coordination, eliminate bullwhip effect, economies of scale, manufacturing efficiency, efficient logistics systems Responsive – Build to order, mass customization, order accuracy, demand information, customer linking, postponement, cycle time reduction Risk Hedging – Information sharing, involving suppliers in product development and life cycle management, integration, upstream inventory positioning, hubs, multiple sources, risk pooling, SC visibility and event management Agile – Responsive and flexible to customer needs, hedging supply uncertainties, tight linkages with suppliers, flexible supplier contracts, Cisco e-hubs for multiple levels of suppliers (merge in-transit) Source: Hau L. Lee, 2002 © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 36 Defining the Opportunity • Focus on your most important customers. • Understand the value you bring to their supply chains. • Focus IT innovation on: – helping your target customers achieve supply chain success, – improving relationships and performance across the supply chain, and – doing both at a reasonable profit. © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 37 Keys to Supply Chain Success © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 38 Keys to Supply Chain Success Collaboration Optimization Visibility Connectivity Flexibility* Speed Execution “Connectivity: Enabling Visibility in the Adaptive Supply Chain,” Year 2004 Report on Trends and Issues in Logistics and Transportation, Capgemini, Microsoft, CRST Logistics, University of Tennessee © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 39 Integrated Technology Infrastructure Connectivity, Visibility, and Collaboration Managing the Interface Planning & Execution Decision Support Systems Ecommerce, CPFR, CRM, CTM, SRM Optimization Modeling, Planning & Analytics Information ERP Systems Data Internet, Inranet, EDI, RF, Barcoding © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Integrated Transaction Management System Connectivity and Data Interchange Page 40 Building Flexibility - The “Lego” Model • Synchronized supply chain responses • Rapid redeployment of assets • Quickly shift source of supply • Standardization – Data – Business Processes © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 41 In Summary © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 42 Keys to Making Technology a Competitive Weapon • Adopt a customer focus – Identify most valuable customers – Differentiate offering to support objectives of target segments – Focus first on business processes – Understand what the technology will and will not do – Understand what you must do to use the technology effectively – Make decisions based on what value the technology will deliver © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 43 Keys to Making Technology a Competitive Weapon • Improve relationships and performance across the supply chain – Make it easy for customers to do business with you – Provide supply chain visibility with timely exchange of relevant data and information – Develop an integrated technology infrastructure that supports supply chain success © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Managing the Handoffs Page 44 Keys to Making Technology a Competitive Weapon • Do it profitably – Understand profitability of customers, products, and services and manage the mix – Pursue technology strategy in support of your business strategy – Manage internal efficiencies well © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 45 From a transportation perspective, what are the greatest opportunities and barriers to using technology as a competitive weapon? OPERATIONAL TACTICAL STRATEGIC Barriers DemandOpportunitiesUnavoidable Customer facing 1. 2. Supply3. 1. 2. 3. 1. 2. 3. 1. 2. 3. Internal © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 46 Questions to Ponder • Can technology be used as a competitive weapon? • Is there one answer to this question? • If the answer is no, how should technology be managed? © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 47 Discussion? © TCU Supply and Value Chain Center - 2004, All Rights Reserved, 11.10.04 Technology as a Competitive Weapon in the Supply Chain Page 48