Executive Briefings

In Pursuit of Supply-chain Excellence

Supply Chain 2020, a project of the Center for Transportation and Logistics at MIT, creates a framework for determining what makes a supply chain excellent now, and in the future.

For at least a decade, industry gurus have told us supply-chain excellence is the key to gaining competitive advantage. Unfortunately, these same experts have neglected to tell us what constitutes an excellent supply chain, let alone how to achieve such excellence. As a result, companies have simultaneously been trying to minimize costs, increase customer responsiveness, and maximize asset utilization, all while emulating the latest best practice hyped by industry consultants.

Such efforts don't always work, according to Larry Lapide, research director for the Massachusetts Institute of Technology Center for Transportation and Logistics (MIT CTL), mainly because there may be little connection between these companies' competitive strategies and their supply-chain processes, operations and practices.

"Supply chains are as unique as individuals," he says. "Neither can be all things to all people."

Lapide also has a problem with most ranked lists of "top supply chains" because they tend to over-simplify the appropriate metrics or pick the wrong metrics altogether. For example, Lapide says that a short-term connection between a company's financial performance and the quality of its supply chain is unlikely.

"Cisco had fantastic financial results a few years ago and then fell on difficult times when the internet bubble burst and demand plummeted," he says. "Their supply chain was excellent when they were flying high, and it was still excellent when their financial results fell. To believe otherwise would mean their supply-chain's excellence changes quarter to quarter!"

Nor is any single set of metrics, such as low-cost or high-service, a reliable proxy for supply-chain performance. Lapide says that a company's strategic positions-whether it's customer intimacy, operational efficiency or product superiority-require operating against a balanced set of different metrics that align to the business strategy.

"Excellent supply chains support the strategic imperatives of an organization needed to compete effectively," he says.

For example, a customer-focused strategy for a company such as Best Buy requires relative high inventory and significant costs for customer interaction. That strategy is very different from a cost-minimizing model such as Wal-Mart's. Both supply chains are excellent, but competitive strategy will determine the operational metrics that are appropriate for any given organization.

Defining exactly what constitutes an excellent supply chain is the first objective of a three-year project that Lapide now heads up. Called Supply Chain 2020, the project's ultimate goal is to look into the future of supply-chain management to help companies prepare for the events and trends that are likely to impact supply chains in the next 10 to 15 years. For example, what will happen to global supply chains if gradual fuel price increases give way to skyrocketing costs owing to oil shortages? How might a consumer goods company design its supply chain if, by law, all packaging had to be shipped back to a recycling center? How might an apparel maker or consumer electronics firm deal with a world that has no low-cost producer countries such as China or the Philippines? The 2020 project will be looking at such scenarios over the next few years to help companies prepare for them, should they come to pass.

Supply Chain 2020 is actually a project initiated by the MIT-Zaragoza International Logistics Program. The global project involves dozens of faculty, research staff and students at MIT and other institutions around the world. Two groups of supply-chain executives from leading companies from around the world keep the project firmly grounded in practicality. Currently, the largely U.S.-based Industry Advisory Council (IAC) consists of 25 members, and the European Advisory Council (EAC) includes 15 members.

"To help understand what will make supply chains excellent in 2020, we need to understand what makes them excellent today," says Lapide. "The 2020 research does much more than just document so-called best practices, because council members already have that information."

Instead, the project is also mapping and modeling the relationship between the current range of practices and the current range of underlying business and economic factors that drive the selection among those practices.

Characteristics of Excellence
In the six months or so that Supply Chain 2020 has been under way, the IAC and EAC have concluded that excellent supply chains have four characteristics:

1) They both support and enhance the strategy of the business, by being an integral part of the overall design of the business.

2) Excellent supply chains are based on a complementary, not necessarily unique, operating model that creates competitive advantage.

3) They emphasize high-performance execution, where performance is measured by a balanced set of business-relevant objectives or metrics.

4) Excellent supply chains leverage a tailored set of business practices. Specifically, strategy, operating models and operational objectives are interrelated and mutually supportive. The tailored set of business practices, a subset of all possible business practices, are chosen to reinforce each other and for their ability to support the strategy, operating model and objectives of the organization. The use of the term tailored practices, rather than best practices, reflects the alignment of the practices to holistically fit the context of the organization.

Thus, an excellent supply chain will almost always be found in companies that have a clear business strategy enabled by a complementary operating model aimed at achieving a balanced set of operating objectives. At a more detailed level, the operating model comprises a tailored set of business practices and the right enabling capabilities. See Figure One (PDF).

For example, Dell is universally viewed as having an excellent supply chain, but few people can explain why it's good other than to point to their innovative practices and financial performance. Lapide sees the reasons very clearly. Dell's strategy is to sell good computer equipment at a good price. To keep the price low, they don't use traditional retail. They sell direct via phone and internet to customers who primarily know what they want and don't need a lot of handholding. Dell supports this strategy with the build-to-order model driven by operating objectives, including low cost and price, availability of product, fast and accurate fulfillment, etc.

Dell's business practices include supplier consigned inventory that Dell does not own but is just close to the plant. Dell just assembles orders and sends them out. The company is able to minimize inventory and maintain a great cash-to-cash cycle. They work tightly with suppliers to help them decide what items to hold in their inventory. Dell knows what is in the supplier inventory, so if an item is out of stock, they will not offer it on the web. If there is an excess of an item, Dell will lower the price to drive customers to what they have.

"Dell has tightly fit together their metrics, their unique operating model, their business strategy and their highly-crafted tailored business practices," says Lapide. "That is how they compete so well with HP, IBM and everyone else."

Lapide points out that IBM, which competes with Dell in certain markets, also has an excellent supply chain, but it's completely different from Dell's. IBM's strategy is to support all of its customers' technology needs. They are a diversified technology company providing both products and services.

"IBM assembles very complex systems for their customers and then supports them over their life," says Lapide. "IBM's supply-chain metrics are more focused on customer responsiveness in a more encompassing way and over the long haul."

Operational Objectives
The current model that the 2020 project is using to determine supply-chain excellence is based on how well a company achieves its operational objectives. These objectives codify what is important to the company. They are the metrics that the company relies upon to drive its supply-chain performance. Lapide puts these operational objectives into three separate groups that support distinctly different business strategies and operating models.

1) Customer Response: Operational objectives such as order cycle time, perfect order fulfillment rates, quality, and new product time-to-market are all objectives that assess the external, customer-facing side of the company. Companies in industries with high-margin, short-lifecycle products often emphasize this set of objectives. These industries include pharmaceuticals, fashion apparel, toys, and computers.

2) Efficiency Objectives: These operational objectives are internal measures that can assess how well the company converts inputs into output. Examples include labor productivity, labor content, supply-chain costs, wastage, etc. Cost-conscious companies such as food and beverage, consumer electronics, non-fashion retail, and industrial supplies often focus on these types of metrics.

3) Asset Utilization Objectives: These operational objectives are also internal measures, however, they focus instead on how effectively the company is leveraging its assets such as facilities, inventories and working capital (e.g., cash). Capital-intensive industries, for example, such as semiconductor fabrication, petrochemicals, and commodity materials (steel, paper, and coal) makers, all try to make the most of their plant and equipment with 24x7 operations.

These three groups can be represented graphically through a triangle-each group of objectives being a corner of the triangle. Companies can be mapped on this diagram according to the relative focus of their supply chains. See Figure Two (PDF). A capital-intensive company, such as a steel-maker, might reside in the "asset utilization" corner of the triangle. Companies that combine objectives would sit somewhere in the middle of the triangle. For example, an airline might sit halfway between "asset utilization" and "customer response" because it both requires substantial assets and emphasizes timely service.

Whether or not a company has an excellent supply chain goes one step beyond the mapping process. The company must employ tailored practices, technologies, and collaborative relationships that meet the metrics for its chosen operating objectives. In other words, it must execute very well, and execute consistently. If all of these factors align, the supply chain is excellent under this model.

As the 2020 Council members point out, this operational objectives model requires further clarification because large companies are likely to have multiple supply chains for different divisions, products and brands. The operational objectives will also vary. For example, the Borealis Group has a chemical plant in Abu Dubai that never shuts down, with asset-utilization as the primary operational objective. On the other hand, some other Borealis plants can be shut down when demand is low, and here the focus is on other objectives such as low cost. General Dynamics is a company that makes Gulfstream jets for business executives, armored tanks for the U.S Army, and nuclear submarines for the Navy. Each division calls for its own supply-chain design, with its own set of strategies and objectives driving it.

Products that have strong brand equity, price-insensitivity, and high profit margins need to be focused more around customer response goals, while price-sensitive, higher-volume brands need to be focused more on efficiency objectives because of competition and lower margins. In the automotive parts industry, there is a set of products with stable (predictable) demand for which operational objectives focus on providing a cheap and efficient supply chain. The unstable (unpredictable) parts, that are asset-intensive and subject to faster demand changes, need a flexible supply chain. Thus, companies often need to address different needs in supply-chain management, rather than building a one-for-all solution for different brands or products.

Operational objectives also evolve over time, according to Council members. For example over the history of Novartis, a company formed by the merger of two companies, the initial focus was on asset-utilization, then on customer service, and then on cost efficiencies. When first formed, Lucent focused a lot on customer response because of the high growth it was experiencing in high margin businesses, yet more recently it has a greater focus on asset-utilization, as exemplified in its outsourcing of manufacturing. As the business environment and a company's core competencies change over time, operational objectives change accordingly.

As competitive strategies evolve over time, operational objectives also change and are almost always unequally balanced. As corporate boards meet to alter business strategy and change priorities in a changing competitive climate, supply-chain objectives will also need to change-often placing a greater focus on one type of operational objective over the others.

So which companies have excellent supply chains? The Supply Chain 2020 project team has a long list of company names that it is researching across 10 different industries.

"We have over 20 researchers working with the Council members to look very closely at these supply chains and how they support the companies business strategies," says Lapide. "Frankly, we are far more interested in identifying the critical success factors that make a supply chain work well, rather than producing a list of top supply chains."

Although this supply-chain analysis is only one part of the 2020 project, Lapide is eager to share with the industry the models and framework his team is using to conduct its research.

"It is important to have our industry view supply-chain excellence in the right perspective," he says. "Supply-chain excellence is not just about one year's great service levels or financial performance. Real excellence is performance that supports the business strategy and makes the company competitive year after year."

MIT's Supply Chain 2020 project has provided GL&SCS with the framework for determining excellence and sources of information about companies worthy of consideration. Based on our own research and the criteria that MIT has provided, we have put together a list of excellent supply chains, based on how the companies' metrics, practices and execution support their business strategy and operating model.

The names of these companies, along with a description of their business strategies, metrics and practices are in the accompanying table. See Figure Three (PDF).

"The important take-away from this exercise must be to appreciate what it really takes to create an excellent supply chain," says Lapide.

For at least a decade, industry gurus have told us supply-chain excellence is the key to gaining competitive advantage. Unfortunately, these same experts have neglected to tell us what constitutes an excellent supply chain, let alone how to achieve such excellence. As a result, companies have simultaneously been trying to minimize costs, increase customer responsiveness, and maximize asset utilization, all while emulating the latest best practice hyped by industry consultants.

Such efforts don't always work, according to Larry Lapide, research director for the Massachusetts Institute of Technology Center for Transportation and Logistics (MIT CTL), mainly because there may be little connection between these companies' competitive strategies and their supply-chain processes, operations and practices.

"Supply chains are as unique as individuals," he says. "Neither can be all things to all people."

Lapide also has a problem with most ranked lists of "top supply chains" because they tend to over-simplify the appropriate metrics or pick the wrong metrics altogether. For example, Lapide says that a short-term connection between a company's financial performance and the quality of its supply chain is unlikely.

"Cisco had fantastic financial results a few years ago and then fell on difficult times when the internet bubble burst and demand plummeted," he says. "Their supply chain was excellent when they were flying high, and it was still excellent when their financial results fell. To believe otherwise would mean their supply-chain's excellence changes quarter to quarter!"

Nor is any single set of metrics, such as low-cost or high-service, a reliable proxy for supply-chain performance. Lapide says that a company's strategic positions-whether it's customer intimacy, operational efficiency or product superiority-require operating against a balanced set of different metrics that align to the business strategy.

"Excellent supply chains support the strategic imperatives of an organization needed to compete effectively," he says.

For example, a customer-focused strategy for a company such as Best Buy requires relative high inventory and significant costs for customer interaction. That strategy is very different from a cost-minimizing model such as Wal-Mart's. Both supply chains are excellent, but competitive strategy will determine the operational metrics that are appropriate for any given organization.

Defining exactly what constitutes an excellent supply chain is the first objective of a three-year project that Lapide now heads up. Called Supply Chain 2020, the project's ultimate goal is to look into the future of supply-chain management to help companies prepare for the events and trends that are likely to impact supply chains in the next 10 to 15 years. For example, what will happen to global supply chains if gradual fuel price increases give way to skyrocketing costs owing to oil shortages? How might a consumer goods company design its supply chain if, by law, all packaging had to be shipped back to a recycling center? How might an apparel maker or consumer electronics firm deal with a world that has no low-cost producer countries such as China or the Philippines? The 2020 project will be looking at such scenarios over the next few years to help companies prepare for them, should they come to pass.

Supply Chain 2020 is actually a project initiated by the MIT-Zaragoza International Logistics Program. The global project involves dozens of faculty, research staff and students at MIT and other institutions around the world. Two groups of supply-chain executives from leading companies from around the world keep the project firmly grounded in practicality. Currently, the largely U.S.-based Industry Advisory Council (IAC) consists of 25 members, and the European Advisory Council (EAC) includes 15 members.

"To help understand what will make supply chains excellent in 2020, we need to understand what makes them excellent today," says Lapide. "The 2020 research does much more than just document so-called best practices, because council members already have that information."

Instead, the project is also mapping and modeling the relationship between the current range of practices and the current range of underlying business and economic factors that drive the selection among those practices.

Characteristics of Excellence
In the six months or so that Supply Chain 2020 has been under way, the IAC and EAC have concluded that excellent supply chains have four characteristics:

1) They both support and enhance the strategy of the business, by being an integral part of the overall design of the business.

2) Excellent supply chains are based on a complementary, not necessarily unique, operating model that creates competitive advantage.

3) They emphasize high-performance execution, where performance is measured by a balanced set of business-relevant objectives or metrics.

4) Excellent supply chains leverage a tailored set of business practices. Specifically, strategy, operating models and operational objectives are interrelated and mutually supportive. The tailored set of business practices, a subset of all possible business practices, are chosen to reinforce each other and for their ability to support the strategy, operating model and objectives of the organization. The use of the term tailored practices, rather than best practices, reflects the alignment of the practices to holistically fit the context of the organization.

Thus, an excellent supply chain will almost always be found in companies that have a clear business strategy enabled by a complementary operating model aimed at achieving a balanced set of operating objectives. At a more detailed level, the operating model comprises a tailored set of business practices and the right enabling capabilities. See Figure One (PDF).

For example, Dell is universally viewed as having an excellent supply chain, but few people can explain why it's good other than to point to their innovative practices and financial performance. Lapide sees the reasons very clearly. Dell's strategy is to sell good computer equipment at a good price. To keep the price low, they don't use traditional retail. They sell direct via phone and internet to customers who primarily know what they want and don't need a lot of handholding. Dell supports this strategy with the build-to-order model driven by operating objectives, including low cost and price, availability of product, fast and accurate fulfillment, etc.

Dell's business practices include supplier consigned inventory that Dell does not own but is just close to the plant. Dell just assembles orders and sends them out. The company is able to minimize inventory and maintain a great cash-to-cash cycle. They work tightly with suppliers to help them decide what items to hold in their inventory. Dell knows what is in the supplier inventory, so if an item is out of stock, they will not offer it on the web. If there is an excess of an item, Dell will lower the price to drive customers to what they have.

"Dell has tightly fit together their metrics, their unique operating model, their business strategy and their highly-crafted tailored business practices," says Lapide. "That is how they compete so well with HP, IBM and everyone else."

Lapide points out that IBM, which competes with Dell in certain markets, also has an excellent supply chain, but it's completely different from Dell's. IBM's strategy is to support all of its customers' technology needs. They are a diversified technology company providing both products and services.

"IBM assembles very complex systems for their customers and then supports them over their life," says Lapide. "IBM's supply-chain metrics are more focused on customer responsiveness in a more encompassing way and over the long haul."

Operational Objectives
The current model that the 2020 project is using to determine supply-chain excellence is based on how well a company achieves its operational objectives. These objectives codify what is important to the company. They are the metrics that the company relies upon to drive its supply-chain performance. Lapide puts these operational objectives into three separate groups that support distinctly different business strategies and operating models.

1) Customer Response: Operational objectives such as order cycle time, perfect order fulfillment rates, quality, and new product time-to-market are all objectives that assess the external, customer-facing side of the company. Companies in industries with high-margin, short-lifecycle products often emphasize this set of objectives. These industries include pharmaceuticals, fashion apparel, toys, and computers.

2) Efficiency Objectives: These operational objectives are internal measures that can assess how well the company converts inputs into output. Examples include labor productivity, labor content, supply-chain costs, wastage, etc. Cost-conscious companies such as food and beverage, consumer electronics, non-fashion retail, and industrial supplies often focus on these types of metrics.

3) Asset Utilization Objectives: These operational objectives are also internal measures, however, they focus instead on how effectively the company is leveraging its assets such as facilities, inventories and working capital (e.g., cash). Capital-intensive industries, for example, such as semiconductor fabrication, petrochemicals, and commodity materials (steel, paper, and coal) makers, all try to make the most of their plant and equipment with 24x7 operations.

These three groups can be represented graphically through a triangle-each group of objectives being a corner of the triangle. Companies can be mapped on this diagram according to the relative focus of their supply chains. See Figure Two (PDF). A capital-intensive company, such as a steel-maker, might reside in the "asset utilization" corner of the triangle. Companies that combine objectives would sit somewhere in the middle of the triangle. For example, an airline might sit halfway between "asset utilization" and "customer response" because it both requires substantial assets and emphasizes timely service.

Whether or not a company has an excellent supply chain goes one step beyond the mapping process. The company must employ tailored practices, technologies, and collaborative relationships that meet the metrics for its chosen operating objectives. In other words, it must execute very well, and execute consistently. If all of these factors align, the supply chain is excellent under this model.

As the 2020 Council members point out, this operational objectives model requires further clarification because large companies are likely to have multiple supply chains for different divisions, products and brands. The operational objectives will also vary. For example, the Borealis Group has a chemical plant in Abu Dubai that never shuts down, with asset-utilization as the primary operational objective. On the other hand, some other Borealis plants can be shut down when demand is low, and here the focus is on other objectives such as low cost. General Dynamics is a company that makes Gulfstream jets for business executives, armored tanks for the U.S Army, and nuclear submarines for the Navy. Each division calls for its own supply-chain design, with its own set of strategies and objectives driving it.

Products that have strong brand equity, price-insensitivity, and high profit margins need to be focused more around customer response goals, while price-sensitive, higher-volume brands need to be focused more on efficiency objectives because of competition and lower margins. In the automotive parts industry, there is a set of products with stable (predictable) demand for which operational objectives focus on providing a cheap and efficient supply chain. The unstable (unpredictable) parts, that are asset-intensive and subject to faster demand changes, need a flexible supply chain. Thus, companies often need to address different needs in supply-chain management, rather than building a one-for-all solution for different brands or products.

Operational objectives also evolve over time, according to Council members. For example over the history of Novartis, a company formed by the merger of two companies, the initial focus was on asset-utilization, then on customer service, and then on cost efficiencies. When first formed, Lucent focused a lot on customer response because of the high growth it was experiencing in high margin businesses, yet more recently it has a greater focus on asset-utilization, as exemplified in its outsourcing of manufacturing. As the business environment and a company's core competencies change over time, operational objectives change accordingly.

As competitive strategies evolve over time, operational objectives also change and are almost always unequally balanced. As corporate boards meet to alter business strategy and change priorities in a changing competitive climate, supply-chain objectives will also need to change-often placing a greater focus on one type of operational objective over the others.

So which companies have excellent supply chains? The Supply Chain 2020 project team has a long list of company names that it is researching across 10 different industries.

"We have over 20 researchers working with the Council members to look very closely at these supply chains and how they support the companies business strategies," says Lapide. "Frankly, we are far more interested in identifying the critical success factors that make a supply chain work well, rather than producing a list of top supply chains."

Although this supply-chain analysis is only one part of the 2020 project, Lapide is eager to share with the industry the models and framework his team is using to conduct its research.

"It is important to have our industry view supply-chain excellence in the right perspective," he says. "Supply-chain excellence is not just about one year's great service levels or financial performance. Real excellence is performance that supports the business strategy and makes the company competitive year after year."

MIT's Supply Chain 2020 project has provided GL&SCS with the framework for determining excellence and sources of information about companies worthy of consideration. Based on our own research and the criteria that MIT has provided, we have put together a list of excellent supply chains, based on how the companies' metrics, practices and execution support their business strategy and operating model.

The names of these companies, along with a description of their business strategies, metrics and practices are in the accompanying table. See Figure Three (PDF).

"The important take-away from this exercise must be to appreciate what it really takes to create an excellent supply chain," says Lapide.