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"Supply chains that support and reinforce corporate competitive strategy are much more powerful drivers of success than those that focus narrowly on short-term gains such as cost savings," says Larry Lapide, director of research at the Massachusetts Institute of Technology's Center for Transportation & Logistics. "It follows, then, that the way a supply chain is managed should be in sync with the organization's strategic objectives."
Lapide's team of researchers and a score of supply chain practitioners established this principle while studying how supply chains should be designed as part of a multi-year project called Supply Chain 2020.
"Leading companies such as Wal-Mart, Toyota, and Dell owe much of their success to supply chains honed to fit their business models," says Lapide.
MIT is certainly not the only group to conclude that aligning corporate strategy with supply chain operations is fundamental to competitive success. According to Douglas A. Engel, vice chairman and U.S. manufacturing industry leader for Deloitte & Touche USA LLP, a handful of successful companies in his firm's Global Benchmarking Study of 800 manufacturers worldwide had become "complexity masters" by synchronizing overall business strategy with execution. These companies generated up to 73 percent higher profits, higher growth and better shareholder returns than the rest of the companies studied.
"Complexity masters take a holistic view of their business strategy and align the organization-including the supply chain-to execute across that strategy," says Engel. "There is no compromise. Any other approach results in an organization that is constantly in conflict with itself."
While high-profile corporate giants like Wal-Mart and Toyota are great examples of this holistic approach, they are not the only ones that have built their competitive advantage on the strategic alignment principle. Consider D-M-E, a mid-market provider of mold tooling and supplies for the plastics die casting and metal stamping industries with annual revenues in excess of $150m. This Madison Heights, Mich.-based manufacturer is a wholly owned subsidiary of Cincinnati-based Milacron, a publicly traded $800m diversified manufacturing corporation.
According to D-M-E President David Lawrence, his company's corporate strategy is very simple: To be the essential resource to its customers in the plastics and die casting industry.
"We serve our customers every step of the way from the first call until the product is in production at the customer's location," he says.
This high-service strategy requires all supply chain operations being totally aligned to meet customer requirements anywhere in the world. Like most manufacturing supply chains, it includes planning, materials sourcing, engineering design and manufacturing, distribution and logistics. D-M-E's supply chain also includes a large service component.
"We have many highly engineered products that require a great deal of consulting and applied technology," says Lawrence. "We also have many basic commodity products and aftermarket supplies, so we can serve our customers' total needs."
Mold tooling technology is a $3bn worldwide industry and includes about 400 competitors. Half of the market today is in Asia, while the remainder is divided between North America and Europe. D-M-E is among the top three or four in every major market.
"The industry is in the midst of many changes, primarily because of the rapid rise of the economies of China and India and Eastern Europe," says Lawrence. "Because we have established a global footprint, we are competitive in every important market."
D-M-E has 12 manufacturing locations worldwide and 14 distribution locations in North America. Globally, D-M-E has wholly owned subsidiaries and joint ventures in Canada, South America, Europe, Japan, Singapore, China, Australia and India. Its operating model is to manufacture custom products and standard products, as well as to outsource production of commodity products. It directly serves more than 20,000 customers in 60 countries.
Because of its range of products, a critical operational decision for D-M-E is whether to manufacture or source a product from an outside supplier. The decision is based entirely on the customer's service requirement, not customer location. D-M-E globally manufactures all custom products that require applied engineering expertise. For most other products, D-M-E either outsources the manufacture or procures the product from suppliers. Where a customer has a high speed-to-market requirement, D-M-E will manufacture even the most standard products.
"We can bring a product faster than anyone in the industry," says Lawrence.
The global nature of the mold technology industry has required D-M-E to develop a large number of product suppliers throughout North and South America, Western and Eastern Europe, Russia, China, India and Thailand. For customers in India and China, sourcing tends to be in those countries.
Partnerships are important parts of this global strategy. For example, D-M-E recently formed an exclusive corporate partnership agreement with Brazil-based Polimold Industrial, S.A., Latin America's largest provider of mold bases. The partnership goes beyond distribution. The companies are combining engineering, support and product capabilities to offer an expanded range of products that reduce cycle time, drive down costs and improve manufacturing efficiencies. The D-M-E/Polimold partnership allows for products developed by one company to be manufactured by the other.
Eastern Europe is growing in importance as a point of supply. Businesses in Eastern Europe that used to be state-owned and primarily serving East Bloc military and aerospace customers are now private companies that are eager to serve global commercial customers.
"Product and prices coming out of Russia and former East Bloc countries are extremely competitive," says Lawrence. "Their capabilities have created a market for them. In Asia, it is the opposite. The demand has created the capability."
Products are managed on a global basis. Each product is managed centrally from the part of the world where it is strongest. For example, D-M-E has developed so-called hot-runner molding components for plastic products that eliminates most waste during the molding process. That product is sold all over the world but it is strongest in North America, so product management resides there for that product. Product managers elsewhere in the world work with the North American business manager to further develop the product and to find global sources that meet quality and cost parameters.
According to Lawrence, the company's high-service strategy is key to its success because its customers frequently need fast turnaround on orders. Mold-based products change very quickly, so D-M-E customers have to respond their customers' ever-changing requirements. There is also the planning factor.
"Much of our success is based on the fact that many of our customers are bad planners," says Lawrence. "A slogan we have about our customers is that they 'want what they want when they want it.' We have built the organization supporting that concept."
D-M-E has designed its supply chain to make the process seamless, from the time a customer calls or hits its web site, until the time the product is in their plant. Its quality measurement is not focused just on the product but on the quality of the whole customer experience. That focus has enabled D-M-E to support its basic business strategy of being the essential source for its customers. If a customer just wants a standard product, but right away, D-M-E can ship it the same day for next-day delivery. Depending on the customer location, D-M-E can even make it available the same day.
"We take away their pain," says Lawrence.
For those who need a highly engineered product to meet their customers' needs, D-M-E has a technical center manned by applications engineers who can provide specifications and costs, as well as actual product design. This tech support is a critical part of the supply chain strategy.
"We help our customers compete better in their marketplace," says Lawrence. "We can show a customer how a particular part will react in a mold. We can do flow and stress analysis on a part, so they can optimize their molding process. It is all part of being the essential resource."
MIT, Deloitte and many other management experts have proven that no company can truly align its business strategy with its supply chain without systems and processes that allow operational visibility among all departments, facilities, suppliers, customers and partners.
For D-M-E, the tool that allows it to align its operations to its high-service strategy is its Enterprise One enterprise resource planning (ERP) system from J.D. Edwards (now owned by Oracle). Besides the usual internal planning capabilities, the Enterprise One system links D-M-E with its whole supply chain.
"This system has given us a whole new web-based capability that we are sharing with our customers, our suppliers and our partners around the world," says Lawrence. "Customers have immediate access to our information. Suppliers can directly inquire on sales history and see market trends."
Suppliers can monitor inventory levels for specific products in D-M-E's warehouses using the Enterprise One system. Rather than wait for purchase orders, suppliers can replenish automatically. Customers can check order, shipping and transportation status over the web because the system is linked to D-M-E's automated warehouse management systems.
The sales and order processing are also integrated into the system. D-M-E sells directly to customers. Telemarketing has been the traditional customer interface, but its growing web-based capabilities are becoming more important. Besides a detailed product catalog, the company web site includes a library of computer-aided design files and other downloads. Customers can order direct and track those orders.
"As the essential resource for our customer every step of the way we want our operating model working from the first customer contact," says Lawrence.
To measure how well companies truly align their supply chain operations with the business's competitive strategy, MIT determined that a company can have three possible objectives that it can measure itself against: customer response that assesses the performance of the customer-facing operations; cost and efficiency that focuses on income statement measurements; and asset utilization that measures effective use of facilities, inventories and other balance sheet items. To determine how focused a company is on its objectives, it can plot itself on a triangle with these three types of measurement at each corner. Since these three types of measurements tend to conflict, a company with aligned strategies will find itself toward one of the three corners. An unaligned company will try to be in the middle, but will inevitably be ineffective in trying to do all things well.
D-M-E has looked at this model and clearly finds itself very close to the customer-response corner of the triangle. It relentlessly tracks customer service metrics such as on-time delivery performance, back order levels, percent of orders filled by published cut-off times, as well as call answer time and wait time in its direct sales operations.
"This customer focus is at the core of our benchmarking process," says Lawrence. This is not to say that D-M-E ignores efficiency and asset utilization. Factories and warehouses are measured by on-time performance. Inventories of build-to-stock items are monitored. The corporate office also has a focus on working capital and cash management by measuring the percentage of working capital to sales.
"We know we have to operate efficiently with an eye on working capital, but unless we focus on getting the customer what he needs when he needs it, the rest doesn't really matter."
In the course of studying many successful companies with excellent supply chains MIT's SC2020 project discovered a number of "time-independent immutable operating principles" that underly all supply chain best practices.
"While practices may change over time and across industries and between companies, the operating principles will not," says Lapide. While not consciously focusing on MIT's work, D-M-E developed its operational strategy on many of the principles MIT identified. For example:
Expand the sphere of influence up and down the supply chain: D-M-E has developed long-term relationships with its key suppliers, so it can engage them in the product development cycle. D-M-E taps into the special expertise of all suppliers by looking at how it can apply their technology to the molding industry and to D-M-E in particular.
"The suppliers' expertise and our ability to apply it to customer needs provide a win-win for everyone," says Lawrence.
As part of its strategy of making itself an essential resource, D-M-E makes itself available to customers for consulting, engineering, design and even testing of product before it is even made.
Increase transparency: D-M-E's web-enabled Enterprise One system makes it possible to share information with suppliers and customers. Suppliers can plan automatic replenishment to D-M-E based on real-time inventory information visible online in the company's ERP. D-M-E does not have to create purchase orders or releases that would create time lags.
Match supply and demand: D-M-E reduces lead times to optimize the sales and production cycle. Its components plants have reduced lead times by 80 percent by rigorously reducing lot size set-up time. "We have constantly reduced the lead time to the customer and our inventory over the past five years," says Lawrence. "Our hard work has paid off. We have now matched supply and customer demand."
Trade off inventory against cycle time: These trade-offs are very difficult for D-M-E because it has so many products, so many widely dispersed customers and so many orders that require rapid turnaround. One approach has been outsourcing in lower-cost countries while leveraging the capabilities of expedited transportation providers such as UPS, DHL and FedEx. In China, D-M-E has optimized its inventories by centralizing all product purchased in China into a logistics center in the Shenzen. That DC also handles product qualification and distribution to the rest of the world. "From a cycle time and inventory standpoint, this centralized approach is much more service and cost effective than shipping directly from every source," says Lawrence.
Use supply contracts: A constant challenge for a toolmaker like D-M-E is shortages of key materials such as specialty steels and metals such as cobalt. D-M-E has reached sole-sourcing contracts with several suppliers in exchange for guaranteed service on certain steel orders and for agreeing to warehouse materials on a consignment basis. The so-called "roll and hold" agreements allow D-M-E to have access to critical materials without actually owning it. "These materials become our safety stock," says Lawrence. "These long-term supply relationships have enabled us to adopt lean inventory techniques without having large quantities of material waiting to be used."
In MIT's model for supply chain excellence, an important element is the implementation of very specific tailored practices, rather than generic best practices, that support the operational performance of the supply chain. D-M-E has developed its own tailored practices that support its unique supply chain operations.
One such practice is called Quick Delivery Special (QDS) that allows customers to have a near-custom product, which they do not have in-house, while greatly reducing the normal lead time for such a special order. They depend on D-M-E to deliver a product on a very short time frame that is customized to exactly what they need. D-M-E has developed what it calls customized standards that customers can access on its web site. They can configure a product that is extremely close to a true custom product that they would normally make for their customers. D-M-E relies on its suppliers to work within the time frame the customer requires. It is a true example of supply chain collaboration. "We developed QDS because our customers find it increasingly difficult to get qualified mold makers," says Lawrence. "They need to use their most talented people more efficiently. We know how with our suppliers to meet a short lead time."
D-M-E has also modified the order entry routines in its ERP system to allow it to handle customer inquiries for inventory availability, multiple shipping locations and product options. If the customer is looking for a particular product that is rarely ordered and may be at a remote stocking point, D-M-E has improved the software to allow the customer to get even the most complex order confirmed and fulfilled in the required time frame. "Our competitors don't have this capability that supports our high service strategy," says Lawrence. "This tailored practice was developed by our inside people and our IT people working together to satisfy our customers."
According to Deloitte's Engel, one final element in aligning the organization for success is the role of top management in the supply chain.
"Just about every one of the successful complexity masters in our study had an executive level owner of the supply chain strategy," he says. "The leadership role is always a success factor."
At D-M-E, that leader is the company president, David Lawrence.
"I am an old operations guy who remembers all I learned sitting through many APICS meetings," says Lawrence. "I am very involved in our supply chain and operational strategies, and I make sure they are tightly aligned with our corporate goal of being our customers' essential resource. As the world flattens, supply chain strategy is hypercritical to our global success."
Why is Strategic Supply Chain Alignment So Hard?
If companies with supply chain operations tightly aligned with business strategy are more successful, why do so few actually try to implement this holistic alignment?
"Supply chain professionals are often too busy with day-to-day demands to worry about big-picture issues such as strategy alignment," explains Larry Lapide, research director at the Massachusetts Institute of Technology's Center for Transportation & Logistics, which has studied what makes supply chain excellence in a project called Supply Chain 2020. "Moreover, they may not be intimately familiar with the company's strategic course. The goalposts shift with major changes such as mergers and acquisitions, or the latest top-level thinking may not have filtered down through the ranks."
As part of the multi-year SC2020 project, the MIT center took a detailed look at how supply chains are designed to meet specific market challenges in nine industries. The project profiled 21 companies to investigate the linkages between corporate strategies, operating models, and business practices. The research pinpointed four key elements of supply chains that excel in this supportive role; in other words, supply chains that have achieved excellence.
1. Supports and enhances a company's competitive business strategy
2. Leverages a supply chain operating model to sustain competitive advantage
3. Executes well against a balanced set of competitive operational performance objectives
4. Concentrates on a select group of tailored business practices that reinforce each other to support the operating model, and are the best available to meet the organization's operational objectives.
So how can companies get on the right track to a workable alignment strategy?
"Take the holistic approach," says Douglas A. Engel, vice chairman and U.S. manufacturing industry leader for Deloitte & Touche USA LLP, which conducted a Global Benchmarking Study of 800 manufacturers worldwide to see what makes a few companies successful "complexity masters."
"By holistic, I mean there is strategic and tactical alignment across the organization, so engineering and design and innovation seed the supply chain processes."
For companies that are already good and want to be great, Engel says that this holistic approach is the only path. For companies that are not so good, he says it is easy to find performance improvements in functional areas. Very quickly, however, this functional approach will result in sub-optimization where improvement in one area will result in poorer performance in another, and probably for the entire organization.
"We call this paradox number one," says Engel.
While Engel says there are few shortcuts to becoming a complexity master that has truly optimized its entire global enterprise, he points to three key enablers:
Visibility-Access to critical information regarding product, customer service and manufacturing costs, customer and product profitability, and other vital signs. More than 90 percent of companies researched were not fully satisfied with their visibility of critical information necessary to achieve global optimization;
Technology-An integrated and flexible technology infrastructure allows companies to gain visibility and dynamically support changes in the network structure; and,
Top Management Support-The vast majority of those manufacturers that are successfully optimizing their networks in a holistic fashion have one executive in charge of the overall supply chain. Conversely, only 40 to 60 percent of other groups (the majority of companies studied) have one leader at the helm.
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