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There is one great irony about supply chain management. While it is supposed to be about improving visibility into corporate operations, most companies stubbornly see only what they want to see and ignore anything too disturbing.
For example, Levi Strauss & Co. had the hottest brand in the apparel industry during the 1980s. Worldwide sales to retail chains were so strong, demand literally could not be met. While Levi Strauss saw this brand-driven demand as a sign of ever-increasing sales strength, its retailers saw only lost sales at the counter. Rather than rely on the problematic Levi's supply chain, retailers quickly turned to private labels. The jeans industry changed over night. Despite its legendary brand, Levi Strauss lost market share to other apparel makers that to this day has not been regained.
Today, companies searching for solutions to their own supply chain problems look for answers among so-called best practices exhibited by successful companies. For best practices in inventory and supplier management, companies look at Dell Computers, the world's leading low-cost provider of personal computers. For vendor collaboration and technology-driven logistics, companies seek to emulate Wal-Mart Stores, the world's largest retailer. For lean manufacturing, there is no better example of best practices than Toyota Motors.
Unfortunately, replication of such best practices is very unlikely to happen.
"There is no such thing as a best practice," says Larry Lapide, research director at the Massachusetts Institute of Technology Center for Transportation & Logistics. "Best connotes the most superior in all cases, but best practices only work under certain business conditions and industries."
He says that companies need to look deeply within their own business operations and strategies, not at some other company's success. For example, Lapide points out that Dell's direct-selling, build-to-order model does not directly apply to brick-and-mortar retail businesses. Indeed, they do not even apply to all segments of the computer hardware business.
"In supplying sophisticated high-end computer servers to large businesses that operate global and complex technology networks, IBM's service-intensive supply chain works better," says Lapide.
This insight is just one of many that Lapide has discovered in his role as project manager of Supply Chain 2020, which is a multiyear research effort initiated by MIT and Spain's Zaragoza University to identify and analyze the factors that are critical to the success of supply chains as far into the future as the year 2020. According to Lapide, the designation Supply Chain 2020 has a dual, vision-related meaning.
"We are seeking a clear vision of what constitutes supply chain excellence today," he says. "We also are looking into the future at various different geopolitical and economic scenarios that companies and their supply chains will have to cope with by the year 2020."
Supply Chain Principles
Based on its research of actual company supply chains and its future scenario generation, Lapide says that the ultimate goal of Supply Chain 2020 is to discover fundamental supply chain principles that will show organizations what actions they should take now to help ensure supply chain excellence regardless of what the future holds.
"Industry has spent the last decade trying to integrate what they perceive as supply chain management concepts into their business strategies," says Lapide. "If industry expects to reap substantial benefits from these concepts, companies must move beyond a fixation on best practices. The world is undergoing rapid change and companies need process innovation based on sound underlying principles to stay ahead of their competitors."
Although the project is being led by university faculty, staffers, and students at MIT and Zaragoza, it is not just an academic exercise. Forty-six global companies based in the U.S. and Europe are concerned enough about these issues to have their senior supply chain executives participate as advisors on the project. More than 20 of these companies consented to a detailed analysis of their supply chains to see how well they supported corporate goals, and to what degree they exhibited excellence.
While excellence is a highly subjective term, the researchers worked on the premise that an excellent supply chain must do four things:
• Support, enhance, and be an integral part of a company's competitive business strategy
• Leverage a distinctive supply chain operating model to sustain competitiveness
• Execute well against a balanced set of operational performance objectives, and
• Focus on a limited number of business practices that reinforce each other to support the operating model and best achieve operational objectives.
According to Lapide, all of the supply chains studied that proved to be excellent had one thing in common. Each had aligned its business strategies, operations and performance metrics, and then devised tailored supply chain practices that supported these business elements. The performance objectives and metrics focused as much as possible on one of three goals: efficiency, asset utilization or customer response.
"Dell has a great supply chain because its efficiency in dealing with inventory and suppliers allows it to provide value to its customers in the form of low-cost PCs," says Lapide. "But Dell has poor customer responsiveness when it comes to after-sale service for these PCs. It doesn't matter. Dell is not about customer responsiveness or about asset utilization. It is a myth that companies have to do all things well to have excellent supply chains. In fact, it is impossible to do all things well."
Wal-Mart has become the world's largest retailer because it has aligned its supply chain operations and practices with its operating model and its business strategy of providing everyday low pricing for cost-conscious customers. Its operating model is selling through many large-format stores carrying a wide variety of products that are replenished by suppliers through company distribution centers. Everything about Wal-Mart is centered on efficiency, and its tailored supply chain practices reflect this focus:
• Vendor collaboration to include vendor managed inventory
• Differentiated flow logistics for products depending on their characteristics, including extensive cross-docking and direct store delivery for perishables and hard-to-store items, and
• Network design incorporating large-sized distribution centers and short-haul private fleets for economies of scale.
These tailored practices have made Wal-Mart successful, but they are not simply transferable to another company, even another large retailer. What should be transferable are underlying principles of logistics and supply chain efficiency that Wal-Mart has built its practices upon.
"An important part of our research is finding these fundamental principles, so companies can leverage them to devise their own tailored practices that meet their corporate objectives," says Lapide.
To find these underlying principles, Lapide's research starts with the tailored practices, and then digs down to find the underlying operating principles and finally down to a fundamental principle.
The Limited Brands' Victoria's Secret division makes the point. According to Lapide, Victoria's Secret has separate supply chains for its two types of products: basic items, such as socks, and fashion items, such as its high-end lingerie. The objective of the high-fashion supply chain is to have them on the shelf to maximize sales of short-lived high-margin items. The goal for the basic items is to make them available at the lowest possible cost.
Because the goals of these two supply chains are different, their respective tailored practices also differ significantly, but they stem from the same principle of trading off of cycle time against inventory. The longer the cycle time, the more inventory must be stocked. This operating principle is derived from a fundamental principle known as Little's Law: the average number of items in a queuing system is equal to the average arrival rate of items to that system, times the average time spent in that system.
In the case of fashion items for Victoria's Secret, the cost of holding inventory on a ship for 30 days is prohibitive, not because of the holding cost, but because of the cost of lost sales if short-lived items are not in the store. That is why the Limited ships these items by air regardless of the cost. The profit from capturing high margins for high fashion more than makes up for airfreight. In the case of basic items such as socks, there are no lost sales from holding inventory on a slow, but cost-efficient boat because the same items are in a constant and predictable replenishment flow. The same low margins will apply even if the item takes a month to get in the store.
"The tailored practices are exactly the opposite, but they both leverage the operating principle of cycle time versus inventory, which in turn is supported by Little's Law," says Lapide.
For the high-tech networking equipment company, Cisco, one of its key tailored practices is to guarantee customers a delivery time, but one allows lead times, usually at least 21 days. Cisco is focused on efficiency, so having this large service window allows the company to relax delivery constraints in its globally distributed supply chain. An entire order for a networking project may consist of 50 different items coming from many different plants and stocking points. Their challenge is to have everything arrive at the customer site at the same time, and do it efficiently. No doubt the delivery window could probably be much shorter for some orders, but by relaxing the delivery constraint Cisco is better able to optimize its transportation and logistics to achieve low-cost efficiency.
Lapide explains that "constraint relaxation" is an operating principle that is based on a fundamental law of optimization that says the tighter the constraints applied to a solution, the less opportunity there is to optimize that solution.
Constraint relaxation can manifest itself in many ways such as breaking down department and company silos, changing a critical assumption, or shortening a cycle time to get rid of a major bottleneck. Companies that adopt such practices are converting the constraining factors into decisions that need to be made rather than just worked around. Some examples of these from the 21 Supply Chain 2020 case studies include:
• Toyota's well-publicized single-minute-die-changing techniques that drastically reduced die-change cycle times from one-day to three minutes, allowing it to economically run small batches-adding competitive flexibility to its manufacturing operations.
• Dell's demand-shaping processes by which it varies prices and the products promoted on its website on a daily basis to better match supply and demand. By pricing and marketing based on dynamic sourcing capabilities, Dell has avoided the organizational boundaries that often sit between sales and operations organizations at many companies.
• Similarly, Gillette created the Global Value Chain group, a horizontal organization to better plan supply and demand across functions, thereby eliminating intra-company silos.
• Procter &Gamble's collaborative demand management processes by which it shares information with its retail customers to streamline inventory replenishment and helps to tear down inter-company boundaries.
"We expect to uncover at least seven to 10 fundamental principles that can support 25 or 30 operating principles, which in turn are leveraged into many tailored practices and process innovations," says Lapide. "It is the principles that need to be leveraged over time and across industries to develop the innovative practices that companies need to focus on to support their competitive strategies, operating models, and operational objectives. These principles are timeless. The practices can be adapted as the world around us changes."
In fact, the need for companies to understand permanent principles to help them adjust their supply chain practices in a changing world has led the Supply Chain 2020 project to consider different scenarios for the future. Lapide says that his team has analyzed at least 60 studies and reports about the future of supply chain management. The vast majority of them assume a rosy scenario-one that assumes the future will be like today's world, only better. The consensus is that world will be highly connected, boundaries will open, trade will be free, information will be shared, collaboration will blossom and supply chains will become truly seamless.
Scenarios for the Future
"Everyone says the world is moving in this direction, but our research suggests that this view of the future is utopian and entirely inconsistent with business reality," says Lapide.
For example, a number of manufacturers of electronics, athletic shoes and other consumer products that have outsourced their design, sourcing and production to low-cost Chinese suppliers have seen these "partners" turn into direct competitors overnight.
"This outsource trap is of growing concern to most companies," says Lapide. "Today, competition is largely built on information-based strategies. Knowledge is often a company's most valuable asset, so sharing information throughout the supply chain can be very dangerous."
And then there is the threat of terrorism causing massive supply chain disruptions; growing calls for trade protectionism in many countries; creeping economic instability; inflationary pressures on energy and other key commodities; and many other looming threats to supply chain stability.
"I hope the optimists' views of the future is the right one, but I would not want to bet my company on this assumption," says Lapide. "Companies must be prepared to deal with different futures.
"Every company assumes that outsourcing to China is a best practice because it lowers sourcing and manufacturing costs," Lapide continues. "But what would happen if tomorrow China invaded Taiwan? The political turmoil and possible war would suddenly make outsourcing to China a very bad practice. Many of the world's largest companies would be in big trouble."
Lapide suggests various possible scenarios for describing the world that could force dramatic change on supply chains by 2020:
1. Volatility in oil prices: Non-OPEC countries will be at peak production in 2020, and OPEC countries shortly thereafter. For oil production to rise, costs will increase and become more volatile. Prices could fluctuate between $200 and $400 per barrel. Offshoring halfway around the world will not make economic sense for most items. How will supply chains change?
2. Global economic shift to China, India and Russia: These huge countries are likely to become large consumer markets as their economies grow. The West will no longer be the economic or cultural force dominating global society. How will supply chains shift to provide the goods that these markets demand? What will this mean to the "old economies"?
3. Military conflict: China could use its military force to take over Taiwan or perhaps dominate other parts of Asia. All the investment that companies have made in China would be gone. How would companies rebuild their global networks with new sourcing or low-cost manufacturing?
4. Trading blocks: For any number of political or economic reasons, countries could join to create closed, protectionist blocks. Trade beyond these blocks would be largely excluded. How would supply chain networks be redrawn?
5. Knowledge workers: The success of many companies, especially in high-tech, has been built by knowledge workers that have been recruited from China and India to the U.S. and Western Europe. But with advances in technology, information sharing and outsourcing, there is no reason for these knowledge workers to leave their home country. If these people innovate in their homeland, rather than in the West, what impact will that have on supply chains?
The Supply Chain 2020 team is generating dozens of possible scenarios. Lapide emphasizes that none of these is any more likely than the rosy future that most companies seem to assume. However, he hopes this exercise will make companies realize that there are multiple future scenarios and that long-term decisions must be based on consideration of all the possible risks.
"If I am making a decision for operating or sourcing in China that will obligate me nearly 100 percent for 15 years, should I really be doing that?" asks Lapide. "The electronics industry seems to be doing this. Is that good risk management for themselves or for the rest of the world? If China becomes the global leader in advanced electronics, they will eventually have the best weapons. Maybe outsourcing everything in China is not such a good idea."
Lapide insists that Supply Chain 2020 is not about predicting the future. The researchers will generate a number of possible scenarios for the purpose of seeing how they would impact the world's supply chains. The final output of Supply Chain 2020 will be an analysis of these future scenarios and their impacts overlaid on the supply principles that are now being developed.
"We want to help companies break out of their complacency so they can prepare themselves for whatever the future may hold," says Lapide. "Yogi Berra said it best: 'The future ain't what it used to be.'"
How 9 Global Companies Align Their Strategies, Operations, Metrics and Tailored Practices (PDF)
Supply Chain 2020 is a multiyear research program operated in the U.S. by MIT's Center for Transportation and Logistics. Its goal is to identify and analyze the factors that are critical to the success of future supply chains. More information is available at:
The research director for Supply Chain 2020 is Larry Lapide. He can be reached at: firstname.lastname@example.org
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