Making supply chain management work design implementation partnerships technology and profits

RICHARD JOHNSON, Ph.D., CPA, Professor of Accounting, Utah State University, Logan, Utah JOHN JORDAN, Ph.D., Principal, Consulting & Systems Integration, Computer Sci-ences Corporation,

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Work

Design, Implementation, Partnerships, Technology,

and Profits

Editor

James B Ayers

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Making supply chain management work : design, implementation, partnerships, technology, and profits / James B Ayers, editor

p cm — (Best practices series)

A collection of 57 articles compiled from Auerbach Publications’ Knowledgebase Includes bibliographical references and index.

ISBN 0-8493-1273-6 (alk paper)

1 Business logistics—Data processing 2 Industrial procurement—Data processing 3 Business networks—Communication systems 4 Industrial procurement— Computer network resources 5 Electronic commerce I Ayers, James B II Best practices series (Boca Raton, Fla.)

HD38.5 M35 2001

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Johnson City, Tennessee

ALEX N BEAVERS, JR., Chief Executive Officer, Thomson Industries, Port ington, New York

HOUSTON H CARR, Professor of Management, Auburn University, Auburn, Alabama

KAZEM CHAHARBAGHI, Faculty Member, Manufacturing Technology and tion Management, Cranfield University, Bedford, United Kingdom

Produc-STEVEN CHAN, IT Specialist, IBM Global Services

Michigan

TIM CHRISTMANN, Senior Consultant, Deloitte & Touche Consulting Group, onto, Ontario, Canada

ANDREW J CZUCHRY, AFG Industries Chair of Excellence, Business and

Technol-ogy and Professor of Management, East Tennessee State University,

Johnson City, Tennessee

TIM R.V DAVIS, Professor of Strategic Management and International

Busi-ness, Cleveland State University, Cleveland, Ohio

L.R DEJARNETT, Managing Director, The Lamar Group, Ranchos Palos Verdes,

California

DAWNA TRAVIS DEWIRE, Editor, Information Systems Management, and Faculty

Member, Babson College, Wellesley, Massachusetts

RIK DRUMMOND, Chief Executive Officer, Drummond Group, Fort Worth, Texas

RAINER FEURER, Research Student, Cranfield University, Bedford, United

Kingdom

University of Toledo, Toledo, Ohio

MARK N FROLICK, Ph.D., Associate Professor of Management Information

Sys-tems, University of Memphis, Memphis, Tennessee

IDO GILEADI, Senior Manager, Deloitte & Touche Consulting, Toronto, Ontario,

Canada

HAL H GREEN, Consultant, Setpoint, Inc., Houston, Texas

CRAIG GUSTIN, Principal, CGR Management Consultants, Playa del Rey,

California

DOUGLAS B HOYT, Consultant and Writer, Hartsdale, New York

BILL JEFFERY, Vice President, A.T Kearney, Chicago, Illinois

BRIAN JEFFREY, Managing Director, International Technology Group, Mountain

View, California

RICHARD L JENSON, Ph.D., CPA, Associate Professor of Accounting, Utah State

University, Logan, Utah

I RICHARD JOHNSON, Ph.D., CPA, Professor of Accounting, Utah State University,

Logan, Utah

JOHN JORDAN, Ph.D., Principal, Consulting & Systems Integration, Computer

Sci-ences Corporation, Waltham, Massachusetts

JERRY KANTER, Director, Center for Information Management Studies, Babson

College, Wellesley, Massachusetts

MARIE KARAKANIAN, Senior Manager, Deloitte Consulting, Toronto, Ontario,

Canada

KARL KELTON, Consultant

KEITH KENNEDY, Principal, CGR Management Consultants, Playa del Rey,

California

WILLIAM R KING, Professor of Business Administration, University of

Pitts-burgh, PittsPitts-burgh, Pennsylvania

WALTER KUKETZ, Technical Lead, Performance and Engineering, Consulting

& Systems Integration, Computer Sciences Corporation, Waltham,

Massachusetts

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WILLIAM F LENIHAN, Senior Manager, Deloitte & Touche Management

Consult-ing, Stamford Connecticut

MARSHA LEWIN, President, Marsha D Lewin Associates, Inc., Los Angeles,

California

YOGESH MALHOTRA, Founder and Chief Knowledge Architect, @Brint.com, Ft.

Lauderdale, Florida

ERIC A MARKS, Director of Consulting, BrightRoad, Inc, Andover, Masachusetts

ROBERT J MATYSKA, JR., Doctoral Student, Accounting Information Systems,

Michigan State University, East Lansing, Michigan

HOLMES MILLER, Associate Professor of Business, Muhlenberg College,

Allen-town, Pennsylvania

JIM MORRISON, Principal, A.T Kearney, Chicago, Illinois

RAJAGOPAL PALANISWAMY, Doctoral Candidate, Manufacturing Management

Pro-gram, The University of Toledo, Toledo, Ohio

YANNIS A POLLALIS, Syracuse University, Syracuse, New York

G PREM PREMKUMAR, Associate Professor of Information Systems, College of

Business, Iowa State University, Ames, Iowa

R KELLY RAINER, JR., Privett Professor of Management, Auburn University,

Au-burn, Alabama

MAHESH RAISINGHANI, Director of Research, Center for Applied Technology and

Faculty Member, University of Dallas, Dallas, Texas

JOHN F ROCKART, Director, Center for Information Systems Research, Sloan

School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts

JEANNE W ROSS, Principal Research Scientist, Center for Information Systems

Research, Sloan School of Management, Massachusetts Institute of

Technolo-gy, Cambridge, Massachusetts

RICHARD ROSS, Principal CSC Index, New York, New York

JAMES E SHOWALTER, Consultant, Enterprise Computing, Automotive Industry

Business Development, Sun Microsystems, Greenwood, Indiana

ROBERT L SLOAN, Business Information Systems Architect, Nylon Business

Unit, E.I du Pont de Nemours & Co., Charlotte, North Carolina

SCOTT STEPHENS, Business Manager, Commercial Supply Chain Management,

Command and Control Integration Systems, Lockheed Martin, Manassas, Virginia

STEWART L STOKES, JR., National Practice Director, Behavioral Skills

Manage-ment, PLATINUM Technology Solutions, Inc., Wellsley, Massachusetts

DJOEN S TAN, The Netherlands

MOHAN TANNIRU, Professor, School of Management, Syracuse University,

Syra-cuse, New York

MARIE TUMOLO, California State University, Fullerton, California

RAY WALKER, Senior Consultant, Process Monitoring and Control (PM&C)

Mi-gration Program, Process Control Initiative, DuPont Engineering, Wilmington, Delaware

JOHN WARGIN, Manager, Strategic Consulting and Business Alignment Practice,

Hewlett-Packard, Germany

HUGH WATSON, Professor of Management Information Systems, Terry College

of Business, University of Georgia, Athens, Georgia

MICHAEL WEBER, Project Manager, Redesign and Implementation of Processes

and IT Support, Hewlett-Packard, Germany

MADELINE WEISS, President, Weiss Associates, Inc., Bethesda, Maryland

MARGARET L WILLIAMS, Senior Disbursements Controls Specialist, Federal

Ex-press, Memphis, Tennessee

MAHMOUD M YASIN, Professor of Management, East Tennessee State

Universi-ty, Johnson CiUniversi-ty, Tennessee

DALE YOUNG, Associate Professor, Department of Decision Sciences and

Man-agement Information Systems, Miami University, Oxford, Ohio

To all those striving to improve their supply chains My hope is this bookwill in some way ease the pain

1 A Primer on Supply Chain Management 5

Richard L Jenson and I Richard Johnson

14 Strategic Implications of Electronic Linkages 173

Dale Young, Houston H Carr, and R Kelly Rainer, Jr.

15 The Evolution of EDI for Competitive Advantage: The

FedEx Case 185

Margaret L Williams and Mark N Frolick

16 Portfolio Techniques Eliminate Lingering IT ManagementProblems 195

Mark Bills

17 Developing a Global Information Vision 207

Tim Christmann

18 Aligning Strategies, Processes, and Information

Technology: A Case Study 219

Rainer Feurer, Kazem Chaharbaghi, Michael Weber, and John Wargin

RELATIONSHIPS 237

19 Supply Chain Information Systems: Putting the Process

First 241

James B Ayers

20 The New Enabling Role of the IT Infrastructure 253

Jeanne W Ross and John F Rockart

21 Are Human Resources Departments Ready for E-HR? 267

Robert L Sloan and Hal H Green

27 Organizational Pitfalls of Reengineering 323

D.P Cardarelli, Ritu Agarwal, and Mohan Tanniru

28 Quality and Change Management 333

Yannis A Pollalis

29 Developing Reward and Compensation Systems to

Motivate Self-Managed Teams 343

Madeline Weiss

30 Reengineering the Supply Chain: The Next Hurdle 359

Scott Stephens, Craig Gustin, and James B Ayers

31 Interorganizational Systems and Supply Chain

Management: An Information Processing Perspective 367

G Prem Premkumar

32 Are You in Control of Your E-Commerce Strategy? 389

Andrew J Czuchry, Mahmoud M Yasin, and Paul Bayes

33 Business-to-Business Exchanges 399

Marie Tumolo

34 Partnering on Extranets for Strategic Advantage 415

Steven Chan and Tim R.V Davis

35 An Implementor’s Guide to E-Commerce 427

39 Application Service Providers 467

Dawna Travis Dewire

Lei-da Chen and Mark N Frolick

42 Web-Enabled Data Warehouses 507

Mary Ayala-Bush, John Jordan, and Walter Kuketz

43 Data Warehousing Stages of Growth 517

Hugh Watson, Thilini Ariyachandra, and Robert J Matyska, Jr.

44 Leveraging Developed Software: An Economic

Perspective 531

Hal H Green and Ray Walker

45 Leveraging Developed Software: Organizational

Implications 545

Hal H Green and Ray Walker

46 Business-to-Business Integration Using E-Commerce 553

Ido Gileadi

47 The Future of Application Service Providers 561

Mahesh Raisinghani and Mike Kwiatkowski

48 Refurbishing Legacy Systems: An Effective Approach to

50 Knowledge Management for E-Business Performance:

Advancing Information Strategy to “Internet Time” 603

Yogesh Malhotra

51 Supply Chain Prestudies 619

James B Ayers

53 Enhancing Manufacturing Performance with ERP

Systems 633

Rajagopal Palaniswamy and Tyler Frank

54 Technology, Inventory, and the Supply Chain: Roles in

Business Model Building 653

James B Ayers

55 Managing Customer Expectations 665

Holmes Miller

56 ERP, One Letter at a Time 671

Bill Jeffery and Jim Morrison

57 Whether to Outsource and Downsize 677

Douglas B Hoyt

ABOUT THE EDITOR 691 INDEX 693

This book collects the wisdom of many contributors to Auerbach

Publish-ers’ KnowledgeBase I thank these authors for their contributions Also, my

thanks go to Christian Kirkpatrick, Cherise Walker, and Rich O’Hanley fortheir help in sorting through their ample supply of wisdom

This book compiles articles related to the impact of information ogy on supply chain management (SCM) practice The source for the arti-

technol-cles is Auerbach Publication’s Knowledgebase Auerbach is renowned for

its focus on information technology issues The Knowledgebase, however,contains many selections that extend beyond technical issues All dealwith practical aspects of systems implementation

The combination of technology focus and practical general advice leads

us to the title: Making Supply Chain Management Work: Design,

Implementa-tion, Partnerships, Technology, and Profits We hope the selections will first

and foremost help readers make new supply chain designs work To do so,they must vault several hurdles These include strategy alignment, accep-tance by the organizations that must operate them, enabling technologyimplementation, and deployment of a profitable business model

From time to time over the past ten years, I have contributed articles toAuerbach publications Many of these articles have dealt with the supply

chain and are included here Some were chapters in my book, The

Hand-book of Supply Chain Management This work was published by St Lucie

Press (like Auerbach, an imprint of CRC Press) and APICS

To organize the selections, I have borrowed the structure I employed in

the Handbook of Supply Chain Management The book begins with a section

called “Introduction to the Supply Chain.” This contains selections to ent the reader to the topic of supply chain management (or SCM) Thebook then describes five management tasks that are changing becausecompanies will increasingly compete as parts of supply chains rather thanstand-alone entities These five also follow the five themes in our book title

ori-• Task 1 Designing supply chain for strategic advantage

• Task 2 Implementing collaborative relationships within the organization

• Task 3 Forging supply chain partnerships with other organizations

• Task 4 Managing supply chain information

• Task 5 Making money from the supply chain

Doing well in all five is likely to be a prerequisite for success This willrequire more from all managers, even more so for IS management

In undertaking this effort, there was a fear of not finding enough material

in the Auerbach Knowledgebase to cover each of the five tasks Certainly,

there would be ample material on Task 4 But what about the other tasks

As it turns out, there were selections for improving performance on all fivetasks Many chapters address more than one task When this was the case,

I tried to pick the best fit However, I woud acknowledge that another sification could be just as valid

clas-Each chapter is also classified in one of three ways: as a tutorial, a tool,

or a technology Tutorial chapters explain some aspect of SCM or tion technology Chapters on tools offer methodologies for assessing orimplementing information technology for better SCM Technology chaptersdescribe hardware, software, case studies, and implementation planning

informa-My experience is that information technology is a major factor in thesuccess of any supply chain initiative Unfortunately, IT comes into play inone or the other of two extreme modes At one extreme, the entire effortcenters on the IT effort The technology is “front and center” driving theprogram The project may even be run by the IS team with varying levels ofuser participation Often, these projects fail for lack of operating teaminvolvement At the other extreme, supply chain changes are implemented

at some distance from the IS functions They involve too little in the way ofchanges to information systems, running the risk of failure because newprocesses are not “locked in” by changes to systems

There must be a “happy medium” between these extremes This impliesbalanced implementation of supply chain change, accompanied by anappropriate amount of information technology change This will reducethe risk that poorly performing systems pose to efforts to improve the sup-ply chain It might also avoid wasting what one client referred to as “buck-ets of money” on ineffective systems

It is this vision of the happy medium that drove me to propose thisproject to Auerbach My chapter selection reflects this mission Fortu-nately, other authors have articulated similar sentiments, and these areincluded here

The book should serve two audiences The first is the IT manager Thebook gathers information technology articles on a focused topic — thesupply chain — from a variety of sources Thus, even a subscriber to one

or more Auerbach publications will now have a specialized resource on thesupply chain topic The second audience includes nontechnical managerswho need more knowledge on the appropriate application of technologyfor improving supply chains

Section 1

Introduction

to the Supply Chain

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This section frames the management issues around information ogy and the supply chain Line managers in the supply chain and IS profes-sionals who need an understanding of pitfalls they might face in supplychain change should find value here

technol-For the IT professional, the section presents chapters with a generalmanagement perspective These should help those in the IS function tocommunicate with users on business terms and to better understand thebusiness needs behind a technology effort

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Chapter 1

A Primer on Supply Chain Management

James B Ayers

Understanding the supply chain is increasingly important to thoseinvolved in related process and systems improvement This chapter out-lines the basic concepts and purposes of the supply chain

The definition of a supply chain can legitimately be broad or narrow,depending on the perspective of the “definer.” The trend is to broaden thedefinition of the supply chain One speaker at a recent conference spon-sored by the Council of Logistics Management (CLM) described it broadly

We paraphrase, “The supply chain is as all that happens to a product fromdirt to dust.” The supply chain begins, in the speaker’s view, with miningores and growing crops, extracting raw material from Mother Earth Thechain goes on to a multitude of conversion and distribution processes thatdeliver the product to the end user It ends with ultimate disposal — pre-sumably back to Mother Earth somewhere

DEFINING SUPPLY CHAIN MANAGEMENT

Defining terms is a start in clarifying the supply chain discussion Thenatural beginning is a working definition of supply chain The supply chain

is more than the physical move of goods “from earth to earth.” It is alsoinformation, money movement, and the creation and deployment of intel-lectual capital We would summarize with the following definition:

Supply chain: Life cycle processes supporting physical, information, financial, and knowledge flows for moving products and services from suppliers to end-users.

The following terms further break down the definition:

These are not the same for both durable goods and services Thatcomputer, a product, and that 30-year mortgage, a service, must besupported long after newer products replace older ones Manyproducts may be sold in a time window that is relatively short com-

INTRODUCTION TO THE SUPPLY CHAIN

pared with their useful lives For this reason, the longevity of theseller and its reputation for product support are important factors

in the purchasing decision After-sales support can be the most crative service provided — outpacing the money made on the orig-inal sale

dimen-sions of the supply chain The traditional viewpoint of supply chains

as only physical distribution is too limiting Less frequently tioned is the role of knowledge input into supply chain processes.Knowledge is as important, if not more, as physical and other types

men-of input A good example is new product development This supplychain process requires close coordination of intellectual input (thedesign) with physical input (components, prototypes, and the like).Today, added value in the form of intellectual capital is vital to mar-keting profitable goods and services

uct development department, which produces designs, not ucts, can benefit from the same techniques used by productmanufacturers Federal Express operates a service business, but it

prod-is certainly also a complex supply chain A software company prod-ischallenged to constantly improve its product through upgrades Itsprocess also is a supply chain

The term “product” describes the basic product or service The

that delivers it, plus other features and factors that go along with the uct or service

prod-In many markets, there may be little difference in products However,there can be great differences in extended products Examples include thebroadened choices users have for buying personal computers They canpurchase them in a store (like the laptop from a leading maker), over theInternet (like a heavily discounted “no-name” desktop version), or by tele-phone The furniture industry offers another example of varied channels

We can buy assembled furniture at a neighborhood store or go to a house operation such as Ikea and buy it unassembled

ware-Choice begins with a need for the basic product or service, but quicklymoves to extended product factors such as delivery, service, and reputa-tion For many products, the supply chain design is perhaps the singlemost important extended product feature (see Exhibit 1)

Once we decide we need a car, decisions must be made We must decidewhat type of car — factors associated with the physical “base product.”Should the car be large or small? New or used? How many seats should ithave? What should it cost?

AU1273_frame_C01 Page 6 Thursday, November 8, 2001 2:07 PM

Having made these decisions, we still have decisions based on

“extended product” features These tend to be more subtle and intuitive.Exhibit 1 shows some “outside the box” factors we might consider Theseinclude dealer quality, selection, brand image, support service, and resale.The supply chain enters into a number of these extended product factors.Exhibit 2 shows a few examples

Many products that people buy or contemplate buying have similar tomer dynamics A poorly executed basic product will not succeed in the

cus-Exhibit 1 Extended Product

Exhibit 2 Examples of Extended Product Factors

Dealer quality Dealers for most auto companies are the distribution

backbone How they operate, their facilities, their reputations are key factors in the buying decision Availability/delivery/selection Having the right model at the right time for the right

buyer often means a sale Supply chain cycle times and information systems improve the chances of being successful.

After-sale service/warranty Many buyers look to this important support network

when buying For many, this service is the most lucrative.

Financing Except for those who pay cash, the convenience and

speed of this closely related service can make or break a deal.

Resale Many outlets for resale will raise the market value So

will all the factors that contribute to the car’s reputation.

INTRODUCTION TO THE SUPPLY CHAIN

marketplace On the other hand, a well-done product does not necessarilyensure success When competitors loom, it will be the basic product sup-plemented with extended product features that will most likely succeed.The term “supply chain management” is gaining currency, implyingthere is something different about managing the supply chain In fact, theacronym SCM, is employed as shorthand for the term

Supply chain management: Design, maintenance, and operation of ply chain processes for satisfaction of end-user needs.

sup-SCM is a discipline worthy of a distinct identity This identity puts it on alevel with other disciplines such as finance, operations, and marketing Theabove definition reflects the idea that SCM extends to both the supply chainformulation and its subsequent operation and maintenance SCM createsnew challenges for managers Old missions must be achieved in new ways

In general, SCM is broadening the roles of many We begin with a description

of common supply chain viewpoints that exist in different companies

SUPPLY CHAIN PARADIGMS

Supply chains and the tasks that go with SCM very much depend on theeyes of the beholder Different companies and even managers in a singlecompany have different viewpoints, or paradigms And these are evolvingrapidly There is no right or wrong supply chain viewpoint In fact, the view

in one company probably should differ from the view in another This isbecause their situations are surely different, and what makes one success-ful work for another In addition, the right viewpoint is not static As timemoves on and competitive pressures shift, the need to change viewpointswill arise

Below are descriptions of the generic paradigms and way to tie themtogether They are described from the bottom up, from the narrowest tothe broadest paradigm

Functional Paradigm

The functional supply chain paradigm is what exists in most companiestoday It is the “base” state Companies that do not think in supply chainterms fit the functional paradigm In this view, companies are composed ofindividual departments Manufacturing company examples are procure-ment, operations, engineering, and distribution Each department has, to alarge degree, its own agenda Oversight of links between departments isweak within the company Between companies in the supply chain, thisoversight is practically non-existent

Performance evaluation in these companies is typically cost dominated.Procurement is measured on the purchase cost of material and material

AU1273_frame_C01 Page 8 Thursday, November 8, 2001 2:07 PM

overhead rates Manufacturing has measures such as direct labor tivity Distribution effectiveness is measured on the percentage of sellingprice represented by distribution cost

produc-In the functional organization, strong department heads sponsorchange “Cross-talk” among departments is minimal, so most initiatives arelocal They may or may not improve the supply chain as a whole Theactual impact on the total supply chain usually is not measured where thefunctional paradigm prevails

The cost of outside material and services makes this an attractive targetfor cost reduction This brings on programs such as sourcing initiatives,supplier reduction programs, and vendor-managed inventory (VMI) In thisparadigm, the procurement executive may take charge of the supply chain.These efforts reach outside the company into the upstream supplierbase They include “partnering” with the supplier and shrinking the sup-plier base Often, especially when the buyer dominates the seller, partner-ship talk focuses on price reductions This usually shifts profits from oneparty to another in the chain without fundamental improvement

Logistics and Transportation Paradigm

The idea of companies linked together has roots in the logistics field Ofcourse physical movement of products along stages in the supply chain is

an important part of most national economies The previously mentionedCLM (Council of Logistics Management) defines “logistics” as “that part ofthe supply chain process that plans, implements, and controls the efficient,effective flow and storage of goods, services, and related information fromthe point of origin to the point of consumption in order to meet customers’requirements.” Note that the CLM includes both goods and services in its

INTRODUCTION TO THE SUPPLY CHAIN

definition It also addresses “customers’ requirements” and the need to fill them

ful-In the logistics and transportation paradigm, when companies decide toanoint a supply chain executive, they will likely pick the distribution exec-utive In place of the supply chain term, these companies may turn to analternative — the demand chain This reflects attention paid to the out-bound, rather than the inbound side, or supplyside, of the business.The logistics view often addresses the outbound, downstream side inmuch the same way the procurement viewpoint worked the inbound side.This is also a cost-reduction effort aimed at incremental improvements inprofit Typical activities include modeling warehouse, distribution center,and transportation networks to reduce cost

Information Paradigm

The information paradigm seeks to improve the links both within thecompany and within the supply chain New applications plus new ways ofmoving information around, make this an active area Electronic data inter-change (EDI) is an early example of ways to improve communicationsamong companies A barrier has been the lack of integrated software, bothinside and outside the company Efforts underway sponsored by organiza-tions such as the Supply-Chain Council seek to standardize the definition ofdata elements and processes This facilitates supply chain informationsharing along the supply chain

Dramatic results have come from the use of information to improve ply chain performance A frequently cited example is Wal-Mart, whichmoves point-of-sale data back through its system to its suppliers Thisreduces the need for forecasting in supply chain decision making

sup-One shortcoming associated with this paradigm is the lack of “processconsciousness.” Efforts to implement new systems often become allencompassing, absorbing time, staff, and money resources The effortdrives toward implementation of the technology, and not necessarilyimprovement in underlying processes

Business Process Reengineering (BPR) Paradigm

Business process reengineering (BPR) efforts call for “radical” turing of processes to eliminate waste and improve quality Such effortstake many forms For example, new systems and reengineering are closelylinked in many minds “Six Sigma” is a quality initiative that’s also a closecousin of BPR Systems and technology designs should follow processdesign; this is the intent of BPR Thus, the underlying process require-ments, not the technology itself, are the dominant force behind the change.The technology becomes an “enabler.”

restruc-AU1273_frame_C01 Page 10 Thursday, November 8, 2001 2:07 PM

compet-This paradigm has been discussed in depth.1 All projects to implement

a new supply chain or to change an existing one will affect an organization’sability to compete This impact is better planned than left to chance

EVIDENCE OF THE IMPACT

The business press, plus our own experiences as consumers, reinforces

an important message Supply chains in many industries are rapidly ing The following paragraphs contain examples — many of which may befamiliar Each situation reflects how the “extended product” whichincludes the supply chain, has become a competitive battleground Thediscussion continues by describing the dangers of ignoring changes in thesupply chain

evolv-CASE STUDIES

Different industries and companies view supply chains and supply chainchange in various ways These changes reflect broad undercurrents andmay not be seen by participants in the industry These examples call atten-tion to these undercurrents in a few selected industries, through the eyes

of industry observers and commentators This is “buzz.” What they have

to say points to the growing importance of supply chain management inthe coming years In the examples, we call this “spin.”

Personal Computers

As this chapter was written, this is one of the most discussed and mostcommented on industries on the face of the planet It holds lessonsbecause of its speed of growth and the rapid evolution of supply chainsused by competitors

high-profit business with most sales coming from retail stores

Howev-er, the product itself evolved to where there are only minor differencesbetween company offerings In fact, much of the product innovation

INTRODUCTION TO THE SUPPLY CHAIN

effort centers on producing cheaper and cheaper machines Makingmoney by introducing ever-more sophisticated components (e.g., pro-cessors) has exhausted its potential for increasing sales dramatically.Consumers have found that lower-performing machines are “goodenough.” Practical day-to-day use requires much less So knock-offprocessors and low-cost machines have penetrated the market.One response has been the emergence of alternative supply chains.Dell sells directly over the telephone and through its Web site, therebylowering overhead and improving cash flow by using supplier capital

to finance its business Existing channels make it difficult for othermanufacturers to shift their supply chains They fear alienation oftheir retail partners if they bypass them and go direct But the pres-sure to have a direct outlet is irresistible Internet sales are also grow-ing One software retailer, Egghead, closed its entire retail chainfocused on software and started selling hardware on the Internet

supply chain design over product design Personal computer nents and software are readily available to all producers Manufactur-ing is, in essence, an order-taking and final-assembly operation.Extended product activities, which are defined as part of the supplychain, have become the basis for competitive advantage These fea-tures include customer support, the ability to customize, rapid re-sponse, purchasing clout, and operating economies

compo-Entertainment

This is an industry where knowledge is a primary input in the tion process The material content in the final product is trivial A movie issomething we buy from the video store for its entertainment value, not forthe tape and plastic spool that comprise its package The physical form ofthe product is a minor portion of the price we pay Over 90 per cent of ourdollar is for intellectual “components” arising from the creativity of artists,writers, directors, and producers

of its supply chain Rhino’s specialty is re-release of popular music in abroad range of genres Rhino uses the knowledge of its music experts todecide what “packages” will be successful in the marketplace Rhino thengains permission to publish its selections from license holders The licens-ers are various large and small music companies Product managers forassigned markets decide how to promote the release in the marketplace.Only after these steps are taken does the actual physical product takeshape This involves transferring recordings of the tracks (songs) fromoriginal sources, design of the packaging to attract buyers, and arranging

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production with a contract manufacturer At Rhino, only a third of thoseinvolved in the process actually work on the physical aspects of the prod-uct The remainder work with ideas, licensers, and the media Only 20 per-cent of the customer’s dollar goes to physical product; 80 percent goes toknowledge requirements

The Rhino process produces about 15 releases each month At thebeginning of the project, the process took up to two years for any onerelease An “uncontrollable” in the process was the time to get approvalsfrom licensers Although permissions were usually granted, there was fre-quently considerable delay in responding as requests for licenses queued

up This was considered, with much justification, as an “out-of-control” tor Another factor in the extended lead-time was the lack of concurrentprocesses Rhino’s internal production tasks were serial, with none start-ing before the next one was complete

fac-The old process resulted in a loss of control over the timing of releases.This in turn hobbled financial planning and, more importantly, control overthe timing of releases Often, sales were tied to key events: Christmasmusic for Christmas is an obvious example; winning Academy Awardtracks timed for release along with the Oscars is somewhat less obvious

prod-uct is far more knowledge than tangible prodprod-uct However, efficientproduction requires the same management and coordination onemust give to a complex physical product; thus, the domains of physi-cal and intellectual products are not widely separated — if they areseparated at all

product Brands are built on reputations among customers, productfunctionality, advertising and promotion, and awareness among po-tential buyers A company’s value will often greatly exceed its bookvalue Book value is a calculated value determined by accountingrules These rules recognize tangible value in assets such brick-and-mortar and inventory; but the “market cap” or value place on the com-pany by investors can greatly exceed book value Much of this addedvalue is due to brand value in an attractive market

share-holder value The brand distinguishes the company and its productsfrom a crowded competitive field The importance of the brand in-creases in mature markets In growth situations, there is often suffi-cient market for everyone Having enough product may be theprincipal challenge As capacity catches up with demand, the overallvalue of the brand becomes more and more important Brand imageevolves from product to extended product features Brand value in-creasingly shifts from the physical product to other factors

INTRODUCTION TO THE SUPPLY CHAIN

image Specific supply chain operations that contribute to brand age are shown in Exhibit 3

im-Each example relies on the supply chain, at least in part, for its itive edge Vans uses its alternative channels to boost sales and off-loadexcess inventory Solar has targeted a growing market for co-generation.This market, emerging from electric utility deregulation, involves placingsmall gas turbine generators at local operating sites Customers are notaccustomed to maintaining gas turbines; thus, Solar will provide this ser-vice as part of its “extended product.”

compet-Giving away computers is like giving away the razor to sell the blades.One cannot go on line without the computer So the theory goes: give awaythe computer and gain a captive audience IBM and the online booksellerscompete on the breadth of their product The IBM decision removed riskfor buyers of large ticket systems Booksellers are looking for product sup-ply breadth as a competitive edge This is after rivalry among online sellershas made the convenience and price no longer a point of differentiation.The category killers and roll-ups have increased purchasing power Mak-ing buys in large volume increases their clout with suppliers

Health Care

In the United States, health care is an industry in turmoil Much is due tothe complexity of the supply chain, which includes medical service provid-

Exhibit 3 Supply Chain Operations that Contribute to Brand Image

Channels Vans This California shoe company caters to the youth market with

skateboard parks and “hip” gear It sells through retailers, its own stores, and factory outlets.

Hand-holding Solar Turbines This San Diego-based division of Caterpillar sells

on-site power-generation equipment It uses a “one-touch” repair guarantee to assure customers of uninterrupted service.

Free stuff Free computers Online services now compete for “eyeballs” by giving

away the access tool, a personal computer.

Staying power IBM In its days of uncontested glory, decision makers could not miss

by buying Big Blue.

Lots of

product

Online booksellers After Amazon’s early market success, it and rival Barnes & Noble started competing on how many millions of titles they offer.

Cheap “Category killers.” Companies such as Staples and Home Depot use

economies of scale to offer low price.

Roll-ups U.S Filter This company actively acquired companies providing water

equipment and services When acquired for a premium, it was 15 times the size of its nearest competitor.

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ers, insurance companies, employers, government regulators, and, ofcourse, users of healthcare services Most people do not pay directly forhealthcare services Private companies and the government pay, and theflow of money is a dominant factor in the turmoil The industry accountsfor 14 percent of the U.S economy, but many payers feel they are not get-ting their money’s worth There are many anecdotes pointing out that thefrequency of use has more to do with the available capacity than medicalneed The disconnect between the buyers and users is blamed for buildingwasteful habits into industry management practices

The industry contains supply chains of several types There are sional services These include physician and hospital services There arehighly lucrative pharmaceutical products, often developed at greatexpense The industry also needs a plethora of support equipment rang-ing from sophisticated electronic testing equipment, to gloves used inpatient treatment

fos-tered innovation in the design of services and organizations Most ofthe innovations have two themes The first imperative is to get larger.This brings consolidation of individual physician practices and part-nering between doctors and hospitals The second imperative, sup-ported by the first, is cost reduction This includes many facetsalready encountered in other industries Examples are variation re-duction, overhauling processes, and upgrading management skills

effi-cient delivery “enterprise.” This enterprise must have substantial ital behind it and be capable of efficient operations This meanseffective management of a broad range of processes with diverse mea-sures from medical outcomes to the cost of tissue paper It is likely atrial-and-error process requiring persistence and patience As evi-denced by the number of physicians taking MBA courses, it also re-quires new skills

ig-noring SCM as a discipline The most serious is the loss of profitablecustomers The supply chain in the Exhibit 4 illustrates this

The chain shows the physical movement of products through a tional network for a manufactured product The flow begins with severalsuppliers They send raw material to a factory Other material that requires

tradi-no conversion goes directly to warehouses that support customers Thefactory outbound shipments supply a distribution center or regional ware-houses The distribution center and warehouses support customers.However, these customers are not homogeneous They divide into seg-ments, and each segment has distinct requirements These requirementsmay arise from differences in either the product itself or the extended

INTRODUCTION TO THE SUPPLY CHAIN

product, including customer service, information, and technical tance Sometimes, companies fail to recognize these segments and theirdistinct requirements This leads to a “one size fits all” supply chain design

assis-In effect, the supply chain is a compromise based on the demands of ent segments, and no segment is served as well as it should be

differ-The threat arises when a competitor perceives the service shortfall.That competitor detects an opportunity and structures a focused supplychain based on the needs of an attractive segment The result is shown inExhibit 5

The consequence is loss of a customer segment Very often, this ment is the most profitable This is because the competitor does his home-work not only on the supply chain features needed to serve the segment,but also on the economics of delivering those features This process mayoccur over long periods of time and be seen as erosion of market share.More often, it can be dramatic — executed by an upstart company fromoutside the industry

seg-Exhibit 4 The Loss of Profitable Customers

Exhibit 5 Competitor’s Focused Supply Chain

Distribution Center

Regional Warehouse

Factory Line 1 Line 2

Suppliers

Customer

Segments

Distribution Center

Regional Warehouse

Factory Line 1 Line 2

Suppliers

Customer

Segments

Focused Competitor

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This threat is also an opportunity SCM enables one’s own enterprise to

“pick off” entrenched competitors, so SCM is both a defensive and sive weapon Managers with responsibility for supply chain decisions —and that includes many in most organizations — should prepare to meetboth the challenges and opportunities that will surely find them

offen-Notes

1 Ayers, Jim, Supply Chain Strategies, Information Strategy: The Executive’s Journal, Winter,

1999 (15/2), pp 3-10.

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THE BASICS OF ELECTRONIC COMMERCE

The question of how electronic commerce (EC) fits with e-mail and EDIfrequently comes up in EC-related conversations It is best defined in thefollowing vignette Joe, in front of a large audience, was leading a discus-sion that kept attempting to define what electronic commerce is and is not.Holding up a piece of blank paper, Joe said, “The best way to define elec-tronic commerce is to picture doing business without this,” as he crumpledthe paper and tossed it into the waste can

The definition of electronic commerce is doing business without usingpaper Electronic commerce is not EDI, it is not e-mail, it is not Web brows-ers — it is all of these and more It is electronic mail, Web servers, workflowsystems, process changes and reengineering, EDI, Internet, video ondemand, and voice messaging — electronic commerce is not using paper.Not using paper reduces errors in communications, speeds informationflow, reduces mailing costs, increases opportunity costs, and helps makebusiness processes more effective

Because EC affects so many areas — all the ways companies do business

— a broad set of disciplines must be harnessed to cover EC This includessuch disciplines as process reengineering, communications, databases,and applications (e.g., Web and e-mail clients)