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The Triple-A Supply Chain

“The best supply chains aren't just fast and cost-effective. They are also agile and adaptable, and they ensure that all their companies' interests stay aligned.”

-by Hau L. Lee

History

More than 60 leading companies that focused on building and re- building supply chains to deliver goods and services to consumers as quickly and inexpensively as possible invested in state-of the- art technologies, and when that proved to be inadequate, they hired top-notch talent to boost supply chain performance.

Fundamental Issue

Despite the increased efficiency of many companies' supply chains, the percentage of products that were marked down in the United States rose from less than 10% in 1980 to more than 30% in 2000, and surveys show that consumer satisfaction with product availability fell sharply during the same period.

Companies whose supply chains became more efficient and cost-effective, the performance of those supply chains .

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Success Mantra

Top-performing supply chains possess three very different qualities:

AGILITY - They react speedily to sudden changes in demand or supply.

ADAPTABILITY - They adapt overtime as market structures and strategies evolve.

ALIGNMENT - They align the interests of all the firms in the supply network so that companies optimize the chain's performance when they maximize their interests.

Perils of Efficiency

1 . High Speed, low-cost supply chains are unable to respond to unexpected changes in demand or supply. When rises without warning, these organizations are unable to react even if they have the items in stock.

2 . Companies’ obsession with speed and costs also causes supply chains to break down during the launch of new products.

3. Efficient supply chains often become uncompetitive because they don't adapt to changes in the structures of markets.

Supporting incidents

1. Merchandise Case

2. Consumer Electronics Firm

3. Lucent's Electronic Switching Systems

Fostering Agility

Fostering Agility

What is Agility?

Supply chain agility can be described as a company's ability to quickly adjust tactics and operations within its supply chain.

Responding to short-term changes in demand or supply quickly.

Handling external disruptions smoothly.

chain. • Responding to short-term changes in demand or supply quickly. • Handling external disruptions smoothly.
chain. • Responding to short-term changes in demand or supply quickly. • Handling external disruptions smoothly.
chain. • Responding to short-term changes in demand or supply quickly. • Handling external disruptions smoothly.

Why Agility?

Current business environment can be characterized by constant change, shorter product lifecycles, and increased demand uncertainty.

Most cope by playing speed against costs chains and hence pay a big price for disregarding agility, but agile ones respond both quickly and cost-efficiently.

Sustainable source of competitive advantage.

Recover quickly from setbacks.

More critical in recent years because of sudden shocks to supply chains.

The terrorist attack in New York in 2001

The dockworkers' strike in California in 2002

The SARS epidemic in Asia in 2003

threat from natural disasters, terrorism, wars, epidemics, and computer viruses

Methods to build Agility

Promote flow of information with suppliers and customers

Provide data on changes in supply and demand to partners continuously so they can respond quickly.

Develop collaborative

relationships with suppliers

Companies work together to design or

redesign processes, components, and products as well as to prepare backup plans.

Design for postponement

Design products so that they share common parts and processes initially and differ substantially only by the end of the production process.

that they share common parts and processes initially and differ substantially only by the end of

Methods to build Agility

Keep a small inventory

Build inventory buffers by maintaining a stockpile of inexpensive but key components that are often the cause of bottlenecks.

Have a dependable logistics system or

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Enable company to regroup quickly in response to unexpected

needs. Can strike alliances with third-party logistics providers.

Can strike alliances with third-party logistics providers. Draw up contingency plans Put together a team that

Draw up contingency plans

Put together a team that knows how to invoke backup plans. Possible only if companies have trained managers and prepared contingency plans to tackle crises.

to invoke backup plans. Possible only if companies have trained managers and prepared contingency plans to

Recovering from Setback: Case of Dell

In September 1999, an earthquuake in Taiwan delayed shipments of computer components.

Most PC manufacturers, such as Compaq, Apple, and Gateway, couldn't deliver products to customers on time and incurred their wrath. One exception was Dell

It changed the prices of PC configurations overnight.

Got data on the earthquake damage early, sized up the extent of vendors' problems quickly, and implemented the plans it had drawn up to cope with such eventualities immediately.

of vendors' problems quickly, and implemented the plans it had drawn up to cope with such
of vendors' problems quickly, and implemented the plans it had drawn up to cope with such

Contrasting case of Nokia and Ericsson

In March 2000, a Philips facility in Albuquerque, New Mexico, went up in flames.

The plant made radio frequency chips, key components for mobile telephones, for both Scandinavian companies

for mobile telephones, for both Scandinavian companies  Nokia's managers quickly carried out and contacted
for mobile telephones, for both Scandinavian companies  Nokia's managers quickly carried out and contacted

Nokia's managers quickly carried out and contacted backup sources.
Two suppliers, one in Japan and another in the United States, asked for just five days' lead time to respond to Nokia.

Weeding out backup suppliers because it wanted to trim costs.
It didn't have a plan B in place and was unable to find new chip suppliers. Not only it had to scale back production, but it also delay the launch of a major new product.

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Importance of being Agile:

The Case of

Importance of being Agile: The Case of  In the 1990s, whenever Intel unveiled new microprocessors,

In the 1990s, whenever Intel unveiled new microprocessors, Compaq took more time than its rivals to launch the next generation of PCs.

The company lost mind share because it could never count early adopters, who create the buzz around high-tech products, among its consumers.

Products stayed in the pipeline for a long time, the company had a large inventory of raw materials.

Compaq incurred more reworking costs because of its larger work-in-progress inventory.

Importance of being Agile

H&M, Mango, and Zara have become Europe's most profitable apparel brands by building agility into every link of their supply chains.

The three companies have created agile design processes.

Reduces the number of items they must sell at a discount.

All three companies have superefficient distribution centres.

State-of-the-art sorting and material-handling .

 All three companies have superefficient distribution centres.  State-of-the-art sorting and material-handling .
 All three companies have superefficient distribution centres.  State-of-the-art sorting and material-handling .
 All three companies have superefficient distribution centres.  State-of-the-art sorting and material-handling .
“It is not the strongest or the most intelligent who will survive but those who
“It is not the strongest or the most intelligent who will survive but those who

“It is not the strongest or the most intelligent who will survive but those who can best manage change “ - Charles Darwin

Objectives ➔ Adjust Adjust supply chain’s design to meet structural shifts in the market ➔
Objectives
➔ Adjust
Adjust supply chain’s design to meet
structural shifts in the market
➔ Modify
Modify supply networks to strategies,
products and technologies
to meet structural shifts in the market ➔ Modify Modify supply networks to strategies, products and

Building an adaptable supply chain requires two key components

The ability to spot trends

&

The capability to change supply networks

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In addition to unexpected

changes in supply and demand supply chains also face near permanent changes in the

market

Reason Structural shifts usually occurs because of economic progress, political and social changes, demographic
Reason
Structural shifts usually
occurs because of
economic progress,
political and social
changes, demographic
trends and technological
advances
C a p t u r e L a t e s t D a

Capture Latest Data

C a p t u r e L a t e s t D a t

Filter Noise

t e s t D a t a F i l t e r N o

Track Key Patterns

i s e T r a c k K e y P a t t e

Relocate Facilities

e T r a c k K e y P a t t e r n

Change Sources of Supply

e T r a c k K e y P a t t e r n

Outsource Manufacturing

Future Patterns Guidelines to identify future patterns ➔ Track Economic Changes As nations open up
Future Patterns
Guidelines to identify future patterns
➔ Track Economic Changes
As nations open up to developing economies the
cost, skills & risks of global supply chain operations
changes
➔ Decipher Needs of Ultimate Customer
Not limiting to deciphering the needs of your
immediate customers else you may fall a victim of
the Bullwhip Effect
customers else you may fall a victim of the Bullwhip Effect Bullwhip Effect Amplifies and Distorts

Bullwhip Effect

Amplifies and Distorts demand fluctuations

customers else you may fall a victim of the Bullwhip Effect Bullwhip Effect Amplifies and Distorts
Alter Supply Chains Companies must retain the option to alter supply chains. They must practice
Alter Supply Chains
Companies must retain the option to alter supply
chains. They must practice the following
➔ New Suppliers
Developing new suppliers that complement the
existing ones. It is recommended to use
intermediaries while working in unknown parts of the
world.
➔ Product Design Team Awareness

Ensuring that the product design team is well aware of the supply chain implications of their design

Design Team Awareness Ensuring that the product design team is well aware of the supply chain

The case of Toyota Hybrid Cars

The case of Microsoft’s

Design for supply principles

Commonality

Ensures that products share components

Postponement

Delays the step at which products become different

Postponement Delays the step at which products become different

Standardisation

Ensures that components

& processes for different products are same

products become different Standardisation Ensures that components & processes for different products are same
Revising Adaptability ➔ Monitor Economies ➔ Use Intermediaries ➔ Evaluate needs of Ultimate Customers ➔
Revising Adaptability
➔ Monitor Economies
➔ Use Intermediaries
➔ Evaluate needs of Ultimate Customers
➔ Create Flexible Product Designs
➔Benchmark Products (Technology & Product Life Cycles)
of Ultimate Customers ➔ Create Flexible Product Designs ➔Benchmark Products (Technology & Product Life Cycles)

Creating the right Alignment

Idea of Right Alignment

Its is the ability to have common and shared interests across the supply chain including vendors and customers.

Company takes care of all the firms in their supply chain with their own

Create incentives for better performance

Company takes care of all the firms in their supply chain with their own • Create
Company takes care of all the firms in their supply chain with their own • Create
Company takes care of all the firms in their supply chain with their own • Create

Methods to create right alignment

Alignment of f

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Exchange information and its knowledge freely with vendors and customers.

Alignment of Identities Lay down roles, tasks, and responsibilities clearly for each partner

Alignment of Identities

Lay down roles, tasks, and responsibilities clearly for each partner

Alignment of Identities Lay down roles, tasks, and responsibilities clearly for each partner

Alignment of incentives

Equitably share risks, costs, and gains of improvement i

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partner Alignment of incentives Equitably share risks, costs, and gains of improvement i n iti a

Examples : Effects of Non-Alignment

Case of Cisco

Till 1990’s everyone regarded Cisco's supply chain as almost infallible : completely agile and adaptable, automated workflows, modern technology, remote testing to deliver quality results . However, Cisco lost $2.25 billion of inventory in 2001 . Reasons :

Misalignment of Cisco's interests with those of its contract manufacturers

Contractors accumulated a large amount of inventory for months without factoring in the demand for Cisco's products.

Growth of the U.S. economy slowed down, the contractors continued to produce and store inventory at the same pace, the company had to sell the raw materials off as scrap.

Faliure of VMI

Vendor-managed inventory(VMI) systems allow suppliers to track the consumption of components to reduce

transportation costs

and derive scale benefits

Suppliers set up hubs close to manufacturing plant and vendors maintain enough stock at hubs to support manufacture’s need
Problems : Suppliers own components until they physically enter the manufacturers 'assembly plants and therefore bear the costs of inventories for longer periods
Friction between Manufacturers and vendors as manufacturers reduce cost by shifting ownership of inventories to vendor

Friction between Manufacturers and vendors as manufacturers reduce cost by shifting ownership of inventories to vendor

Case Study :

Saturn (Autoparts Manufacturer)

Strategy :

Case Study : Saturn (Autoparts Manufacturer) Strategy : • Saturn’s service part supply chain is one

Saturn’s service part supply chain is one of the best in the industry, great example of incentive alignment especially for consumers

It has relieved car dealers of the burden of managing service part and makes a decision for the dealer based of a centralized system

It tracks the off-shelf availability of parts at the dealers and during emergency orders , it transfers the parts from other dealer and bears shipping costs

Saturn shares the cost of excess inventory with the dealer to prevent overstocking at dealers by its internal divisions

Benefits of alignment :

While the off-the-shelf availability of service parts in the automobile industry ranges from 70% to 80%, service part availability at Saturn's dealers is 94%.
Inventory turnover of spare parts at Saturn's dealers is seven times year while it is only between one and five times a year for other automobile companies 'dealers

is seven times year while it is only between one and five times a year for

Adaptable, Aligned but not Agile

In 1995, Hewlett-Packard teamed up with Canon to design and launch ink-jet printers.

While HP took on the responsibility of producing printed circuit boards. Canon agreed to manufacture engines for the LaserJet series. That was an equitable division of responsibilities, and the two R&D teams learned to work together closely.

After launching the LaserJet, HP and Canon quickly adapted the supply network to the product’s markets. HP used its manufacturing facilities in Idaho and Italy to support the LaserJet, and Canon used plants in West Virginia and Tokyo.

its manufacturing facilities in Idaho and Italy to support the LaserJet, and Canon used plants in
its manufacturing facilities in Idaho and Italy to support the LaserJet, and Canon used plants in

Adaptable, Aligned but not Agile

But HP and Canon failed to anticipate one problem. To keep costs down. Canon agreed to alter the number of engines it produced, but only if HP communicated changes well in advance-say, six or more months before printers entered the market. However, HP could estimate demand accurately only three or fewer months before printers hit the market.

As a result, the supply chain couldn’t cope with sudden fluctuations in demand. So when there was an unexpected drop in demand for the LaserJet III toward the end of its life cycle, HP was stuck with a huge and expensive surplus of printer engines: the infamous LaserJet mountain. Having an adaptable and aligned supply chain didn't help HP overcome its lack of agility.

infamous LaserJet mountain. Having an adaptable and aligned supply chain didn't help HP overcome its lack
infamous LaserJet mountain. Having an adaptable and aligned supply chain didn't help HP overcome its lack

Case Study :

Seven Eleven Japan’s Three Aces

Strategy :

The company has designed its supply chain to respond to quick changes in demand-not to focus

cheap deliveries. SEJ used satellite connections and ISDN lines to link all its stores with distribution centres, suppliers, and logistics providers. SEJ schedules deliveries to each store within a ten-minute margin. If a truck is late by more than 30 minutes, the carrier has to pay a penalty equal to the gross margin of the products carried to the store.

To minimize delays due to traffic snarls, the company asked its suppliers from the same region to consolidate shipments in a single truck instead of using several of them. The incentives and disincentives are clear: Make Seven Eleven Japan successful, and share the rewards. Fail to deliver on time, and pay a penalty.

on fast or

Benefits :

(SEJ) is an example of how a company that builds its supply chain on agility, adaptability, and alignment stays ahead of its rivals. With gross profit margins of 30%, SEJ is also one of the most profitable retailers in the world.

Conclusion

Supply chain efficiency is necessary, but it isn't enough to ensure that firms will do better than their rivals. Only those companies that build agile, adaptable, and aligned supply chains get ahead of the competition.

Aayush Kumar Singh Anish Lamba Shashwat Pandey Suyash Karkare

Aayush Kumar Singh

Anish Lamba

Shashwat Pandey

Suyash Karkare