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KISHORE THOMAS JOHN

ASST. PROFESSOR

SUPPLY CHAIN MANAGEMENT

HBR ON SCM

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THE TRIPLE A’s OF SCM

• Agility: Reacting speedily to sudden changes in demand and supply

• Adaptability: Adapting over time as market structures and strategies evolve

• Alignment: Aligning the interests of the firm in the supply network so that supply chain performance is optimized and profits maximized.

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THE PERILS OF EFFICIENCY

• High speed, low cost supply chains are unable to respond to unexpected changes in demand or supply

• Eg. During promotions, stock-outs can rise to 15%, and during lean periods, excess inventory. So companies often sell at discounted rates- (30% at Dept. Stores in the US.)

• This can erode brand equity and anger loyal customers who bought at full price- Eg. Fashion Industry.

• Eg. Akai, Fujitsu, Kyocera, Sanyo, TDK, JVC, Minolta, NEC & NTT, Sharp, etc.

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EXAMPLES

• Lucent’s Electronic Switching Systems Division in Oklahoma, 1980s. Centralize procurement, assembly and testing, and order fulfillment. 1990s- Emergence of Asia as a market- poor response, lost market When vendors shifted to Asia- Supply chain collapsed.

• Intel Processors in the 1990s Compaq always behind others in launching new gen models. Long design cycle because of tight supply chain Lost mind share to early adopters, lost on pricing, lost market share Compaq couldn’t take advantage of component prices falls in market Vendors: Compaq couldn’t adjust to Engg. Modifications- reworking costs.

• H&M, Mango, Zara- Fashion Brands of Europe Agile designers, quickly spot trends. Excellent distribution and market

pulse

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DISASTERS & CALAMITIES

• Sep ’11 2001, Dockworkers Strike 2002, SARS Epidemic 2003

• Sep 1999- Earthquake in Taiwan- US computer industry hit. Weeks and Months of delays. Dell was only exception- changed PC configurations overnight- steered consumer demand away and redirected sales efforts.

• Mar 2000. Philips factory fire in New Mexico. RF Chips for Ericsson and Nokia. Nokia managers changed designs and contacted backup suppliers in US and Japan. 5 days delay only. Ericsson lost business for months. Lost launch of new product.

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WHY AGILE?

• HP-Canon Printer Pact 1995: Launching ink-jets.

HP Made PCBs. Canon made the Printer Engines. Division of responsibilities- joint R&D. HP used its Idaho US and Italy factories, Canon used its W Virginia and

Japan Factory. Canon could adjust production only if HP gave 6 months heads up. HP’s demand forecasting systems worked only to 3-4 months Supply chain couldn’t cope with fluctuations in demand. At end of life cycle- HP was stuck with huge surplus of printer engines Write off, and huge losses for HP. An example of poor agility of Supply Chain.

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WHY ADAPTIBLE?

• Lucent in 1990s. Making inroads into Asia

Overhauled its supply chain Set up new plants in Taiwan and China Inexpensive, cheap and customizable quickly. Compete with Siemens and Alcatel It stopped its manufacturing and shipping from US. Recaptured China, Indonesia, India and Taiwan markets.

However, it does not end here…

Lucent did not consider small and medium size competitors. With Economies of Scale, local competitors could produce at a fraction of cost Competitors of lucent outsourced- but Lucent ultimately shut down its factory in

Taiwan in 2002, and outsourced later.

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WHY ALIGNMENT?

• In 2001, Cisco wrote of $ 2.5 billion worth of Inventory.

Different firms in same supply chain can have different interests. In the 1990s, Cisco’s supply chain was considered infallible. Cisco was the first to introduce internet to communicate to suppliers and

customers, automate work flow and develop remote solutions. Most of Cisco’s manufacturing was outsourced.

There was misalignment between Cisco’s interests and those of its contract manufacturers.

Contract manufacturers accumulated inventory without forecasting demand for products.

Even after US Economy slowed down, contractors produced and stored inventory at the same pace.

When demand fell soon after, Cisco had to scrap the inventory.

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HP AGAIN…

• Started its printer business in 1980s• Both R&D and Manufacturing in Vancouver.• Biggest printer market was the US then.• When demand grew in other markets, HP set up facilities in Spain and

Singapore to cater to Europe and Asia.• Vancouver remained R&D hub, but Singapore became the largest

production facility.• By 1990s, Printer Manufacturing technologies had matured.• So HP outsourced its production to vendors completely.• Thus it controlled its costs and remained the leader in the market.

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MICROSOFT XBOX

• In 2001, Microsoft decided to enter the Video Game Market.• It outsourced hardware production to Singapore based Flextronics.• In 2001, Xbox had to be in the stores before December so that Microsoft

targeted Christmas Shoppers.• Speed was the crucial factor for a successful launch.• So Xbox was made at facilities in Hungary and Mexico.• The above sites were expensive, but design and engineering changes could

be made quickly.• Mexico and Hungary was also near the biggest markets- US, Europe• The product was launched in record time and became a stiff challenge to

Playstation 2 of Sony.• When Sony started offering deep discounts, Flextronics shifted the supply

chain to China. So it was able to compete on price.• In 2003, Xbox took over 20% share in the Video Game Market from

Playstation 2.

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CISCO - MULTIPLE SUPPLY CHAINS

• Cisco has 3 different supply chains• For Standard, high volume Networking products are commissioned

from China• For Wide Variety of mid-value items, Cisco uses vendors in low cost

countries to build core products, but customizes those products in major markets like the US.

• For highly customized, low volume products, Cisco uses vendors close to main markets: like Mexico for US and Eastern European Countries for Europe.

• Cisco switches the manufacture of products from one supply network to another when necessary.

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GAP - MULTIPLE SUPPLY CHAINS

• GAP has 3 brands: Old Navy, Gap and Banana Republic

• Old Navy is for cost conscious buyers- sourced from China for efficiency.• Gap is for trendy buyers- chain in central America to ensure speed and

flexibility.• Banana Republic is Premium Clothing: Sourced from Italy to ensure

quality

• The use of 3 supply chains increases overheads, lower scale of economies and transportation costs, but it improved agility and adaptability.

• The 3 supply chains can also serve as a back up in case of emergencies.

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TOYOTA PRIUS SUPPLY CHAIN

• Toyota in 2000, did not accurately know the market for Prius in the US.• Prius was a new technology, a new product and appealed to a different

customer segment.• Instead of giving stocks to dealers, Toyota decided to maintain inventory in

a central stockyard.• Dealers took orders and communicated via the internet, and Toyota

shipped cars from the stockyards, and dealers delivered them.• Inventory was thus carefully managed.• In 2002, Toyota’s on the road in north California and Southeast were 7%

and 20%. But 25% of Prius were sold in North California and only 6% in Southeast.

• If the older system was used, then the model would have failed.

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VENDOR MANAGED INVENTORY VMI

• Many high tech companies like Flextronics, Solectron, Cisco and 3com keep supplier hubs close to assembly plants.

• Vendors maintain just enough stock at the hubs to support manufacturers needs, and hubs are replenished without waiting for orders.

• VMI systems allow suppliers to track consumption of components, reduce transportation costs and hubs can be used to support several manufacturers and derive scale benefits.

• VMI has problems: here, the suppliers own components till it enters the manufacturing facility. So the costs have passed from manufacturer to supplier/vendor. When the inventory costs starts rising, the vendors would charge higher costs for their products.

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SEVEN ELEVEN OF JAPAN

• SEJ is an adaptable, agile and aligned Supply Chain.• $21 Billion convenience store chain in Japan.

• Inventory turnover of 55- what is inventory turnover?• Gross profit margins of 30% and over 9000 stores.

• It responds to quick changes in demand- not just cheap and fast deliveries.• Real time systems to take customer preferences and data on sales and

customers.• Every store in connected with distribution centers, suppliers and logistics

providers.• Fluctuations in demand across stores, changes etc. etc. is responded fast.• Deliveries are scheduled within 10 minute margin, else heavy penalties.• Store shelves are reconfigured thrice daily

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SCM MANUFACTURING MANTRAS

• Commonality: It ensures that products share components

• Postponement: It delays the step at which products become different

• Standardization: Ensures that processes and components for different products are the same.

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A BAD SUPPLY CHAIN EXAMPLE

• Raymond’s apparel franchisee format.

• The brand has been mismanaged in recent times.

• No clearance of old stocks. It is just re-tagged and sold the next year

• The annual discounts offered by the company is not passed on to the customers. Discounts on purchases and not on sales.

• In contrast, Brand House retail of Reid & Taylor clears the stock twice every year by discounts and offers.

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FIAT AND TATA

• TATA was responsible for the commercial and distribution activities of Fiat until May 2012.

• Fiat’s sales are now going down from 1800 units a month to less than 900 per month

• Fiat’s low distribution network and service network is eroding its business in India

• Opel Motors experienced a similar problem in the past decade.

• Another example of an electronics giant was Grundig.