Aug 25, 2006
Supply Chain Management Review magazine has a new article titled The Intimate Supply Chain. Writes David F. Ross in the teaser:
After all the excess inventory and nonproductive processes have been removed, what\’s the next stage of supply chain advancement? This article contends that it lies in the creation of “intimate” supply chains. Intimate supply chains create value for customers at every touch point. And by doing so, they enable companies and their channel network partners to do business in a profoundly different way from the competition.
A little later in the article, David recounts the words of supply chain pioneer Arch W. Shaw writing in 1915:
Writing in 1915, supply chain pioneer Arch W. Shaw described distribution as composed of two separate yet interconnected functions: demand creation and physical supply. Demand creation, Shaw wrote, consists in communicating the value to be found in products and services that meet the desires and needs of the customer. However, the customer\’s willingness to expend the effort to make an acquisition would possess no economic value if these goods and services were not available at the time, place, and cost wanted. It is distribution\’s role to solve this basic problem of creating exchange value by ensuring that the flow of the output of production matches the customer\’s requirement as efficiently and as quickly as possible. Shaw felt that finding a solution “was the most pressing problem of the business man today.”
The first thought that crossed my mind when I read the above words – that\’s the very question that Lean and perhaps a whole slew of improvement methodologies seek to address.
But David Ross is introducing something more and he sets the stage for that introduction in the following way:
Until now, companies have sought to compete by constructing supply chain models that leverage lean manufacturing and supply-side management. They have deployed agile and flexible assets and information technologies in the pursuit of supply-channel networks capable of supercharging everything from product development to fulfillment. And all the while they have searched relentlessly for cost reductions.
And further more,
But while such initiatives have yielded sometimes dazzling advances in productivity and marketplace responsiveness, they are rapidly becoming insufficient in the face of globalization and the mass-consumption strategies of market leaders like Wal-Mart and Dell. In order to succeed against global competitors that can offer high-quality products at the lowest cost, companies must go beyond the traditional approaches to improving the business. But after they have removed the waste and streamlined the supply chains to minimize costs, what\’s next?
What\’s next? More of the same – that was my first answer. Before, I get into David\’s solution for the current general operating environment, I want to look at whether “More of the same” as described above needs to be superseded. Remember that David began with the excerpt – After all the excess inventory and nonproductive process have been removed… How does that insight square cohere with the era of globalization? It simply doesn\’t. In this first wave of globalization (both global sourcing and global markets), inventories have not decreased – they can\’t decrease unless they truly adopted lean techniques. How? In very general terms, the following table shows the types of inventory that can be found in the supply chain:
|Inventory Type||Mass production||Lean production|
|Work in Process (WIP)|
I have described the two contrasting philosophies in extreme terms purely for the purpose of clarity and not because firms actually compete in reality in such neat categories. Lean and mass production approach globalization in different ways. Mass production (driven in large part at driving down cost per unit) in the globalization age will incur inventory in the stages described above and that doesn\’t change if the firm is located in the US or in a foreign location. If the firm is a US firm located offshore carrying out manufacturing for markets in the developed world or a foreign firm located offshore producing again for markets in the developed world, the inventory carried by both firms would be largely along the lines described in the Mass production criteria. In the lean scenario, regardless of whether the firm is US based or foreign based, the idea would be to get closer to the customer and therefore the means of production would be situated accordingly.
Let me suppose the that the described competition: In order to succeed against global competitors that can offer high-quality products at the lowest cost, companies must go beyond the traditional approaches to improving the business. But after they have removed the waste and streamlined the supply chains to minimize costs, what\’s next? is really between US based firms that are situated in the US engaged in global sourcing but local manufacturing competing with a foreign firm located in a foreign location sourcing locally but producing for foreign markets. The competitive advantage is enjoyed by the foreign firm on account of lower costs of production. However, the foreign firm has to sacrifice agility and flexibility because the pipeline (i.e. shipping from a foreign market to the developed market) is quite long. Moreover, on account of being situated close to the market, the US firm enjoys the advantage of responding to the customer\’s needs quickly (the typical lean advantage of being situated close to the market).
So given that background, I\’ll take a look at intimate supply chains in the next post.