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The Essence of Excellence 2006
The Essence of Excellence 2006
The Essence of
EXCELLENCE
S
ince ancient times, military strategists, civic
MIT’s Supply Chain 2020
planners, and global traders have all viewed inte-
Project shows that true grated logistics as strategically important. But it
By Larry Lapide supply chain superiority is only within the last dozen years that the corpo-
rate world has begun to acknowledge supply
does not come by
Larry Lapide is a research chain management as a discrete discipline that is essential
director at the Center for emulating the best to a sound business strategy. Much of this recent realization
Transportation & Logistics, practices of others. Rather, has been sparked by the widely publicized successes of
Massachusetts Institute of companies such as Toyota, Wal-Mart, and Dell. Each has
it flows from leveraging a
Technology. effectively demonstrated that back-office functions can be
strategic framework and turned inside-out to help win the long-term business battles
deeper set of guiding being fought by front-office sales and marketing staff.
The visibility of those companies’ achievements has
principles that lead to
encouraged supply chain managers from many other indus-
competitive advantage for tries to benchmark against their practices and to try to apply
your company. This is the some of the practices in their own organizations.
Unfortunately, such best-practice emulation rarely works
notion of the “competitive-
well. Toyota’s approach to supply chain superiority is not
ly principled” supply chain. the same as Dell’s or Wal-Mart’s. One size does not fit all;
Here’s a look at the not only are there obvious differences between the automo-
tive industry and the high-tech sector, but the companies
framework and principles
themselves operate quite different supply chains and com-
that can form the core of pete in different ways. So this begs a more interesting ques-
supply chain excellence. tion: What exactly is an excellent supply chain?
The Center for Transportation & Logistics at the
Massachusetts Institute of Technology (MIT) is striving to
answer that question. Last year, we launched a multi-year
research project that we call Supply Chain 2020 (SC2020).
Rethinking the
Meaning of
“Excellence”
Early in the SC2020 project,
the research team wrestled
with the concept of excellence.
We knew that our SC2020
team was not the first to inves-
tigate the idea of the “excel-
lent” supply chain. Various
business publications and
more than a few consultants
have bandied the concept
around over the last several
years. Some have even gone so
far as to rank high-performing
supply chains based mostly on
financial and qualitative crite-
ria. We believe, however, that
those rankings are fundamen-
tally flawed.
For example, many
observers would argue that a
company that has succeeded
financially for many years must
have an excellent supply chain
The project hopes to identify the factors that will be critical while those that have done poorly have supply chains that
to the success of future supply chains. It will also map out perform poorly. However, although there are broad linkages,
the process innovations that will underpin successful supply there is no direct correlation. A company can turn in out-
chains as far into the future as 2020. The first phase of our standing financials despite having lackluster supply chain
project, completed in the summer of 2005, has begun to capabilities. A host of companies live off their robust brand
answer the “what” question: What makes successful supply names and their prowess in marketing and sales.
chains tick? The second phase, now underway, is attempt- Such was the case for clothing manufacturer Levi Strauss
ing to answer the “why” and the “how” questions. during the 1980s. Worldwide demand for its branded jeans
We hope that part of the work of the SC2020 Project will frequently outstripped supply. The jeans flew off retailers’
be to take the emphasis off best practices. It is not our shelves faster than Levi’s could provide them, creating scarci-
intent to dismiss the value of best-practice benchmarking in ty that further burnished its brand image. The company was
the right context. But it concerns us that managers contin- highly profitable then, extracting high margins based on the
ues to search fruitlessly for the “silver bullet” practice that brand’s global mystique.
they expect will transform their organizations into the next In contrast, a company that is struggling financially might
Toyota or Dell. have an excellent supply chain if it is aligned to meet corpo-
What we are finding so far is that there is a strategic rate goals or if the supply chain is designed to help it survive
framework and a set of deeper guiding principles—not best financial ups and downs. For example, Internet retailer
practices—that underpin supply chain superiority. This arti- Amazon.com was losing money during its early years—a
cle introduces the concept of “the competitively principled” time when it was creating an innovative supply chain to sup-
supply chain—one in which strategies, operating models, port its emerging business model. The company’s develop-
ment involved substantial investment in the physical infra- competitive strategy of the overall business. (See Exhibit 1.)
structure needed to fulfill a large number of small orders Second, excellent supply chain managers recognize and act
shipped by parcel. It also established several highly efficient on the idea that they need to adhere to the intent of the
distribution centers that could handle orders for a broad supply chain strategy. They don’t exhibit a “silo” mentality,
range of items picked at a warehouse as “one-offs.” Since and they distinguish between those operations that have to
then, of course, Amazon has become profitable, bolstered by be best-in-class when compared to competitors and others
an excellent supply chain that both supports and enhances that need to be only par. Therefore, trade-offs need to be
its business strategy. made among departments in terms of the effort expended
So if supply chain excellence cannot be defined simply and resources applied. These trade-offs need to align with
by strong financial performance, what’s a better way? the competitive strategies in place.
Consultants and analysts often define excellent supply Putting it another way, excellent supply chains have an
chains as those that leverage so-called best practices and intended focus and purpose, and excellent supply chain
technologies—for example, the most effective and efficient managers understand, act on, and respect those intentions.
use of key performance metrics, or the most consistent col-
laborative planning with suppliers, or the smoothest integra- Framework for Excellence
tion with new product development. However, realistically, Qualitative research during phase one of SC2020 delved
there is no such thing as a “best” practice; best practices into nine industries’ drivers and challenges and the supply
only work under certain business conditions in certain chain responses to them. In addition, the supply chains of
industries. Dell’s direct-sell, build-to-order business model 21 case-study companies were profiled to identify the
does not directly apply to other industries such as brick-and- important linkages that exist among competitive strategies,
mortar retail businesses like Wal-Mart and Tesco. Indeed, it operating models, operational performance objectives, and
does not even apply to all segments of the computer hard- business practices. The research supported the premise that
ware business. To supply sophisticated high-end computer an excellent supply chain:
servers and services to large businesses that operate global 1. Supports, enhances, and is an integral part of a compa-
and complex technology networks, IBM’s high-touch cus- ny’s competitive business strategy.
tomer service model is more apropos. 2. Leverages a supply chain operating model to sustain a
Some months into our research, we noticed a shift in the competitive edge.
conversation. Our research had started out with a focus on 3. Executes well against a balanced set of competitive
best practices. But as more and more findings came in, the operational performance objectives.
concepts of “tailored practices” and “underlying principles” 4. Focuses on a limited number of “tailored” business
surfaced in our discussions. We began to think about viewing practices that reinforce each other to support the operating
SCM excellence “top down”—from the strategic level down model and best achieve the operational objectives.
to the practices and their underlying core principles that While these four characteristics sound relatively straight-
could be taught, encoded, and implemented. The principles forward and easy to put in place, they are not. It takes years
would, we hoped, answer fundamental questions such as: to mesh the elements together—and a great deal of effort to
What really makes this supply alter them as the competitive
chain so effective? What EXHIBIT 1 landscape changes over time. If
trade-offs are being made? Framework for an Excellent Supply Chain you were to start from scratch
Today, with the comple- to build an excellent supply
tion of the phase-one intelli- Competitive Landscape chain, you would start on the
gence-gathering and analysis, Excellent Supply Chain first characteristic, which is
our SC2020 research has strategic in nature. You would
determined that an excellent Business Strategy then work sequentially down
supply chain is essentially a the list above to those charac-
“competitively principled” Operating Model teristics that are more tactical
supply chain. The supply and operationally oriented. In
chain’s operation is guided by Operational Performance Objectives the course of doing this, upper-
principles along at least two level characteristics might have
dimensions. First, the supply to be revisited. You would fol-
chain is strategically designed Tailored Business Practices low a similar process if you
and operated according to an • Fit were trying to drive an existing
--Consistent
“excellent supply chain --Reinforcing supply chain toward excellence.
framework” (addressed --Cross-Optimized It’s valuable to look at key
below), which ensures align- • Principles Leveraged aspects of the characteristics in
ment between supply chain detail, moving from the top
business practices and the level down.
mance of the customer-facing operations of a supply chain. intensive companies such as semiconductor fabricators
(Note that metrics of this type do not directly relate to the and petrochemicals producers generally run around the
metrics on a company’s financial statements.) Companies clock to maximize the use of their expensive production
in industries with high-margin, short-life-cycle products equipment.
often emphasize these types of objectives; examples include Common supply chain metrics that fall into each of
the pharmaceutical, fashion apparel, and media and enter- these categories include: costs, which measure efficiency;
tainment industries. fill rates, which measure customer response; and invento-
2. Efficiency. These operational performance measures ry turns, which measure asset utilization. Use of several
are internal; they assess how well a supply chain converts types of metrics requires trade-offs—for instance, improv-
inputs into outputs. Examples include labor productivity, ing fill rates often requires higher inventories and
labor content, supply chain costs, and waste. (Note that increased costs.
these metrics relate directly to metrics on the income state- A competitive strategy calls for using a balanced set of
ment.) Cost-conscious companies such as food and bever- operational performance metrics that purposefully puts vary-
age, basic-goods retail, and industrial supplies often focus ing emphasis on metrics from each of these three
on these types of objectives. types—placing greater focus on some and less on others. As
3. Asset utilization. These operational measures are also depicted in Exhibit 4, the trade-offs are necessary in order
internal. However, they focus on how effectively assets to place the focus (represented by the small circle’s position
such as facilities and inventories are being used. (They in the triangle) in alignment with the business strategy and
relate directly to the balance sheet.) For example, capital- the operating model.
EXHIBIT 3
Dell/High Tech Highest value-to-price Direct sales to cust- 1. Efficiency (e.g., costs) Consigned inventory supplier hubs.
(Computers) provider of computers omers via Web/phone. 2. Asset utilization Demand shaping.
and accessories to price- Build-to-order 3. Customer response Inbound transportation collaboration.
conscious customers. manufacturing.
Box-level service.
IBM/ High Tech Diversified and value- Direct, single face to 1. Customer Response Consolidated customer
(Computers) added provider of net- customer via sales reps. (e.g., satisfaction fulfillment process.
worked technology Build-to-order and sales rep efficiency ) Launch "buffer" manufacturing.
solutions to businesses. manufacturing. 2. Efficiency Centralized procurement.
Extensive pre- and post- 3. Asset Utilization Consolidated and outsourced logistics.
sales support.
Cisco Systems/ Market world-class IT Outsourced supply chain 1. Efficiency (Costs) Virtual supply chain.
High Tech solutions. leveraging partners. 2. Customer response Partner visibility into end-to-end
(Communications Be industry leader in World-class new-product- 3. Asset utilization processes.
Equipment) the data-networking introduction process. Early design engagement.
market. Facilitate rapid Operating standards to support
Become end-to-end integration of technology- rapid assimilation of acquired
solution provider. rich acquisitions. companies.
Wal-Mart/Retail Everyday low pricing Lowest-cost, brick-and- 1. Efficiency (e.g., Vendor collaboration with co-
for cost-conscious mortar retailer with supply chain costs) managed inventory programs.
customers. supplier/retailer DC-to- 2. Asset utilization Flow logistics distribution including
store flows. 3. Customer response cross-docking, direct-store-delivery,
Large-format stores and differentiated flow.
carrying a wide variety of Network design incorporating
products (not necessarily large-sized DCs and short-haul
brands and SKUs). private fleets for economies of scale.
Amazon/Retail Be the largest one-stop Internet retail with unit- 1.Customer response Drop-ship fulfillment from multi-tier
shopping site on the level picking, packing, (e.g., availability) partner network.
Internet. and parcel fulfillment. 2. Efficiency Advanced batched-order warehouse
Offer customers low Multi-tier network of 3. Asset utilization picking, packing, and shipping strategies.
prices, convenience, inventories for distributed Customer lead-time service-
and a wide selection fulfillment from partners window management.
of merchandise. to offer scale and scope.
Limited Brands/ Sell innovative, Control supply chain 1.Customer response Segmented fashion vs.
Fashion Apparel Retail technologically advanced, operations from plants to (e.g., responsiveness) basic supply chains.
high-margin fashion DCs to owned stores. 2.Asset utilization / Captive global sourcing company.
products. High shelf availability at efficiency Captive, shared-services logistics
Reduce risk by balancing store level. provider--from plants to stores.
basics vs. fashion mix.
*Note: Performance objectives ranked by the competitive focus placed on each type, with examples for the highest focus.
ning and forecasting, these retailers are increasing their influ- beyond that provided by the customer’s own margin contri-
ence (albeit on a low level) over the suppliers. bution. For example, Blockbuster Video and the movie stu-
2 . I n c r e a s e T r a n s p a r e n c y . By increasing visibility
dios leverage the supply-contract operating principle in their
throughout the supply chain, participants can better manage business relationships. The studio sells a movie to
it. Collaboration between a supplier and customer in which Blockbuster at a heavily discounted price with an under-
data is shared on a one-way basis increases transparency standing that it will receive a portion of the rental revenue.
along a supply chain. For example, while historical POS In this manner, Blockbuster Video can buy more copies of a
data from RetailLink helps to increase Wal-Mart’s influence movie for the same investment as it could before the sharing
of revenues. Moreover, it can increase rev-
It is extremely important to think enue by fulfilling more requests thanks to
higher availability.
about leveraging operating principles, As the examples cited demonstrate,
rather than best practices. Best practices change supply chain operating practices can
leverage a variety of principles depending
over time; principles do not. on how they are implemented. So it is
important to identify all the operating
over its suppliers, the suppliers in turn are getting more principles being leveraged by a particular
information on Wal-Mart’s needs. Generally, increased practice because they provide the basis
transparency can aid in better forecasting of demand for assessing the cost-benefits of that
and supply among supply chain partners. Dell and Wal- practice. They also help gauge whether
Mart both provide their suppliers with forecasts of their the practice is consistent with, reinforces,
needs out to 13 weeks or more. and cross-optimizes the company’s other
3. Relax Constraints. If a supply chain constraint is practices. In this regard, tailored prac-
removed or relaxed, it can lead to more optimized opera- tices work best when the operating principles being lever-
tions. Often in collaborative relationships, the customer aged by them support similar resource trade-offs and target
shows more flexibility. For example, a customer might agree similar performance objectives.
to accept deliveries within a window of time rather than at a
fixed time. In this case, its supplier can better optimize its Leveraging the Principles
operations because the delivery constraints for the cus- These days, it is extremely important to think about leverag-
tomer’s orders have been relaxed. The supplier now has ing operating principles rather than best practices. Best
more options with which to optimize the delivery of all of its practices change over time, but the principles upon which
customer orders, using techniques such as increased load the practices are based do not. Indeed, supply chain prac-
consolidation. tices can eventually become obstacles to meeting corporate
4. Match Supply with Demand. This principle involves goals.
balancing supply and demand over time in order to satisfy Therefore, to have an excellent supply chain—a competi-
demand, optimize operations, and minimize wasted resources. tively principled one—it is important for supply chain man-
It is predicated on the realization that marketing and sales agers to create an evolving set of tailored practices based on
decisions made jointly with supply chain operations provide understanding the operating principles being leveraged by
better outcomes than decisions made by each organization in them. These practices must also operate within the context
isolation. The sales and operations planning process, an inter- of the “excellent supply chain framework.” This understand-
nal integration process practiced at many companies, applies ing will help managers to develop the executive-level busi-
this principle to tactical planning. Dell’s demand-shaping ness cases needed to drive change.
practice uses it on a short-term, execution basis. In addition, a That is why the SC2020 Project is currently identifying
collaborative planning, forecasting, and replenishment pro- the operating principles applied in today’s excellent supply
gram that includes joint forecasting and planning between a chains. The next phase of the research promises to be
supplier and customer also uses the principle. rewarding. We expect to learn much about the contours of
5. Trade off Inventory Against Cycle Time. Supply chain tomorrow’s supply chains as we start to understand what
integration practices that reduce the cycle time of the order- external factors and business demands will shape them. And
ing and fulfillment process—by using the Internet or other we expect to gain a clearer picture of what companies will
electronic channels, for instance—also reduce the invento- have to do to prepare for that future. !!!