WINTER 2010 V O L . 5 1 N O. 2
Steven A. Melnyk, Edward W. Davis,
Robert E. Spekman and Joseph Sandor
REPRINT NUMBER 51221
S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S
Companies such as Wal-Mart Stores Inc.
have developed a demand-driven supply
chain, but every industry is different.
The key is to arrive at outcomes that
differentiate a supply chain from its
competitors — a blend that customers
find attractive and for which they are
willing to pay.
Outcome-Driven THE LEADING
Supply Chains How can
The supply chains of tomorrow must deliver varying not only for
degrees of six outcomes — the traditional cost-related but also for
benefit plus responsiveness, security, sustainability, resilience multiple
and innovation — depending on key customers’ needs. outcomes?
BY STEVEN A. MELNYK, EDWARD W. DAVIS, ROBERT E. SPEKMAN AND JOSEPH SANDOR FINDINGS
There are six basic
with a correspond-
ing set of specific
WHEN PROPERLY DESIGNED and operated, the traditional supply chain has offered customers design traits.
three primary benefits — reduced cost, faster delivery and improved quality. But managers are increas- Outcomes should
be blended, where
ingly recognizing that these advantages, while necessary, are not always sufficient in the modern business feasible, without
world. A new paradigm is emerging of a more sophisticated supply chain — one that also serves as a ve- any single one.
hicle for developing and sustaining competitive advantage under a variety of performance objectives. Supply chains’
In academic terms, we could say that while the old supply chain was strategically decoupled and management
price driven, the new supply chain is strategically coupled and value driven. More simply put, the sup- should be tailored
to particular operat-
ply chain should be designed and managed to deliver specific outcomes. So concluded participants in ing conditions.
COURTESY OF WAL-MART WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 33
S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S
the Supply Chain Management 2010 and Beyond a great deal of attention, with instances of tainted food
research initiative, a four-year set of surveys and products from China and tainted generic drugs from
workshops on which this article is based. (See India. It implies that the supply chain’s products will
“About the Research.”) not be contaminated or otherwise unsafe.
We believe that supply chains should provide Sustainability differs from security, as it involves
one or more of six basic outcomes: “cost,” respon- “green” — environmentally responsible — supply
siveness, security, sustainability, resilience and chains that eliminate waste, reduce pollution and
innovation. contribute in a positive manner to improving the
Cost. Reducing price (initially) and cost (ulti- quality of the environment through eco-friendly
mately) are the key objectives. This “cost” outcome processes, subassemblies and finished goods.
is a combination of monetary cost (the primary Carbon footprint reduction along the supply chain
performance criterion) and delivery and quality is one example.
Resilience ensures that the supply chain can re-
ABOUT THE RESEARCH cover quickly and cost-effectively from disruptions
This article is based in large part on the findings of the Supply Chain Management 2010 caused by natural disasters (such as earthquakes),
and Beyond research initiative, which since its inception in 2005 has carried out a large- social factors (employee strikes), medical emergen-
scale review of the supply chain management literature, developed a survey instrument cies (epidemics such as H1N1 flu), economic
(questionnaire) for identifying major issues associated with the supply chains of today
and tomorrow, and completed four research workshops.
setbacks (the bankruptcy of a critical link in the
The questionnaire was originally constructed from the findings of the literature chain) or technological failures (a software crisis).
review, but it was also seen as a living document in that it subsequently was modi- Innovation. In recent years, many companies have
fied as necessary to reflect insights gained from each workshop. The selection of the increasingly relied on their supply chains as a source
survey participants was considered of primary importance to the success of the
of new products and processes or improvements in
study. Thus the research team selected recognized academic supply chain research-
ers and knowledgeable representatives from companies generally regarded as existing ones. Organizations’ key innovation tasks
leaders in the practice of supply chain management. have been performed not only internally but also in
The workshops were designed to bring together all participants in a survey collaboration with supply chain partners.2 For exam-
group to review the survey findings, identify the current and future states of supply
ple, Lafley and Charan3 relate how Procter & Gamble
chain management, and help uncover major gaps affecting the progress of supply
chains from current to future states. Because supply chain management is so
Co. obtained new antiwrinkle technology from a small
strongly influenced by practice and because it is an emerging field, the workshops French cosmetics company, which led to P&G’s highly
provided a valuable opportunity for participants to share their experiences in a struc- successful Olay Regenerist line of skin creams.
tured environment. (The number of academic researchers was limited to a Once the desired outcome is selected, it influ-
maximum of one for every two practitioners; and to ensure active discussion be-
ences critical supply chain characteristics and
tween participants, each workshop was limited to a maximum of 40 people.) Each
workshop had a central organizing characteristic, which allowed the researchers to practices; some of these design traits are summarized
focus on specific issues of importance to the project as well as to tailor some of the in the table “Supply Chain Outcomes and Key De-
content to the needs and interests of local hosts. (Workshops were held in Michi- sign Traits” (p. 37). But it is important to recognize
gan, Switzerland, Virginia and Alberta.)
that while the traits must be present somewhere in
Generally, the workshops reviewed the responses to the survey requests, identi-
fied the present and future states of supply chain management, and explored how to the supply chain, they need not manifest themselves
reduce the obstacles to, and enhance the facilitators of, the supply chain of the fu- in each and every link. Actually creating and harness-
ture. After each workshop ended, the research team reconvened in order to glean ing these traits in the right places, however, is a major
insights about what was learned and to identify any unexpected results. management undertaking, especially when the sup-
ply chain is comprised of more than one company.
(secondary criteria). Using the terminology of Terry For many managers new to supply chain manage-
Hill,1 cost is the “order winner,” while delivery and ment, this challenge is made more daunting by the
quality are “qualifiers.” lack of useful frameworks and guidelines, which are
Responsiveness is the ability to change quickly necessary if managers are to answer questions such as:
in terms of volume, mix or location as a function of ■ How do you design a supply chain for a specific
changing conditions. Typically, responsiveness desired outcome?
warrants a higher price. ■ When can outcomes be blended, and under what
Security is an outcome that has recently garnered conditions should they not be?
34 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 SLOANREVIEW.MIT.EDU
■ How do you turn your supply chain into a com- BLENDING SUPPLY CHAIN OUTCOMES
petitive weapon? TO ACHIEVE COMPETITIVE ADVANTAGE
While Company D appears to offer low-cost products or services to the
We address these questions here.
exclusion of all other outcomes, it lacks the versatility of Companies A, B
and C to respond to changing conditions.
Blending Supply Chain Outcomes
Some researchers and managers might be tempted “Cost”
Fraction of each outcome in
to regard the six basic supply chain outcomes as company's overall blend
mutually exclusive. But in practice, effective supply 1.0
chains are often hybrids — reflecting various com- 0.8 Resilience
binations of the six. Hau L. Lee4 in fact concluded 0.6
from his extensive study that supply chains focus- 0.4
ing on only one of the six outcomes were fatally 0.2 Company A
flawed, as they could not develop and maintain a 0 Company C
sustainable advantage over the competition. In par- Company D
ticular, Lee found that supply chains offering low
cost alone were unable to respond sufficiently to
unexpected changes in demand and supply. Sustainability Security
Similarly, the SCM 2010 and Beyond workshops
indicated that such “overfocused” supply chains
often cannot meet the requirements of the newly Responsiveness
emerging business environment. In the figure
“Blending Supply Chain Outcomes to Achieve “decent” job on every outcome but fails to excel on
Competitive Advantage,” for example, it appears any one of them. The problem with this approach is
that Company D is overfocused on cost. It will likely that the company may suffer from the curse of me-
outperform any competitor as long as the customer diocrity, possibly rendering it a weak competitor.
demands the lowest price above all else. However,
the other three companies are more adaptable and Blending outcomes places greater emphasis
agile, as they offer a blend of outcomes. on the alignment of incentives within the sup-
The goal is to arrive at a blend that differentiates ply chain. The flexibility gained by blending allows
a supply chain from its competitors — a blend that greater responsiveness to the needs of critical cus-
key customers find attractive and for which they are tomers, potentially resulting in a more competitive
willing to pay. Consider the following propositions supply chain. But the incentives needed to ensure
about blending outcomes, supported by the current the appropriate actions and performance can vary
results of the SCM 2010 and Beyond project: substantially for different outcomes. Incentives for
cost reduction, for example, may conflict with those
Blending outcomes means making trade-offs. for responsiveness and resilience.5
When the supply chain manifests numerous out-
comes, it is unlikely to outperform, on any single Blending outcomes complicates the perfor-
outcome, another supply chain that is more heavily mance measurement process. Dealing with only
focused on it. That is the price paid for having a sup- one outcome makes it easier to design a simple
ply chain that is adaptable, and it helps the company and mutually consistent set of metrics. When
differentiate itself in the marketplace. On the other blending several outcomes, however, the measure-
hand, a greater mix may position a supply chain for ment of performance becomes by necessity more
faster adaptation when market conditions change. complex — reductions in performance along one
dimension might be necessary, for example, to allow
When blending outcomes, it is important for performance improvements in other dimensions. It
at least one of them to stand out. It might be is also important to choose performance measures
tempting to try to build a supply chain that does a with care. If the goal is, say, to develop a supply chain
SLOANREVIEW.MIT.EDU WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 35
S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S
that delivers responsiveness and sustainability, a outcome negatively affect the ability of the supply
focus on measuring and rewarding cost might cre- chain to attain the other outcome. Cost-oriented
ate confusion and frustration. supply chains regard slack as a form of waste —
something that must be eliminated or reduced. But
Under certain conditions, blending outcomes al- innovation demands slack for success. Because fail-
lows for the leveraging of practices and resources. ure is likely to occur during the innovation process,
Some combinations of outcomes are complemen- slack provides safety in the form of resources to
tary, as the practices and resources required to support complete the task without jeopardizing other as-
a particular outcome may also serve other desired pects of the business.
outcomes. For example, a cost-focused supply chain, Cost-driven supply chains also typically demand
with its emphasis on waste reduction and control, standardization of processes. In such systems, the
can more readily be transformed into a sustainable mantra is often “Without standardization, there is
supply chain because many of the underlying tools no opportunity for improvement.” Yet for innova-
and processes are the same. Similarly, the sharing of tion truly to be successful, a diversity of processes
practices and resources is also possible when blend- and approaches is often needed.
ing responsiveness and resilience. Responsiveness
often demands buffers with respect to capacity, lead Adaptability: Key to Success
time and inventory, which also help increase resil- By beginning with the outcomes and designing the
ience to supply chain disruptions. supply chain to deliver them, the goal is not simply to
align incentives or metrics. Rather, it is also to align
The same or similar outcomes may be achieved the capabilities of the supply chain with the mem-
by following different paths. Given the diverse bers’ shared vision for competitive success — based
ways in which different companies might achieve on a profound understanding of key customers. Full
realization of this goal depends on a va-
riety of factors, including the following:
Some researchers and managers might be tempted to
regard the six basic supply chain outcomes as mutually Critical supply chain drivers. Compa-
exclusive. But in practice, supply chains are often nies such as Wal-Mart, Toyota and Dell
hybrids — reﬂecting various combinations of the six. have developed supply chains that are
demand driven. But supply chains can
also be supply driven, as when dealing in
their supply chain objectives, there is no one mono- oil, gas, electricity and other products that cannot be
lithic approach to a set of supply chain outcomes. stored for long periods of time. Supply chains can also
For instance, if one company wants to skim the be technology driven. What works well in one indus-
price-insensitive segments of the market to recoup try or context might not work in another.
its cost of innovation, and another company favors
a penetration strategy to gain large market share at Locations where the supply chain is deployed.
a lower margin, the outcomes could be much the Most of the academic work done in supply chain
same. The differing approaches may be inevitable, management has been limited to developed econo-
even desirable, as each company should address its mies. Yet as companies focus more on low-cost-
unique customer base in an optimal manner. country sourcing and other strategies that depend
on emerging economies, many of the traditional
But while some outcomes can be blended effec- assumptions regarding factors such as transporta-
tively, other outcomes probably never should be. A tion, infrastructure, work force and security must
primary example involves innovation and cost (es- be revisited.
pecially if the latter outcome is pursued through the
use of lean systems and other inventory-reducing Countries’ cultural differences. Business terms
practices). Here the procedures for attaining one and practices that work well or are clearly under-
36 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 SLOANREVIEW.MIT.EDU
SUPPLY CHAIN OUTCOMES AND KEY DESIGN TRAITS
Certain characteristics and practices are essential to addressing a set of objectives that in turn may ultimately
lead to achievement of a particular outcome.
OUTCOME OBJECTIVE KEY DESIGN TRAITS
Cost Reduce product ■ Reduced use of slack in its three forms — inventory, lead time and capacity.
costs, ensure timely ■ Standardization of products and processes where possible.
and reliable delivery ■ Emphasis on reducing waste and variance across the supply chain.
and maintain quality. ■ Modular supply chain design, involving close interaction and integration with immediate cus-
tomers and first-tier suppliers (other suppliers are expected to manage their own suppliers).
Responsiveness Respond to changes ■ Close information linkages with critical customers and suppliers to monitor demand,
in demand (volume, facilitate/improve forecasting and monitor state of supply.
mix, location) quickly ■ Excess capacity — redundancy — in the supply chain (especially on the upstream side).
and at reasonable ■ Supply planning to include not only production capacity but also logistics capacity.
cost. ■ Prequalified suppliers.
■ Emphasis on small-lot production.
■ Extensive supplier development and supplier assessment systems.
■ Information systems to coordinate production/information flows.
Security Ensure that supplies ■ Emphasis on visibility and transparency, provided through integrated information
coming through the systems (or, in extreme cases, vertical integration) throughout the supply chain.
supply chain are ■ Redundancy of resources in case of a problem with a supplier.
protected from dis- ■ Limited number of partners (fewer opportunities/entry points for a possible threat).
ruption because of ■ Mapping of the supply chain to identify possible weak points.
external threats. Pro- ■ Comprehensive and integrated supply chain planning and management.
tect product integrity ■ Emphasis on control through certification, extensive auditing or other means.
Sustainability Provide products ■ Visibility/transparency throughout the supply chain to ensure that all members are aware
through a supply of threats or opportunities.
chain that ensures ■ Greater emphasis on the Three Ps (product design, process, packaging).
controlled and mini- ■ Integrated supply chain planning and management, in recognition that design must begin
mal resource impact, with resource extraction and end with product disposal/renewal.
both today and in the ■ Use of broader performance measurement systems and measures (total cost of owner-
future. Ultimately im- ship, triple bottom line).
plement and maintain ■ Extensive supplier prequalification and assessment to ensure that the “right” suppliers
a “cradle to cradle” are selected and that they understand what is required.
perspective.i ■ Extensive use of audits and certification standards throughout the supply chain (ISO 14001).
■ Introduction of systems for product takeback (reverse logistics) and marketing waste.
Resilience Develop a system ■ Emphasis on visibility and transparency, provided through integrated information
that can identify, systems (or, in extreme cases, vertical integration) throughout the supply chain.
monitor and reduce ■ Acceptance of the need for excess resources (inventory, capacity, lead times).
supply chain risks ■ Mapping of the supply chain to identify possible weak points.
and disruptions, as ■ Integrated supply chain planning and management.
well as react quickly ■ A focus on possible threats not only to suppliers but also to logistics linkages.
and cost-effectively. ■ Presence of precertified/prequalified suppliers.
Offer the critical
■ Extensive use of contingency planning (“What if?” analysis).
Innovation Provide critical ■ Development and protection of intellectual property, due to cooperation with key suppliers.
customers with a ■ Deliberate presence of excess resources.
stream of products ■ Viewing suppliers as sources of “near innovations” — developed to solve problems in
and services that not other markets but that have to be refined before they can be used to address current cus-
only are new but also tomer needs.
address needs that ■ Close integration, especially with critical customers and suppliers, so as to innovate jointly.
competitors have ne- ■ Encouragement of a wide range of different perspectives and solutions.
glected or not served ■ Avoidance, during early stages of product development, of specific performance metrics
well. Provide new so as not to stifle innovation.
ways of producing, ■ Offering a wide range of supply chain structures ranging from purely modular to purely
delivering or distrib- integrated, depending on the type of innovation being pursued.
SLOANREVIEW.MIT.EDU WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 37
PDFs ■ Permission to Copy ■ Back Issues ■ Reprints
Articles published in MIT Sloan Management Review are
copyrighted by the Massachusetts Institute of Technology
unless otherwise specified at the end of an article.
MIT Sloan Management Review articles, permissions,
and back issues can be purchased on our Web site:
www.pubservice.com/msstore or you may order through
our Business Service Center (9 a.m.-7 p.m. ET) at the
phone numbers listed below. Paper reprints are available
in quantities of 250 or more.
To reproduce or transmit one or more MIT Sloan
Management Review articles by electronic or
mechanical means (including photocopying or archiving
in any information storage or retrieval system) requires
written permission. To request permission, use our Web site
(www.pubservice.com/msstore), call or e-mail:
Toll-free: 800-876-5764 (US and Canada)
Posting of full-text SMR articles on publicly accessible
Internet sites is prohibited. To obtain permission to post
articles on secure and/or password-protected intranet sites,
e-mail your request to MITSMR@pubservice.com
MIT Sloan Management Review
PO Box 15955
North Hollywood, CA 91615