Outcome-Driven Supply Chains
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    Outcome-Driven Supply Chains Outcome-Driven Supply Chains Document Transcript

    • WINTER 2010 V O L . 5 1 N O. 2 Steven A. Melnyk, Edward W. Davis, Robert E. Spekman and Joseph Sandor Outcome-Driven Supply Chains 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 QUESTION Supply Chains How can supply chains be designed and managed The supply chains of tomorrow must deliver varying not only for reduced cost 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 outcomes, each 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 overfocusing on 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’ design and 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 Innovation 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 Company B 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. and consistency. 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). customer “peace of mind.” 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. uting products.ii SLOANREVIEW.MIT.EDU WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 37
    • 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 stood in, say, North America can become sources of Our goal here has been to demonstrate that one size confusion or be totally misunderstood when applied does not fit all and that future supply chains must in another setting. This point was driven home first and foremost be tailored to the end-user. In to- during the second 2010 and Beyond workshop, day’s world, it is typical that low cost can readily be held in Lausanne, Switzerland, in June 2007. Dur- replicated and thus is unlikely to lead to competitive ing the participant discussions the facilitators, who advantage over the long term. Supply chain manag- were from the United States, stressed the impor- ers will succeed only if they understand the needs of tance of collaboration. This term was bothersome key customers and strive to maintain alignment be- tween the supply chain’s design and its customers’ changing needs and desires. Supply chain managers will succeed only if they To paraphrase Charles Darwin, it is not understand the needs of key customers and strive the strongest that survives, it is the most to maintain alignment between the supply chain’s adaptable to change. design and its customers’ changing needs and desires. Steven A. Melnyk is a professor of operations in the Department of Mar- to some of the European participants, however, keting and Supply Chain Management at Michigan State University’s Eli Broad School of Management; who equated it, as a result of their history, with Edward W. Davis is Oliver Wight Professor of Busi- slavishly serving a hostile invader. Even when ness Administration and Robert E. Spekman is working with the British participants, the endur- Tayloe Murphy Professor of Business Administration at the University of Virginia’s Darden School of Busi- ing truth of George Bernard Shaw’s classic ness; and Joseph Sandor is Hoagland-Metzler observation — that the United States and England Endowed Professor of Practice in Supply Manage- are two countries “separated by a common lan- ment at Michigan State University’s Eli Broad School of Management. Comment on this article or contact guage” — became apparent. the authors at smrfeedback@mit.edu. Corporate cultures. A critical issue largely unad- REFERENCES dressed in studies of supply chain management is that of corporate culture or, as one participant put 1. T. Hill, “Manufacturing Strategy: Text and Cases, ” 3rd ed. (McGraw Hill Higher Education, 2000). it, “what people do when the boss is not around.” 2. D. Tapscott and A. Williams, “Wikinomics: How Mass This issue helps shape how employees react in dif- Collaboration Changes Everything” (New York: Penguin ferent situations and how they deal with changes. It Group USA, 2008). influences what supply chain members see, with 3. A.G. Lafley and R. Charan, “The Game-Changer: How whom they interact and how they go about their You Can Drive Revenue and Profit Growth With Innova- daily routines. Such behaviors reflect companies’ tion” (New York: Crown Business Publishing, 2008). core values, which need to be aligned if the supply 4. H.L. Lee, “The Triple-A Supply Chain, Harvard Busi- ” ness Review 82, no. 10 (October 2004): 102-111. chain is to succeed. 5. V.E. Narayanan and A. Raman, “Aligning Incentives in Supply Chains, Harvard Business Review 82, no. 11 ” Stage of product life. The demands placed on the (November 2004): 94-102. supply chain, as well as the kinds of product attri- i. W. McDonough and M. Braungart, “Cradle to Cradle: butes viewed as acceptable by the customer, change Remaking the Way We Make Things” (New York: North as the product moves through various stages of Point Press, 2002). evolution. For example, the outcomes of respon- ii. C. Markides, “Strategic Innovation, Sloan Management ” siveness, innovation and security may be critical Review 38, no. 3 (spring 1997): 8-23; and C. Markides, “Strategic Innovation in Established Companies, Sloan ” during the introduction and early growth stages, Management Review 39, no. 3 (spring 1998): 31-42. but less so as the product matures and concerns for cost and resilience become dominant. We would Reprint 51221. expect supply chain design and capability to adapt Copyright © Massachusetts Institute of Technology, 2010. to these changing factors. All rights reserved. 38 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 SLOANREVIEW.MIT.EDU
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