Supply Chain Integration:               Putting Humpty-Dumpty Back Together Again1             Geoffrey G. Parker         ...
1       Introduction“How do we manage the networks of suppliers we are building in order to becompetitive?” In our fieldwo...
1.1     Design for Supply Chain IntegrationA key feature of the economy for the past century has been that the wealth ofte...
2       Background and Motivation2.1     Product outsourcing has happenedAs noted above, outsourcing in the product domain...
suppliers (Williamson 1975). One key source of transaction costs, product integration, isespecially important in industrie...
pieces should be sub-contracted to a supplier of design services, and what should beretained internally.Given that much pr...
subcomponents and services from a network —or supply chain — of independentsupplier companies. But how does it manage this...
We examine each of these dynamics in more detail below.3.2     Making Life Easy for the Competitor (or Maybe Creating One)...
is disbanded, a firm may lose its capability to create new technological advantages andbecome utterly dependent on the sup...
Microsoft something of a monopolist’s power and enabled them to capture the bulk of thesupply chain’s profits (Carroll 199...
The danger of falling into this trap is especially acute for companies that outsource acomponent to one supplier for a lon...
Component Costs in Dollars vs. Time  100   75   50   25    0        0    5     10    15     20     25    30     35    40  ...
General Motors and Ford may have fallen into this trap when they decided to spin offtheir component divisions. The two new...
Component Costs in Dollars vs. Time          100           75           50           25            0                0   5 ...
Microsoft’s detractors claim that Microsoft uses its in-depth knowledge of the Windowsoperating system to give it an edge ...
component while maintaining adequate knowledge to keep many outsourcing risks andintegration penalties under control. A si...
Denso. So it lets Denso produce most of them; thus keeping average parts costs down.However, by designing and manufacturin...
systems-integration skills, such as systems engineering. If employees can carefully designa product so that its component ...
In the next section, we consider issues of supplier relationships that affect a supplier’swillingness to invest in the fir...
4.1     Key factors in building integration-enabling capabilitiesThe negotiation between firms and suppliers over which pr...
IncentivesWe assume that supply chain partners act in their own self-interest. That is, supplierscannot be compelled to un...
Supply chain partners appropriate the profitFast forward to 2000 and the environment is far different. Both Microsoft and ...
4.3     Supplier Incentive DesignsParker (1998) developed models of capability development for suppliers under differentsh...
offer substantially higher sharing contracts than those (such as space flight systems) thatemploy technologies of relative...
From these information sources, we have come to believe that there is a job, the supply-chain integrator, that has become ...
veteran employees who learned their skills in large, vertically-integrated manufacturingfirms.We suggest that the supply-c...
higher-end automobiles incorporate specialized laptop-type computers as subsystems toprovide navigation and other informat...
But, inevitably such obstacles will arise. Thus, the integrator must also be a skilledpractitioner of “soft” people skills...
Integrators need not know how to evaluate all the problems themselves; knowing all thepossible technological ramifications...
knowledge of what supply chain strategies information technology can and cannot enableis essential.The care and feeding of...
supply-chains is becoming increasingly more critical, makes the expense of setting upsuch training programs unavoidable. A...
We firmly believe that integration will become the key issue for firms as they design theirphysical and technology supply ...
ReferencesAlden, E. (1999). One-Stop Shop Is No Cure-All: Supply Chain Problems Can be    Extremely Costly but Passing the...
Fine, C. H. (1998). Clockspeed: Winning Industry Control in the Age of Temporary    Advantage. Reading, Mass., Perseus Boo...
Zaheer, A., B. McEvily, et al. (1998). “Does Trust Matter? Exploring the Effects of   Inter-Organizational and Inter-Perso...
Upcoming SlideShare
Loading in …5
×

SCM Integration

1,721 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,721
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
29
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

SCM Integration

  1. 1. Supply Chain Integration: Putting Humpty-Dumpty Back Together Again1 Geoffrey G. Parker Edward G. Anderson Jr. Tulane University University of Texas Freeman School of Business McCombs School of Business New Orleans LA 70118 Austin TX 78712 504.865.5472 512.471.6394 gparker@tulane.edu edward.anderson@bus.utexas.edu We propose integration and learning as appropriate lenses through which to view supply chain design decisions. As background, we discuss the challenges already posed by product outsourcing, and future challenges likely to arise as design outsourcing becomes more common. We describe outsourcing traps which are decisions that improve a firm’s short-run cost position but fail to take integration issues into account and lead to a long-run cost penalty. We present supply chain design for integration, discussing key factors in building integration capability. We then describe the change in supply-chain management toward supply-chain integration, finding that as large firms disaggregate into linked chains of focused firms specializing in distinct areas, those focused firms paradoxically require more highly-skilled generalists, "supply-chain integrators," capable of coordinating product development, marketing, production, and logistics within and across organizational boundaries. Finally, we call for systematic study of integration and learning in supply chain design. August 4, 2000 To Appear as a Chapter in the Book: Future Directions in Supply Chain and Technology Management This book is to be published in conjunction with the Frank Batten Young Scholars Forum in Operations and Information Technology Management College of William and Mary, Williamsburg, VA June 30-July 1, 20001The authors would like to thank Tonya Boone and Ram Ganeshan for organizing theBatten Conference. We would also like to thank Mary Ann Anderson, who madenumerous contributions to the intellectual content of this paper.
  2. 2. 1 Introduction“How do we manage the networks of suppliers we are building in order to becompetitive?” In our fieldwork on the management of supply-chains, we have heard thisquestion at every firm we have visited. As they have vertically disaggregated in theproduct domain at an often blinding pace, these firms sense that their existing models ofsupplier management are inadequate, yet they have no clear idea of what might workbetter. Even as firms are still experimenting with their product supply chain decisions,they face a new challenge: how to think about design outsourcing.In this chapter, we suggest that a key organizing principle behind supply chain decisionsshould be learning and integration. When viewed through the learning and integrationlens, we can make rational choices about what products should be made internally andwhat design capabilities should be retained in-house. These decisions are intimatelyrelated to product design choices and indeed product design and supply chain designshould be concurrent, as a number of authors have suggested (Nevins and Whitney 1989),(Fine and Whitney 1995), (Fine 1998). However, we go beyond this earlier work todescribe when retaining integration capabilities might be particularly important.The period from 1980-2000 saw a dramatic re-organization of industry in the UnitedStates and much of the world toward a tiered system of industrial production, modeledafter the system Toyota developed in the 1960s and 1970s. The Toyota system has beenmuch-studied and is well documented in (Womack, Jones et al. 1990) and (Clark andFujimoto 1991) and in many other sources. Supplier firms such as Solectron and SCIhave experienced tremendous growth rates as brand-name firms have concluded thatmarketing, distribution, and product design are where their talents lay. More recently,firms have re-considered the distribution function, turning third-party logistics into anindustry with twenty percent growth rates. We suspect that the product development anddesign function is the next area likely to see increasing outsourcing activity. 2
  3. 3. 1.1 Design for Supply Chain IntegrationA key feature of the economy for the past century has been that the wealth oftechnological knowledge is increasing at an exponential rate. This has led to thesubdivision of technologists into ever-finer specialties creating management problems forlarge companies that no longer are capable of monitoring and rewarding theirtechnologists effectively (Zenger 1994). This problem is often referred to as a“diseconomies of scale in R&D.” However, two recent trends in the past decade, the riseof information infrastructural capabilities and the breaking down of regional tradebarriers, have radically reduced the costs of geographic distance on knowledgecollaboration (Fine, Gilboy, and Parker 1995). Thus, we speculate that there is again areturn of R&D economies of scale, albeit for groups based on more narrowspecializations and greater geographical distribution than before. This leads, however, towhat we call the “Humpty-Dumpty” problem. Any technical design or developmentwork of the future is likely to incorporate many more firms than 5 years ago or eventoday, each of which will have a different set of corporate cultures and beliefs. But oncetechnical development is broken into perhaps a dozen or more pieces, how are all theKing’s (or OEM’s) product planners going to put them back together again into a productthat satisfies customer requirements? Maintaining product coherence, let alone quality,across the supply chain will become an ever more difficult and important proposition asthe number of supply chain members increases. Hence, in the future, one key to productquality will be how effectively a supply chain integrates individual firms’ developmentprojects into a coherent whole. In this paper, we speculate on two themes. First, howdoes a firm integrate all of the pieces of a “humpty-dumpty” project back into a coherentwhole? Second, as a key lever to answering the first question, exactly what sort of sizesand parts should a firm break up the “humpty-dumpty” of a product development projectinto in the first place? By examining these two questions, we hope to provide a key tosuccessful product development in the future. 3
  4. 4. 2 Background and Motivation2.1 Product outsourcing has happenedAs noted above, outsourcing in the product domain is a well-established practice. Veryfew firms remain vertically integrated, and those that do are likely to be reconsideringtheir supply chain design in the near future.At Japanese automobile firms, outsourcing became common during the 1970s (Clark andFujimoto 1991; Womack, et al. 1990). However, outsourcing really did not hit most U.S.firms head-on until the beginning of the 1990s. Now, there is a tidal wave of outsourcingas firms scrutinize their operations and keep in-house only what is core. And—as weshall see in the HP study—the “new” outsourcing is much more radical than thetraditional Japanese keiretsu model in both its extent and continual reconfiguration. As aresult, supplier firms are surfacing in all domains and industries. Sturgeon (1997) callsthis new model of “brand-name” firm/contract-manufacturer firm partnership a “turnkeyproduction network” and documents its emergence in the electronics industry. Forexample, it is now possible to purchase a hard-drive service in which the supplier firmdelivers a certain amount of storage (usually measured in terabytes) and performsmaintenance and backups (Parker 1999b). This relieves firms of a large asset. The hard-drive service has been particularly popular with web-based start-up firms who want toavoid large capital outlays but require a high level of service. A similar situation hasevolved in the shipping industry with the emergence of “third-party-” and even “fourth-party-logistics” providers. With annual industry growth rates of twenty percent, thesefirms are taking control of companies’ docks, inventory control systems, and, in somecases, inventory itself (Alden 1999). A close look at any industry would likely revealsimilar breakups of vertically integrated organizations and the formation of firms thatprovide non-core products and services (non-core to the customer firms). Our goal is tobetter understand how to work with these new suppliers to ensure successful integrationof their activities into a coherent final product or service. We are also concerned withunderstanding and mitigating transaction costs as non-core activities are performed by 4
  5. 5. suppliers (Williamson 1975). One key source of transaction costs, product integration, isespecially important in industries with short product or process life-cycles in whichsuppliers are often changed, requirements are unclear, and the incentives to achievecoordination have not been specifically addressed.In answer to these problems, the Japanese keiretsu model is illuminating but insufficient.In the paradigmatic keiretsu, the assembly firm still designs the core components thatform a product’s technological center-of-gravity (Prahalad and Hamel 1990). However,as (Parker and Anderson 2000) learned in their study of Hewlett-Packard, some of thenew disaggregated firms seem to outsource everything except product integration. Thus,disaggregated firms must “design” products without having any traditional design—i.e.component—capabilities to leverage. In contrast, keiretsu assembly firms typicallyoutsource the design of non-core components only to suppliers with whom they havedecades-long relationships. These conditions foster an atmosphere of well-understoodmutual expectations enabling efficient and precise problem resolution (Fujimoto 1994).However, disaggregated firms do not have the luxury to spend twenty years developinggood supplier relationships. One of the challenges firms face as they assemble a virtualorganization is how to ensure that products are specified, designed and built coherently,even though many individual firms may be responsible for pieces of a product, and, as wediscuss in the next sub-section, the design of a product.2.2 Design outsourcing is comingWe believe that design outsourcing is likely to increase, as firms again examine theircorporate structures for areas in which to reduce cost. The design services business isexperiencing high rates of growth as firms take advantage of design outsourcing(Wiederhold 2000). In the past, firms have retained design in-house, arguing that thiswas their core competence, as they outsourced production. However, firms are nowasking whether all of design can possibly be a core competence, and if not, then what 5
  6. 6. pieces should be sub-contracted to a supplier of design services, and what should beretained internally.Given that much production is outsourced, and that design outsourcing could become asubstantial trend, we now discuss some of the possible pitfalls from failing to takeintegration into account.3 Outsourcing TrapsThis section draws substantially from material first developed in (Anderson and Parker2000) and later in (Anderson and Anderson Forthcoming). As we have discussed above,since the 1990s, there has been a tidal wave of firms outsourcing all or part of theirproducts and services. The two remaining domestic automakers have recently broken offtheir multi-billion-dollar component businesses to focus on their core design andassembly operations. Many personal computer manufacturers, such as Hewlett-Packard,are farming out their notebook computer products to manufacturers in Taiwan. In thesoftware industry, the rise of contract software designers in the “three I’s”—India,Ireland, and Israel—represents a prominent trend. Some firms—such as those whooutsource their logistics decisions to “fourth-party” logistics providers— have even goneso far as to outsource the very decision of whether or not to outsource. Why are so manycompanies taking this dramatic step? The benefits of this new business model includelower parts or service costs, lower investment, and less financial risk if expected salesvolumes do not materialize. But outsourcing has hidden drawbacks that may take severalyears to emerge. Ultimately, these “outsourcing traps” may actually increase a firm’scost structure, reduce its products’ competitiveness, or in the worst case, lead to theemergence of new competitors.As the vertically integrated firm of yesteryear transforms itself into the virtuallyintegrated supply chain of today, it evolves from a firm that produces all of its finalproducts’ subcomponents and services internally into a firm that buys all of its 6
  7. 7. subcomponents and services from a network —or supply chain — of independentsupplier companies. But how does it manage this transformation without falling into anoutsourcing trap? Research shows that the design of a company’s supply chain is ofdecisive importance. Fine (1998) argues that supply chain design may be a business’smost important competency and that deciding which components to make and which tobuy profoundly influences long-term corporate survival. We suggest in our research thatone key to making wise sourcing decisions is to understand the short- and long-termtrade-offs that outsourcing entails.Although the outsourcing issue has been extensively examined in the academic literature,most of this work has focused on topics such as the economies of scale available throughoutsourcing. We are aware of few resources that examine the outsourcing issue from asystems perspective, taking into account the intricate relationships, time delays, andfeedback processes that relying on an outside vendor sets into motion. But companiesthat fail to apply this level of analysis to the decision-making process may encounter aseries of traps that could seriously undermine their competitive position.3.1 Common Outsourcing TrapsAs part of our research, we have developed a system dynamics simulation model that hasidentified several circumstances in which an organization may experience short-termgains from outsourcing followed by devastating—and unexpected—long-termconsequences. We call these “outsourcing traps.” Three of the more interesting trapsare: 1. A firm loses its market dominance when its supplier acquires its propriety technology and diffuses it to its competitors. 2. A firm relies too heavily on a single supplier, which weakens its ability to negotiate favorable purchase agreements. 3. A firm outsources a component to a vendor to reduce costs only to encounter higher expenses or reduced functionality when assembling the final product. 7
  8. 8. We examine each of these dynamics in more detail below.3.2 Making Life Easy for the Competitor (or Maybe Creating One)One possible consequence of outsourcing is that a competitor may gain access to criticaltechnology through a common supplier, either directly through purchasing it, orindirectly as the supplier’s engineers move to projects with other companies bringing theknowledge gained from working with the original firm. If the competitor then uses theinformation to duplicate or improve the original product, it may erode the first company’smarket position. The classic example of this dynamic occurred when IBM wasdeveloping its new personal computers (PCs) in the early 1980’s. The company madewhat turned out to be a fateful decision to outsource production of the PC’smicroprocessor to Intel and development of its operating system to Microsoft. Little didIBM know that by doing so, it was opening the door for direct competitors such asCompaq and Dell to purchase directly the two components of the PC most difficult toduplicate (Carroll 1993). Today, IBM is only the third-largest maker in an industry that ithelped to create. Furthermore, the majority of profits in IBM’s PC business come notfrom manufacturing the “box” but rather from “servicing” it by providing buyers withmaintenance and technical support. Hence, its ability to generate profits rests not on itscapability to design and manufacture products efficiently, but rather the capability tokeep these products up and running for their clients at all times. The logical progressionof this trend would be for IBM to give up producing boxes, and instead provide servicesfor those made by other firms.Enterprise-wide integrated software packages such as SAP provide another example.While they often improve operational performance for many firms, they also remove anychance for a company to obtain a sustainable strategic advantage through advancedinformation systems. Furthermore, once the information systems group of a corporation 8
  9. 9. is disbanded, a firm may lose its capability to create new technological advantages andbecome utterly dependent on the supplier for innovation.Another twist on this situation may occur as the supplier grows more efficient at makingthe component and learns more about the component’s functionality. Eventually, it maybecome sufficiently skilled at manufacturing the entire product to become a directcompetitor. U.S. consumer electronics firms followed this path in the 1960s and 1970swhen they outsourced production of televisions and other electronics to Japanesesuppliers (Dertouzos, Lester et al. 1989). Ultimately, as domestic suppliers failed todevelop their own capabilities, they fell further and further behind their own vendors. Thesuppliers eventually began to sell products under their own names—including Sony,Panasonic, and Mitsubishi—driving U.S. manufacturers such as Zenith and GeneralElectric out of business. Today’s U.S. electronics and software companies may berepeating the same mistakes, as they increasingly outsource design activities tointernational suppliers.3.3 Held Hostage by Your SupplierA common but subtle outsourcing trap occurs when a supplier holds a firm hostage. If afirm—or an industry—becomes too reliant on a particular vendor or set of vendors,power may shift to the supplier, allowing it to reap most of the profits. This dynamic isreally just an extension of the problem illustrated earlier in the example of the IBM PC.Little did IBM know that the PC assembly industry would become primarily acommodity business as the functionality that differentiated performance migrated fromthe assembled circuit board into the purchased semiconductor chips and software. WhenIBM outsourced the bulk of the PC’s intellectual property to the software andsemiconductor houses, they gave up a great deal of power in the supply chain. Intel andMicrosoft could sell to any of a number of circuit board manufacturers that could readilyduplicate IBM’s design, but IBM could only purchase Intel-compatible processors fromIntel and Windows-compatible operating systems from Microsoft. This gave Intel and 9
  10. 10. Microsoft something of a monopolist’s power and enabled them to capture the bulk of thesupply chain’s profits (Carroll 1993).IBM tried to buck this trend by developing OS/2, its own operating system, in the late1980s. It was arguably a better operating system than Windows, however, customerswouldn’t buy OS/2because the majority of software applications available at the timefunctioned only on Windows. Furthermore, because Windows had many more users thanOS/2, Windows customers could much more easily trade documents or software withother users than could OS/2 customers. In the end, the OS/2 system didn’t offer enoughnew features to convince users to overcome these standardization benefits (Carroll 1993).Because of the difficulties in competing with Microsoft or Intel, many PC firms areinstead trying to expand beyond the unprofitable PC business today by following IBM’smove into providing services to PC users, which offers more comfortable margins.Others are giving up in another way by outsourcing as much of their production aspossible to Asian contract manufacturers with lower personnel costs.Another possible adverse consequence to outsourcing is that a company may lose theability to intelligently purchase components—and the suppliers may take advantage ofthis ignorance and price them at a premium. An executive at a top PC manufacturerrecently stated that his firm found completely outsourcing a product to be undesirable(Anderson 2000). He said that, when the company first outsourced its computermanufacturing, it could do so efficiently. However, after three years, the technology hadchanged sufficiently that internal people no longer knew enough about the product todetermine whether a contract bid was sufficiently competitive—especially because theysuspected their vendors of engaging in price collusion and price gouging in certain areas.The suppliers had the PC company in a difficult position, because they knew that the firmcould no longer make the product themselves and that they had even lost the ability todetermine the cost of the products they were buying. 10
  11. 11. The danger of falling into this trap is especially acute for companies that outsource acomponent to one supplier for a long period of time. Lack of expertise within theoriginal company about creating the component leads to increased in-housemanufacturing costs, which makes outsourcing even more attractive. This reinforcingdynamic can prove costly if the firm ever desires to make the part again, because as timepasses and the knowledge of how to make the component diminishes, it can becomeprohibitively expensive to reverse the outsourcing decision. If the firm determines in thefuture that this component is vital to the performance of the product, it may need to investto bring the knowledge back in-house. However, this penalty may be necessary to regainsome bargaining leverage with suppliers.3.4 Outsourcing’s Impact on Systems IntegrationA related problem to having enough information to effectively negotiate with suppliers isthe need for a firm to know enough about its components to effectively integrate theminto coherent products. As stated earlier, a common reason why a firm outsources is thatit can purchase a component from a supplier for much less than the firm can make ititself. In (Anderson and Parker 2000), the authors develop a model of sourcing thatincorporates learning effects. We draw on this source for Figures 1-3 below.Figure 1 below illustrates the point about the need to mind integration by showing threecost curves: integration cost, component cost, and total cost. At time t=10, the firmchanges from internal component production to 100% component outsourcing in order totake advantage of a supplier’s lower component cost position. Figure 1 - OEM switches from 100% internal component production to 100% purchasing of component at t = 10 11
  12. 12. Component Costs in Dollars vs. Time 100 75 50 25 0 0 5 10 15 20 25 30 35 40 45 50 year Component Make/Buy Cost System Integration Cost Total Product CostAt first, total product costs are lower. In fact, component acquisition costs continue todecline in the short run because the additional manufacturing volume at the supplier willdrive its production costs even lower than they were at the time of outsourcing. However,because internal component production has ceased, the OEM is no longer learning aboutthose aspects of the component that are crucial to integrating it effectively into theproduct. Thus, with time, the integration knowledge stock deteriorates from obsolescencethat causes the integration cost to begin to creep upward. After about five years (forthese parameter values), the total product cost is equal to the cost before the decision tooutsource was made. After this time, increased integration costs exceed the componentcost savings, causing the total product cost to climb even more. Thus, while outsourcingprovided excellent short-run returns, it proved to have long-run drawbacks. Furthermore,if the OEM decides to re-insource once again, it will no longer have the in-housemanufacturing experience it had at the time of the outsourcing decision, and will have toclimb the learning curve yet again before returning to the lower total product costs.Hence, the OEM has been caught in the outsourcing trap of seductive low initial supplieracquisition costs, and will find a return back to its prior cost levels to be quite painful. 12
  13. 13. General Motors and Ford may have fallen into this trap when they decided to spin offtheir component divisions. The two new companies, Delphi and Visteon, are busilyexpanding their customer base beyond their parent corporations. As they do so, the riskof another automaker gaining access to once-proprietary technology grows. GM andFord’s knowledge of the components may also become obsolete, leaving them helpless tomake innovations in component performance and unable to effectively integrateelectronic components with the rest of the system.We suspect that this was the main reason behind Toyota’s re-insourcing of electronicscomponents. Auto companies may be most vulnerable to potential integration costpenalties in the area of automotive electronics, which has become the decisive factor inadvancing car comfort, safety, and performance. Toyota may be acting to avoid this trapby bringing its automotive electronics back in-house after 45 years , even though itssupplier, Denso, is the world leader in cost and quality (Hansen Report 1994). It hasmade this move just as U.S. manufacturers are divesting themselves of this samecapability. Without understanding electronics, we believe it will be more difficult todevelop a competitive automotive product than in previous years.Figure 2 illustrates the cost hurdle that a firm must overcome if it wants to insourcecomponents after a long period of outsourcing component production. Figure 2 - OEM switches from 100% purchasing of components to 100% internal component production at t = 10 13
  14. 14. Component Costs in Dollars vs. Time 100 75 50 25 0 0 5 10 15 20 25 30 35 40 45 50 year Component Make/Buy Cost System Integration Cost Total Product CostAt time t=10, a firm that was outsourcing all component production begins tomanufacture the component internally. At first, the firm’s costs increase due to highercomponent costs. However, for products with high integration costs (as in this example),integration costs could fall enough in the long run to offset the higher component cost.In another from another industry, the second-largest software company in the world,SAP, a German provider of enterprise-wide integrated software packages, experiencedserious implementation problems with many of its North American clients. Thesesoftware packages, often known as enterprise resource planning programs (or ERPs),integrate all the information processing activities in a firm, from purchasing andmanufacturing, to order fulfillment and accounting. SAP ultimately traced its difficultiesto its outsourcing of implementation to third-party consultants. Because SAP didn’tparticipate in the implementation process directly, the company didn’t gain knowledge tofeed back into product improvements. Many of these problems have lessened since SAPbegan to join its alliance partners in actual implementation projects.Manufacturing a component or performing a service can thus give a firm a decisive edgein knowing how to integrate it effectively into the final product. For example, many of 14
  15. 15. Microsoft’s detractors claim that Microsoft uses its in-depth knowledge of the Windowsoperating system to give it an edge over its competitors in designing the features of itsapplications software. If this is true, then splitting Microsoft into an operating systemscompany and an applications software company, as mandated by court order, may have ahidden cost to the consumer. The new applications company may become less familiarwith Windows as the operating systems changes with time and their former Microsoftemployees turn over, leading it to design products that exploit Windows’ capabilities lesseffectively. In a related phenomenon, (Parker and Van Alstyne 2000) have modeled thepotential benefit to consumers when firms are allowed to take advantage of products thatexhibit cross-market externalities by setting one price to zero.3.5 Overcoming Outsourcing TrapsHow does a firm overcome these outsourcing traps? One way is to avoid outsourcingaltogether. This approach may be necessary for firms concerned about the leakage ofproprietary knowledge through a supplier. If the company still wants to pursueoutsourcing, it may need to have vendors sign binding nondisclosure agreements.However, even the best of these will only slow, not stop, the diffusion of knowledge.Personnel cannot be permanently kept from transferring between projects from differentclients. And, even if transfers could be stopped, as long as the supplier is reaping somebenefit from selling to more than one customer, there will necessarily be someinformation leakage between the groups supplying each customer. On the other hand,complete insourcing may not be an option. Making components in-house will avoid thesupplier-hostage and systems-integration traps; however, it can also put a firm at aserious competitive disadvantage by raising the cost of acquiring components or services.There is at least one possible way to avoid this dilemma and obtain both the lowcomponent cost of outsourcing and the low risks and integration costs of insourcing. Inmany instances, by making just a small percentage of the component (or one of a numberof similar components) in-house, a firm can reduce the average cost to make or buy a 15
  16. 16. component while maintaining adequate knowledge to keep many outsourcing risks andintegration penalties under control. A similar strategy can be pursued when outsourcingservices. The success of this strategy depends on a number of variables, but clearly of theutmost importance are the fixed costs associated with the component or service. If highfixed costs need to be duplicated at both the firm and its suppliers, then pursuing thispartial outsourcing strategy may not be feasible. Figure 3 demonstrates the partialoutsourcing strategy. In this figure, only total costs are plotted for three differentstrategies: total component outsourcing, total component insourcing, and 90% componentoutsourcing. Figure 3 - OEM maintains 100% internal component production or switches to 90% or 100% purchasing of component at t = 10 Total Product Cost in Dollars vs. Time 90 85 80 75 70 0 5 10 15 20 25 30 35 40 45 50 year No Outsourcing 90% Outsourcing Complete OutsourcingFor these parameter values, a firm that pursues total component outsourcing gets into anoutsourcing trap, as described above. However, the firm that pursues 90% outsourcinggains most of the benefit of lower component costs while keeping integration costs lowenough to gain a total cost advantage.This is essentially the policy we suspect that Toyota has pursued with Denso. It isprobable that Toyota can never produce electronics control systems more cheaply than 16
  17. 17. Denso. So it lets Denso produce most of them; thus keeping average parts costs down.However, by designing and manufacturing some electronics in-house, Toyota can gainenough knowledge to utilize the full potential inherent in electronics control systemswhen designing new automobiles. It also helps prevent a “Denso inside” strategyparalleling Intel’s branding of the personal computer industry. A similar strategy can bepursued when outsourcing services. Franchisors that maintain company-owned stores areclassic examples of using partial outsourcing to give “a firm direct knowledge ofoperations issues and allows it to test and implement marketing strategies franchiseesmay not be able to do at their stores” (Tikoo 1996). For example, in 1988 Dunkin’Donuts operated only 2% of its 1500 locations itself. However, it specifically used itscompany-operated sites to pilot all of its new distribution and marketing programs beforeasking franchisees to adopt them (Kauffmann 1988). Hence, partial outsourcing is apowerful tool in many economic endeavors to gain outsourcing cost benefits whilemaintaining insourcing’s innovation and integration benefits.The success of the partial outsourcing strategy depends on a number of variablesincluding economies of scale, the pace of technological change, and the modularity ofcomponents. But most important are the fixed costs associated with the component orservice. If high fixed costs need to be duplicated at both the firm and its suppliers, thenpursuing this partial outsourcing strategy may not be feasible. For example silicon waferfabs, which make semiconductor chips, cost several billion dollars and are unsuitable forlow-volume production. Unless a semiconductor company has a tremendous number ofcomponents, partial outsourcing in this industry is unlikely to be cost-effective. On theother hand, in the software design industry, the majority of fixed costs, such as providinghigh-end computers and internet access, are accrued per programmer. Hence,maintaining a small fraction of programming activities in-house is unlikely to duplicatefixed costs at the supplier.There are other possible solutions to the outsourcing dilemma as well. For example, afirm can lower its integration costs by hiring and training people with certain specific 17
  18. 18. systems-integration skills, such as systems engineering. If employees can carefully designa product so that its component interfaces are well defined and well understood, thenmany thorny integration problems may be avoided. For example, products that aredesigned to use “snap-in” components are usually much easier to assemble into a finalproduct than those requiring parts to be screwed into place. Hewlett-Packard has pursuedthis approach in tandem with increased outsourcing over the past five years. HP’snotebook division has seen a tenfold increase in its revenue and a significantimprovement in profitability since it began outsourcing production of its notebookcomputers in 1997 (Parker and Anderson 2000). In Section 5, we discuss the humanresource strategy of employing supply chain integrators whose job is to work to ensureproduct and service integrity.3.6 Could the IBM PC’s Fate Have Been Avoided?This section looked at just a few of the difficulties that can result from a decision tooutsource. The outsourcing traps highlight how a seemingly simple decision to have avendor produce a component or service can have devastating effects on a company’sfuture well-being. By examining the dynamics behind outsourcing, companies canidentify potential traps and make better decisions about outsourcing than they might haveotherwise.By building the concept of integration into dynamic models, we can look beyond theshort-term benefits achieved by outsourcing and analyze the long-term consequences,including what effects these decisions may have on future economic and marketpositions. We can be almost certain that IBM’s management did not envision the futurethat it created when it chose to farm out its microprocessor to Intel and its operatingsystem to Microsoft. Perhaps the fate of IBM in the personal computing market and thestructure of the entire industry would have been different if they could have used thetools that system dynamics and systems thinking offer. 18
  19. 19. In the next section, we consider issues of supplier relationships that affect a supplier’swillingness to invest in the firm-specific technologies necessary to pursue high-performance integrated product design strategies.4 Supply Chain Design for Integration-Contracting IssuesThis section draws substantially from material originally presented in (Parker 1998). Asfirms work to design their supply chains, they must build relationships with providers ofgoods, technology, and skills, both within and outside company boundaries. In this work,think of a supply chain as a chain of skills or capabilities superimposed on a chain oforganizations (Fine 1996, 1998). This section focuses on skill development, taking asgiven that the types and strengths of capabilities in the chain are key determinants ofsupply chain performance.The question for firms is how to contract for a coherent sequence of projects that satisfiesthe need to compete successfully in today’s marketplace and builds a set of desiredcapabilities to enable competition in tomorrow’s marketplace. Supplier capabilities donot remain static over time, but instead constantly evolve as unused capabilities shrinkand new capabilities are created (Leonard-Barton 1992). Contracting firms must takeinto account that suppliers will evaluate business opportunities in part by assessing howprojects will improve market opportunities outside the existing relationship. The tensionis that buyer firms may prefer projects that add little value to a suppliers outsideopportunities, but create substantial value within the firm/supplier relationship. The workpresented in this section attempts to establish some of the building blocks forunderstanding the strategic implications of projects between customers and suppliers thatinvolve learning. 19
  20. 20. 4.1 Key factors in building integration-enabling capabilitiesThe negotiation between firms and suppliers over which projects to undertake and how todistribute rewards takes place in a complex setting that includes but is not limited to thefollowing:Firm technologyA major factor that both parties will take into account is the type of technology employedby the firm with which the supplier (firm or individual) must integrate in order to producethe desired output. If the firm employs very specialized technologies, the supplier (if ithasn’t already) will have to acquire the ability to work with this technology. To theextent that the technology is unique, the supplier cannot use the capabilities with otherfirms, and suppliers will take this into account before agreeing to develop the capability.Suppliers might fear that they will be locked in to a specific technology and that oncelocked in, they might lose negotiating leverage with the customer firm. Conversely, afirm that pursues specialized designs with high integration requirements might fearsupplier hold-up as described in Section 4.Rate of technological changeThe rate of technological change is a factor that affects the willingness of suppliers toadopt unique capabilities. For example, suppliers to a coal-fired electric generating plantcan be confident that the capabilities they develop will likely be useful over the (thirty-to-forty-year) lifetime of the plant. However, the capabilities of suppliers to a consumerelectronics firm may obsolesce in a very short time period of years to months. Planningto make capability investments in a rapidly changing environment requires the parties tomake the additional calculation of how long the capability is expected to be relevant. Theterminology “slow clockspeed” and “fast clockspeed” is used to describe industries thatare innovating slowly versus those which are innovating rapidly (Fine, 1998). 20
  21. 21. IncentivesWe assume that supply chain partners act in their own self-interest. That is, supplierscannot be compelled to undertake projects that are not in their interest. It is assumed thatsuppliers always have the option to make (potentially unobserved) capability investmentsin more general technologies if the customer firm does not offer a sufficiently broad setof project choices. Firms must therefore offer incentives to suppliers if they wishsuppliers to risk getting locked in to highly unique technologies.4.2 Supply chain design matters: IBM exampleAs noted in the section above on outsourcing traps, IBM’s supply chain design decisionfor the personal computer product line launched in the early 1980s provides an exampleof the importance of the supplier decisions companies make early in productintroductions. At the time, no one had a believable prediction for how large the marketfor personal computers was going to become. “Heavy Iron,” the large mainframecomputers upon which IBM was built remained supreme.Supply chain decision allowed quick entryIBM tasked Microsoft with the development of the operating system and assignedmicroprocessor production to Intel. This division of responsibility allowed IBM to gainquick access to the market. The product design and distribution activities carried out byIBM provided the most value added early in the industry life-cycle. However, as othercompetitors entered the market over time, product designs became standardized andadditional distribution channels were developed. IBM was no longer able to earnsubstantial profits on the basis of these activities. 21
  22. 22. Supply chain partners appropriate the profitFast forward to 2000 and the environment is far different. Both Microsoft and Intel areamong the world’s most valuable companies, as measured by market capitalization. Asdiscussed earlier, the design and sale of personal computer boxes became a commoditybusiness, while the majority of industry profit is made further up the supply chain inmicroprocessors and operating systems; a recent report said that Intel and Microsofttogether earn fully half of the total profits earned in the personal computer industry.2Other firms learned to use Intel/Microsoft output.Early in the personal computer industry life-cycle, there was a very limited market forIntel and Microsoft output, so IBM could appropriate industry profits. However, otherfirms developed the capability to manufacture PCs using Intel and Microsoft output. Inthis way, the capabilities developed by Intel and Microsoft became general to the industryinstead of specific to IBM.Could IBM have done anything differently when it was designing the supply system forthe personal computer to capture more of the value created by the capabilities developedalong the supply chain? Was there a way of thinking about the supply chain and how thelocus of relative value could shift, which might have led IBM to make different decisionsabout control over personal computer components? Should (could?) IBM have attemptedto bind supply chain members to technologies controlled by IBM as opposed to openingthe architecture for component by component competition (see Farrell, Monroe et al.(1998))? It is unlikely that the industry would have grown nearly so rapidly if IBM hadadopted a closed architecture (as Apple did), forcing Intel and Microsoft to remaincaptive suppliers. So, any answers to the questions above must take into account thedesire to create a large and growing market, while at the same time attempting to earnprofits from participating in this market. 22
  23. 23. 4.3 Supplier Incentive DesignsParker (1998) developed models of capability development for suppliers under differentsharing regimes. The general problem being considered was how to provide incentivesfor suppliers to develop highly specific technologies while reducing the hold-up problemsdiscussed in (Williamson 1975) and many follow-on studies. Figure 4 – Output and payments for two technologies Output, Payments yt |Proprietary technology yt | General technology rt | General Capability rt | Proprietary Capability tIn the figure above, there are two output (yt) curves, and two reservation payment (rt)curves are shown for two technology and capability emphases, general and proprietary.In this example, the firm’s proprietary technology joined with a supplier that has investedit creates more output than a general technology. Conversely, when the supplier investsin general capabilities, other firms place a higher valuation on the supplier’s capabilitiesthan if it invests in more firm-specific capabilities. This means that the distance betweenoutput and reservation wages in the proprietary case is larger than the distance betweenoutput and reservation wages in the general case. If the purchasing firm chooses to sharenone of this distance, then a rational supplier firm will act only to raise it own reservationpayments, but not to improve output and would therefore choose to invest only in generalcapabilities. Such capabilities would be unlikely to lead to successful joint buyer-supplier product development efforts if the design is for a highly integrated product.Parker (1998) models how much a buying firm must employ profit-sharing in order toinduce suppliers to invest in proprietary technologies. In survey results from technicalprofessionals, Parker finds that firms that employ highly-sought-after technologies must 23
  24. 24. offer substantially higher sharing contracts than those (such as space flight systems) thatemploy technologies of relatively little value elsewhere.This example leads us to consider the issue of how to train and reward people for supplychain integration roles.5 Human Resource Issues – Supply Chain IntegratorsThis section draws heavily from (Parker and Anderson 2000). Our story about the newrole of the supply-chain integrator is developed from four sources. (1) We drew upon asubstantial set of background interviews through our participation in a research projectwith Professor Charles Fine and Dr. Daniel Whitney of the Massachusetts Institute ofTechnology, during which we visited many firms (including the Chrysler Corporation[now Daimler-Chrysler], the Ford Motor Company, General Motors, CincinnatiMilacron, Bihler USA, Detroit Center Tool, Progressive Tool, Giddings and Lewis,Leblond-Makino, NipponDenso [now Denso], Toyota, Applied Materials, Intel, andothers) over the period 1993 to 1996. These visits were part of the supporting researchfor an investigation of the development of corporate technology supply-chains (Whitney1993; Fine and Whitney 1995; Fine 1998). (2) In 1997 and 1998, we were introduced tothe changing role of the supply-chain manager through a series of 19 open-endedinterviews at Hewlett-Packard. Between October and December 1999, we followed upwith five additional interviews at Hewlett-Packard. We augmented this knowledge basewith interviews at BridgePoint (a semiconductor firm), an automotive firm, and an officeof the Department of Defense. (3) We made use of articles from the popular businesspress to delineate a contrast between industry practice in the early 1980s and today, andto add further support to our case study information. (4) Finally, we utilized our ownexperience as engineers and project managers at General Motors (Anderson 1985-1987),Ford Motor Company (Anderson 1988-1993), and General Electric (Parker 1985-1990).We turned to our former industrial colleagues in these three firms to help clarify issueswe observed in our case and archival data. 24
  25. 25. From these information sources, we have come to believe that there is a job, the supply-chain integrator, that has become critical to the vertically-disaggregated firm’s successand growth. This new job differs radically from those found in traditional supply-management organizations, which have focused primarily on issues of cost, delivery, andinventory control. In the era of large, vertically integrated firms purchasing well-specified components, these issues were of paramount importance. As we have arguedabove, firms have been disaggregating their operations as they cease to perform non-coreactivities in-house (Fung and Magretta 1998), (Scouras 1996). More and more, firms arepurchasing sub-assemblies for final assembly into complete products to be shipped tocustomers, leaving detailed engineering and design work to the suppliers. In order tosuccessfully manage this new “virtually-integrated” supply base, some firms have createdthe position of supply-chain integrator. A number of former mid-level managers, manyof whom may have been victims of corporate downsizing only two years ago, have founda new career as individual contributors managing the interaction of supplier firms. Evenas firms are reducing head-count and becoming more focused, the people responsible fordirect interaction with the suppliers are finding their jobs to be richer and more complexthan ever before.So, how does a disaggregated firm stitch together its suppliers into one virtually-integrated firm? One partial answer to the issue may be to employ supply-chainintegrators on both sides of a customer/supplier relationship. By providing the necessarytranslation, coordination, and negotiation between supply-chain members, these highly-skilled integrators act as the glue to bind together the virtually-integrated firm into acoherent, effective reality. But how does a firm employ them, what skills do these peopleneed, and how does a disaggregated firm find the people possessing them?Based on case studies presented in (Parker and Anderson 2000), we develop a list ofdesirable supply-chain integrator capabilities. We note that in many cases firms are using 25
  26. 26. veteran employees who learned their skills in large, vertically-integrated manufacturingfirms.We suggest that the supply-chain integrator’s primary purpose is to translate knowledgeand mediate requirements across the supply-chain to maintain product integrity. In ourcase studies, two main themes emerge. From the notebook case described earlier we seeone firm emphasizing people-skills and managerial competence (Parker and Anderson1999). We needed a whole new group of people. [These new supply-chain managers] need people-management skills, such as objectives setting and planning and exploiting people’s strengths and setting up plans to improve their weaknesses. The supply-chain managers also need negotiation skills. Half of the people…were managers [in their former positions]. Third party partners [in Taiwan] are more complicated to manage than HP people. They are 16 hours ahead of us. It’s a lot like having first-shift supervisors managing second shift people. Being really good at setting plans and objectives is more crucial. It’s a better more interesting problem. You need to be a better manager than before. Contingency plans need to be set in place. They’re forced not to micromanage. They need to know information technology systems and how they fit together. This is needed to stitch together the systems at HP and the suppliers. They need a cursory understanding of what tools are out there and what’s available. It’s also clearly helpful if they understand logistics, but maybe more emphasis is necessary on the people side.In contrast, one domestic automotive firm has stressed a technological solution to theproblem of managing the supplier base. This firm is emphasizing systems engineeringskills—the ability to make technical trade-offs. A manager at the firm said the following(Anderson and Parker 1999a): Our strategy is to leverage systems engineering capability. We’ve won awards for integration…but it’s in pockets. What are our core competencies? What do we need to do to develop people? We’re trying to manage complexity. Systems engineering tools look like the best for the job. We’re not wedded to [them]; if a better methodology comes along, we’ll adopt it.One explanation for the difference in the two approaches is that automobiles are vastlymore complex products than notebook computers. Indeed, the instrument panels in some 26
  27. 27. higher-end automobiles incorporate specialized laptop-type computers as subsystems toprovide navigation and other information services to drivers and passengers. Despite theemphasis on systems engineering at one automobile firm, we believe that this firmrequires at least the same skills in its supply-chain integration function as the notebookcomputer firm. Combining these approaches, we develop a set of skills for the supply-chain integration role. This set includes:1. Product development, including system decomposition and interface specification as well as project management. This also includes that portion of marketing science required to translate customer requirements faithfully into a product concept and maintaining its integrity over time (see Iansiti and Clark, 1994 for a fuller description of product integrity).2. The “soft” people skills necessary to mediate and resolve conflicts successfully.3. The ability to evaluate business decisions on a cost and strategic basis.4. The ability to make trade-offs at the sub-system level to improve system level performance.5. Operations management, particularly logistics and process analysis.6. A good working knowledge of information technology capabilities.Several comments are necessary on the list above. The integrator clearly mustunderstand product development, including system decomposition and the translation ofcustomer needs into product requirements. This is, of course, true for any firm.However, the disaggregated supply chain makes special demands. One is the multiplicityof firm world-views, expectations, and assumptions. In this mixed and ambiguousmilieu, a clear articulation of product vision is of the utmost importance in aligning firmsto a common purpose. Also crucial is decomposing a product to minimize potential inter-firm design problems because, as we will discuss shortly, resolving problems across firmboundaries is extremely difficult. Thus, a deep understanding of product design isnecessary to clearly delineate the “virtually-integrated” firm’s target, define a pathtowards it, and removing as many obstacles as possible along the way. 27
  28. 28. But, inevitably such obstacles will arise. Thus, the integrator must also be a skilledpractitioner of “soft” people skills. This requirement may appear unimportant if there isonly one integrator purchasing all of a project’s outsourced goods and services.However, as demonstrated in the case of the semiconductor manufacturing chain, thesupply-chain integrator may not reside in the same company that purchases the finalproduct. Thus, at that firm, there is automatically a complex relationship cutting acrosstwo organizational boundaries (chip supplier testing, packaging, and integrationcustomer firm end customer). And even if only one integrator is purchasing theservices, the buyer’s coercive power is essentially restricted to threatening withdrawal ofbusiness from the supplier. While such power can be effective, it is also crude and likelyto work only in stable environments with well-known requirements and multiple potentialreplacements for the affected supplier. Something else must replace the fine-grainedcoercive power of a product manager in an integrated firm with organizationalconnections to supplier engineers. What is necessary, then, are the skills of persuasionand mediation. When requirements are not all that clear and product life-cycles short, theintegrator’s goal is to tease out the joint solutions with the supplier firms in order tofaithfully maintain the original product vision. This suggests that the relationship withsuppliers is not a zero-sum game with players negotiating over a fixed-size reward, butinstead an effort to create the highest joint reward. An integrator’s ability to engendermutual trust with suppliers is critical to facilitating this type of joint problem-solving(Currall and Judge 1995), (Zaheer, McEvily et al. 1998). It also suggests how necessaryit is for the integrator to translate imperfect requirements from the technical andinstitutional context in one firm to another. For without such inter-firm translation,miscommunications will lead inevitably to either inter-firm conflict or a sub-optimalproduct (Nonaka 1991). Hence, translation as well as mediation and negotiation are theprimary tools with which the supply-chain integrator must organize the supply-chain.The complementary abilities to evaluate business cases and system trade-offs arenecessary to guide the integrator in solving the inevitable product development andsourcing problems in such a way as to maximize customer value and firm profit. 28
  29. 29. Integrators need not know how to evaluate all the problems themselves; knowing all thepossible technological ramifications of every possible problem as well as being expert inproject management and soft people skills would require a superhuman. The solutionfavored by many is to hire specialized technical experts to advise front-line integratorswhen they must handle especially challenging technical problems. For instance, HP’snotebook division employs several such troubleshooters with deep technical expertise inminiaturization. According to a manager in the notebook division, most of these experts“were small hardware designers at HP for a long time. People who designed calculatorsin the 70s and palmtops” (Parker and Anderson 1999). The Department of Defenseemploys companies such as Aerospace Corporation to fill a similar role by providingPh.D. experts in fields such as load dynamics to provide technical evaluation support fortheir project managers on an as-needed basis (Anderson and Parker 1999b). Thus, whileit is imperative that integrators have the general skills of an MBA and systems engineer,they need not know all the technical fields with which they interact in depth.The integrator must also understand the core concepts of operations management such asprocess analysis quite well. For the more esoteric aspects of specific areas such aslogistics, they can request technical assistance from an operations research group.Without a good understanding of the possibilities inherent in operations management,however, they will not know what questions to ask suppliers or which possible solutionsto evaluate. Finally, a basic knowledge of the possibilities inherent in moderninformation technology is also necessary to the integrator. This may surprise the reader(as it did the authors!). Increasingly, however, the requirement for a basic knowledge ofinformation technology appears to be true not only for supply-chain integrators, but foroperations managers in general. Sturgeon (1997) noted that “electronics firms are usinginformation technology to communicate across the firm boundary….” One of the authors(Anderson) supervised five MBA operations group-internship projects (at four separatefirms) in the 1999-2000 academic year. Each project required a significant informationtechnology component; this prevalence was not true even two years ago. Again, theactual information technology applications can be developed by specialists, but a 29
  30. 30. knowledge of what supply chain strategies information technology can and cannot enableis essential.The care and feeding of supply chain integratorsHaving defined the skill set necessary for supply-chain integrators, we must address howto develop and maintain them. Parker and Anderson (2000) discusses some possibleoptions to formally educate supply-chain integrators. However, for the foreseeablefuture, firms will obtain integrators in one of two ways. The first method described byfirms such as Hewlett-Packard that are currently building integration capabilities is tohire older engineers and managers who have held multiple positions in product designand manufacturing over ten to twenty years. While this is a quick and efficient method, itmay become less viable as the vertically integrated firms which created these veterans inthe first place disaggregate. The other option available to firms is to create integratorsthrough internal training. This training will necessarily be demanding and lengthy,including in all likelihood both a period of formal training and a following period of on-the-job learning. Once firms obtain a number of experienced integrators, they may beable to reduce this training period by mentoring less-experienced colleagues. However,even with a veteran core of experience integrators, managing these sorts of in-housetraining programs is quite difficult because of the dynamic trade-offs involved,particularly if there is market growth (Anderson 2000) or cyclicality (Anderson 1999).For example, during upswings in demand, should integrators best spend their timeintegrating new products or training new integrators? During downswings, shouldintegrators be fired knowing that they will be difficult to replace during the nextupswing? Anderson, Fine, and Parker (forthcoming) explore similar issues in skillretention issues in the machine tool industry in the face of industry cyclicality. Further,all of these problems are exacerbated when planning policies for product design staffsmust be integrated across a supply chain (Anderson and Morrice 2000). The results of allthese papers suggest that such programs and people must be treated as expensive, long-term investment programs. Many firms may be naturally reluctant to bear the costs ofsuch training programs. As discussed earlier, however, the ability to effectively integrate 30
  31. 31. supply-chains is becoming increasingly more critical, makes the expense of setting upsuch training programs unavoidable. And given the lead time required to build up thiscapability, the earlier that firms begin to develop this capability, the sooner they will beable to exploit their new disaggregated business models most effectively.6 ConclusionWe have argued that designing supply chains with an eye toward managing learning andintegration along the supply chain will provide substantial advantage to firms that canmanage these difficult tasks well. As motivation, we note that product outsourcing hasled to a number of challenges for managers. As firms have disaggregated their supplychains to take advantage of cost savings offered by supplier organizations, firms becomesusceptible to the “humpty dumpty” problem. They must somehow ensure that productsremain tightly integrated even though their design is broken up into a dozen pieces ormore. One response, as described above, is to design products that have well-definedsub-systems (modular architecture) and hence need little integration. Another response isto hire special integrators whose job it is to ensure product integrity over a disaggregatedsupply chain. The need for such personnel is likely to increase if firms begin tooutsource substantial portions of their product design. However, creating such aworkforce may be initially quite problematic.There are other downsides to the vertically integrated firm. In particular, there are manyoutsourcing traps that snare firms in low quality, high-cost product solutions. Whatmakes outsourcing traps difficult for firms to avoid is that near-term decisions that offercomponent cost savings are the very decisions that, in the long run, can increaseintegration costs, and possibly increase total product cost. Finally, there are substantialcontracting issues that firms must confront if they wish to develop proprietarytechnologies jointly with their suppliers. 31
  32. 32. We firmly believe that integration will become the key issue for firms as they design theirphysical and technology supply chains in the future. Because there is little literatureexamining how learning, integration, and outsourcing mutually interact, we call for asystematic study of their relationship to improve supply chain design. This study canteach us how to fully exploit the advantages of product and design outsourcing withoutsuffering the possibly devastating consequences of poor outsourcing decisions. 32
  33. 33. ReferencesAlden, E. (1999). One-Stop Shop Is No Cure-All: Supply Chain Problems Can be Extremely Costly but Passing the Buck to a Third-Party Logistics Company is No Solution in Itself. Financial Times. London: Pg. 02.Anderson, E.G. (1999). The Nonstationary Staff Planning Problem with Business Cycle and Learning Effects. Under revision for Management Science.Anderson E.G. (2000a). Managing the Impact of High Market Growth and Learning on Knowledge Worker Productivity and Service Quality. Under revision for the European Journal of Operational Research.Anderson, E. G. (2000b). Partial Insourcing at a Top PC Maker. Personal Comunication. University of Texas at Austin.Anderson, E. G. and M. A. Anderson (Forthcoming). “Are Your Purchasing Decisions Today Creating Your Future Competitor: Avoiding the Outsourcing Trap.” Systems Thinker.Anderson, E.G., C.H. Fine, and G.G. Parker (forthcoming). "Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study." Journal of Production and Operations Management.Anderson, E. G. and G. G. Parker (1999a). Interview with Domestic Automobile Systems Manager. Austin, TX, University of Texas at Austin.Anderson, E. G. and G. G. Parker (1999b). Interview with Mr. Alan Sheasley - Former D.O.D. Program Manager, University of Texas at Austin - School of Business.Anderson, E. G. and G. G. Parker (2000). “A Dynamic Simulation of the Effect of Learning on the Make/Buy Decision.” Under Review at Production and Operations Management.Anderson, E. G. and G. G. Parker (2000). “Learning, Product Integration, and the Make- Buy Decision.” University of Texas Business School Working Paper.Anderson, E.G., and D.J. Morrice (2000). "Capacity and Backlog Management in Service-Oriented Supply Chains. McCombs School of Business Working Paper, University of Texas.Carroll, P. (1993). Big Blues. New York, Crown Publishers.Clark, K. B. and T. Fujimoto (1991). Product Development Performance. Boston, Harvard Business School Press.Currall, S. C. and T. A. Judge (1995). “Measuring Trust Between Organizational Boundary Role Persons.” Organizational Behavior and Human Decision Processes 64(2): 151-170.Dertouzos, M. L., R. K. Lester, et al. (1989). Made in America. New York, Harper Perennial.Farrell, J., H. K. Monroe, et al. (1998). “The Vertical Organization of Industry: Systems Competition versus Component Competition.” Journal of Economics and Management Strategy 7(2): 143-182.Fine, C., G. Gilboy, and G. Parker (1995). The Role of Proximity in Automotive Technology Supply Chain Development: An Introductory Essay. Creating and Managing Corporate Technology Supply Chains, M.I.T., Cambridge, MA.Fine, C. H. and D. Whitney (1995). Is the Make/Buy Decision a Core Competence? Cambridge, MA, Massachusetts Institute of Technology. 33
  34. 34. Fine, C. H. (1998). Clockspeed: Winning Industry Control in the Age of Temporary Advantage. Reading, Mass., Perseus Books.Fung, V. and J. Magretta (1998). “Fast, Global, and Entrepreneurial: Supply Chain Management Hong Kong Style: An Interview with Victor Fung.” Harvard Business Review 76(5): 102-114.Hansen Report (1994). “The Company Profile: Nippondenso.” September 1994.Kauffmann, P.J. (1988). Dunkin Donuts (E): 1988 Distribution Strategies. Case Study. Harvard Business School.Leonard-Barton, D. (1992). “Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development.” Strategic Management Journal 13: 111-125.Nevins, J. L. and D. E. Whitney (1989). Concurrent Design of Products and Processes: A Strategy for the Next Generation in Manufacturing. New York, McGraw-Hill.Nonaka, I. (1991). “The Knowledge Creating Company.” Harvard Business Review 69(6): 96-104.Parker, G.G. (1998). Contracting for Employee and Supplier Capability Development. Doctoral Dissertation-Management Science. Cambridge, MA, Massachusetts Institute of Technology.Parker, G. G. (1999b). Interview with Storage Networks. New Orleans, LA, Tulane University Freeman School of Business.Parker, G. G. and E. G. Anderson (1999). Interviews with HP Employees, Tulane University Freeman School of Business.Parker, G. G. and E. G. Anderson (2000). “From Buyer to Integrator: The Transformation of the Supply-Chain Manager in the Vertically Disintegrating Firm.” Under Review at Production and Operations Management.Parker, G. G. and M. W. Van Alstyne (2000). “Information Complements, Substitutes, and Strategic Product Design.” Working Paper-William Davidson Institute, University of Michigan.Prahalad, C. K. and G. Hamel (1990). “The Core Competence of the Corporation.” Harvard Business Review(May-June): 79-91.Scouras, I. (1996). Contract Manufacturing is Changing Industry Map. Electronic Buyers News.Sturgeon, T. J. (1997). Turnkey Production Networks: A New American Model of Industrial Organization? Berkeley, CA, University of California at Berkeley - Berkeley Roundtable on the International Economy.Tikoo, S. (1996). “Assessing the Franchise Option.” Business Horizons (Indiana University Kelley School of Business)(May-June): 78-82.Whitney, D. E. (1993). “Nippondenso Co. Ltd: A Case Study of Strategic Product Design.” Research in Engineering Design 5: 1-20.Wiederhold, R. (2000). Leading Trends in The Design Services Industry. Web Driven Development, Boston University Center for Enterprise Leadership.Williamson, O. E. (1975). Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization. New York, Free Press.Womack, J. P., D. T. Jones, et al. (1990). The Machine that Changed the World. New York, Rawson Associates. 34
  35. 35. Zaheer, A., B. McEvily, et al. (1998). “Does Trust Matter? Exploring the Effects of Inter-Organizational and Inter-Personal Trust on Performance.” Organization Science 9(2): 141-159.Zenger, T. R. (1994). “Explaining Organizational Diseconomies of Scale in R&D: Agency Problems and the Allocation of Engineering Talent, Ideas, and Effort by Firm Size.” Management Science 40(6): 708-729. 35

×