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Supply Chain Management (SCM), the Wheel and the ...


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  1. 1. Supply Chain Management (SCM), the Wheel and the Manufacturing Engineer James B. Ayers Author Posted with permission © 2002 by the Society of Manufacturing Engineers (SME), Dearborn, Mich., all rights reserved.
  2. 2. Society of Manufacturing Engineers The Computer and Automated Systems Association of SME April 2002 Dear CASA/SME Member, The Computer and Automated Systems Association of the Society of Manufacturing Engineers (CASA/SME) is pleased to provide you with the second Blue Book of 2002, entitled Supply Chain Management (SCM), the Wheel and the Manufacturing Engineer. James B.Ayers, the author and principal with CGR Management Consultants, uses his in-depth knowledge and experience to describe how the disciplines of supply chain management impact the manufacturing engineer. The Blue Book explains the relationship between the CASA/SME Manufacturing Enterprise Wheel, which most of you are so familiar with, and SCM thinking. It does an excellent job of describing the necessary role changes of the manufacturing engineer due to the trend toward SCM thinking and how they can work within the framework of the Wheel to impact their company’s performance. I want to remind you to visit the CASA/SME website, which continues to be enhanced. If you have not visited recently, I recommend that you do so. I have found the site’s new layout much more friendly and resourceful. I continue to use it more often for information related to computer automation and manufacturing. One resource that can benefit you and your industry colleagues is SME’s Jobs Database found under the Member Services section of SME’s website, Given the nature of our econ- omy today, several of your industry colleagues have resumes in the database and would appreciate your consideration for employment as well as you posting any employment opportunities. Finally, I want to invite you to get more involved with CASA/SME this year.There are many oppor- tunities available that will benefit both you and the association. Please contact the CASA/SME Association Manager, James Adams, at (313) 271-1500, ext. 1832, or, for more information. Sincerely, Douglas Genord Technical Fellow Manufacturing Engineering Products The Boeing Company Society of Manufacturing Engineers • One SME Drive • P.O. Box 930 • Dearborn, Michigan 48121 USA (313) 271-1500 • FAX (313) 271-2861 • Copyright © 2002 Society of Manufacturing Engineers This Blue Book may not be reproduced in whole or in part in any form without the express written permission of the Society of Manufacturing Engineers. By publishing this paper, SME neither endorses any product, service, or information discussed herein, nor offers any advice. SME specifically disclaims any warranty of reliability or safety of any of the information contained herein. ISSN 0895-5085 Manufactured in the United States PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS
  3. 3. CASA/SME MANUFACTURING ENTERPRISE WHEEL CASA/SME The Computer and Automated Systems Association of the Society of Manufacturing Engineers (CASA/SME) was founded in 1975 to provide comprehensive and integrated coverage of the field of computers and automation for the advancement of manufacturing. As an educational and scientific association, CASA/SME has become “home” for engineers, managers and other professionals involved in computer-based technologies and automated sys- tems. CASA/SME is applications oriented and addresses all phases of research, design, installa- tion, operation and maintenance of the total manufacturing enterprise.This book is one example of its wide-ranging activities. Specific CASA/SME goals are: to provide professionals with a focus for the many aspects of manufacturing that utilize computer systems automation; to provide liaison among industry, gov- ernment and education in identifying areas of further technology development; and to encour- age the development of the totally integrated manufacturing enterprise.s ABOUT THE AUTHOR James B.Ayers is a principal with CGR Management Consultants (Los Angeles). He has con- sulted for 30 years on strategy, operations improvement and new product development. He has held client management positions with consulting firms Theodore Barry & Associates, Ingersoll Engineers (now the Bourton Group), and Coopers & Lybrand, and is a senior member of the Society of Manufacturing Engineers and a member of the Council of Logistics Management. CGR is active with the Supply-Chain Council in the development of its Supply-Chain Operations CASA/SME BLUE BOOK SERIES 2002 •
  4. 4. Reference (SCOR) model for supply chain operations. Mr.Ayers is a certified management con- sultant (CMC) by the Institute of Management Consultants. He has written the Handbook of Supply Chain Management [1], Improving Competitive Position: A Project Management Approach [2], and Making Supply Chain Management Work: Design, Implementation, Partnerships, Technology, Profits [3]. He was also a contributor to Making Manufacturing Cells Work [4]. Mr.Ayers holds a BS with distinction from the US Naval Academy. In the Navy, he served in nuclear submarines. He also has an MBA and MS in industrial engineering from Stanford University (Stanford, CA). He can be contacted at (310) 822-6720 or via e-mail at For more information on CGR Management Consultants and its services, visit PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS
  5. 5. Supply Chain Management (SCM), the Wheel and the Manufacturing Engineer INTRODUCTION RELATED BLUE BOOK This Blue Book describes how the disci- CONTRIBUTIONS plines of supply chain management (SCM) Michel and Jordan described next gen- will affect the everyday life of the manufac- eration manufacturing in their Blue Book, turing engineer. It expands on themes “Next Generation Manufacturing (NGM)” already evident in recent CASE/SME Blue [5].They pointed out six NGM attributes. Books.These include the following: Five of the six deal with “responsiveness” in several flavors. Primary attributes are • Manufacturers no longer conducting busi- responsiveness to customers and global ness in isolation. Suppliers, partners and markets.To achieve flexibility in these areas, customers are part of the customer-serving the culture and practices must also be “manufacturing infrastructure.” Over-focus responsive.To make this happen, people on one’s own company, department or and physical assets in the NGM must be shop will not cut it anymore. flexible. The sixth NGM attribute is “teaming as • The CASA/SME Manufacturing Enterprise a core competency.”This includes teaming Wheel continues to be an excellent model both inside—with other functions—and for the manufacturing enterprise “infra- outside the company—with suppliers and structure.” However, SCM brings new customers. Flexibility and effective teaming insights into relationships among the dif- are also integral to SCM. ferent levels of the Wheel. More recently, the CASA/SME Board of • Effective SCM should produce a competitive Advisors detailed the impact on the Wheel advantage for your company through better of the “virtual enterprise” in their Blue manufacturing infrastructure. Strategists Book,“Virtual Enterprise Integration: now give increased credit to the role of Creating a Sustainable Manufacturing Life operation design in providing distinctive, Cycle” [6].The authors point out that peo- unique competencies.To paraphrase, ple will be as important as technology.They “Competitive advantage does not come as assert that the CASA/SME needs to “reinvent much from the products produced, but the the Wheel” to keep pace with change. processes that produce them.” Integration of the virtual enterprise requires an easy flow of information among partners All three themes highlight the growing through systems for shared knowledge. importance of manufacturing engineers in These Blue Books acknowledge the designing and executing enterprise strategies displacement of narrow, company-centric that bring products to market. One of the thinking with broader, supply chain think- CASA/SME’s missions is “to provide profes- ing. Terms like virtual enterprise, NGM, sionals with a focus for the many aspects of supply chain and the Wheel’s infrastruc- manufacturing that utilize computer systems ture support this idea. This Blue Book automation.”What follows are pointers to sat- looks further at how the trend will change isfy that mission.This Blue Book argues that the roles of individual engineers and the due to supply chain dynamics, systems inte- paradigms inherent in the Wheel. Critical gration is a journey not a destination. questions include: CASA/SME BLUE BOOK SERIES 2002 • 1
  6. 6. • “How will my job change?” SCM Task Wheel Components • “What do I need to do differently?” 1 Design supply chains for Translates needs of the customer • “Is my company doing all it can to stay com- strategic advantage (level 1) into a design for a manu- facturing infrastructure (levels 2-6). petitive?” 2 Implement collaborative Primarily a level 2 and 3 task, focus- • “How can I lead change in my company?” relationships ing on internal cooperation among functions. The goal of this Blue Book is to describe 3 Forge supply chain Focuses on external collaboration— the interaction of the Wheel with supply partnerships customers, suppliers and partners. Permeates the Wheel because inter- chain thinking and how the engineer working actions are at all levels. within the Wheel framework can really make 4 Manage supply chain Supports levels 3 for shared knowl- an impact on his or her company. information edge and level 5 enabling technol- ogy requirements. OLD TASKS—NEW WAYS 5 Remove cost from the Level 4 captures the costs of the supply chain supply chain and the importance of OF PERFORMING cost reduction. In this author’s opinion, supply chain Table 1. Five SCM tasks and the CASA/SME management brings changes to five tasks for Manufacturing Enterprise Wheel. managing the manufacturing enterprise. Figure 1 shows the five tasks.Task 1, in the chains grow over time without the benefit of middle, plans the strategy; tasks 2-5 make it a “clean sheet” design. Manufacturing engi- happen.The CASA/SME Manufacturing neers spend their time maintaining that infra- Enterprise Wheel closely parallels the way a structure making, at best,“tweaks” that pro- supply chain should be built—starting with duce only incremental improvement. customer require- Capable manu- ments at level 1 and facturing engineers then constructing A customer-centric mission should play increas- infrastructure layers provides a clear direction to ing roles not just in to meet those align activities and empowers the operations and main- requirements all the work of teams in the new tenance (level 4) but way out to level 6 manufacturing enterprise. [7] also in strategy design (Table 1). and execution (levels Figure 1 makes 1-6).The Wheel will an important point that often escapes senior be used as a framework, noting new ways to executives. Supply chain design and the result- think about and use each of the six levels. ing manufacturing enterprise infrastructure are fundamental to strategic advantage. LEVEL 1. “CUSTOMER”—EASIER Unfortunately, most infrastructures and supply SAID THAN KNOWN The “customer” is at the center of the Wheel because all Wheel activities must add value to the customer.The logical and correct 2 Implementing collaborative relationships 4 Managing supply chain information conclusion is that, if one does not read their cus- tomers’ requirements well, the whole infrastruc- ture is likely to be uncompetitive.When design- ing supply chain infrastructure, it is necessary to 1 Designing supply chains for strategic advantage understand what is going on with customers. The Wheel description makes that job look deceptively easy. In fact, market shifts, technology and product dynamics make the 3 Forging supply chain partnerships 5 Removing cost from the supply chain job of reading customer requirements exceed- ingly difficult.There are many complications in trying to discover “clear direction” for “knowing” the customer, and the manufactur- Figure 1. Five tasks changed by SCM. ing engineer needs to be wary.The sections PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 2
  7. 7. Supply Chain Competitive Developing/Uncompetitive Innovative 2. Growth 1. Inception Product 4. Decline Functional 3. Maturity Market size Time 1 2 3 4 Figure 2. Product life cycle and the supply chain. that follow provide guides to interpreting cus- 1. In stage 1, products are just beginning to be tomer requirements. sold. Sales are quite low and uncertain. There is little in the way of supply chain PRODUCT LIFE CYCLE infrastructure; what is made is made in Figure 2 helps illustrate the interaction small batches.The product type is “innova- of the supply chain infrastructure, products tive,” a descriptive term originated by and the customer.The figure shows the prod- Marshall Fisher [8]. uct “life cycle,” which is a model long used by 2. Stage 2 is high growth. Profits are plentiful, marketers to understand product positions.An customers cannot get enough of the prod- understanding of Figure 2 is indispensable for uct and margins are high.The product is insights into what customers want.The reason still considered innovative.As the supply is that the four life cycle stages have different chain takes shape, product availability is its customer requirements necessitating different main mission. Missing product cuts into types of supply chain and accompanying man- profits, so it is acceptable to carry “just-in- ufacturing infrastructure.The following para- case” inventory and have excess capacity. graphs describe the environment in each of 3. Sales stop growing in stage 3 as competition the four stages. stiffens. Most of us work for companies that CASA/SME BLUE BOOK SERIES 2002 • 3
  8. 8. Our company End user Figure 3. The end-to-end supply chain. sell stage 3 products. In Fisher’s terminology, for competitive manufacture. In stage 2, the the product is now “functional.” Cost matters company is constrained by demand and must as much as delivery, and supply chains must work hard to keep up.At stage 3, the engi- be cost-effective. Competitors that cannot neer squeezes out costs to keep the product reduce costs drop out. competitive.These varied missions require 4. In Stage 4, the market declines. Only those different skill sets. able to eke out a small profit remain. So when we use the term “infrastruc- ture” with regard to level 6 of the Wheel, a The product life cycle says that what the supply chain view would consider the end-to- “customer” wants is a moving target, compli- end supply chain shown in Figure 3.This is cating the job of building a competitive sup- implied in the Wheel but is seldom put into ply chain and related infrastructure.As we practice. It is likely that many limit their view proceed, the effects of the product life cycle of “infrastructure” to their assigned duties—a on supply chain and infrastructure building natural response. will be referred to. Because they are immersed in day-to-day problems, few engineers think like this. VIEWPOINT: WHAT IS Perhaps the engineer supports a particular A SUPPLY CHAIN? shop. In fact, the shop is part of the supply Terms like “infrastructure” and “virtual chain and must be considered so.“Manufac- enterprise” have different meanings to differ- turing enterprise” in the context of the Wheel ent people. For many executives, the term should be thought of as the company and the “supply chain” calls to mind their own incom- supply chains of which it is a part. Engineers ing materials from their suppliers.A more should look up at least occasionally and take comprehensive view, illustrated in Figure 3, is the supply chain view. that the “supply chain” starts with the end user.“Our Company,” a sub-tier supplier, in VIEWPOINT: WHAT IS Figure 3, is far back in the chain but may be A CUSTOMER? vital to the product.The end user views all As was discussed above, the “customer” these contributors, including “Our Company” is not monolithic. Unless the business is very and “Its Partners” as the supply chain. simple,“customer” is likely to have multiple With the onset of supply chain thinking, meanings. Figure 4 illustrates this view. On a manufacturing engineer in “Our Company” top, it shows the “customer” as a single cir- must consider his or her customer’s cus- cle, as depicted in the Wheel.The reality is tomer and his or her supplier’s supplier.The that the customer circle fragments into seg- challenges for stage 1 life cycle products are ments, shown by the smaller circles in quite different than those for stage 3 prod- Figure 4. ucts. In stage 1, the race is on to line up qual- Customer segmentation is a marketing ified suppliers or to develop new processes tool for analyzing distinct requirements and PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 4
  9. 9. on the dynamics of products as determinants of enterprise infrastructure. But all products Customers (CASA/SME are not created equal, and the differences Manufacturing complicate infrastructure design.A manufac- Enterprise turing enterprise with a large product portfo- Wheel) lio will likely have a mix of products at vari- ous stages of their life cycles, as shown in Figure 2. Some will be new, undergoing fre- quent design change, growing in terms of sales and high-margin contributors to profit. Older products may have stable designs, no growth and declining profitability. A practical example involves a machine tool purchase. Often engineers use cost reduc- Figure 4. Market segments. tion to justify such purchases. However, flexi- bility could be a more valuable benefit if the tool is to make a stage 2 product.The tool setting strategies. Supply chain thinking calls may make the product cost more, but the for building product supply chains that cater added profit more than makes up for it. to attractive segments. So it should be with manufacturing infrastructure. SOLUTION: DIVIDE The Wheel oversimplifies by implying all AND CONQUER customers speak with a common voice.This A solution to these issues is a tactic for can lead the engineer to design an infrastruc- using “spheres” when designing the manufac- ture good for one segment but lousy for oth- turing enterprise.A sphere has product-mar- ers. In fact, the “essence” of strategy is making ket-operations dimensions and gets its name conscious choices about designing infrastruc- by virtue of the fact that it has three dimen- tures for competing. If one’s current infra- sions. Figure 5 depicts the sphere concept. structure does not fit the needs of some seg- Table 2 provides examples of ways an engi- ments, then one has three choices: neer can carve spheres out of a complex enterprise. 1. Dropping those segments in which the A couple of examples help explain the company cannot compete. concept.An automotive company might cre- 2. Losing market share over time to competi- ate a sphere with these components: tors catering to attractive segments. 3. Developing another infrastructure alongside Products the existing one. Operations Referring to Figure 3, one segment may value service, while another buys on price. The company may have to choose between the two.This will affect choices of equipment, deals with suppliers and distributors, and inventory along the supply chain. Manufacturing engineers should point out the differences and choices required. How many actually do? VIEWPOINT: WHAT IS A PRODUCT? Markets Products are the reason customers buy from you.The Wheel, however, is very quiet Figure 5. Conceptual depiction of spheres. CASA/SME BLUE BOOK SERIES 2002 • 5
  10. 10. Dimension Basis for sphere Examples manufacturer in this case could support its Markets End-user segments OEM/Aftermarket distributors by providing vendor-managed Regions where products US/Europe/Asia are sold Immediate/Delayed delivery inventory services to end users. Expectations for service, delivery This approach extends Wickham Skinner’s Products Innovative/Functional SUV/Sedans “focused factory” to the supply chain Manufacturing processes Batches/Assembly line (described by Hayes and Wheelwright [9]).The employed Materials used Metal/Composite concept argues that a single factory or supply Operations Production facilities Plant 1, 2, 3 chain will not perform multiple specialized (plants, cells and so on) Intel/other microprocessor tasks well. Carving out and designing spheres Key suppliers Direct/distributor/VMI Distribution channels GM/Ford/DaimlerChrysler to the needs of customers as advocated in the Customer-dedicated facilities Wheel will lead to competitive success. Table 2. Basis for spheres in a manufacturing enterprise. LEVELS 2-3: “COLLABORATION” Levels 2 and 3 are the “collaboration” lev- 1. Market—a regional market (the US). els. Here, the Wheel recognizes the impor- 2. Product—a product life cycle division; (new tance of the “soft” side of the manufacturing SUVs [a stage 2 product] that are expected infrastructure—People,Teamwork, and to grow rapidly). Organization. In the 3. Operations—com- five SCM tasks, task 2 ponent and assem- The organization is only encompasses collabo- bly plants that make as strong as its people, rative relationships the SUVs. organization, and culture. within the enterprise; task 3 addresses those Today’s highly competitive with outside partners. Such a sphere worldwide markets require a There are two distinct might adopt liberal new approach to managing, tasks because the chal- inventory policies that organizing, and applying lenges are different. would enable fast the knowledge and skills Also, it has been this response to expected of people. [7] author’s experience higher levels of sales. that achieving internal Equipment choices at collaboration is no component plants in terms of numbers and less challenging than external collaboration. type would reflect the need for quick added Collaboration is a “hot topic” in supply capacity. chain circles these days. Everyone wants to Another example is a single plant manu- do it more effectively, but often do not know facturer of aerospace fasteners, which might why or how. Discussions of collaboration are define a sphere as follows: often closely tied to new software standards and products to facilitate it.This fuels a huge 1. Market—distributors (rather than direct commercial motivation for promoting the sales to airframe manufacturer customers). concept. For this reason, level 3, Shared 2. Product—high-volume standard fasteners. Knowledge & Systems, is closely linked to 3. Operations—designated manufacturing cells the information infrastructure that enables and customer distribution centers. the sharing of knowledge around the enter- prise. Level 3 is likewise linked with level 4, In the automotive example, the products consisting of all the activities that make up are “innovative” high-profit SUVs (stage 2 the enterprise. product).The manufacturing infrastructure will assure supply to the market.The supply WHAT KIND OF INFRASTRUCTURE chain in this case would have built-in flexibili- PROJECTS ARE YOU ty to minimize lost sales due to stock-outs.The WORKING ON? fasteners are a functional product (stage 3), Unlike hardware and facilities, the impact and costs are as important as availability.The of people, organization and culture is hard for PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 6
  11. 11. Level 1 Function Level 2 Company Level 3 Supply Chain correction of a problem or installing an infor- mation system that is gaining broad accep- Strategic (S) Changes basis for competition tance in an industry. (ERP systems in the late Identified in strategic plan 1990s are an example.) Implementing these New product/capability systems is a cost of doing business and adds Justified by market share, margins little in the way of distinctive competitive Non-Strategic (N) advantage. Responds to deficiency Most projects are level 1, non-strategic Incorporates common technology Justified by ROI, cash flow investments.As a manufacturing engineer, you Sponsored by a department can perform a self-assessment. List all projects under way in your company. Include manufac- Figure 6. SCM improvement projects. turing equipment, facilities improvement and information systems.You should worry if few the outside, or even the inside, observer to see. are strategic and at the business unit or sup- Figure 6 describes some tests the manufactur- ply chain level. ing engineer can apply to his or her own com- pany.This figure shows six categories of an WHAT KIND OF STRUCTURE improvement project.The levels along the top DO YOU HAVE? correspond to entities in the supply chain—a One response to the supply chain phe- function or department, a company or business nomenon has been the conversion of execu- unit, or the supply chain itself. tive titles to “supply chain” labels. For exam- Most improvement projects in a compa- ple, directors of procurement transform into ny likely reside at the functional level and are “supply chain vice presidents.” In a con- confined to improvements in one department. sumer-oriented business, the VP supply chain A new machine tool is such an example.A title might settle on the director of distribu- company-level change requires the involve- tion. Some companies also bring their manu- ment of more than one function.An example facturing functions into the supply chain could be the integration of design and manu- fold; others do not.These companies should, facturing processes. Level 3 is the supply because manufacturing is certainly part of chain level.These involve more than one busi- the supply chain. ness unit. Examples are joint product develop- You can test your organization’s struc- ment between companies or cost-reduction tural approach to SCM. Table 3 shows three initiatives between suppliers and their cus- generic approaches to organizing a manufac- tomers. turing enterprise.The traditional approach is The vertical axis shows two types of pro- the “functional” organization. For example, if jects and the criteria that apply. Strategic pro- a manufacturing engineer (working on the jects have the potential to change the basis of shop floor) reports to a vice president of competition.They can occur at all three lev- manufacturing (who is responsible for all of els.The exhibit suggests some tests to apply to the company’s products), then this is the your projects.The non-strategic project,“N” type of organization your company has.The type, is often a defensive move. It could be the model corresponds to the functionally laid Organization type Appropriate when: Not appropriate when: Functional Small company, narrow product line, mature business, Multiple products in different stages, serving dif- Stage 3, four products, useful for start-up, prototyping ferent customer segments processes (stage 1) Product-centric Capital intensive production process, homogeneous Varied customer base, relative low-cost produc- customer base, wide variety of production process tion technology, innovative products technologies, stage 3 products Supply chain centric Strategy targets attractive segments, style-driven business, Too many market segments cause loss of focus, heavy new product flow, stage 1 and 2 products price-sensitive market Table 3. Approaches to supply chain organization. CASA/SME BLUE BOOK SERIES 2002 • 7
  12. 12. out shop where like equipment is located in to collaborative systems for sharing informa- one location. tion. Implementing supply–chain level pro- Another option is the product-centric jects unlocks options for improvement, partic- organization.As a manufacturing engineer, ularly if all the product’s costs are represented your department is responsible for a prod- by the collaborating organizations. uct.This is the intent of cellular manufactur- Multi-company supply chain collabora- ing where unlike machines are grouped tion can benefit by having the following in together to reduce lot sizes and cycle time place: for a family of products.The automotive assembly plant, where platforms with differ- 1. Teams with representatives from the signif- ent nameplates are produced in a single icant participating companies. plant, embodies this model. 2. Goals for the endeavor, including the basis A supply chain organization might for competing and expectations for rev- reflect the spheres described earlier.This enues, profits and investments. case is the “factory within a factory” and 3. A third-party “honest broker” to facilitate could also include procurement, suppliers, the effort, oversee meetings, decisions and warehouses, distribution centers, engineering implementation. and other functions traditionally not includ- 4. A CEO, or upper-level management repre- ed with manufacturing. sentative, steering committee to lead the effort. DO YOUR ACTIONS 5. Multi-year projects to implement the strate- HAVE NO PURPOSE? gy with participating companies funding Christensen, Raynor and Verlinden [10] the effort. contend that earlier in the product life cycle 6. A financial model that distributes risks and (stages 1 and 2 in Figure 2), a company will rewards to guide contracting. likely need to maintain control of its supply 7. Investments in technology to facilitate chain. In the industry vernacular, it will be needed information sharing among the “vertical integrated.” Manufacturing engineers partners. Partners with legacy systems will will favor “make” rather than “buy” to control operate those if they do not interfere with processes. supply chain operations. As the market matures and moves into stage 3, cost becomes paramount. Christensen, Not every supply chain situation calls for Raynor and Verlinden contend that companies all seven elements, but the manufacturing will favor “buy” over “make.”The supply chain engineer should look for these elements if will consist of best-in-class suppliers. It is time entering into joint supply chain improvement to go outside with a process rather than mak- projects with partners. If they are absent, per- ing marginal improvements to an internal one. haps he or she should suggest them. An engineer may be persistently and unsuc- cessfully trying to improve processes that WHERE IS THE POWER? could be completed elsewhere, or processes Supply chain organizations must recog- for products that are better off dead. nize the power relationships that exist between companies, their suppliers and their CAN YOUR ORGANIZATION customers. Certainly, suppliers to Detroit’s “Big EXECUTE? 3” are aware of the stringent requirements. Nor In 1997, Stephens, Gustin and Ayers [11] are these suppliers under any illusions that described a vision of stage 3 supply chain they can easily change the situation.They must organizations. It is still too soon to tell if this do their best to comply, maintain high perfor- vision will be widely implemented; however, it mance evaluations and escape Draconian serves as a model for governance of the “virtu- requirements that go with low performance. al enterprise.” However, there are a host of other rela- An organization such as the one tionships that one or both parties can shape to described here is also a necessary precursor their needs.The earlier “Next Generation PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 8
  13. 13. Manufacturing” Blue Book [5] mentioned that is important.There are two basic directions— “teaming must be a core competency.” horizontal and vertical. Figure 7 illustrates the Creativity in these “collaborations” needs to be “direction” property.The open circles show honed to maintain and increase market share. the proposed supply chain; black circles show The Handbook of Supply Chain Management a competitive or parallel supply chain.The fig- [1] recommends a vocabulary for supply chain ure shows two horizontal partnerships. On partner relationships. Putting the vocabulary to the right, the partnership creates space by the work is useful for reviewing partnership pro- partnering of two organizations that serve a posals and organizing the virtual enterprise. common customer. On the left, a horizontal The methodology uses three dimensions—pur- partnership is formed between two compa- pose, direction and choice—to characterize a nies performing similar functions in separate partnership or virtual enterprise. supply chains. Purpose.This first classification is used to A vertical partnership is created along determine whether the partnership will create the same supply chain.Two partners joining new “space” in the market. New space might be within the same chain illustrate this.A retailer the case with an innovative product or supply who concentrates its business with a pre- chain approach. Dell did this by capturing the ferred distributor is an example.Wal-Mart did lead with direct sales of personal computers. this successfully with McKesson, a pharma- The company successfully created new supply ceutical distributor. Supplier reduction pro- chain space at a time when personal comput- grams are examples of vertical partnerships ers were a stage 2 growth product.As the prod- developing in a number of industries. uct has matured into stage 3, Dell retains its Choice.The term choice reflects the rela- profit leadership. Contract electronic manufac- tive power of partners.This characterization is turers, known widely as CEMs, have pulled off borrowed from information systems, using a similar move.They buy assets of large elec- terms “one” and “many” to describe relative tronics companies and adapt them to serve positions of the partners.A “one” describes multiple customers. cases where there are few potential partners. A company seeking new space should Automotive, aerospace and government next consider whether it should partner or not. agency markets have only a few OEM buyers. The partner must bring something to the party These markets are oligopolies.The “many” side to make the venture work. For example, a part- describes the supplier base for these compa- ner may be needed to fill in a manufacturing capability that one’s own company does not have. It could be cheaper to partner than to End users build the new capability internally. In some cases, the company may decide to go it alone. Companies can also partner to enhance an existing supply chain. In this case, no new space is created. Consolidation in an industry is an example of partnering of this sort. It involves mergers driven by the perceived Physical flow in the supply chain opportunities for economies of scale. Online sellers “hooking up” with brick and mortar retailers, called “clicks” and “bricks,” are an Horizontal partnerships example of this type of partnership. Both sup- ply chains exist, but the combination can be more powerful than separate versions.“Clicks” provide convenient transactions.“Bricks” facili- tate viewing the product before buying and returning it later if needed. Another supply chain Our supply chain Direction.When considering options for partnering, the “direction” of the partnership Figure 7. Partnership directions. CASA/SME BLUE BOOK SERIES 2002 • 9
  14. 14. nies.Therefore, auto suppliers work in a needs they bring.Also, if a company is consid- “many-to-one” relationship. ering a partnership, it should review the abili- The other end of the spectrum is repre- ty of its infrastructure to make the partner- sented by Microsoft’s leverage over personal ship successful. computers. It is an example of “one (Microsoft) to many (personal computer sellers).” In fact, PROCESS-ENHANCING SYSTEMS recent anti-trust suits have challenged this Shared knowledge and associated sys- leverage.A “many-to-many” environment indi- tems form level 3 of the Wheel. Indeed, cates partners have multiple options for joining CASA/SME has, as its mission, the sharing of with others. Both sides of the partnership have ways to make enterprise integration work. many potential companies.This is the situation This level interacts with levels 2 and 4, the in very competitive markets. processes of the enterprise. Level 3 can be Partnerships and mergers of equals repre- viewed as “lubricating” the interface sent a “one to one.”AOL with Time Warner and between the people, their skills and knowl- Daimler with Chrysler are two examples.AOL edge, and the processes the people must and Time Warner attempt to combine content operate. from Time Warner with distribution from AOL. There is no end to supply chain soft- This is new space and a vertical partnership. ware “solutions” available in the marketplace. DaimlerChrysler is a horizontal partnership, Some are finding that those investments limit but probably creates no new space.An exam- flexibility in adapting, as roles in the supply ple of a “many-to-many” horizontal partnership chain can change rapidly.They are also find- would be two distributors joining to offer ing that transaction systems can effectively wider geographic coverage or two machine deal with routine transactions. Many transac- shops with complementary equipment capa- tions are anything but routine, and level 2 bilities joining to pool their capabilities. skills and knowledge are needed to get the Vocabulary and the Wheel.Why should work done. manufacturing engineers worry about this? Bensaou and Earl [12] contrasted The answer lies in the increasing importance Western and Japanese management styles in of collaboration through partnerships in the terms of what they call “mindsets” for manag- enterprise infrastructure.The Wheel at level 2 ing information technology.The authors refers to “People,Teamwork and Organization,” recount the frustration often heard in the US which captures the need to use people knowl- regarding integration of technology into the edge and skills.The way we go about this will business and the tendency to chase “technolo- depend on the nature of the partnerships we gy for technology’s sake.” have with other companies. Table 4 summarizes their research into Unfortunately, many partnerships take the different mindsets.The Western mindset form without conscious reworking of the contrasts with the Japanese mindset on the infrastructure. By identifying these cases and way managers frame technology use.They characterizing them with the vocabulary, infra- were surprised that many of the problems structure designers can formally address the cited in the US do not occur in Japan.The Issue Western Mindset Japanese Mindset Matching IT with business needs Align IT with business strategy Basic way we compete drives IT investments Return on investment Capital budgeting process, ROI Operation performance improvement Technology and process improvement Tend to adopt technology—seen as best Use the right technology to meet a performance goal way to improve Connections between IT users and specialists Tech-savvy staff and CIOs Rotation through technical and management roles Improvement of organization performance Design elegant system; adapt to it Design system to use employee knowledge Table 4. Mindsets for implementing information technology. PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 10
  15. 15. research supports the Wheel’s conception that level 3 systems and methodologies 1. Pick attractive segments should bring level 2 know-how to the support of level 4 processes.As the discussion pro- 2. Make choices how you will compete ceeds, this idea will be expanded. 3. Develop themes to support each choice LEVELS 4-5: “ACTIVITY SYSTEM” This Blue Book addresses levels 4 and 5 of 4. Design activities to support the themes the Wheel together. In reality, level 5 resources bring level 4 processes into being, so they are tightly entwined. It is up to level 5 to translate 5. Assure activity network provides advantage aspects of the external environment (level 6) into enterprise resources to fuel value-adding Figure 8. Building an activity system. processes at level 4.This is the “outside-in” per- spective. From lower levels 1-3, processes reflect their “inside-out” perspectives. and costs to keep up.There is no other reason The Wheel divides level 4 into 15 to buy from you. Serving all masters means processes. It is recognized that a single manu- you will be mediocre, serving no one well. facturing enterprise need not perform all 15 Competitors can swoop in and pick off pieces internally. The “virtual enterprise” happens by of your market. delegating functions that outside specialists Focusing on a market will help bring may perform better.Alternatively, the manufac- prosperity. Figure 8 shows steps in the turer can carve out market niches as “best in process. Step 1 is picking out attractive seg- breed” in some narrow service or product ments to pursue. Once the segment is cho- focusing on a subset of processes. sen, the company must make conscious This section describes ways to decide choices of how it will compete; this is step what form infrastructure processes should 2. In step 3, each choice defines a “theme” take.After all, without conscious, ongoing that supports the activity system.To execute redesign, the infrastructure grows weak in on each theme, the company must develop comparison with competitors that aggressive- supporting activities in step 4. Each activity ly implement change. supports one or more themes. It is the link- ages between activities and themes that ACTIVITY SYSTEMS FOR erect barriers to competitors. PROCESS DEFINITION Most strategic planning approaches focus BUILDING INFRASTRUCTURE: too much on finance and marketing and over- THE ACME CASE look the role of operations.These approaches A hypothetical case illustrates how to relegate operations to a passive role in achiev- build an activity system.The company, called ing a competitive position.“Activity systems” Acme, is a machining operation that produces in the heading refers to a methodology from fasteners for OEM airframe manufacturers, Michael Porter [13], a respected guru on such as Boeing.Acme is a technology leader strategic planning. Porter’s activity systems that licenses its products to competitors.This approach is a way to define and design manu- technology includes the fasteners themselves facturing enterprise processes.What follows is and the tooling to install them.The total cost a description of the methodology. to the OEM of installing a fastener, including Underlying the approach is the principle labor, is much more than the cost of the fas- that effectively competing means making tener itself and the tooling. choices about how to compete.You cannot be In the past, customers bought directly all things to all people.Without choices, one is from Acme through its sales force.The largest condemned to commoditization, and the only OEM (Boeing) still buys direct and accounts advantage comes from operational effective- for about half the market. However, many ness. In other words, one has to cut prices more OEMs now buy from distributors.These CASA/SME BLUE BOOK SERIES 2002 • 11
  16. 16. distributors provide vendor-managed inven- another era or adapt ways to provide short tory to the OEMs assembly lines.These lead-time responses.This would particularly arrangements reduce costs for the OEMs and aid its position for supporting the distribu- enforce stringent delivery requirements on tor supply chain. the distributors.Acme has a small share of Should Acme take the full-service Boeing’s business because Boeing buys on options, becoming the lowest price, lowest price, and several licensees offer lower service provider would cost a lot in terms of prices than Acme. good will, as well as its hard-won position as a Acme makes fasteners to order. In a peri- leader. Figure 9 shows the activity system that od of high demand, it has long lead times might result if Acme chooses the “high-end because its plant is near capacity. Acme is options” from Table 5. Notice that these choic- noted for its quality and the technical support es are reflected in the four themes that it provides. It maintains an engineering group, anchor the activity system. a sophisticated sales force and laboratories to Figure 9 shows activities that support guide customers in fastener selection and the themes.The lines from the activity to the application. However,Acme does not charge themes display linkages.Also, notice that activ- for technology-related services. Such services ities support multiple themes.These activities, are a cost of maintaining a leadership position such as the level 4 processes of the Wheel, are for the technology. what make the enterprise tick. Fit between Users of Acme’s technology often seek the activities comes from their ability to sup- technical advice from Acme, then buy from a port the themes, which are the result of con- licensee.Acme’s machining operations are scious choices on how to compete. arranged in a “functional” layout with like Table 6 explains how the activities (or equipment located together. So the path processes) support the themes. It describes through various operations in the shop is how each of the activities identified in lengthy, and there are many stops. Figure 9 can address what Acme might view Even in times of prosperity,Acme makes as market opportunities. With regard to the little profit. Industry competition is fierce in a Wheel, these activities will form specifica- cyclical business.Apparently, profitable busi- tions for levels 3, 4 and 5. A danger is that, ness leaves little on the bottom line after over time, the 15 processes in the Wheel expenses are deducted.Acme recently have taken their own courses.They no installed a manufacturing-oriented ERP system longer support any underlying themes for to control its finances and operations. competing. Companies with various depart- Table 5 describes the choices Acme has ments (termed “fiefdoms”) probably have in the themes that would anchor its activity this problem. system and infrastructure. In the left-hand column of Table 5 are four “themes” and the REINVENTING THE WHEEL associated choices. For example, for “produc- As a long-time SME and CASA member, tion flexibility,”Acme could choose to con- this author has not paid much attention to tinue its inflexible approaches built for the Wheel, other than to observe that it Theme As-Is High-End Option Low-End Option Technology leadership Engineers, labs, sales force Continue the as-is Drop expensive overhead functions to reduce cost Production flexibility Inflexible, long lead time Have plenty of capacity, carry inventory, and be responsive Focus on one customer; dedicate plant, tightly link to that customer Customized services Services designed around Design specialized approaches for Offer no service options. Compete on traditional OEM direct sale major segments. Compete on services. price. Account profitability Poorly managed. All products Focus on segments with highest Lower costs to compete in most appeared profitable. margins. Adopt activity-based approach. Table 5. Acme’s strategic themes. PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 12
  17. 17. Master planning Cellular layout Flexible Profit production focus Scheduling Activity costing Service-based Flexible Finished customer good inventory pricing interfaces Process R&D Partnering Technology leadership Customized service Figure 9. Example activity system. Themes supported Activity/process Contributions Flexibility Technology Service Profit Master planning Develop plan for facilities, customers and products. X Scheduling New methods would improve plant utilization and X create fast-response FG inventory. Cellular layout Rearrange plant to quickly produce high–volume products. X X Process R&D Develop new product designs to lower installation cost. X X X Partnering Create alliances with others to fill in product line. X X Finished goods Establish fast response finished goods inventory. X X Flexible interfaces Implement systems to manage customer relationships. X X Service-based pricing Reflect services component in pricing. X Activity-based costing Change allocation methods to match costs with cost drivers. X X Table 6. Activity support of strategic themes. seemed quite complex. Writing this Blue REFERENCES Book evoked some observations on the Wheel and its use—calling to mind the [1] J.Ayers, Handbook of Supply Chain strengths and what could be construed as Management (New York: St. Lucie Press weaknesses. Going through the exercise has & APICS, 2001). shown how versatile and useful the Wheel [2] Improving Competitive Position: A is as a model for modern manufacturing Project Management Approach enterprises. What is lacking, and what has (Dearborn, MI: Society of Manufacturing hopefully been addressed (at least partially), Engineers, 1990). are the changes brought on by the need to [3] J.Ayers, Making Supply Chain Manage- compete through supply chains rather than ment Work: Design, Implementation, as stand-alone companies. Partnerships, Technology, Profits (New CASA/SME BLUE BOOK SERIES 2002 • 13
  18. 18. York: Auerbach Publications, 2002). Publishing, 1997). [4] L. Nyman, Making Manufacturing Cells [9] R. Hayes and S.Wheelwright, Restoring Work (Dearborn, MI: Society of Our Competitive Edge: Competing Manufacturing Engineers, 1992). Through Manufacturing (New York: [5] F. Michel and J. Jordan,“Next Generation John Wiley & Sons, 1984). Manufacturing,” CASA/SME Blue Book [10]C. Christensen, M. Raynor, and M. Series (Dearborn, MI: Society of Verlinden,“Skate to Where the Money Will Manufacturing Engineers, 1999). Be,” Harvard Business Review (Boston: [6] CASA/SME Board of Advisors,“Virtual Harvard Business Publishing, 2001). Enterprise Integration: Creating a [11]S. Stephens, C. Gustin, and J.Ayers, Sustainable Manufacturing Life Cycle, “Reengineering the Supply Chain: The CASA/SME Blue Book Series (Dearborn, Next Hurdle,” Information Strategy MI: Society of Manufacturing Engineers, (Englewood, CO: CGR Management 2001). Consultants, 1997). [7] “The New Manufacturing Enterprise [12]M. Bensaou and M. Earl,“The Right Mind- Wheel,” CASA/SME (Dearborn, MI: Society Set for Managing Information of Manufacturing Engineers, 1993), Technology,” Harvard Business Review (Boston: Harvard Business Publishing, casa/casamwh6.htm&&&CASA&. 1998). [8] M. Fisher,“What Is the Right Supply Chain [13]M. Porter,“What Is Strategy?”, Harvard for Your Products?”, Harvard Business Business Review (Boston: Harvard Review (Boston: Harvard Business Business Publishing, 1996). PUBLISHED BY THE COMPUTER AND AUTOMATED SYSTEMS ASSOCIATION OF THE SOCIETY OF MANUFACTURING ENGINEERS 14
  19. 19. Society of Manufacturing Engineers Computer and Automated Systems Association of SME One SME Drive, P.O. Box 930 Dearborn, MI 48121-0930