Strategic Sourcing and

Supply Chain Design

 Strategic Sourcing and
Supply Chain Design

1. Fruit Flies & Temporary Advantage

2. Supply Chain Design & 3-DCE
3. eBusiness Phenomena:
Business Model Innovation
4. Technology Roadmapping:
A telecom example
 Business System Design in a Fast-Clockspeed World:
Study the Industry Fruitflies
Evolution in Evolution in
the natural world: the industrial world:
INFOTAINMENT is faster than
FRUITFLIES
MICROCHIPS is faster than
evolve faster than
AUTOS evolve faster than
MAMMALS
AIRCRAFT evolve faster than
evolve faster than
MINERAL EXTRACTION
REPTILES
THE KEY TOOL:
THE KEY TOOL:
Cross-INDUSTRY
Cross-SPECIES Benchmarking
Benchmarking of Dynamic Forces
of Dynamic Forces
 Cisco’s End-to-End Integration for
its Fulfillment Supply Chain
• New product development on-line
with supply base
Customers • Technology Supply Chain Design:
Innovation through Acquisition

Cisco Finished Product flows direct to

Order info
customer via logistics
flows direct to supplier
Cisco and suppliers
Contract
Manufacturers
• Single enterprise information system
• Dynamic replenishment, direct fulfillment,
merge in transit Component
• Customer orders through Cisco Suppliers &
Connection online Distributors

Basic Design Principle: Arm’s length

Relationship with Fulfillment Chain Partners
 Cisco’s Strategy for
Technology Supply Chain Design
1.Integrate technology around the router to
be a communications network provider.
2. Leverage acquired technology with
- sales muscle and reach
- end-to-end IT
- outsourced manufacturing
- market growth
3. Leverage venture capital to supply R&D

Basic Design Principle: Acquisition

Relationship with Technology Chain Partners
 Volatility Amplification in the Supply Chain:
“The Bullwhip Effect”

Customer Retailer Distributor Factory Tier 1 Supplier Equipment

Information lags
Delivery lags SOLUTIONS:
Over- and underordering Countercyclical Markets
Misperceptions of feedback Countercyclical Technologies
Collaborative channel mgmt.
Lumpiness in ordering (Cincinnati Milacron & Boeing)
Chain accumulations
 Supply Chain Volatility Amplification:
Machine Tools at the tip of the Bullwhip

“We are experiencing a 100-year flood.” J. Chambers, 4/16/01

See "Upstream Volatility in the Supply Chain: The Machine Tool Industry as a
Case Study," E. Anderson, C. Fine & G. Parker Production and Operations Management,
Vol. 9, No. 3, Fall 2000, pp. 239-261.
LESSONS FROM A FRUIT FLY:
CISCO SYSTEMS

1.KNOW YOUR LOCATION

IN THE VALUE CHAIN
2. UNDERSTAND THE DYNAMICS
OF VALUE CHAIN FLUCTUATIONS
3. THINK CAREFULLY ABOUT THE ROLE
OF VERTICAL COLLABORATIVE
RELATIONSHIPS
 INDUSTRY CLOCKSPEED IS A COMPOSITE:
OF PRODUCT, PROCESS, AND ORGANIZATIONAL
CLOCKSPEEDS

Mobile Phone INDUSTRY CLOCKSPEED

THE THE
Mobile Phone Mobile Phone
product technology
THE MANUFACTURING
Mobile Phone COMPANY
organization
PRODUCTION
PROCESS
process technology
 Mobile Phone System CLOCKSPEED is a mix of
Transmission Standards, Software and Handsets

Mobile Phone System

TRANSMISSION
SOFTWARE
STANDARD
slow clockspeed APPLICATIONS HAND SET
medium clockspeed fast clockspeed
OPERATING SERVICES
SYSTEM fast clockspeed
slow clockspeed

ISSUE: THE FIRMS THAT ARE FORCED

TO RUN AT THE FASTEST CLOCKSPEED
ARE THE MOST LIKELY TO STAY AHEAD
OF THE GAME.
 Clockspeed drives
Business Strategy Cadence

Dynamics between New Projects and Core

Capability Development: PROJECTS MUST
MAKE MONEY AND BUILD CAPABILITIES

CORE NEW PROJECTS

CAPABILITIES (New products,
new processes,
new suppliers)

See Leonard-Barton, D. Wellsprings of Knowledge

The Strategic Leverage of Supply Chain Design:
Who let Intel Inside?
1980: IBM designs a product, a process, & supply chain

Customers

Intel

IBM Intel Inside

Microsoft
The Outcome:
A phenomenally successful product design
A disastrous value chain design (for IBM)
 LESSONS FROM A FRUIT FLY:
THE PERSONAL COMPUTER

1. BEWARE OF INTEL INSIDE

(Regardless of your industry)
2. MAKE/BUY IS NOT ABOUT WHETHER IT IS
TWO CENTS CHEAPER OR TWO DAYS FASTER
TO OUTSOURCE VS. INSOURCE
3. SUPPLY CHAIN DESIGN CAN DETERMINE
THE FATE OF COMPANIES AND INDUSTRIES,
AND OF PROFIT AND POWER
4. THE LOCUS OF VALUE CHAIN CONTROL
CAN SHIFT IN UNPREDICTABLE WAYS
 Vertical Industry Structure
with Integral Product Architecture

Computer Industry Structure, 1975-85

IBM DEC BUNCH
Microprocessors

All Products

All Products
All Products
Operating Systems

Peripherals

Applications Software

Network Services

Assembled Hardware

(See A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)

 Horizontal Industry Structure
with Modular Product Architecture

Computer Industry Structure, 1985-95

Microprocessors Intel Moto AMD etc

Operating Systems Microsoft Mac Unix

Peripherals
HP Epson Seagate etc etc

Applications Software
Microsoft Lotus Novell etc
Network Services
AOL/Netscape Microsoft EDS etc
Assembled Hardware
HP Compaq IBM Dell etc
(See A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)
 THE DYNAMICS OF PRODUCT ARCHITECTURE
AND VALUE CHAIN STRUCTURE:
THE DOUBLE HELIX

See Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
 THE DOUBLE HELIX
IN OTHER INDUSTRIES

• TELECOMMUNICATIONS--
– “MA BELL” was Vertical /Integral
– BABY BELLS & LONG LINES & CELLULAR are
Horizontal/Modular
– Today’s Verizon is going back to Vertical /Integral
• AUTOMOTIVE--
– Detroit in the 1890’s was Horizontal/Modular
– Ford & GM in the mid 1900’s were Vertical /Integral
– Today’s Auto Industry is going back to Horizontal/Modular
• TELEVISION--
– RCA was Vertical /Integral
– 1970’S THROUGH 1990’S were Horizontal/Modular
– Today’s media giants are going back to Vertical /Integral
• BICYCLES--
– Safety Bikes to 1890’s boom to Schwinn to Shimano Inside
Controlling the Chain Through Distribution:
The End of P&G Inside ?

• Controlling the Channel Through Closeness to Customers:

• consumer research, pricing, promotion, product development

Customers

Retailer

P&G
Retailer

Retailer
 Controlling the Chain Through Distribution:
Beware of Walmart Outside

Controlling the Channel Through Closeness to Customers: Chain Proximity

Customers WalMart
Retailer

Retailer
P&G
Retailer

WalMart Private Label

Vertical Growth on the Double Helix

Volatility Amplification in “The Bullwhip Effect” and
Clockspeed Amplification in “The Speedup Effect”

Customer Retailer Distributor Factory Tier 1 Equipment

Inventories & Orders fluctuate more

as you look upstream, tough on suppliers, but

New Phone Handsets Telecom Optical

Applications Equipment Components

Clockspeeds accelerate as you head downstream,

closer to the final customer
 Media Supply Chains: An Industry at Lightspeed

Customers The box The Pipe The Content

(Access, Metro, Backbone)
Wired Phone Video/Audio:
Land-basedTelco:
-copper POTS Movies & Art
-fiber & News & Sports
Wireless phone
-DSL
News/articles/books
PC/laptop Cable (newspapers &
Networks magazines)
PDA Wireless:
-broadcast TV
Communication:
Television -CDMA, TDMA, GSM
voice & video & email
-satellite/microwave
Retail Outlets Banking
VCR
-Borders:
-Blockbuster Education
Pager -Seven-Eleven
Shopping
Delivery (e.g., Fedex)
Internet, et al
 ALL COMPETITIVE ADVANTAGE
IS TEMPORARY
Autos:
Ford in 1920, GM in 1955, Toyota in 1990
Computing:
IBM in 1970, DEC in 1980, Wintel in 1990
World Dominion:
Greece in 500 BC, Rome in 100AD, G.B. in 1800
Sports:
Bruins in 1971, Celtics in 1986, Yankees no end
The faster the clockspeed, the shorter the reign
 Strategic Business System Design
And Technology Roadmapping

1. Fruit Flies & Temporary Advantage

2. Supply Chain Design & 3-DCE
3. eBusiness Phenomena:
Business Model Innovation
4. Telecom Value Chains:
A fruit fly example
 SUPPLY CHAIN DESIGN:
Three Components
1. Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)

2. Partner Selection
(Choice of suppliers and partners for the chain)

3. The Contractual Relationship

(Arm’s length, joint venture, long-term contract,
strategic alliance, equity participation, etc.)
IMPLEMENTATION OF GUSINESS SYSTEM DESIGN:
EMBED IT IN 3-D CONCURRENT ENGINEERING

Recipe, Unit Process

PRODUCT
PROCESS
Performance
Specifications Technology, &
Process Planning
Details,
Strategy

Product Architecture,
Time, Space, Availability Manufacturing System,
Make/Buy components
Make/Buy processes
VALUE CHAIN
 ARCHITECTURES IN 3-D
INTEGRALITY VS. MODULARITY

Integral product architectures feature

close coupling among the elements
- Elements perform many functions
- Elements are in close spacial proximity
- Elements are tightly synchronized
- Ex: jet engine, airplane wing, microprocessor
Modular product architectures feature
separation among the elements
- Elements are interchangeable
- Elements are individually upgradeable
- Element interfaces are standardized
- System failures can be localized
- Ex: stereo system, desktop PC, bicycle
 SUPPLY CHAIN ARCHITECTURE

Integral value-chain architecture

features close proximity among its elements
- Proximity metrics: Geographic, Organizational
Cultural, Electronic
- Example: Toyota city
- Example: Ma Bell (AT&T in New Jersey)
- Example: IBM mainframes & Hudson River Valley
Modular value-chain architecture features multiple,
interchangeable supplier and standard interfaces
- Example: Garment industry
- Example: PC industry
- Example: General Motors’ global sourcing
- Example: Telephones and telephone service
DESIGNING ARCHITECTURES FOR PRODUCTS &
SUPPLY CHAINS: THE NEED FOR ALIGNMENT

SUPPLY CHAIN ARCHITECTURE

(Geog., Organ., Cultural, Elec.)
INTEGRAL MODULAR
PRODUCT
Jet engines
ARCHITECTURE Polaroid
Microprocessors
Nortel, Lucent
INTEGRAL Mercedes vehicles

Automotive Personal Computers

Supplier Parks Bicycles
MODULAR Chrysler Vehicles
Cisco
 In/Outsourcing: Sowing the Seeds
of Competence Development to develop
dependence for knowledge or dependence for capacity

Dependence Independence
Amount of Amount of Work
Work Outsourced Done In-house

+ knowledge
+/or supply + + knowledge
+/or supply +
Supplier Amount of Internal Amount of
Capability Supplier Capability Internal
Learning Learning

+ +
 Technology Dynamics in the Aircraft Industry:
LEARNING FROM THE DINOSAURS

Japanese
+ appeal as
subcontractors U.S. firms’
appeal as
subcontractors
Japanese + +
Boeing outsources
Industry
Autonomy to Japan
(Mitsubishi Inside?)
+
Japanese U.S.
industry industry
size &
+ size &
capability
- capability
 SOURCEABLE ELEMENTS

PROCESS ELEMENTS

ENGINEERING

CONTROLLER ASSY

VALVETRAIN
TEST
BLOCK
I4 V6 V8
PRODUCTS

SUBSYSTEMS
 Strategic Make/Buy Decisions:
Assess Critical Knowledge & Product Architecture

INDEPENDENT FOR
DEPENDENT FOR
KNOWLEDGE & INDEPENDENT FOR
KNOWLEDGE
DEPENDENT FOR KNOWLEDGE & CAPACITY
& CAPACITY
ITEM IS INTEGRAL ITEM IS MODULAR

CAPACITY

A BEST OVERKILL
POTENTIAL OUTSOURCING IN
OUTSOURCING OPPORTUNITY VERTICAL
TRAP INTEGRATION

WORST CAN BEST

OUTSOURCING LIVE INSOURCING
SITUATION WITH SITUATION
OUTSOURCING

Adapted from Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
 Strategic Make/Buy Decisions:
Also consider Clockspeed & Supply Base Capability

DEPENDENT FOR DEPENDENT FOR INDEPENDENT FOR

KNOWLEDGE & CAPACITY CAPACITY ONLY KNOWLEDGE & CAPACITY

Few Many Ou t

st Few Many k r-
s
DECOMPOSABLE

Be
Few Many ap

t
Clockspeed Clockspeed

Be Suppliers Ove
Clockspeed

ill
Tr

Fast Slow Fast Slow Fast Slow

(Modular)

Suppliers

Suppliers
OK
Watch
it!
st

Clockspeed
r

OK

In
Clockspeed
o

Clockspeed
INTEGRAL

Fast Slow Fast Slow Fast Slow

Few Many
Suppliers

Few Many

Few Many
Suppliers

Suppliers
Adapted from C. Fine, Clockspeed, Chap. 9
 Strategic Sourcing Assessment
requires evaluation of five key criteria
Customer ‹ High customer importance and fast clockspeed
Importance: means more strategic
• High
• Medium
• Low
Technology
Clockspeed: ‹ Competitive position is critical for
• Fast assessing value of outsourcing
• Medium
• Slow Competitive
Competitive
Position:
Position:
Advantage
• Advantage
• Parity
Parity
•• Disadvantage
Disadvantage

Capable Suppliers:
‹ Supply Base Capability • None
must be present for • Few
Possible Decisions
• Many (Knowledge & Supply):
successful outsourcing • Insource
• Outsource
Architecture: • Partner/Acquire
Degree of modularity affects • Integral
‹
• Modular
• Partial Insource
significantly the ease of • Partial Outsource
outsourcing • Invest
• Spin Off
Model Developed by PRTM, Inc., GM Powertrain & Clockspeed, Inc. • Develop Suppliers
 Every decision requires qualitative and
quantitative analysis to reach a conclusion

Knowledge
Supply

High
Improve Invest &
Economics Build

Qualitative
Value
Strategic
Qualitative Model Importance
Customer
Importance:
Divest/ Harvest
Outsource Investment
• Hig h
• Med ium
• Low

Technology

Low
Clockspeed:
• Fas t
• Medium
• Slow
Competitive
Position:
• Ad vantage

Low High
• Parity

Quantitative
• Disa dva nta ge

Value
Capable Suppliers:
• No ne
• Few
• Many Possible Decisions:
• Insource
• Outsource
Architecture: • Partner/Acquire
• In teg ral • Partial Insource
• Modular • Partial Outsource
• Invest
• Spin Off
• Develop Suppliers
Engine A
EVA PBIT Revenue

EVA
Engines
−.
EVA
NOPAT
AS-IS
BIC

AS-IS
AS-IS

COGS
BIC

BMK
AS-IS
BIC

AS-IS
BIC

Engine B
EVA

GMPT
EVA Taxes
AS-IS
BIC

.
.
. Capital
Charge Net Assets
AS-IS
BMK
Working
Capital
Quantitative Model
(Financial)
+.
Transmissions −. X WACC

EVA
AS-IS

AS-IS
BIC

BMK

AS-IS Fixed
BMK
Assets
AS-IS
BIC

Model Developed by PRTM, Inc., GM Powertrain & Clockspeed, Inc.

 Value Chain Mapping
Organizational Supply Chain
casting clay
Chrysler Eaton supplier supplier

Technology Supply Chain

casting clay
engines valve lifters manufacturing chemistry
process

Capability Chain
Supply Chain Management Quality assurance NVH engineering R&D

Underlying Assumption: You have to draw

the maps before you can assess their dynamics.
 SUPPLY CHAIN DESIGN IS
THE ULTIMATE CORE COMPETENCY
Since all advantages are temporary,
the only lasting competency is to continuously build and
assemble capabilities chains.
KEY SUB-COMPETENCIES:
1. Forecasting the dynamic evolution of market
power and market opportunities
2. Anticipating Windows of Opportunity
3. 3-D Concurrent Engineering:
Product, Process, Value Chain CAPABILITIES PROJECTS

Fortune Favors the Prepared Firm

 PROCESS FOR
SUPPLY CHAIN DESIGN

1. Benchmark the Fruit Flies DOUBLE HELIX

2. Map your Supply Chain

-Organizational Supply Chain
BOEING
-Technology Supply Chain
-Competence Chain
3. Dynamic Chain Analysis
at each node of each chain map
4. Identify Windows of Opportunity
5. Exploit Competency Development Dynamics
with 3-D Concurrent Engineering
CAPABILITIES PROJECTS
 Strategic Business System Design
And Technology Roadmapping

1. Fruit Flies & Temporary Advantage

2. Supply Chain Design & 3-DCE

3. eBusiness Phenomena:
Business Model Innovation
4. Telecom Value Chains:
A fruit fly example
 Internet Era Phenomena:
eCompetition in Business Model Innovation

Benchmarking the eFlies

E-tailing:
Attack:
Amazon, Webvan Market disruption in hopes of making a place
Defend:
Walmart.com, Ford.com Defense can require costly SC revamping
B2B:
E2E integration:
Cisco, Dell Integration pays off with modular products
Marketplace Creation:
Freemarkets Reverse auctions reduce short term costs
Covisint Common standards reduced supplier investment cost

Free & Open Digital Content:

Peer-toPeer Sharing/Theft:
Napster Industry-shaking disruptions require value chain SWAT team
 DOT.COM COMPETITION:
FOCUS ON THE SUPPLY CHAIN

CASE#1: WALMART.COM GOT NO TRACTION

Customers
Walmart Supplier
Store

Walmart WalMart
Store Procurement

Walmart.com Supplier
Shipper

Alternate Solution: Partner with UPS or Fedex

 DOT.COM COMPETITION: FOCUS ON THE SUPPLY CHAIN
Napster’s New Supply Chain Strategy
(go to the end and steal everything!)

Identify Vertically Integrated

Talent
Develop Music Giants
Songs
Record
Music
Promote
Music
Press
CD’s
Steal Sell to
Songs Retail

Alternate Solution: Customer

partner with your competitor Consumption
 Strategic Business System Design
And Technology Roadmapping

1. Fruit Flies & Temporary Advantage

2. Supply Chain Design & 3-DCE
3. eBusiness Phenomena:
Business Model Innovation
4. Technology Roadmapping:
A telecom example
 Moore’s Law
Transistors per chip

See: Joel Birnbaum, HP, Lecture at APS Centennial, Atlanta, 1999

 Disk Drive Development
1978-1991

Disk Drive Dominant Dominant Approx cost per

Generation Producer Usage Megabyte
14” IBM mainframe $750
8” Quantum Mini-computer $100
5.25” Seagate Desktop PC $30
3.5” Conner Portable PC $7
2.5” Conner Notebook PC $2
From 1991-98, Disk Drive storage density increased by 60%/year
while semiconductor density grew ~50%/year. Disk Drive cost
per megabyte in 1997 was ~ $ .10
 ”Killer Technologies” of the Information Age:
Semiconductors, Magnetic Memory, Optoelectronics

“We define a ‘killer technology’ as one that

delivers enhanced systems performance of a
factor of at least a hundred-fold per decade.”
C.H.Fine & L.K. Kimerling, "Biography of a Killer Technology:
Optoelectronics Drives Industrial Growth with the Speed of Light,”
published in 1997 by the Optoelectronics Industry Develoment
Association, 2010 Mass Ave, NW, Suite 200, Wash. DC 20036-1023.

Killer Question:
Will Integrated Optics evolve linearly like
Semiconductors with Moore’s Law or like
Disk Drives with repeated industry disruptions?
 All Conclusions are Temporary
Clockspeeds are increasing almost everywhere

Supply Chain Relationships must anticipate

Industry and Value Chain Dynamics

Proactive Relationships Design is a key

organizational competency

Supply Chain Relationships must be designed

concurrently with the products and systems they
will deliver

Study of Fruit Flies can help with crafting strategy