SUPPLY CHAIN VS. SUPPLY CHAIN - MIT

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ERFORMANCESUPPLY CHAINVS.SUPPLY CHAINHYPEREALITYTHE&THE46SUPPLY CHAIN MANAGEMENT REVIEW· SEPTEMBER/OCTOBER 2001www.scmr.com

The conventional wisdom is that competition in the future will not be company vs. companybut supply chain vs. supply chain. But the reality is that instances of head-to-head supplychain competition will be limited. The more likely scenario will find companies competing—and winning—based on the capabilities they can assemble across their supply networks.By James B. Rice, Jr. and Richard M. HoppeAn increasingly vocal and popular sentiment holds that the nature of competition in the future will not bebetween companies but ratherbetween supply chains. If this does,in fact, represent the future, howwill these chains actually compete against eachother? And what can practitioners do now inanticipation of this future?In contemplating the much-ballyhooed supply chain vs.supply chain (SC vs. SC) proposition, we first sought examples of this competition in action. Yet for as many examplesof SC vs. SC competition that we found, there were at leastas many places where the model didn’t fit. On the one hand,we saw vivid examples where one company or a series ofcompanies had designed supply networks to act with singularfocus against other unique companies or groups of companies—for example, Brax, Perdue Farms, and Tyson Foods.Yet more often, we found a different kind of competitive scenario playing out, as in the automotive, aerospace, and personal computer (PC) industries, where many original equipment manufacturers (OEMs) share common suppliers. (Thesidebar on page 49 gives more detail on these and otherexamples where supply chain vs. supply chain competitiondoes—and does not—work.)Although true SC vs. SC competition appears to apply torelatively few situations, that vision of the future continues togain widespread acceptance. Why?Recent business trends might offer part of the answer.Shrinking product life cycles and innovative informationtechnology applications started a reaction that has raised theperformance expectations of supply networks. Specifically,they need to deliver more value in new ways, to be faster tomarket, to become more flexible in responding to demandchanges, and to reduce costs. To achieve these higher servicelevels, many companies have turned to external suppliers toprovide them with capabilities that they themselves could nolonger provide. This increases the need for higher and deeperlevels of coordination (alliances)1 among these companies.Similarly, many companies have chosen to build a supplynetwork that depends on external suppliers to help them create a unique offering. By integrating the capabilities of othersinto its supply network, a company can effectively createunique value. That value is maximized when the supply network acts in unison, almost as if it were one company in themarketplace. Given these trends toward outsourcing andintegration, it’s not surprising that so many view the nature offuture competition as supply-chain based.2Before examining the SC vs. SC vision in depth, a fewnotes on terminology are in order. Although we use the termsupply chain throughout the article, supply network is probably a better term because it more accurately describes thenature of supply relationships today (that is, nonlinear flows,network-like systems, and webs of suppliers and customers).The Delphi Study on “SC vs. SC”To better understand the perceptions and expectations surrounding supply chain vs. supply chain competition, theIntegrated Supply Chain Management (ISCM) Program at theMassachusetts Institute of Technology (MIT) conducted aDelphi study with more than 30 supply chain experts fromindustry, academia, and consulting. The study found that thegreat majority of respondents who answered the question (70percent) agreed that supply chain vs. supply chain accuratelycharacterized the competitive future. (See Exhibit 1 on the following page.) Yet probing into that majority viewpoint, weobserved that the respondents interpreted the SC vs. SC concept in distinctly different ways. Specifically, when asked,“What does ‘supply chain competing against supply chain’mean to you?” they offered a broad range of interpretations.This lack of a common understanding and language can lead topotentially damaging impact on a business. It presumes alignment within an organization but in reality reflects conflictingpriorities that would likely undermine a supply network’s ability to align and coordinate activities.We segmented the responses into three different interpre-James B. Rice, Jr. is director of the Integrated Supply Chain Management Program at the Massachusetts Institute of Technology.Richard M. Hoppe, a former research assistant and Master of Science in Transportation candidate at MIT, is now a consultantwith McKinsey & Co.www.scmr.comSUPPLY CHAIN MANAGEMENT REVIEW· SEPTEMBER/OCTOBER 200147

SC Vs. SCtations, or scenarios, regarding the nature of competition andthe supply network. (See Exhibit 2 for a complete breakout ofthe responses):31. Competing as SC vs. SC Literally. The nature of competition will be between groups of companies from across thesupply network competing as one entity, formally or informally. (Forty-one percent of the respondents held this view.)2. Competing on Supply Network Capabilities. The natureof competition will be between individual companies competing on their internal supply network capabilities (37 percentof the respondents). From this point of view, competition willbe based largely on two capabilities:䡲 Internal supply network cost and/or service capabilities,which refer to the effectiveness, efficiency, and responsiveness of the supply network. An example of this capability is having the right configuration of products available.䡲 Internal supply network design, which refers to the supply network design used. Examples would include either avertically integrated or heavily outsourced design; build-tostock, build-to-order, or postponement production; or aretail, direct, or distributor (or a combination of the three)distribution channel. Dell’s competing against Apple inthe personal computer market arena, for example, is basedon competing supply network designs.3. Competing on Supply Network Capabilities Led by aChannel Master. The nature of competition will center on thesingle, most powerful company of a supply network, whichwill determine the terms of trade across the entire supplynetwork. The single most powerful company is sometimesreferred to as the channel master. Twenty-three percent ofthe respondents held this view.The data indicate that although just over 40 percent of therespondents describe the future in literal terms, that numberis well below the 70 percent who concurred that the SC vs.SC model characterized the future. (The sidebar on page 50discusses the literal interpretation of supply chain vs. supplychain.) The disparity is consistent with the definition andlanguage difficulties mentioned earlier. Perhaps the underlying message here is that the question of how companies willEXHIBIT 1A Supply Chain vs. Supply Chain Future?80%70%Response ltingNoSUPPLY CHAIN MANAGEMENT REVIEWAllEXHIBIT 2How Will Companies Compete?(% of respondents)Formal SC vs. SC (strategicset of supply networkcompanies compete) 36%Most powerful companydetermines competion("Channel Master") 23%Single company competeson supply network design 14%Informal SC vs. SC(group of supply networkcompanies compete) 5%Single company competeson supply network cost and/orservice capabilities 23%compete in the future is a complex one with multiple dimensions. It’s not as simple or straightforward as the supply chainvs. supply chain concept.Analyzing the Three ScenariosTo better ascertain the validity of the three scenarios identified, we analyzed the feasibility of each and examinedinstances where they would—and would not—work.Scenario 1: Competing as SC vs. SC LiterallyThe LimitationsCloser examination of the SC vs. SC proposition revealssome inherent limitations that help explain why it is not practical or valid for all conditions. In particular, certain realitieschallenge the validity of literal SC vs. SC competition. Thefirst relates to the presence of common or overlapping suppliers, a condition that makes it difficult for a supply network tocompete as a unit for several reasons:䡲 Common suppliers limit the ability to source uniquecapabilities (products or services). Some can argue that itis possible for a single supplier to provide unique valueofferings to different customers. Yet at the very least, acommon supplier is presented with a conflict of interest.䡲 Common suppliers limit the customer’s ability to fosterand develop unique capabilities within a particular supplier. Ultimately, any investment in a supplier will provide a“free” benefit for competitors using the same supplier.䡲 When common suppliers are used, it becomes difficultto compete without compromising other supply networkparticipants’ business plans. The existence of common oroverlapping suppliers complicates the task of aligningbusiness strategies and sharing intimate business intelligence. By responding to one customer’s requirements ordeveloping new capabilities for one customer, the suppliereffectively signals that customer’s proprietary businessintelligence to all other customers.䡲 Common suppliers inherently pose a barrier to openinformation sharing with customers. Information sharedby one customer with a common supplier may be inadvertently disclosed to other customers, despite the supplier’s· SEPTEMBER/OCTOBER 2001www.scmr.com

best efforts and intentions. It may be unrealistic to expectthat an entire organization could completely protect itsknowledge of one customer’s activities from getting intoother customers’ hands.Another inherent limitation to the SC vs. SC model is thatsuppliers often compete with customers, making true collaboration extremely difficult. Two cases serve as illustrations.Siemens sells circuit breakers both to panel board OEMs andto an internal Siemens business that competes with thosesame OEMs. Dell and Intel collaborate to market their products, but they also compete to get the consumer to purchasea computer based on their respective brand and value-add.Intel wants the customer to choose a PC for the Intel processor inside. Dell wants the customer to buy the PC for theconvenience, fast service, and reasonable cost it can offer.The benefit of coordinating across more than three tiers inthe supply network is not clearly proven—one more realitythat limits true SC vs. SC competition. (In fact, the onlyclearly demonstrable advantage relates to sole-source supplier-customer relationships.) Data are difficult to use beyondone tier upstream and one tier downstream for several reasons. Demand data need to be aggregated, segmented for var-SC vs. SC: Where It Does and Doesn’t WorkFor every example of supply chain vs. supply chain in action, you can find at least as many instances where that model does not fit.Where It WorksWhere It Doesn’t WorkFashion vs. fashion. Apparel manufacturers use different supply networks to achieve different capabilities. Rather than dependon production operations in the Asia-Pacific, Spanish apparelmanufacturer and retailer Zara relies on a local supply network,which it largely owns and controls. That network can design andreplenish hot-selling fashion products in the stores within threeweeks. Zara’s supply network entails a near-vertically integratedcompany that owns retail, product design, dyeing, and fabric cutting operations. Only the sewing operations are outsourced.Poultry vs. poultry. Perdue Farms and Tyson Foods pit theirrespective supply networks to compete against each other andothers in the poultry market. Being vertically integrated to alarge degree, they compete on their brand as well as on theirability to mass-produce quality chicken products. They also compete on their ability to trace product through the supply network.Wool vs. wool. Brax, the innovative German fashion manufacturer and retailer, developed a unique line of men’s trousers madefrom Tasmanian wool that reinforced the company’s image ofselling products that “feel good.” The products flow through analigned and dedicated supply network of selected wool producers,bypassing the auction system, and through to Brax for production.This network helps establish longer-term relationships. And this,in turn, results in higher predictability of supply and higher quality, which are integral parts of Brax’s go-to-market approach.Chains of success. As part of the Chains of Success initiativesponsored by the Agriculture, Fisheries, Forestry-Australia,1 several specialty food producers 2 structurally realigned into“chains” with their distributors and retailers. Through information technology and collaboration, they created aligned networksmore responsive to customer requirements. This program isdesigned to promote Australian food producers.The U.S. automotive industry. General Motors’ supply network can’t literally compete against Daimler-Chrysler’s becausethe two companies share the same suppliers. This makes it difficult for both automakers to get unique value from a commonsupplier. It also prevents them from leveraging supplier capabilities to their sole advantage. (It should be noted that Chrysler didcreate considerable advantage over GM and Ford in the late1980s and early 1990s through closer collaboration with its supply chain partners.)Dell, Compaq, and other PC manufacturers. The modularityand universality of personal computer components results in anoverlapping of PC supply chains at multiple tiers. Every computer manufacturer uses pretty much the same components. Theyseek to differentiate themselves through cost and customizationAirbus and Boeing. Both of these aerospace companies relyon the same suppliers for avionics, engines, tires, seats, andmany other components. Therefore, the competition takes placenot on their supply network capabilities but on other capabilities—principally product design and the ability to assemblecomponents cost efficiently.Suppliers that are also competitors. It is increasingly common to find suppliers competing with their customers. Thismakes collaboration more difficult, as the two companies maybe working toward competing ends. To cite one example, thesupplier may also be serving an internal customer that sells tothe same end market as its external customer does. Or theretailer may compete with a manufacturer. To illustrate, Dellhopes that customers will buy a Dell computer because of thecompany’s product, price, and service. Intel hopes that customers will buy the PC because of the specific Intel processorand its capabilities.Footnotes1Agriculture, Fisheries, Forestry - Australia, “Chains of success,” Food and Fibre Chains Programme, www.supermarkettoasia.com.au.Miandetta Pty Ltd. (Australian specialty asparagus and pig meat producer), Wood Fisheries (fish trawling and export company), and PacificFoods (supplier of portion control meat cuts).2www.scmr.comSUPPLY CHAIN MANAGEMENT REVIEW· SEPTEMBER/OCTOBER 200149

SC Vs. SCious suppliers, and then adjusted for the latest bill-of-materialchanges. Those supply networks that can use data beyondone tier by necessity have inflexible and complex systems.This limits customer procurement to a predetermined list ofproducts from predetermined suppliers for a predeterminedfixed bill of material. Given that each supplier will likely havea different product design and bill of material for each SKU,the complexity of making the demand data useful for suppliers and sub-suppliers exceeds the potential benefits ofautomating the data.Yet another problem is that few supply networks have acentral control point that can coordinate the competitive battle against another supply network. Further, in some cases,the industry structure may contribute to less-than-favorableconditions for supply network-based competition. In indus-tries with consolidated supply bases, a handful of supplierstypically possess entrenched vested power. In such cases,these suppliers may have little incentive to coordinate withcustomers or with suppliers.Finally, the high sunken costs and large investments intechnology dedicated to one supply network pose a significant limitation to the SC vs. SC model. This is particularlytrue if high asset specificity is required to service one particular supply network. In many industries, it is not uncommonfor a customer to set integration requirements that require asubstantial investment on the supplier’s part (for example,Wal-Mart’s RetaiLink) or to require dedicated service (suchas Dell’s requesting a supplier to build a distribution centernext to a Dell plant).The flexibility required for competitive supply networksSupply Chain vs. Supply Chain: A Literal Looko gain a better understanding of the erally somewhere in between these two depending on the nature of the product,nature of supply chain vs. supply chain extremes, reflecting the distribution of price, and capacity of the supply network.Examples of supply networks in each catcompetition, it’s useful to examine the flows and relationships as seen in Exhibitconcept’s literal meaning.1 By definition, 3.3. There are some overlaps and some egory are shown in the chart below. Notesupply networks (to use the preferred ter- completely disconnected tiers within the that those under the heading “Completelyminology) do compete against other supply networks. In most cases, many of the poten- Disconnected Supply Networks” are primarinetworks to a certain extent. Unless a tial links are eliminated, since there are ly vertically integrated, or historically orcompany is completely vertically integrat- closer relationships with some companies, geographically dispersed supply networks.ed, it cannot successfully competeEXHIBIT 3alone. It needs to be part of a broadCategories of Supply Networkser supply network.2 As illustrated in3.1CompletelyDisconnected3.2 Completely Overlapping3.3 Partially OverlappingExhibit 3.1, if the companies competing in the networks (m) are completely disconnected (no overlaps) ateach tier (n) in an industry, thesenetworks do compete against eachother.On the other hand, these networksNote: m 3 n 4Note: m 3 n 4Note: m 3 n 4do not compete against each otherwhen all companies compete in eachDisconnectedCompletely OverlappingPartially Overlappingof the different supply networks. As CompletelySupply NetworksSupply NetworksSupply Networksseen in Exhibit 3.2, each network (m)PC vs. Mac supply chains in theoverlaps the other, with each compa- Vertically integrated manufacturers Compaq vs. HP (modular productlike Perdue Farms vs. Tyson Foods architecture and fragmented suppli- 1980s (overlap limited mostly tony at every tier (n) selling goods to in poultry production.er base create significant overlap).memory and software).every tier (n 1) company. An examintegrated manufac- Private-label apparel retailers thatThe Limited vs. branded apparelple of this would be modular and Near-verticallyturers-retailers such as Zara insource from contract manufacturers products, such as Levi’s sold throughin Southeast Asia.retailers.commodity products being procured fashion apparel.efficiently from multiple members in Automobile manufacturing supplyAirbus vs. Boeing (overlap inAutomotive supply networks of thechains of the United States,engines, electronics, avionics, tires,Unites States in 2000 with manyan open market.OEMs sharing common suppliers.Competition in an industry is gen- Germany, and Japan in the 1970s. seats, and other components).TFootnotes1This analysis uses concepts from a personal interview with Thomas Malone, a professor at the MIT Sloan School of Management and director ofMIT’s Center for Coordination Science.2If the company is completely vertically integrated, it is, in fact, the entire supply chain and it competes as such.50SUPPLY CHAIN MANAGEMENT REVIEW· SEPTEMBER/OCTOBER 2001www.scmr.com

today is inconsistent with the kind of commitment and complexity needed to utilize demand data across several tiers.The explicit coordination costs and implicit opportunity costsassociated with this kind of complexity and inflexibility mayexceed the potential benefits of utilizing demand data acrossseveral tiers. The conclusion: TheSC vs. SC concept, taken literally,does not provide a universally validofcharacterization of future supplycompetition.When SC vs. SC AppliesDespite the limitations noted, supply chain-based competition clearly takes place in certain limited instances. Hereare some examples:䡲 When the supply chain is a vertically integrated company, either competing against another vertically integratedorganization or against supply networks made up of manycompanies. In some instances, the organization may ownmost of the supply chain, outsourcing only selected activities. The critical factor in all cases is that there are nocommon suppliers shared with any competitors.䡲 When the supply network is composed of companiesthat have sole-source relationships.䡲 When the industry is fragmented such that there are nocommon strategic suppliers represented in more than onesupply network and most strategic suppliers are dedicatedto one supply network.In some cases, these conditions will exist for one companyor set of companies but not for others. This results in a situation where one group competes as a supply network andanother group does not. A good example of this is Zara, thehighly integrated fashion clothing designer, producer, andretailer. Zara competes against other companies that outsource their design and production activities and that clearlydo not compete as a supply network. For these companies,the key determinant of success may not be the degree of vertical integration but rather their respective business models(for example, maintaining tight control of the supply chain forfast response or decentralizing the supply chain for low costand a low capital investment requirement).Will a vertically integrated producer always outperformthe nonintegrated supply network? No evidence exists toanswer that question one way or the other. The best answermay be that it depends on the situation. For example, if thecritical factor in a market were low cost and if there werecost advantages to having integrated operations, then the vertically integrated company would have a distinct competitiveadvantage. If, on the other hand, fast cycle time and highproduct innovation were the key market drivers, a nonintegrated supply network might hold the competitive edge. Inshort, there’s no universal answer to the question of whichsupply chain model is always best.Scenario 2: Competing on Supply Network CapabilitiesAs suggested by the respondents to our Delphi study, thisscenario entails a single company or entity (this wouldinclude cooperatives, joint ventures, and other legal entities)competing based mainly on one of two factors: (1) the costand/or service capabilities of their internal supply network4 or(2) internal supply network design. Increasingly, companiesare competing on network capabilities. They are expandingThere’s no universal answer to the questionwww.scmr.comwhich supply chain model is always best.the supply network by utilizing and integrating (not justadding) the capabilities of other members of the supply network, such as an upstream supplier or a downstream customer, to offer a unique and compelling solution. This abilityto integrate capabilities from other supply network participants often can be leveraged for competitive advantage.Companies are integrating additional capabilities from theirimmediately adjacent upstream (suppliers) or downstream (customers) supply network companies via joint marketing arrangements, joint product development programs, and collaborativeinitiatives such as just-in-time (JIT), vendor-managed inventory,and collaborative planning, forecasting, and replenishment(CPFR), among others. These are among the compelling advantages of integrating the capabilities:䡲 The benefits of one-to-one or next-tier coordination arequantifiable.䡲 Successful one-to-one relationships add value.䡲 Data and information sharing is more immediate anduseful.䡲 Relationships with adjacent upstream or downstreamcompanies are more manageable and controllable thanthose with more distant participants in the supplynetwork.䡲 It may be possible to develop unique added value byworking closely with one supplier, developing a uniquerelationship, a unique product or service, a unique contract, or a unique combination of these. It is harder to dothis with multiple companies in the supply network acrossmultiple tiers.So, though it’s useful to consider various methods of coordinating across multiple tiers of the supply network, the morepractical view of the future may be one of a single companyor entity competing on its own supply network capabilities.Our analysis further supports this practical picture of supply network capabilities being leveraged as a single companyrather than as a group. This entails competing by focusing onyour company’s own capabilities (your “ecosystem,” as onerespondent termed it) rather than attempting to build extended relationships with distant members of the supply network.It’s important that the ecosystem be developed not just byadding capabilities but by integrating them into the business.Integrated capabilities are not readily copied and can providesome measure of competitive differentiation, whereas capabilities that are just added offer little competitive differentia-SUPPLY CHAIN MANAGEMENT REVIEW· SEPTEMBER/OCTOBER 200151

SC Vs. SCtion. To illustrate, a company achieves little differentiationwhen it offers a package tracking capability simply by directing customers to use UPS or FedEx. By contrast, it doesachieve differentiation by seamlessly integrating the UPS orFedEx tracking capability into its own system. In this way,customers would enjoy an enhanced service level over simplyusing the UPS or FedEx system.In short, the development of integrated supply chain capabilities needs to be an important part of a company’s go-tomarket effort. Good examples of such capabilities can beseen in the following activities: early supplier engagement onproduct development, supplier and customer involvement incritical decisions, and the commingling of supply networkoperations between two adjacent-tier companies. (Exhibit 4gives representative examples of how companies haveenhanced their supply network capabilities.)Scenario 3: Competing on Network Capabilities Led by aChannel MasterUnder this competitive scenario, the single most powerfulcompany of a supply network will determine the terms oftrade across the entire supply network. This dominant playeris sometimes referred to as the channel master.The channel master uses its market power to coordinateprocesses and activities among some of its suppliers and cus-nel master is a supplier to, or a customer of, that channelmaster. The nature of the channel master typically dictatesthe nature of that relationship. Yet the value added by thesuppliers can somewhat offset the power exercised by thechannel master.The Chrysler Corporation of the 1990s serves as a goodexample of a Lord of the Chain-type of channel master. Theautomaker considered suppliers to be an integral part of its“extended enterprise” and worked aggressively to integratesupplier capabilities into Chrysler’s business. Though Chryslerdid establish many of the rules of the game, its relationshipswith suppliers were far more constructive and collaborativethan anything the automotive industry had seen in the past.The channel master scenario is commonplace in today’smarketplace and will likely remain a viable competitive scenario for the future.A Realistic Look at the FutureIt’s clear that “SC vs. SC” does not universally characterizethe nature of competition and the supply network of thefuture. Granted, it does describe some limited situations. Butas our study suggests, other competitive scenarios are likelyto be far more commonplace.It’s important to note, too, that the three main competitivescenarios identified are not mutually exclusive. Even today, we findexamples where a vertically inteEXHIBIT 4grated company (Zara) competesbased on its supply network againstExamples of Supply Network Enhancementsa channel master (The Limited)EnhancementCompany and InitiativeBenefitsand also against other retailers (likeThe Gap) that are parts of interconSupplier integrationBose Corporation’s JIT II initiative Enhances Bose’s ability to designgives suppliers purchasing responsi- new products faster at lower costnected supply networks but thatbilities. Suppliers have in-plantand with higher quality. Lowerscompete based on their own supplyoffices and operate as Boseoperating costs and improves sernetwork capabilities.employees.vice levels.In preparation for their competiSupplier co-locationVolkswagen’s Resende, Brazil,Improves VW’s ability to reducetive future, companies may findplant is designed so that each supcapital plant requirements whilesome value by recognizing theplier can perform an operation asengaging suppliers in production.vehicles move sequentially alongimportance of language in describproduction line.ing their supply network and understanding the environment in whichSelective and dedicated outsourcing Apparel manufacturer and retailerEnhances Zara’s ability to cusZara is almost completely integrattomize production rapidly by usingthey compete. Does your companyed, outsourcing only its sewinglocal small sewing operations.compete as a supply network, as aoperation.Dedicated set of sewing supplierschannel master or under a channellets Zara act as though verticallyintegrated.master, or as a lone company solelybased on your supply network capatomers. Examples include the sup

rounding supply chain vs. supply chain competition, the Integrated Supply Chain Management (ISCM) Program at the Massachusetts Institute of Technology (MIT) conducted a Delphi study with more than 30 supply chain experts from industry, academia, and consulting. The study found that the gr

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