Strategic Supply Chain Management [1 ed.] 9781136345586, 9780415591751

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S t r at e g i c S u p p l y C h a i n M a n a g e m e n t

The supply chain is at the heart of every successful business organization’s decision-making process. This textbook explains how to create a winning supply chain management strategy by spotlighting how senior executives in European and US companies have turned their supply chains into strategic weapons designed to convert threats, risks and outside pressures into competitive advantages. Strategic Supply Chain Management contains 20 real-world cases, all of which have been field researched by a top author team and tested out in the classroom. Each case adopts an executive leadership perspective to illuminate the real dilemmas faced by managers. The authors draw on their extensive classroom and industry experience to ensure that the writing style is geared towards an executive education readership. This elite case package will provide a complete teaching resource and authentic learning experience for MBA and executive education classes in supply chain management throughout the world. Carlos Cordón is LEGO Professor of Process Management at IMD, Switzerland. He is an expert on business models, value chains and process management and is the co-author of The Power of Two: How Smart Companies Create Win–Win Customer–Supplier Partnerships that Outperform the Competition (Palgrave Macmillan, 2008).

B U S I N E S S & M A N AGE M E N T ISBN 978-0-415-59176-8

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Ralf W. Seifert is Professor of Operations Management at IMD and Professor of Technology and Operations Management at the College of Management of Technology at Ecole Polytechnique Fédérale de Lausanne (EPFL). He is director of the Mastering Technology Enterprise (MTE) programme and has designed and directed numerous company-specific general management programmes. Based on his work with companies, Professor Seifert has co-authored more than 30 case studies winning five case awards. He continues to actively research issues of supply chain strategy, supply chain finance and technology management and has more than 50 articles and international conference presentations to his credit.

Carlos Cordón, Kim Sundtoft Hald and Ralf W. Seifert

Kim Sundtoft Hald is Associate Professor in Supply Chain Management and Performance Management at Copenhagen Business School, Denmark. He has published in leading international academic journals, including Industrial Marketing Management, Management Accounting Research and Global Journal of Flexible Systems Management, and has contributed to several books, such as Leading in the Top Team: The CXO Challenge and Managing the Global Supply Chain.

S t r at e g i c S u p p ly C h a i n Management Carlos Cordón, Kim Sundtoft Hald and Ralf W. Seifert

Strategic Supply Chain Management

The supply chain is at the heart of every successful business organization’s decision-making process. This textbook explains how to create a winning supply chain management strategy by spotlighting how senior executives in European and US companies have turned their supply chains into strategic weapons designed to convert threats, risks and outside pressures into competitive advantages. Strategic Supply Chain Management contains 20 real-world cases, all of which have been field researched by a top author team and tested out in the classroom. Each case adopts an executive leadership perspective to illuminate the real dilemmas faced by managers. The authors draw on their extensive classroom and industry experience to ensure that the writing style is geared towards an executive education readership. This elite case package will provide a complete teaching resource and authentic learning experience for MBA and executive education classes in supply chain management throughout the world. Carlos Cordón is LEGO Professor of Process Management at IMD, Switzerland. He is an expert on business models, value chains and process management and is the co-author of The Power of Two: How Smart Companies Create Win–Win Customer– Supplier Partnerships that Outperform the Competition (Palgrave Macmillan, 2008). Kim Sundtoft Hald is Associate Professor in Supply Chain Management and Performance Management at Copenhagen Business School, Denmark. He has published in leading international academic journals, including Industrial Marketing Management, Management Accounting Research and Global Journal of Flexible Systems Management, and has contributed to several books, such as Leading in the Top Team: The CXO Challenge and Managing the Global Supply Chain. Ralf W. Seifert is Professor of Operations Management at IMD and Professor of Technology and Operations Management at the College of Management of Technology at Ecole Polytechnique Fédérale de Lausanne (EPFL). He is director of the Mastering Technology Enterprise (MTE) programme and has designed and directed numerous company-specific general management programmes. Based on his work with companies, Professor Seifert has co-authored more than 30 case studies, winning five case awards. He continues to actively research issues of supply chain strategy, supply chain finance and technology management and has more than 50 articles and international conference presentations to his credit.

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Strategic Supply Chain Management

Carlos Cordón, Kim Sundtoft Hald and Ralf W. Seifert

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First published 2012 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2012 Carlos Cordón, Kim Sundtoft Hald and Ralf W. Seifert 7KHULJKWRI&DUORV&RUGyQ.LP6XQGWRIW+DOGDQG5DOI:6HLIHUWWREHLGHQWL¿HGDVDXWKRUVRIWKLV work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are XVHGRQO\IRULGHQWL¿FDWLRQDQGH[SODQDWLRQZLWKRXWLQWHQWWRLQIULQJH British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Cordon, Carlos. Strategic Supply Chain Management / Carlos Cordón, Kim Sundtoft Hald and Ralf W. Seifert. p. cm. Includes bibliographical references and index. 1. Business logistics—Management. 2. Strategic planning. I. Hald, Kim Sundtoft. II. Seifert, Ralf W. III. Title. HD38.5.C67 2012 658.7—dc23 2011038416 ISBN: 978–0–415–59175–1 (hbk) ISBN: 978–0–415–59176–8 (pbk) ISBN: 978–0–203–12445–1 (ebk) 978-1-136-34558-6 (ebk) Typeset in Times New Roman by Bookcraft Ltd, Stroud

In memory of Thomas E. Vollmann, our superb mentor, colleague and friend

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Contents

List of figures  List of tables  Introduction

x x 1

How the book is organized  1 The philosophy: Learning with cases  2 1 Thinking strategically about supply chain management

3

The extended supply chain  4 From a function to a vital company process  5 From operations to finance, leadership, innovation and risk management 6 The supply chain: An integrative view of a company’s business model  7 Note 9 2 The supply chain: Key driver of your business model

10

Vertically and horizontally integrated supply chains  11 Identifying and managing supply chain risks  14 Designing supply chain response strategies  16 Bringing strategic flexibility into supply chains  17 Cases in this chapter  18 Case 2.1 Luxottica: Sustaining growth in challenging times  21 Case 2.2 MAS Holdings: Providing design to delivery solutions to the global apparel industry  44 Case 2.3 Nestlé: Quality on the boardroom agenda (A)  66 Case 2.4 Nestlé: Quality on the boardroom agenda (B)  75 Chapter notes  80 Case study notes  80

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viii  Strategic Supply Chain Management

3 Handling dilemmas in the supply chain

82

The flexibility–efficiency dilemma  82 The supply chain’s global footprint  84 The flow and stock of capital in the supply chain  86 Organizing the supply chain processes  87 Innovation through the supply chain  89 Cases in this chapter  90 Case 3.1 Numico: Delivering innovation through the supply chain (A)  93 Case 3.2 Numico: Transforming the supply chain to support new realities (B)  102 Case 3.3 Numico: King Project  113 Case 3.4 ABB transformers  120 Case 3.5 Hewlett-Packard: Creating a virtual supply chain (A)  131 Case 3.6 Hewlett-Packard: Creating a virtual supply chain (B)  140 Chapter notes  142 4 Making the supply chain work

143

Supply chain fundamentals  143 Managing relations across companies  145 Challenging customer demands and reducing supply chain complexities  147 Sharing risks and rewards with customers and suppliers  148 Fast-track project management with suppliers  149 Cases in this chapter  150 Case 4.1 Novo Nordisk Engineering: Running for fast-track project execution  153 Case 4.2 Building partnerships: Reinventing Oracle’s go-to-market strategy  163 Case 4.3 LEGO: Consolidating distribution (A)  176 Case 4.4 LEGO: Consolidating distribution (B)  189 Case 4.5 Freqon: Buyer–supplier evolution?  196 Case 4.6 Unaxis: Going Asia (A)  206 Case 4.7 Unaxis: Going Asia (B)  215 Chapter notes  218 Case study notes  218

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Contents ix

5 Sustaining supply chain alignment

220

How much does change affect your business?  220 Business context analysis  222 Realigning your supply chain  224 Outlook 229 Cases in this chapter  229 Case 5.1 The ‘mi adidas’ mass customization initiative  231 Case 5.2 Hilti: Gearing the supply chain for the future (A)  252 Case 5.3 Hilti: Reflections and outlook (B)  265 Chapter notes  268 Case study notes  268

Index

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Illustrations

List of figures 1.1  Fundamental supply chain flows 1.2  Unilever 2008 baseline study across seven countries 2.1  Charles Fine’s double helix 2.2 Risk–reward-tradeoffs 3.1  Linking product and service characteristics to supply chain design 3.2  Chain of customers and suppliers 4.1  The Kraljic portfolio purchasing model 4.2  Attraction: A force pushing buyers and suppliers closer together 4.3  From specification-driven to time-driven project management 5.1  Drivers of change 5.2  The realignment process

4 6 13 15 83 88 144 147 149 221 223

List of tables 2.1  2.2  2.3  3.1  3.2  4.1  5.1  5.2 

Effect on profitability of sales increase vs. supply chain improvement Types and drivers of risk in a supply chain Measuring the level of flexibility in a supply chain The main reasons companies outsource Evolution of inventory and demand for a chain Ten golden rules for becoming an attractive customer A few vs. many supply chain capabilities Stable vs. robust vs. adaptive design

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10 14 18 85 88 146 225 228

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Introduction

This book positions supply chain management at the center of firms’ strategic decision making and execution processes. By means of case studies of real companies, it illustrates how European and US executives have turned their supply chains into strategic weapons designed to convert threats, risk and outside pressures into core competitive advantages. Executives will find the book useful because of its focus on executive decision making and strategy in the extended enterprise-crossing boundaries between firms and regions. The book provides a solid foundation for understanding the challenges, strategies, dilemmas and opportunities involved in both process and relationship design within and across companies in global supply chains. No other book currently on the market positions supply chain management at the center of firms’ strategic decision making and execution processes, or demonstrates how executives across functions in the firm can help turn supply chain threats and dilemmas into strategic opportunities and value. This book is intended for a broad cross-section of executives. More specifically, its purpose is to inspire executives at all levels and across all functions within a firm, in terms of how they can help turn the firm’s transformation processes into core strategic weapons. With its examples of best practices and the associated dilemmas, this book is a good reference for supply chain management executives.

How the book is organized Unlike most books about supply chain management – textbooks and casebooks alike – this one is not organized around the different disciplines within the field. Instead it deals with the executive decision and management process and focuses on the key questions and dilemmas a broad cross-section of executives may face when supply chain challenges arise. The book is organized around three themes/ chapters, with an introductory and a concluding chapter. Chapter 1 provides a general introduction to the challenge of thinking strategically about supply chain management. It includes a discussion of the extended supply chain, incorporating the traditional flow of goods, information and finances. It then extends these and points to the importance of three additional flows of strategic

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2  Strategic Supply Chain Management importance to the supply chain: the exchange of risks, the exchange of ideas and innovations, and the flow of personal relations and perceptions. It also outlines in more detail the purpose and structure of the book. In Chapter 2, the why and where questions pertaining to strategic supply chain management are discussed and illustrated using examples. Why do companies/ executives face these problems? Where should they go next? Via four case studies, this chapter provides the executive reader with hands-on ideas and tools for identifying and leveraging strategic opportunities in existing transformation and supply chain systems. Chapter 3 focuses on the what questions. Faced with a dilemma, what should the executive do next? A range of actual decision-making problems, all related to supply chain practices, are illustrated in the six cases included. This section helps supply chain and non-supply chain executives to identify and respond to supply chain dilemmas. Chapter 4 turns to the how question. How exactly can the strategy and any decisions taken be implemented? How can executives avoid execution failure and long, costly implementation processes? The collective learning from five US and European firms illustrating how they approached the supply chain execution and implementation challenge is presented and synthesized, and key takeaways for executives are shared. Chapter 5 leverages the knowledge from the first four chapters, and discusses how executives working in the field of supply chain management or a related area can assess their existing supply chain and realign it with a new strategic direction. A process framework is presented.

The philosophy: Learning with cases Case studies are indispensable for modern education as they permit interactive learning based on rich, complex and authentic situations. From the authors’ experience, the use of cases has a lasting impact as the students actively participate in the analysis and resolution of practical problems. The exchanges with both teachers and class participants can leverage group knowledge and create a highly dynamic learning environment that students greatly appreciate. The majority of the cases included in the book have already been successfully used in executive education programs at IMD and other business schools, although there is some new case material. The book is also relevant as a best practice guide for executives working in supply chain management.

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1

Thinking strategically about supply chain management

In this book supply chain management is understood to be the design and operation of the entire chain from the raw material to delivery of the final product to the customer. The expression ‘From the farm to the plate’, coined by food industry executives, encapsulates this idea. There is no generally accepted definition of supply chain because the task of managing this entire end-to-end process has changed over the last 20 years from a fragmented tactical view to a strategic integrated view. In line with this way of understanding the supply chain, the most advanced companies have an executive vice president of global supply chain who works directly with the CEO to manage the entire process. Typically, this person is responsible for customer service, logistics and distribution, manufacturing, sourcing and planning, and often also quality, IT and sustainability. It could be said, then, that the supply chain provides the infrastructure for a corporation’s business model and thus determines its profitability and future. Furthermore, the trend over the last 20 years to outsource many activities has tremendously increased the role of the supply chain as the backbone of the company. There is even an emerging view, with the current emphasis on business models, that the key to a business model’s profit formula is the supply chain or value chain. For example, in 2010 many companies stated that most of their profit increase was a direct result of supply chain improvements. The supply chain should thus be considered as a value adder rather than a source of costs. When it functions well, it plays a major role in improving revenue and implementing the firm’s value proposition for the end-consumer, as well as its vision and strategy. The second defining feature that distinguishes strategic supply chain management from conceptual flow coordination is the involvement of a senior executive as the supply chain manager. This ensures that supply chain management is no longer confined within the boundaries of a single function, but instead entails the strategic involvement of several functions reporting to the same senior supply chain executive. The objective of this book is to provide a collection of best practices and highlight the main challenges that companies face in managing the supply chain. Within the case studies we also use the terms ‘demand chain management’ and

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‘value chain’ because the executives from the individual companies use them. While this might be considered just a semantic issue, many companies have spent considerable time discussing who is responsible for what and exactly what is included in the supply chain.

The extended supply chain Over the last few decades many value chains have become much more fragmented as a consequence of the drive towards outsourcing. Thus, while decades ago much of the added value of a product or service was created within one company, today most of it is created externally. For many companies suppliers represent more than 50% of the supply chain costs, so the greatest potential for improvement involves working with suppliers. Similarly, for many companies innovation mainly originates outside the organization. In recognition of this, Procter & Gamble (P&G), for example, has created a ‘Connect and Develop’ portal where customers, suppliers and other third parties can buy and sell ideas. As an innovative company, P&G is thus able to FXOWLYDWHFUHDWLYLW\)LJXUHLOOXVWUDWHVWKHVHÀRZVZLWKDPRGHORIWKLVH[WHQGHG supply chain. Traditionally, the supply chain has been described as consisting of three PDLQÀRZV WKHÀRZRIJRRGVIURPWKHVXSSOLHUWRWKHPDQXIDFWXUHUWRWKH GLVWULEXWRUDQG¿QDOO\WRWKHUHWDLOHULQRUGHUWRUHDFKWKHFRQVXPHUDVZHOODV UHYHUVHÀRZVUHODWHGWRUHSDLUVDQGPDWHULDOUHFRYHU\ WKHÀRZRILQIRUPDWLRQ ranging from order placement and forecast sharing to updating supply chain SDUWQHUVRQDYDLODEOHFDSDFLW\DQGH[SHFWHGGHOLYHU\GDWHVDQG WKH¿QDQFLDO ÀRZVLQFOXGLQJWUDGHFUHGLWDUUDQJHPHQWV 7KUHH RWKHU ÀRZV WKDW FLUFXODWH LQ ERWK GLUHFWLRQV DUH HTXDOO\ LPSRUWDQW   WKHH[FKDQJHRIULVNVEHWZHHQFXVWRPHUVDQGVXSSOLHUV WKHH[FKDQJHRILGHDV DQGLQQRYDWLRQDQG WKHSHUVRQDOUHODWLRQVDQGSHUFHSWLRQVRIGLIIHUHQWSDUWLHV regarding the others in the supply chain.

Supplier

Manufacturer

Distributor

Flow of Goods Flow of Information Flow of Cash Exchange of risks Exchange of ideas and innovation Exchange of personal relations

Figure 1.1 )XQGDPHQWDOVXSSO\FKDLQÀRZV

Retailer



Thinking strategically about supply chain management 5

The exchange of risks is of a special nature; many risks cannot be totally transferred. A company might believe that it has transferred the risk to a supplier because it is specified in the contract, but experience shows that it is frequently not transferred. The BP Gulf of Mexico platform disaster in 2010 illustrates this point. BP might have believed that the risk had been transferred to its supplier, Transocean, which owned the platform. Yet, while Transocean’s top managers received a bonus in 2011 for good safety performance in 2010, BP came in for a lot of criticism for its safety record and its CEO was forced to resign following the disaster, not the supplier’s CEO. Clearly, the disparity between BP’s actual risks and those perceived by the supplier is considerable. With the exchange of ideas and innovation that happens through the supply chain, companies can react fast by bringing out new products in response to consumers’ wishes while also taking into consideration suppliers’ innovative ideas. Companies like Victoria’s Secret created ‘councils of suppliers’ to foster the development of ideas from suppliers to its stores (see Chapter 2, Case 2.2). The Numico (A) case (see Chapter 3, Case 3.1) is an excellent example of how these exchanges of ideas and innovation create a comparative advantage for both the customer and the supplier. Finally, personal relations are extremely important because they allow companies to evaluate if the customer or supplier is a reliable business partner. If the relationship works well, it can foster extraordinary performance in the other flows. We will see in Chapter 4 how these personal relations must be managed proactively to achieve this. In particular, the Freqon case (see Chapter 4, Case 4.5) explicitly shows the role relationships play in the success of partnerships between customer and suppliers. In the same chapter we provide several useful models for developing successful win–win relationships.

From a function to a vital company process Comparing definitions of the supply chain across different firms we often find considerable diversity in scope and meaning. Some organizations include only logistics and warehousing in their supply chain while others include the upstream aspect of sourcing and managing suppliers. One shared feature, however, is that today most companies regard their supply chain as the principal process. An important challenge for many companies is setting up a supply chain organization with sufficient decision-making power to manage it. In some firms, an executive VP works directly with the CEO and is in charge of the whole chain. In others, a supply chain executive is in charge of coordinating the process without having direct line responsibility over the parts of the process. Finally, in some other cases, if the corporation is divided into business units, each unit has its own supply chain organization. As with all organizational structures, centralization of the supply chain organization has its dilemmas. On the one hand centralization, and the resulting integration, provides opportunities for increasing speed to market, reducing supply risks, reducing supply costs and improving supply quality. These potential benefits have led to a clear trend towards supply chain integration and centralization over

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the last two decades. On the other hand it can also result in more fragile supply systems, where risks may spread more easily. These and other dilemmas will be discussed in the other chapters, particularly Chapter 3. :HDUHDOVRVHHLQJIRUWKH¿UVWWLPHDGULYHWRZDUGVLQVRXUFLQJDQGQHDUVKRULQJ which facilitates coordination along the supply chain. It is fair to say that the outsourcing trend of the 1990s and 2000s was made easier because companies had learned how to create and develop close relations with suppliers. However, the possibility of transferring and managing risk properly was generally overestimated, as the BP case mentioned earlier, shows. The impact of the supply chain on the environment is also tremendous. For example, Unilever has openly stated on its website that the impact on water consumption of its products is mainly through customers and suppliers. It estimates that 50% of the water used in relation to its detergents can be attributed to the consumer and another 50% to the raw materials it sources (the supply chain). The water it adds to the product represents less than 0.1%, as depicted in Figure 1.2. Thus, the only way for Unilever to reduce its water footprint is to work through the supply chain and the consumer rather than focusing on internal use. We conclude from these developments and their impact on the bottom line that the supply chain has become by far the most important process in a majority of companies. We see industries totally transformed by companies using the supply chain as the main lever for competitive advantage, like Zara in the fashion business, Dell in the computer business, Luxottica in the eyewear industry, and many others.

)URPRSHUDWLRQVWR¿QDQFHOHDGHUVKLSLQQRYDWLRQDQGULVN management ,Q PDQ\ FRPSDQLHV WKH VXSSO\ FKDLQ KDV D IXQGDPHQWDO LPSDFW RQ ¿QDQFH leadership, innovation and risk management. This is mainly because a process WKDWVSDQVWKHZKROHFRPSDQ\VXEVWDQWLDOO\LQÀXHQFHVPDQ\IXQFWLRQV 7KH VXSSO\ FKDLQ¶V LPSDFW RQ D FRPSDQ\¶V ¿QDQFHV DQG WKH ZRUOG ¿QDQFLDO system is extraordinary. Some economists have estimated that the amount of money passing through the accounts receivable and accounts payable books – referred to as the trade working capital – of companies worldwide is almost twice WKHPRQHWDU\PDVVRIWKHZRUOG¿QDQFLDOV\VWHP$WWKHFRPSDQ\OHYHOWKHLPSDFW 50%

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