Supply Chain Design: A Necessary Core Competency to Build Sustainable Competitive Advantage

Author(s):

Thomas A. Crimi, MBA, MAPA, C.P.M.
Thomas A. Crimi, MBA, MAPA, C.P.M., Supply Chain Team Coordinator, Texaco, Inc., Bellaire, TX, 77402, 713-752-3981, crimita@texaco.com
Ralph G. Kauffman, Ph.D., C.P.M.
Ralph G. Kauffman, Ph.D., C.P.M., Assistant Professor, University of Houston-Downtown, Houston, TX 77002, 713-221-8962, kauffmanr@dt.uh.edu

86th Annual International Conference Proceedings - 2001 

Abstract. In today's market, firms don't compete, supply chains do. This paper provides insights on how to design supply chains to give them competitive advantages over competing supply chains. Development of competitive advantage and how to design and implement supply chains to achieve it are the central themes.

Introduction to Supply Chain Management

Definition of Supply Chain Management. A number of definitions have been proposed for supply chain management. Perhaps the best is simply, "an integrative approach to managing supply and distribution networks." The key word is "integrative," making the chain work better and at lower cost than would be possible by managing each segment of the chain independently. Another way of defining supply chain management is to state that it is the management of physical materials, services, information, money, and time across and between organizations in a business relationship in a manner that achieves the objectives of all the organizations at the least total cost.

Objectives of Supply Chain Management. Some common goals of supply chain management include: Reduce waste and nonvalue-added activities (i.e. cost reduction) including excess inventory, increase customer service/responsiveness, improve supply chain communication (speed/timeliness, accuracy of information, information sharing), reduce cycle time (e.g. new product development, supply leadtime), improve coordination of efforts (continuous improvement, understanding of goals) (Ellram 1994).

Results of Applying Supply Chain Management. The most-sought and most common result of applying supply chain management is reduced costs in the supply chain. A cost that exists throughout most supply chains and therefore is often the target of supply chain management is the cost of inventory, managing it and carrying it. Many supply chain management efforts are aimed at reducing inventory costs. Other results of supply chain management include improved quality, more dependable quality, more reliable supplier performance, e.g. in order fulfillment and delivery, improved transportation service, reduced packaging costs, elimination or combination of steps in the supply chain, faster cycle times and more satisfied customers. It is by nature an integrative approach, as much entrepreneurial as logistical, and results come from the following:

• Having knowledge of a variety of methods, processes, techniques, and systems that can be used to manage supply chains
• Studying particular supply chains to identify areas of potential improvement
• Applying and implementing methods, processes, techniques, and systems as appropriate to improve supply chain performance
• Evaluating changes, revising as needed, and practicing of continuous improvement through periodic performance reviews and value analysis.

Example of how Supply Chains Rather than Individual Firms Compete. The final product or service offered and delivered by any firm is the sum total of its own efforts and those of all of its supply chains. A recent example is the Ford Explorer - Firestone tire recall situation. The vehicle sold by Ford included the tires provided by a member of its supply chain — Firestone. Firestone's apparent failure to provide an adequate product is affecting the entire supply chain's ability to sell the product. Not only are Ford and Firestone affected, but so are all the other members of Ford's supply chain — the fewer Explorers that are sold, the fewer parts they can sell to Ford. The discussion reported in the press subsequent to the recall of tires indicates that Ford and Firestone were not operating together as ideal supply chain partners. Firestone recommended a higher tire pressure but, to get a softer ride, Ford recommended a lower pressure. Instead of working together — as if they were one supply chain — to solve the problem, they each proceeded separately with a disastrous result.

Development of Competitive Advantage for Supply Chains.

The necessity to consider the supply chain as the competitive entity results from the integrative nature of supply chain management that, in turn, produces a high degree of interdependence among the members of a supply chain. The timeliness, quality and cost of each member of the chain combine to produce the final product, it is only partly a result of the actions of the chain member that produces the final product. Thus, a supply chain that produces a product at the level of quality demanded by the consumer, but has high-cost upstream supply chain members or uses high-cost transportation to deliver the product will be at a cost disadvantage to a chain that uses lower-cost alternatives.

Examples of Competitive Advantage for a Supply Chain. Competitive advantage accrues to supply chains in a variety of ways. Some of these include:

• Ability to maximize leverage with other supply chain members
• Ability to identify and manage cost drivers
• Optimization of supply chain capacities/release of unused capacity/no added capital — balanced supply/demand throughout the chain
• Improvement in total supply chain response time
• Leverage technology — adoption of current technology by other supply chain members
• Improved sourcing processes that enable optimal commodity strategies
• Improved cash flow throughout the chain
• Benchmarks and performance measures that represent the integrated operation of chain members rather than individual company results
• Improved competitiveness of the supply base resulting from upgrades necessary to participate in the supply chain
• Ability to tier strategies and implement enhanced business strategies
• Lower total cost of ownership for purchased materials and services
• Improved economic value added (EVA) throughout the chain
• Reduced cycle times across the chain
• Reduced transaction costs for supply requirements
• Reduced supply process costs
• Ability to charge lower prices for products
• Ability to provide higher quality products
• Improved ability to consistently meet customer requirements for quality
• Improved ability to meet customer delivery requirements
• Improved Ability to provide improved customer service before, during, and after the sale transaction
• Ability to more effectively communicate with customers to determine their requirements

Concept of Core Competency. Supply chains, not surprisingly, often develop competitive advantages around their core competencies. Core competencies can be defined as those activities that a firm does best and most cost-effectively, and which are central or "core" to success in its business. Thus there are some firms that only market, outsourcing all manufacturing, production, and sourcing activities, because their core competency is marketing. The core competency concept must be kept in mind when designing supply chains because, in an ideal supply chain, each member will perform those things that are their core competencies and assign to other chain members those things that are not core competencies.

Supply Chain Design and Implementation

Supply chains should not "just happen," they should be deliberately designed and developed the same as individual supplier members of supply chains are selected and developed.

Supply Chain Design — Importance of Design. Supply chains determine the ability of the firms included in them to compete in the marketplace. How supply chains are designed will affect their ability to compete. A firm that is attempting to compete in a market where low cost determines who gets the business will have difficulty if it includes high cost suppliers in its supply chain. The characteristics of the end-market in which a firm is competing must be considered when designing supply chains.

Supply Chain Design — Design Process.

1. Select a chain. Criteria for selection may include: What are the largest products or purchased items in terms of sales dollars or spend, products/materials/services that need improvement in cycle or response time, problem products (any type problem that affects customer satisfaction and cost effectiveness), products/items critical to company mission or goals.
   
   
2. Form a design team. Include all affected parties inside and outside your company, especially other members of the supply chain such as suppliers, customers, third party service providers.
   
   
3. Map the chain as a team. Get a common understanding of what you are working to improve. The entire chain does not need to be mapped in detail if you are focusing only on particular parts of it but the entire chain should be mapped generally to assure that all members who could be affected by changes are identified.
   
   
4. Determine supply chain performance criteria. Where or in what activities or results must the supply chain develop and maintain a competitive advantage. At what level must criteria be set, e.g. what level of quality or service is necessary to compete in the final consumer market for the product in question. Performance criteria will drive the metrics, or performance measures that will be used to determine if the supply chain and its individual members are performing well enough to compete. Some areas of performance criteria and metrics include:
   • Total cost Quality
   • Cycle time
   • Reliability
   • Specific product performance characteristics
   
   
5. Analyze each step of the selected supply chain. Select best way of performing that step. Use benchmarking and best practice studies as references and sources of improved business methods. Identify specific measurement criteria and levels to be used in determining metrics and levels of performance that the supply chain must achieve to compete.
   
   
6. Evaluate the impact of changes from existing practice needed to perform each step in the supply chain as a whole. Identify and evaluate tradeoffs of changes at each step to determine the overall best way to perform that step to meet the performance required of the overall chain.
   
   
7. Reiterate the preceding process until the combination of practices that best meets the supply chain performance criteria is determined.

Critical Areas of Supply Chain Design

Supplier Selection. Suppliers must be carefully selected based on the particular combination of attributes they must provide to the supply chain. There may be one criterion of primary importance but others must not be overlooked. For example, a low-cost supplier that has low delivery reliability, or poor financial condition may not be a good choice even if low cost is the principle attribute that is needed.

Supplier Development. To get the exact "fit" or combination of attributes desired, it may be necessary to work with suppliers to help them develop exactly the right capabilities to enhance the supply chain.

Value Added. A supply chain should (must) enhance the customers' ability to compete when the customer is not the final consumer. For example, the supply chain may be required to provide services such as quick replenishment or training, or results such as overall cycle time reduction. Each chain member must add some value to the ultimate final product. Each chain member must provide flexibility to innovate and help to bring unique value to the chain.

Supply Chain Tier Integration, Reduction, Expansion, Cooperation, Communication. This is determining how the chain members fit together. Get the best combination of members, functions, and responsibilities to meet customer requirements. Determine in detail with affected chain members how they will work together initially and ongoing. Use written understandings and procedures to minimize misunderstandings and problems.

Change Management. Decide how to implement changes necessary to initially launch the supply chain relationship and how to agree on and implement subsequent changes that may be necessary.

Relationship Between Information and Process or Activity Cycles. Determine how information will trigger processing or activity. Determine how activity will be recorded and reported to affect future processing or activity. Determine how information systems will be adapted to the needs of the supply chain.

Communication Within the Supply Chain — what, when, where, how, who, must be planned in detail.

Goals of Particular Supply Chain. Specifically what must the supply chain achieve? Quality, performance, cost? Other goals?

Goals vs. Vision for Supply Chain. The initial development of a supply chain should come from a vision of what it must accomplish. This vision must be translated into specific goals that can be operationalized.

Match (Congruence) Between Supply Chain Goals and the Goals/Objectives/Mission/Vision of the Members of the Chain. Any significant mismatch will result in an ineffective and (probably) noncompetitive supply chain.

Coordination of Supply Chain Strategies, Planning, Operations. Use the team approach, involve all affected parties and entities, use written procedures and guides.

Performance Measures (Metrics). Absolutely vital to know if the supply chain is performing as needed and to determine where improvements or changes may be needed. Must be agreed upon as valid and necessary by all affected supply chain members.

Identify and Use Best Practices to determine supply chain processes and procedures.

Supply Chain Implementation

Leadership to Drive Change. There must be credible leadership for the supply chain implementation to be effective. For any significant implementation effort, corporate management must visibly endorse and support the effort through a mandate or other visible means.

Team Approach. Although leadership is essential, a team approach is another vital element of successful supply chain implementation. Use the design team, extend and change it as necessary, but be certain to include members from all entities in the supply chain that are affected and/or must do something to successfully implement and operate the supply chain.

Consider Ease of Implementation and Likelihood of Success. Pick your battles. Evaluate implementation alternatives and choose those with the highest likelihood of implementation success even if they do not offer the greatest potential improvement. Implementation success with a lesser degree of improvement is still improvement where a failure of a high potential implementation is no improvement at all.

Training. Cannot be overemphasized. Absolutely vital to successful implementation. If a person is to do something different than they have previously done, they must know how to do it.

Sources of Resistance. The organizational behavior literature identifies eight common sources of resistance to change: (Schermerhorn, Hunt, Osborn, 1997)

• Fear of the unknown
• Disrupted habits
• Loss of confidence Loss of control
• Poor timing
• Work overload
• Loss of face
• Lack of purpose

The same reference identifies six ways to deal with resistance to change:

• Education and communication
• Participation and involvement
• Facilitation and support
• Facilitation and agreement
• Manipulation and co-optation
• Explicit and implicit coercion

Obviously the last two ways should be avoided or used only if the others fail. The team approach to supply chain design and implementation coupled with leadership and training utilize the first four methods and will usually result in success.

Evaluation and Review

Performance Measurement Review. Perform periodic measurement and review as determined by the design team. Revise, change, and improve the supply chain design as needed to achieve the desired results or as a result of changes in the goals, objectives, or environment of the supply chain.

Practice Continuous Improvement. Competitive advantage gained from supply chain design must be sustained by a planned continuous improvement program and supported by a vigorous, pro-active change management initiative.

REFERENCES

• ElIram, Lisa M., "The 'What' of Supply Chain Management," NAPM Insights, March 1994, 26-27.
• Schermerhorn, John R. Jr., James G. Hunt, and Richard N. Osborn, Organizational Behavior; 6th ed., John Wiley and Sons, Inc., 1997.

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