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Q & A with Hau Lee

You asked, he answered. After guest columnist Hau Lee, Kleiner Perkins, Mayfield, Sequoia Capital Professor, Graduate School of Business and School of Engineering, Stanford University, contributed to the February issue of Inside Supply Management®, you were invited to ask him questions about supply management. Here are your questions and his responses. To gain more insight from Hau Lee, register for the 87th Annual International Supply Management Conference and be sure to attend his keynote session on Sunday, May 5, 2002 at 1:00 p.m.

Q: What are your thoughts on scope expansion relative to the "integration" of Customer Relationship Management (CRM) and Supply Chain Management (SCM)?

Lee: This is another very interesting thought. In fact, some also felt that EPO (Enterprise Profit Optimization) should also be integrated with SCM. But I also must admit that it requires a lot of thoughts as to how CRM can be linked to make it productive. It certainly is a worthwhile initiative.

Q: I'd like some information regarding managing outsource subcontractors. Can you suggest a methodology for moving production of a product from in house to an outsource supplier. What key points do you use to efficiently manage this situation to success?

Lee: This is a big subject. It is probably not easy to answer in a short passage. There are probably a lot of papers written on how to do this well, and so there are good references on the subject. But perhaps a few common points are in order. It is important that open communication be established: the expectations, the responsibilities and accountabilities, the risks and rewards, and performance measures have to be transparent to both parties. Although the physical works have been outsourced, we need to make sure that information flows be maintained open, especially for some key indicators. Finally, we must have the right incentive systems put in place, for both the OEM and the contract manufacturers, so that the best outcome becomes a common goal.

Q: If today's purchasing professional were to suddenly fall asleep and wake up five, maybe ten years from now, would this person be able to perform his/her job given the lack of training during this "sleep period" and the current transition of the role of "Purchasing" from "transaction oriented" to "strategic"?

Lee: There are many jobs that would fall into this category of being faced with rapid changes and scope expansions. In the old days, a professor could get tenure from being an excellent researcher. Today, to gain tenure at a top-tier university, you have to be an outstanding researcher, an excellent teacher in the classroom, being able to win research grants, help the university raise funds, and being able to work with industry closely. But the purchasing and procurement area has been going through perhaps much faster pace of change, because of the trends of globalization, outsourcing, dynamic product and technology cycles, and information technology advances.

Q: Regarding supply management's role in product expansion, how can supply managers actively promote this role? Often designers, service developers, business development managers, or engineers don't want to hear about obsolescence concerns if a product or service fits the immediate need "just right".

Lee: I believe there is a need to educate other functions of the enterprises of the evolving roles of supply managers. Just as we all should be aware of their changing roles and expanding scopes as well, they should recognize that, only through understanding the ways roles and responsibilities are being re-aligned, can the overall supply chain performance can be improved. I remember a few years ago, when some resellers start doing some final configuration of computers for manufacturers, there were a lot of resistances from manufacturers, claiming that the resellers should stick to what they do best. We have come a long way there. But we should all be champions of continuously re-examining our roles and responsibilities and re-aligning them to fit the best interest of the supply chain.

Q: It sounds like "scope expansion" is complex and that only the most sophisticated and wealthy firms can take advantage of these concepts. What would you say to smaller firms in this context?

Lee: I hope that small or minority enterprises also go through similar evolution of scope expansion. Not all supply managers have to expand their scopes in every dimension thinkable, but we should look for opportunities wherever appropriate. Interestingly, a lot of innovations at Toyota came from their suppliers, many of which are smaller firms. So I firmly believe that all players in a supply chain, large or small, can benefit from the concept of scope expansion.

Q: How are companies getting around concerns about intellectual property, proprietary processes, and competitive advantages to actively work supply chain expansion and product expansion roles to the fullest? How can we protect our advantage while exploring what our suppliers and the market can offer us?

Lee: I don't have a great answer to this very interesting question. We should always respect confidentiality and there are definitely some proprietary processes that need to be protected. On the other hand, sometimes sharing a proprietary process can become a competitive advantage. When Procter and Gamble developed a new procurement process, which they called CPR (Continuous Product Replenishment), they created software tools to support this process. But in order for this process to have larger gains and advantage, they need more users and scale economies. The company made a very controversial decision, they let IBM took over the software tools for CPR so that they could market and sell it to all other companies in the grocery chains. The result was faster adoption of the CPR practice, which led to P&G reaping huge benefits in inventory reduction in the end. There is not standard way to deal with this very tricky issue.

Q: How are leading edge companies making the decision to broaden or enlarge a supply base? In other words, we've worked hard to reduce our supply base, when do we need to consider enlarging it or exploring new suppliers?

Lee: My observation is that, when companies are faced with increasing supply uncertainties, or when a product is migrating from a custom product to a commodity-like product, they often times would expand their supply base. But how do we draw the line - for example: when is uncertainty large enough for us to worry about this, or when is a product a commodity - remains a judgment call.

Q: In your experience, where are the supply management leaders of tomorrow coming from - up through the supply management organization, or through other disciplines?

Lee: I don't have a lot of data on this, but I definitely have seen backgrounds of very diverse nature: consultants, engineers, operations, finance, and all the way to traditional supply managers, can all be found. With the scope expansion trend that I indicated, the future supply management leaders would probably be drawn from wider and wider disciplines.

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