Is now the time to develop a “Triple-A” supply chain?
I wonder how many of us believe that we have a real Triple-A supply chain, but instead have something more like the Triple-A ratings that Moody’s and Standard and Poor’s were slapping on all manner of housing-backed bonds that we now know were substantially over rated.
Something in the back of my mind during these times told me it might be time to review the classic Harvard Business Review article “The Triple-A Supply Chain,” by Stanford’s Dr. Hau Lee, published back in 2004. I am glad I did – it offers some great insights very apropos for today – and the future.
"If accurate, the fact that those companies which focused primarily on supply chain efficiency don’t gain any real competitive advantage over time and may even under-perform in the long term – that is a very interesting proposition."
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Lee said that he had studied in-depth the supply chains of more than 60 companies from around the globe.
“All those companies…at greater speed and cost-effectiveness – the popular grails of supply chain management,” Lee wrote. “Of course, companies’ quests changed with the industrial cycle. When business was booming, executives concentrated on maximizing speed, and when the economy headed south, firms desperately tried to minimize supply chain costs.”
That sounds about right, supported by events after this article was written.
But then Dr. Lee offers this provocative statement: “Companies whose supply chains became more efficient and cost-effective didn’t gain a substantial advantage over rivals.” In fact, Lee says that often, the supply chain performance of those companies deteriorated.
Why? Because high-speed, low-cost supply chains are unable to respond to unexpected changes in supply and demand.
I found this thought worth pondering: “Efficient supply chains often become uncompetitive because they don’t adapt to changes in the structure of markets.”
Lee, of course, isn’t against supply chain efficiency. He simply says it is not enough to deliver any sort of real or lasting competitive advantage.
Instead, Lee says that what matters more are three other attributes – the “triple-A’s” of agility, adaptability, and alignment. While I could argue that efficiency and speed are often wrapped into the dimension, let’s look at each one.
Agility: I don’t think hardly anyone would dispute that each year, markets, supply and demand are becoming more dynamic and volatile.
Many companies, he says, play off speed against cost, but the winners respond both quickly and cost efficiently.
Of course, this is especially true for the increasing number of industries bedeviled by increasingly shortened product lifecycles, where slowness of response versus rivals can deliver an often fatal blow to the product line or even the entire company.
Lee equates “agility” with being able to respond rapidly to changes in supply, demand, market conditions, etc. It is, in a sense, similar to the notion of “sense and respond” that is increasingly driving the strategies of supply chain leaders (See Time to Integrate Supply Chain Planning and Execution)
So how do you get there? Lee offers six principles:
1. Improve connections with partners to share changes in supply and demand more quickly (harking back to his seminal work previously on “the Bullwhip Effect”);
2. Improve collaboration with suppliers on product design;
3. Increase use of postponement strategies to delay adding value or differentiation as late as possible in the supply chain process.
4. “Bulk up” a bit more on small, inexpensive components that often cause supply chain bottlenecks;
5. Build more flexibility into logistics systems that can react to disruptions, using third parties as appropriate;
6. Build a small team that is skilled in enacting contingency and back-up plans.
Adaptability: Agility can be thought of as relating to fairly short-time horizons. Adaptability, on the other hand, has a more strategic orientation.
Leading companies “keep adapting their supply chain networks so they can adjust to changing needs [and I would add “strategies],” Lee writes. “Adaptation can be tough, but it’s critical in developing a supply chain that delivers a sustainable advantage.”
In addition to short-term fluctuations to supply, demand and product lifecycles, markets themselves are constantly changing, and more rapidly than before, especially with the global economy. The supply chain strategies and networks that once served the company well can soon become obsolete as the market shifts occur.
“The best supply chains identify structural shifts, sometimes before they occur, by capturing the latest data, filtering out noise, and tracking key patterns,” Lee says.
Keys to getting there:
- Monitor global supply chain economics more closely
- Outsource more where you can, as outsourcing can allow more rapid adaptation
- Make sure the supply chain impact on new product design is well understood
- Build different supply chains for specific market and product characteristics
Alignment: Perhaps the toughest dimension.
“Great firms take care to align the interests of all the firms in their supply chain with their own,” Lee says. “If any company’s interests differ from those of the other organizations in the supply chain, its actions will not maximize the chain’s performance.”
That can happen even within a company, of course. Lee says that in one point in the early 1990s, HP’s chip division went on a very low inventory strategy, which lengthened lead times. That impacted even its own internal customer, the printer division. As a result, the printer division kept high inventories as a buffer, when it would have been less expensive for HP as a whole to keep more chip inventory than the more expensive printers.
Of course, getting this cross supply chain is not easy and, from my view, rarely done in any meaningful way. Toyota is one example of a company that is thought to practice this approach, but it’s hard to find many other examples. Lee says printer RR Donnelly encourages paper and ink suppliers to innovate and shares any resulting savings with them.
Lee says that failure to reconcile these conflicting interests is a key reason the Vendor Management Inventory (VMI) programs fail to work, when VMI could really be a key strategy to reduce total supply chain costs.
So, how are the challenges of alignment overcome? First, you start with alignment of information, “so that all companies in the supply chain have equal access to forecasts, sales data, and plans.”
Second, the channel master needs to more clearly define supply chain “identities” – in other words, making very clear the roles and responsibilities of each partner in a way that minimizes conflict.
Third, set up the relationships so that when any one company tries to “maximize returns, they also maximize the supply chain’s total performance.” Companies must try to understand and predict how partners will react given current incentives, and make changes to get better alignment to overall supply chain goals.
My thoughts: if accurate, the fact that those companies which focused primarily on supply chain efficiency don’t gain any real competitive advantage over time and may even under-perform in the long term – that is a very interesting proposition.
I like the Triple-A framework of agility, adaptability, and alignment, but may have taken a slightly different approach to discussing each. But, I agree that there is a difference between short-term responsiveness to supply/demand changes and disruptions, versus more strategic adaptability.
Can we really get to the level of total supply chain alignment in the way Lee describes it? It will be a long journey for most, but I do think it is possible to move increasingly closer to the goal.
What do you think of Lee’s Triple-A supply chain framework? Does it surprise you – or would you disagree – that a focus largely on supply chain efficiency doesn’t really pay off in the end?
Let us know your thoughts.
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