Creating World-Class Supply Chains

1
Creating World-Class Supply Chains

• Matthias Holweg Ph.D.
• Judge Business School
• University of Cambridge
• Email m.holweg_at_jbs.cam.ac.uk
• World Bank - Knowledge Economy Forum VI
• Cambridge, April 17 2007

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Outline

• Supply chain mangement
• Why is it important?
• Features of high-performing supply chains
• The role of technology
• The automotive industry
• Global trends
• The case of Slovakia
• Conclusions
• Policy recommendations

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Outline

• Supply chain mangement
• Why is it important?
• Features of high-performing supply chains
• The role of technology
• The automotive industry
• Global trends
• The case of Slovakia
• Conclusions
• Policy recommendations

4
Why do we talk about it?

• Traditional thinking competition is driven by
  the 4Ps
• Today supply chain capabilities determine
  competitiveness!
• Wal-Mart versus K-Mart
• Compaq/HP versus Dell
• A final product is not the sole achievement of
  the OEM
• Customer experience is determined by supply
  chain quality, cost, delivery
• Significant proportion of value sourced from
  suppliers!
• Supply chains are connected systems
• Competitiveness of one tier is a function of the
  supply and distribution functions, i.e.
  surrounding tiers.
• Value Chains compete, not individual companies!
  
• (Christopher 1992)

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The Essence of Supply Chain Management

• The essence of SCM 225
• Conventional thinking optimise your own
  operations..
• ..but sum of local optima is not a global
  optimum.
• Synergy is a systems effect
• The differential benefit of SCM is the value you
  derive by not simply managing individual pieces,
  but the entire system
• Goal
• to manage upstream and downstream relationships
  with suppliers and customers in order to create
  enhanced value in the final market place at less
  cost to the supply chain as a whole
  (M Christopher)

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Islands of Excellence or Optimal Supply Chain?
100
Max
Average
Assembly Plant 6
Raw Materials and components 21
Distribution 73
Min
50
Days of Inventory
0
Customer
Dispatch
Distribution
On-site Parts
Raw Material
Assembly WIP
Finished Parts
Assembly WIP
In-house Parts
Bought-in Parts
Inbound Transit
Outbound Transit
Pre-Assembly WIP
Source Holweg and Pil, The Second Century, MIT
Press 2004
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Features of High-performing Supply Chains

• Long-term collaborative relationships
• Trust and commitment, respect of the right of
  mutual existence
• Single or dual sourcing
• Component volume is adjusted according to
  performance
• Constant positive pressure by dual sourcing
• Improvement
• Collaboration with suppliers on operational
  improvement example Toyotas Supplier Support
  Center (TSSC) in Kentucky
• Annual cost reductions are realised in
  collaboration, not isolation
• Operations and logistics
• Level production schedules to avoid spikes in the
  supply chain
• Milk-round delivery systems that can handle
  mixed-load, small-lot deliveries
• Disciplined system of JIT delivery windows at the
  plant suppliers deliver only what is needed,
  even if this compromises load efficiency in
  transport

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A Cry from the (US) Supplier Heart

• There is little chance that beating the hell out
  of the supplier base, breaking contracts,....not
  paying your tooling bills,...is going to get to
  the root cause of your problem, Big Three. You
  know the same suppliers raked over the coals, and
  used as a whipping boy to explain the Big Three's
  cost problem, are the same suppliers investing,
  building partnerships and earning a good return
  with the vehicle producers that have the growing
  market share. There is a discontinuity here.
  But it is also very clear,...the sheer
  mass,...the investment,...the involvement between
  suppliers and the traditional Big Three can only
  lead to one conclusion. Our futures are
  inexplicably tied, and neither can afford the
  other to fail. Tim Leuliette, President/CEO
  of Metaldyne, August 12, 2002

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The Role of Technology

• The Holy Grail in curing supply chain ills?
• Example Bullwhip problem
• Demand visibility is key RFID / AutoID, EDI,
  EDIFACT, EPOS, CPFR
• yet they only work if the planning systems use
  this information!
• Example transaction costs in automotive
• COVISINT (est. 2000) and the B2B/e-commerce
  revolution
• Predicted savings of 1,000 per vehicle in
  transaction costs!
• The Role of Technology
• Technology alone is not a sufficient, it can
  assist problem solving
• If the underlying processes are not capable,
  technology will fail
• It is a means to an end, not an end in itself!

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Outline

• Supply chain mangement
• Why is it important?
• Features of high-performing supply chains
• The role of technology
• The automotive industry
• Global trends
• The case of Slovakia
• Conclusions
• Policy recommendations

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Production by Region 1975-2005
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Auto Industry Major Trends

• Overall global growth by 1.85 CAGR since 1975
• Substitution of production with adjacent low-cost
  regions
• Major growth of production in China (2000-05
  x5.2), and India (2000-05 x1.7), - 4 in Western
  Europe
• Auto industry is regionalising, not globalising!
• What does this mean for the dynamics of
  competition?
• Competing in a global, distributed industry
• Future competition on cost is a futile battle..
• Rely on quality? Brand? Design? Proximity to
  customer?

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Continuous Window of Opportunity
Established Player
Product Features
Time
Any labour cost advantage is temporary!
Source adapted from Christensen (1997)
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The Auto Industry in Emerging Countries

• Automotive industry very attractive
• Job multiplier of 5-7 for every assembly job
• Technology transfer
• Many subsidies, but questions of long-term
  viability!
• The case of Slovakias auto industry
• VW Bratislava, PSA Trnava, Kia Zilina, growing
  cluster CZ, PL, HU
• 5m inhabitants, c.900k production, domestic sales
  of lt80k units
• Challenges
• Logistics lead-time to customer, reliability of
  supply
• Labour shortage, migration and rising
  compensation
• Migration further east is inevitable
• Domestic demand in Russia, growing labour cost
  differential

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Outline

• Supply chain mangement
• Why is it important?
• Features of high-performing supply chains
• The role of technology
• The automotive industry
• Global trends
• The case of Slovakia
• Conclusions
• Policy recommendations

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Conclusion Supply Chain Enemies

• Common logic behind all SCM initiatives!
• Inventory delays
• Time worsens swing of amplification
• Decision delays require stock
• Safety stock decisions send false signals
• Unreliability or uncertainty
• Any kind of uncertainty needs to be covered with
  inventory
• Unreliable processes cause unreliable delivery
• Hand-offs or decision points
• Every hand-off or tier in the system bears danger
  of distortion!

• Inventory is a substitute for information

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Policy Recommendations

• Infrastructure is a always a concern..
• but uncertainty is a sure killer of any location
  decision!
• Customs clearance
• Currency
• Regulation (labour, traffic, taxation)
• Crime bribes
• Supply chains are connected systems
• Labour cost differential is only a short-term
  advantage
• Strong need to attract suppliers, not just
  manufacturers!
• Need to build local competencies, rather than
  screw-driver factories
• Domestic demand is not essential if logistics
  systems work

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Centre for Competitiveness and Innovation,Judge
Business School, Univ. of Cambridge
http//www-innovation.jbs.cam.ac.ukInternationa
l Motor Vehicle ProgramMassachusetts Institute
of Technologyhttp//imvp.mit.edu Email
m.holweg_at_jbs.cam.ac.uk