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Supply
Chain as Engine of Growth
By Michael Alan Hamlin
Novemberr 11, 2002
The supply chain as a source of competitive
advantage, according to Professor Hau L. Lee, is tied to supply
chain management expertise. As you may recall from last week, Lee
is director of the Stanford Global Supply Chain Management Forum,
and a professor at Stanford Graduate School of Business. He is one
of the world's preeminent - and most likeable - authorities on supply
chain management.
During our talk, Lee asked me rhetorically,
"Should original equipment manufacturers (OEMs) own the supply
chain process? Just asking this question seems a bit exceptional,
given the global trend to outsource everything outside of core business
processes. But Lee insisted that it's wrong to assume that outsourcing
is an appropriate strategy for every company and every situation.
That may be rare, but it's not for everyone.
In fact, "there are three alternatives,"
he told me, "that should be considered." First, is outright
ownership, or vertical integration. Second is outsource but manage
the supply chain directly. The third alternative reflects prevalent
thinking today: outsource management and execution. "Which
to use depends on a company's business strategy," Lee told
me. "In some cases, ownership of everything may be appropriate.
Spanish garment company Zaira is an example. It grows 20 percent
a year thanks to expert supply chain management."
Some might consider Zaira's success
a matter of succeeding despite a flawed strategy. Lee disagrees,
and for good reason he believes. "Anytime fashions change,
Zaira can change immediately. Other companies may shift over many
months or even a year. Zaira can change in one month," he said.
Zaira's not alone in its insistence on owning and managing the entire
supply chain. Asian garment manufacturer Esquel does much the same
- including production of the cotton that goes into its shirts -
because it wants to guarantee high-end quality.
At the other extreme is Li &
Fung, which outsources most everything, helping suppliers become
more efficient. Li & Fung is a role model for companies globally
in this respect, but is a huge exception in Asia, according to Lee.
"The majority of companies in
Asian cultures want to have tight control on costs, and that makes
it harder for them to outsource. However, we do see instances where
some non-core activities are outsourced, like transportation or
warehouse management." This is Lee's second alternative for
supply chain management. "This is called substitution outsourcing,"
he said. Lee doesn't rule out this half-way manner of supply chain
management, but doubts that straddling the fence will work for long.
"The new form of outsourcing
is structural. For example, the warehouse is no longer owned or
managed." There are good reasons for Asian companies to move
in this direction, he believes. "The benefits of structural
outsourcing are many times greater than substitution outsourcing,"
he notes. Often times, outsourcing management of business processes
doesn't work because business practices stay the same. "Just
installing systems doesn't do much," Lee cautioned. "You
have to actually change the way things are done."
Whatever alternative is chosen, companies
that manage the supply chain well typically grow faster than their
competitors for three reasons, according to Lee. "First is
value creation. Supply chain management enhances the capacity to
respond to market changes and emerging needs faster. Zaira, again,
is a good example. One month after 9/11 the chain had an entire
new line of all black clothing. Everyone else was still trying to
figure out what to do.
"Second, you can manage sales
and marketing more effectively because integration is tighter. For
example, a recent study shows that stockouts occur globally about
eight percent of the time. But alarmingly, if a product is on promotion,
the stockout rate is double. As a result, big money is left on the
table when the supply chain doesn't support sales and marketing."
Third, supply chain management providing
tight, intra- and inter-enterprise-wide integration "helps
develop and launch new products better. Chrysler is a good example
of new product development practice because it involves suppliers
in product design, not just customers. As a result, they have reduced
cycletimes 25 percent," Lee explained.
Lee doesn't believe that Western
enterprises have a monopoly on excellent supply chain management.
"Two world-class Asian companies are 7/11 Japan - inventory
turnover is 55 times and individual stores rotate inventory up to
three times a day - and Li & Fung." Lee calls Li &
Fung supply chain architects. They are so horizontally integrated
that the company's role is actually designing their suppliers' supply
chains. "Expert supply chain management has created this new
service business for them," Lee said, pointing out another
advantage of expert supply chain management: business model evolution.
Most Asian business people, however,
are too nervous about the leakage of business information to go
the Li & Fung route, Lee believes. In those cases, there are
"two ways to approach supply chain management (but they are
not bullet proof). You don't need to share a whole lot to get 80
percent of the benefits of sharing. Just need key indicators connected,
such as inventory and forecast. Second, you must have performance
monitoring after embarking on an information-sharing program. That's
because you need to know if it is helping.
Why? Because "the human tendency
is that people remember bad things rather than good things. So failure
to monitor may mean that benefits go unappreciated and may even
be cancelled," Lee said. And that's a sure fire way to be left
behind.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001). Write him at mahamlin@teamasia.com.).
Copyright (c) 2002 Michael Alan Hamlin. All Rights Reserved.
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