1.5 Supply Chain Management

Let's briefly return to our story of the 1980s Japanese entry to the U.S. market. As companies like Canon, Kawasaki, and Toyota quickly captured market share, their U.S. rivals struggled to keep pace. In fact, the once-thriving U.S. consumer electronics industry disappeared. Analysts wondered, "How do the Japanese do it? What do they do differently than their American rivals?" One surprising answer was that Japanese companies worked closely with their suppliers to co-create value.

This cooperative approach contrasted sharply to the American way, which emphasized arm's-length, often adversarial, buyer/supplier relationships. General Motors, for example, was famous for pitting suppliers against each other in fierce bidding wars to drive down the price of purchased parts. Rancorous buyer/supplier relationships resulted. The lean revolution showed the world that GM doesn't just compete against Toyota. Rather, GM and its team of suppliers compete against Toyota and its team of suppliers. Your takeaway: If your company builds a more cohesive and competitive team, you win. Working together to co-create great customer value is the goal of supply chain management.

The Anatomy of a Supply Chain

To visualize how supply chains work, you need to grasp the anatomy of a supply chain. Supply chains are usually depicted via a supply chain map. Figure 1.8 shows two simplified maps. Consider the following as you read a supply chain map:

1. You begin with the "focal firm"—that is, the company in the middle.

2. Suppliers are on the left and customers are on the right.

3. Suppliers and customers are organized in columns, called tiers, which are numbered in sequence moving away from the focal firm.

4. Demand information flows from right to left; that is, from the end customer all the way up the chain to raw materials.

5. Purchased goods and services flow the opposite direction—from upstream suppliers, through the focal firm, to downstream customers.

6. Money flows from right to left; that is, from the end customer all the way up the chain to the raw material suppliers.

Now you understand why we say that you manage a supply chain from "suppliers' suppliers to customers' customers."

Now that you know how supply chains are structured, you may be wondering, "What should you look for when you evaluate a supply chain map to determine whether or not a focal firm is positioned to compete and win?" Look for the following two characteristics.

1. Right Players. Members of the supply chain team are very good at what they do.

2. Right Relationships. Members of the team work together to effectively eliminate waste and increase value co-creation.

The Benefit of Being Good at What You Do

Marriott International, a $15 billion hospitality company that operates over 4,087 properties in 80 countries, exemplifies staying focused. By doing what it does best and outsourcing the rest, Marriott has become the worldwide leader in hospitality. What does Marriott do best? Answer: Marriott understands the needs of distinct customer segments and designs a lodging experience to meet those needs.

Marriott's 2015 annual report notes, "Our 10,000 square-foot Innovation Lab . . . is helping us to create solutions that elevate, innovate, and evolve our guest experience."1 Forbes magazine named Marriott as one of the World's Most Innovative Companies in 2015. Among Marriott's 20 brands, Fairfield Inn caters to the budget conscious, Courtyard to the business professional, Residence Inn to the extended-stay traveler, EDITION and Ritz-Carlton to luxury guests, and Moxy to adventurous millennials. By relying on a great supply network, Marriott can keep doing what it does best: Designing and delivering a great lodging experience.

The Cost of Not Working Well Together

Talking about a cohesive supply chain team is easier than building one. In the early 1990s, the efficient consumer response (ECR) initiative evaluated the performance of the cereal manufacturer shown in the lower panel of Figure 1.8. The findings were startling! For example, 104 days of finished-goods inventory filled the cereal pipeline. Nearly 300 days were required to move product from the farm to the consumer.

You may be wondering, "How could these inefficiencies exist in an industry that survives on very skinny margins?" Answer: Each member of the supply chain viewed itself as a distinct entity. Nobody shared the information needed to speed the flow of product through the chain. Companies really didn't know how to work together. Over 20 years later, companies still tend to pursue their own short-term self-interest and struggle to work well together.

The Bullwhip Effect

The bullwhip effect demonstrates how interdependence among members of a supply chain influences behavior and performance (see Figure 1.9). In the food distribution chain described above, the 104 days of inventory exist because the cereal manufacturer, the distributor, and the retailer all hold just-in-case inventory. Just-in-case inventory, or safety stock, is kept on hand to compensate for poor information sharing, possible transportation delays, and other unexpected events. Nobody wants to be out of stock when a customer wants to buy cereal. Now, ask yourself, "If you noticed an increase in demand, what decision(s) would you make to keep cereal in stock—and customers happy?"

Here is what often happens. The grocer forecasts demand for cereal and places an order with the distributor. To make sure that product is available even if demand is greater than the forecast, the grocer does two things: Holds extra inventory in its warehouse and places a larger order with the distributor. Not wanting to run out of inventory, the distributor does the same thing. After aggregating all of the orders from different retailers so that it can place one large order, the distributor places an even larger order with the upstream manufacturer. The manufacturer responds similarly, placing an even larger order with its suppliers. Later, when the retailer's demand diminishes, its upstream suppliers are holding excess inventories, so they reduce their orders. The key point: Small changes in retail-level demand get magnified as they ripple through the supply chain like a bullwhip. Bullwhip-related costs can be as high as 12-25% for each member of the supply chain. You can reduce the bullwhip effect by sharing point-of-sale information immediately and simultaneously with all members of the chain and developing collaborative forecasts with supply chain partners.

The Value Chain

Before you can effectively co-create value up and down the supply chain, you need to learn how to manage collaboratively within the four walls of your own firm. Within every company, a variety of functions are responsible for making decisions that define the firm's ability to create value. Michael Porter coined the term value chain to describe the interconnected nature of these internal functions (see Figure 1.10).9

The following functions all play key value-creating roles.

• Executive management defines company strategy and allocates resources to achieve it.

• Research and development (R&D) is responsible for new product design.

• Supply management coordinates the upstream supply base, which involves finding the right suppliers and building the right relationships with them.

• Operations transforms the inputs acquired from suppliers into more highly valued products.

• Logistics moves and stores materials so they are available when and where they are needed.

• Marketing manages the downstream relationships with customers, identifying their needs and communicating to them how the company can meet those needs.

• Human resources designs the systems used to hire, train, and develop the company's employees.

• Accounting maintains business records that provide the information needed to control operations.

• Finance acquires and controls the capital required to operate the business.

• Information technology builds and maintains the systems needed to capture and communicate information among decision makers.

By helping colleagues across your firm better understand customer needs, motivating them to work together to execute the company's strategy, you can help your company design better processes and make more competitive products. Many company cultures, however, don't promote close cross-functional working relationships. Managers in each function do their own thing. For example, supply managers in the food distribution supply chains often forward buy large quantities of product on sale without coordinating with logistics managers, who are then left to scramble to find ways of storing the product when it arrives. Purchasing costs go down, but the company's total costs may go up. Such trade-offs are common—both within the firm and across the supply chain.

Supply Chain Management in Practice

Companies have always been members of supply chains (or more accurately, supply networks). So, you might wonder, "Why is supply chain management now recognized as a hot business function? What's new?" Consider two reasons:

1. Managers increasingly recognize that operations and supply chain management is the value creation engine of every organization. Creating more customer value than your rivals is the only way to win tough competitive battles for the heart and mind of the customer.

2. Competition is getting even tougher. As McKinsey consultant Kenichi Ohmae emphasized, you need a stong team to compete: "Companies are just beginning to learn what nations have always known: in a complex, uncertain world filled with dangerous opponents, it is best not to go it alone."

Sadly, few companies have learned to co-create value across the supply chain. Most don't take the hard work of working together seriously. Ask yourself, "Would you?" Before you answer, consider the following:

• Your stock price doesn't go up just because you work with a successful supplier or customer.

• Most, if not all of your metrics, focus on the here and now—that is, how well is your company performing today.

• You don't have a lot of extra time to experiment with new business models. You're too busy putting out everyday fires to worry about touchy-feely collaboration.

• Besides, you probably don't know how to collaborate. After all, business schools don't teach deep collaboration skills.

The bottom line: Supply chain management is an emerging discipline. We still have a lot to learn. What does this mean for you? Answer: Good supply chain managers are in high demand!