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In the days following September 11, 2001, a sizable part of American commerce ground to a near standstill. Air shipments halted. Border crossings backed up for hours. Online polls conducted shortly after the events found that as many as 60% of respondents were reporting "dramatic" or "very dramatic" impacts on their supply chains. Since then, you'd think, companies must have taken dramatic steps to protect stocks of parts, raw materials, and goods for sale against similar interruptions. Maybe they're even rethinking their decade-long commitment to "lean" or "just-in-time" (JIT) inventory management. After all, who can run the risk that a factory or store will have to shut down because inventories are too thin?
In fact, the impact of the terrorist attacks on supply-chain practices has been minimal. A manufacturing specialist at Boeing Canada says the aircraft giant is doing nothing significantly different. A spokesman for Wal-Mart Stores reports that his company's practices haven't changed at all. "I haven't seen many companies doing things very differently since September 11," says Miles Cook, leader of Bain & Co.'s North American supply-chain practice.
Is this just head-in-the-sand stubbornness? Not really, say experts in the field. Rather, it reflects just how critical supply-chain management has come to be in today's economyand how uneven the progress has been to date.
Winners and also-rans
Not so long ago, the phrase supply-chain management was heard only in the least-attended classes in business schools. Its practitionersmostly purchasing agentswere relegated to the nether reaches of the corporate hierarchy.
But then the marketplace changed in several critical ways. Globalization and new technologies disrupted the cozy oligopolies that had dominated most U.S. manufacturing industries, ratcheting up the level of competition. Firms began slashing their payrolls, focusing on core competencies while outsourcing more and more of the value-creation process. This alone boosted the importance of supply chains. Many companies now buy 60% to 70% of what goes into their products, points out Jeff Trimmer, chairman of the nonprofit National Initiative for Supply Chain Integration (NISCI), based in Tempe, Arizona. "Companies better be able to manage that," he says, "not just the 30% to 40% that they manage internally."
Then there was the set of techniques known as lean manufacturing, pioneered by Toyota. Lean manufacturers work on reducing or eliminating inventory throughout the entire production system, ensuring that parts and materials arrive at the production line only as they are needed ("just in time"). Lean retailers apply similar ideas to the distribution of goods for sale, promptly replenishing stock as it is depleted and thereby increasing the number of inventory turns. Effective management of the supply chain according to lean principles can wring many millions of dollars of cost out of a large production or distribution system.
By the same token, though, lean operation is brutally difficult to implement; it requires companywide commitment to change on several fronts at once and typically takes years to reach fruition. In a boom economy like that of the 1990s, such distant rewards may not seem worth the effort.
This accounts for a couple of anomalies well known to specialists in the field. For many companiesmaybe mostall the talk about supply-chain management and lean inventories has been just that: talk. "We've done several surveys on this, and something like two-thirds of companies admit that they have very little data on their supply chains," says Bain's Cook. Nor have most companies even begun to realize the payoffs of lean practices. "If you look at a decade of data, inventory turns in most industries aren't any better today than they were ten years ago," Cook adds.
The impact of the terrorist attacks on supply-chain practices has been minimal. |
John Case |
A few firms, however, got supply-chain religion early on, and thanks to years of sustained efforts are now vastly more efficient than their competitors. Dell Computer's supply chain, for instance, is legendarily lean: Dell carries less than five days of inventory as compared with nearly twenty-five for Compaqand that doesn't even count the two to four weeks of inventory in Compaq's reseller system. Experts estimate that a one-week inventory advantage translates into a 1% cost advantage, which helps explain why Dell has been able to continue making money even in the cutthroat personal computer business. Similarly, in retail, the top performer in many categories turns its inventory much more rapidly than its nearest competitor.
Hence the reactionor lack thereofto the events of last fall: A company's response depended on whether it was a winner or an also-ran, but the results weren't so different in either case.
On one end of the spectrum, supply-chain stars were already managing drum-tight operations and had learned to be prepared for disruptions. "September 11, tragic as it was, was just another contingency for us," says Gus Pagonis, the retired three-star general who managed logistics during the Gulf War and who is now the president of Sears Logistics Services and the head of Sears, Roebuck & Co.'s supply chain. "We were pretty well set up for contingencies, and we still are." Sears opened its Disaster Operations Center right after September 11 and kept it open for a month. Operatives at the center monitored truck movements and international shipments closely, adjusting for delays as they cropped up and setting priorities to minimize stockouts. Meanwhile, Pagonis's team laid plans for dealing with other possible terrorist attacks.
And the companies on the also-ran end of the supply-chain spectrum? They, too, made little or no response to the effects of September 11, but for very different reasons: They were less vulnerable because, for them, JIT inventory management was more a vision than a reality. "It's sort of silly when people who are running sixty days' inventory say they're running JIT," says Cook. "They've got miles to go before that really becomes an issue." But the also-rans can hardly afford to stand pat. In a downturn, earnings are under pressure and costs are paramount. Supply-chain stars are already pulling away. So the slower-moving companies don't have much choice but to try to narrow the gap.
Granted, experts recommend tweaking modern supply-chain principles to allow for future disruptions. "But I don't think we're going back to the old days, with great big buffer inventories," says NISCI's Trimmer. "I haven't seen any of the companies we've been dealing with going in that direction."
Learning from the leaders
What do the also-rans have to do to catch up with the winners? Trimmer, Cook, and other specialists point to the following bare-minimum requirements:
Commitment from the top. "There needs to be high-level interest in supply chains," says consultant Richard Schonberger, author most recently of Let's Fix It! Overcoming the Crisis in Manufacturing (Free Press, 2001). "Management needs to be involved at the highest levels, making sure that everything is in place." One chore for senior executives: assigning a healthy proportion of a company's best and brightest talent to supply-chain management. A second chore: ensuring that supply chain is defined as all of a company's suppliers. That includes not only the so-called first-tier suppliers, who deliver components ready for assembly, but also the companies that supply parts and materials to the first-tier firms, those companies' suppliers, and so on down the line. "In the auto industry, that can go to five or six tiers," says Trimmer. "And what September 11 pointed out was that you are vulnerable to the problems of any company in your chain."
Measure, measure, measure. Many senior managers rate their supply chain as important, the Bain surveys found, but few have good information about their performance. "Many marketing departments don't track the accuracy of their forecasts, and many purchasing groups don't measure the on-time performance of their vendors," says Cook. "There's just a huge lack of data." Companies need to tailor metrics to the requirements of their business, he adds: They may want to measure anything from warehouse inventory turns to incoming defect rates. But nearly every company can gain from basic metrics such as the so-called cash-to-cash conversion cycle, which assesses the financial ramifications of how fast your inventory turns over. And oh, yes: Once performance is being tracked accurately, reward managers for improving it.
Think first, buy software later. Spending on powerful new supply-chain computer programs has risen at double-digit rates over the last few years, yet most experts believe companies are buying the technology without thinking through what they hope to accomplish with it. Winners and also-rans often use the same technology, says Cook; the difference is, "the ones who are getting a return on their investment are trying to change their practices, not just the name brand of their software." At Sears, says Pagonis, the key to effective supply-chain management is visibilityknowing exactly what's going on in a thousand different locations. The company needed no fancy new technology to achieve that goal. "[All] we've done is bridge our old legacy systems and adjust them to provide greater visibility."
Adds Cook, in what amounts to a summary of expert recommendations: "You have to think about what you can do upstream and downstream to make the whole system more efficient. At some point, technology can be an important enabler. But organizational structure is also an enabler. So are measurement systems. Technology is just a way to make stuff happen faster and easier."
Three Ways to Take Up Some Slack
Many large companies' supply chains have evolved over the past couple of decades into tightly organized, globe-spanning, just-in-time networks, and a major disruption such as September 11 can leave parts of the network vulnerable. No large company seems to be contemplating a return to the more localized, heavily buffered supply chain of yesteryear, and no expert contacted by Harvard Management Update is recommending that they do so. Still, there are plenty of suggestions for protecting supply chains against too great a disruption. Among them:
Develop local suppliers as a backup. "Global supply is clearly here to stay, but having some local sources can make strategic sense," says Richard Schonberger, an author and consultant based in Bellevue, Washington. "Developing stronger relationships with fewer suppliers has been a dominant industry trend for twenty years. If a supplier has problems, you want to know right away; you just can't do that if there are multitudes of them. But after September 11, you might want to line up a local backup supplier or two to ensure access to critical materials. Maybe start buying 10% of your products from them, so that they're in the loop."
Only one trip across a border. We live in a "spaghetti world," a world in which industrial products typically cross many borders during the production process, says James Womack, president of the Brookline, Massachusetts-based Lean Enterprise Institute, a nonprofit training and research center. Since border crossings can be so slow and problematic, Womack advocates an admittedly radical solution: locating production facilities so that products cross no more than one border. The chosen location might be at home or in a developing nation, depending on the product. But when you do the calculations, says Womack, be sure to include not just labor rates but transportation, waiting time, and other "connectivity" costs.
Smarter use of technology. Companies need "intelligent demand forecasting systems," says Stanford University professor and supply-chain expert Hau Lee in an October 8, 2001, article in Internet Week. People's buying patterns change when a major disruption occurs, and the software must be smart enough to weed out the short-term variations. What's more, a sound e-business infrastructureWeb-based systems providing full information about the supply chaincan allow companies to cover shortages in one place with surpluses in others. "We can have both efficiency and flexibility using e-business," says Lee. "[But] we have emphasized the efficiency side too much, and flexibility is sometimes overlooked."