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 / Fall 2003 / Issue 32(originally published by Booz & Company)


When Will Supply Chain Management Grow Up?

When SCM began to look outside the company’s four walls, the first place attention alighted, naturally, was on customers. Since the late 1990s, however, many leading companies have placed greater emphasis on cost reduction and innovation at the supplier end of the chain. With this evolution, SCM’s scope has expanded well beyond the movement of materials. Now the term supply chain management encompasses such concepts as strategic sourcing and supplier involvement in product development.

The change in the way managers consider supply chain issues reflects an evolution in how they think about the complexities of business. Originally, supply chain management addressed the suboptimal deployment of inventory and capacity caused by inherent conflicts among functional groups within a company. Today, it addresses the risk of suboptimal deployment of capabilities caused by inherent conflicts both within functions and among companies. Yet despite this expanded scope, SCM’s underlying principles have actually remained consistent — and relevant:

  1. Set supply chain policies strategically
  2. Analyze trade-offs holistically
  3. Employ cross-functional support systems

The failure by companies to internalize these principles has generated much of the disappointment among SCM practitioners today.

Set Strategic Policies
First and foremost, a company must define its strategic objectives and establish supply chain policies to meet them. During the period when SCM applied largely to the deployment of finished-goods inventory, advanced companies took a strategic perspective on key issues such as delivery lead times, in-stock service levels, and utilization of manufacturing capacity. These policies resolved some inherent functional conflicts. One such conflict: the tension between marketing’s desire to hold stock of everything to maximize revenue and manufacturing’s efforts to make everything to order (with long lead times, if possible) to maintain capacity utilization and keep production costs low.

Today, leaders in the field take a broad perspective of the “extended enterprise” to address strategic issues such as logistics outsourcing, global sourcing, and even new product strategy. The functional biases often remain, but the range of options has grown dramatically, thanks to the broader scope of SCM.

Unfortunately, too many companies have resolved the functional conflicts by making compromises rather than breaking constraints. Breaking strategic constraints opens the door for new business models and ultimately can create competitive advantage.

The history of the Toyota Production System provides an example of how supply chain constraints can be broken. Taiichi Ohno, the father of the Toyota Production System, was inspired by the modern grocery store in the 1960s. He imagined a system for manufacturing whereby each time a dealer sold a car, it would be replaced seamlessly, as a grocery shelf is restocked when a box of cereal is sold. That way supply and demand would match perfectly; no customer would go unsatisfied, and, equally important, neither dealer nor manufacturer would be stuck carrying the cost of excess inventory.

This was a simple desire, but to make it work, the Toyota Motor Corporation would need to produce vehicles in small lot sizes — ideally a lot size of one. Mr. Ohno turned to industrial engineer Shigeo Shingo and challenged him to reduce the setup time for the large stamping presses, which was then about four hours. A team benchmarked automotive manufacturers around the globe and combined the best practices to reduce setup time to a mere 90 minutes — far less than the “world class” standard at industry leader Volkswagen AG.

Mr. Ohno challenged the team for more — specifically, a target setup time of three minutes. His rationale? It was the level necessary to break the supply chain constraint preventing small-lot production. Mr. Shingo’s team achieved the goal and paved the way for the just-in-time manufacturing revolution.

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