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 / Summer 2005 / Issue 39(originally published by Booz & Company)


Are You Modular or Integral? Be Sure Your Supply Chain Knows

The company has also, however, designed modularity into two key aspects of its phone products: software and engines. Nokia’s software, including the operating system that provides its popular user interface, can be ported across many of the company’s hardware platforms, allowing reuse and continuous upgrading of the software “module.” Within the mobile phone value chain, Nokia has spun out significant aspects of its operating system development into a freestanding industry consortium called Symbian, thus developing a more modular supply chain structure to go with the modular technical relationship. In June 1998, Nokia was instrumental in establishing Symbian as a private independent company, co-owned by Ericsson, Motorola, and Psion. As a result, the supply chain architecture for the Nokia operating system has been made much more modular; some Nokia phones use operating systems from Symbian, but others use a proprietary operating system developed and used solely by Nokia.

The mobile phone’s engine, or hardware “core” — the integrated electronics subsystem, produced primarily on automated circuit board assembly lines — is similarly modular for strategic reasons. Nokia’s engine platforms can be used across its product lines, allowing the development of new products without the need to design engines from scratch. Moreover, engine assembly can be separated in location and time from final product assembly because the architectural relationship between the engine and the rest of the phone can be made reasonably modular. The combination of modular product and modular supply chain in the same subsystems allows Nokia the option to outsource engine assembly to contract electronic manufacturers. That lets Nokia focus the bulk of its cell phone innovation efforts on integrating fashion and function — key elements of customer satisfaction.

Costs of Mismatch
Companies with mismatched architectures, like DaimlerChrysler, nearly always find themselves on the wrong side of cost structures, pricing, customer demand, and quality. They typically try to reduce costs by outsourcing elements of their value chain, and then find themselves facing unexpected coordination costs, extended development times, and even project failure brought on by the unanticipated complexities of misaligned architectures.

That’s what seems to have happened at Chrysler after the Daimler-Benz acquisition. One strength of Chrysler’s modular system was the ability to rapidly turn out new models. Executives coming to Chrysler from the Mercedes unit, accustomed to much longer car launch cycle times, must have found it quite disconcerting to find “the pipeline was empty.” Why were there so few models under development at Chrysler? They set out to “fix” the problem by introducing Mercedes engineering methods. They spent two years trying to adapt Chrysler’s modular processes to an integral model, without rethinking the combined architectures of product and supply chain. They gradually discovered that Chrysler’s suppliers were unfamiliar with the kind of partnership role that Mercedes’s suppliers were well versed in; thus, the new engineering processes could not yield vehicles that would meet Chrysler’s historical customer and price targets. Moreover, during this time, new car development at Chrysler stagnated — with a far more severe effect on Chrysler (which was accustomed to a three- or four-year car development cycle) than it would have had on Mercedes.

After a great deal of effort and substantial financial losses, the Chrysler business model has found a new, very productive equilibrium, but seemingly at a cost to the Mercedes unit and its ability to maintain its traditional integrated model. The resulting quality problems at Mercedes, which, as noted earlier, were quantified by J.D. Power and widely reported in the press, have yet to yield a solution in the merged DaimlerChrysler organization.

Something similar happened at Polaroid in the 1980s. Developed by an independent inventor named Edwin Land more than 50 years ago, Polaroid’s instant photography process was markedly different from conventional photography. It employed a highly integral product architecture and supply chain. No parts, not even the lenses, could be adapted from other cameras, and all the supply facilities were located in the Boston area near Mr. Land’s headquarters; many of them were owned by Polaroid and run by a tightly knit team of managers and technical experts.

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  1. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b, Fall 2004; Click here. 
  2. Tim Laseter and Keith Oliver, “When Will Supply Chain Management Grow Up?” s+b, Fall 2003; Click here. 
  3. Gail Edmondson and Kathleen Kerwin, “DaimlerChrysler Stalled,” Business Week, Number 3851, September 29, 2003; Click here. 
  4. Charles H. Fine, Roger Vardan, Robert Pethick, and Jamal El-Hout, “Rapid-Response Capability in Value-Chain Design,” MIT Sloan Management Review, Winter 2002; Click here. 
  5. Jeffrey H. Dyer, Collaborative Advantage: Winning Through Extended Enterprise Supplier Networks (Oxford University Press, 2000)
  6. Charles H. Fine, Clockspeed: Winning Industry Control in the Age of Temporary Advantage (Perseus Books, 1998)
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