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


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

Then, during the 1980s, Polaroid outsourced its camera assembly facilities — first to Scotland, then to China. But because the product design remained integral, the interfaces among parts remained distinctive and complex. Polaroid engineers shuttled constantly between the U.S., Scotland, and China. This slowed down their ability to launch new products, perhaps distracting their attention from the upcoming challenges posed by digital photography. The Polaroid Corporation filed for bankruptcy in 2001 and was acquired in 2002.

Because most commercial fields contain success stories of companies with both modular and integral architectures, decision makers in companies with well-aligned architectures are often tempted to change them. Both Lucent and Nortel, telecommunications equipment manufacturers, fell prey to this temptation in the 1990s, and both for the same reason: competition from Cisco Systems Inc. in their analog and digital switch businesses. For some products, Cisco’s prices were lower than the manufacturing costs of the equivalent Lucent or Nortel product. Perceiving that Cisco achieved these low costs through a modular architecture, Lucent and Nortel decided to outsource much of their supply, selling off internal factories and facilities that made components for their switches. Because they did not concurrently modularize the product architecture, however, the design task (and the costs) remained with Lucent and Nortel. They could not quickly realize the savings they had hoped for. This increased the difficulty that both companies faced in recovering from the collapse of the telecom market in 2000.

Cisco itself, by most accounts, had an easier time after the bust. One reason may well have been the company’s deliberate strategy for aligning supply chain and product architectures. In effect, there are three lines of business at Cisco. Consumer home products (under the Linksys brand) are designed and outsourced in modular fashion, like Dell computers. “We don’t even touch the boxes,” one Cisco executive told me. Enterprise routers, which account for 65 percent of the company’s sales, are like Nokia telephones: integral in many respects, with some modular components. And then there is the equipment manufactured for telephone companies, “like hand-built Ferraris,” said the executive, “with in-house custom design and lots of Cisco touch.”

Aligned Design
How then can a company design its product and supply architectures to make sure that they are aligned? An apt answer can be found in a concept I call “three-dimensional concurrent engineering,” in which engineering, operations, and procurement participate together simultaneously in product development, process development, and supply chain development. The goal is to ensure that the components can be procured and the product manufactured in a timely fashion; to reduce the number of design changes and product redesigns; and to avoid quality problems by involving cross-functional teams at the beginning of the project.

When key systems are outsourced — in either a modular or an integral fashion — it is critical to bring supply chain experts together at the initial stages of product development. This three-dimensional concurrent engineering, involving manufacturing engineers, design engineers, and engineers from suppliers and key partners, ensures that the product design will dovetail with the constraints and needs of the total supply chain.

Alignment allows companies to be resilient while maintaining a coherent business model. As the product architecture evolves during the design process, the supply chain architecture evolves along with it. For product subsystems with complex interfaces and interactions, close supplier relations must be designed into the supply chain. For supplied components that are standard with well-defined interfaces, modular relationships can be fashioned at arm’s length. The success of Toyota, Dell, Nokia, and Cisco can be attributed to a well-executed alignment strategy. The difficulties of DaimlerChrysler, Polaroid, Nortel, and Lucent illustrate how challenging it can be to cope with separate product and supply chain architectures that are shoehorned together after each of them has evolved in a distinctly different way.

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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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