Supply Chain Excellence =

Strategy Alignment
Track 1 Session 1
 Larry Lapide, PhD
Director, Demand Management
MIT Center for Transportation & Logistics
llapide@mit.edu
617-258-6083

2007 MATERIAL HANDLING & LOGISTICS CONFERENCE SPONSORED BY HK SYSTEMS

Abstract

• MIT Supply Chain 2020 Project’s research on excellent supply

chains found that focusing on achieving corporate customer
objectives rather than just reducing costs and inventories can
have a greater overall impact on financial performance. It also
found that excellent supply chains are those that support,
enhance and are an integral part of a competitive corporate
strategy. Dr. Lapide will cover the Strategic Alignment
methodology and show how it can be used to tailor your supply
chain to compete in the market.
Agenda

• SC2020 Excellence Supply Chain Research

• Excellent Supply Chain Framework

• Illustrations and Case Studies

• Strategy Alignment Process and Takeaways

SC2020 Excellence Research: What is an excellent supply
chain?

Some myths on what is an excellent supply chain:

• Is part of a profitable company

• Is not part of an unprofitable company

• Is comprised of supply chain “best practices”

SC2020 Excellence Research: Excellent Supply Chain
Framework
Qualitative research on 21 companies and 9 industries supports that an excellent
supply chain: *

Corporate Competitive Strategy

Excellent Supply Chain 1. Supports, enhances, and is an integral part of a

Strategy company’s competitive business strategy.
2. Leverages a (not necessarily unique) supply chain
Operating Model operating model to sustain competitiveness
3. Executes well against a balanced set of operational
Operational performance objectives/metrics
Performance Objectives

Tailored Business Practices 4. Focuses on a few “tailored” business practices that

• Fit reinforce each other to support the operating model
• Principles leveraged and best achieve operational objectives.

* L. Lapide, “MIT’s SC2020 Project: The Essence of Excellence”, Supply Chain Management Review,
April 2006
Agenda

• SC2020 Excellence Supply Chain Research

• Excellent Supply Chain Framework

• Illustrations and Case Studies

• Strategy Alignment Process and Takeaways

1. Supports, enhances, and is an integral part of a
company’s competitive business strategy

Example supply chain-related competitive strategy elements

(support, enhance and is an integral part)
• Lowest prices
• Highest margin products
• Highest quality
• Fastest customer response
• Most innovative
• Highest Return-on-Assets
• Broadest product line
• Best customer service
• Best post-sales support
• Most environmentally responsible
2. Leverages a (not necessarily unique) supply chain
operating model to sustain competitiveness
Supply Chain
Governance & Relationship Management
Partner
Relationships Performance Management

Product Portfolio Management

Supply–Demand Alignment
Business
Practices Design Source Make Sell Deliver Return Service Recycle

Supply Chain Design and Capacity Planning

Product Inventory Order Promising Post-sales Product

Launch Replenishment & Fulfillment Support Phase-out

Technology &
Operating model is Info/Funds Flows $ $ $ $

the design of the SC

including: Contract
Virtual OEM
Web
Manufacturer Store
Operating
• Where to Source / Models Supplier

Make /Deliver E-marketplace OEM

Distributor Retailer Customers

• Push-pull points
• Offshoring
• Outsourcing
2. Leverages a (not necessarily unique) supply chain
operating model to sustain competitiveness
SC-Related Competitive Strategy Elements
• Lowest prices
• Highest margin products
• Highest quality
• Fastest customer response
• Most innovative
• Highest Return-on-Assets
• Broadest product line
• Best customer service
• Best post-sales support
• Most environmentally responsible
Example Characteristics of Operating Model
Aligned To Support and Enhance
• Lowest operating costs
• Maximum availability at point of sale
• Lowest operating cots
• Highest quality of suppliers
• Strongest manufacturing quality controls
• Shortest order-to-delivery cycle
• Fastest request-to-promise date
• Most efficient new product launch
• Highest plant utilization
• Lowest inventories
• Adept at managing complexity
• Specific service for each customer segment
• Maximum availability at point of sale
• Maximum availability of service parts
• Minimize waste and maximize recycling
3. Executes well against a balanced set of operational
performance objectives/metrics

Customer Response (customer-facing)

• Order cycle times
• Perfect order fulfillment
• Quality
• New product time-to-market
(Do not relate to financial statements)

? ?
Efficiency (internal) Asset Utilization (internal)
• Labor productivity • Facility utilization
• Supply chain costs • Inventory turns
(Relate to income statement) • Cash-to-cash cycle
(Relate to balance sheet)
Balanced operational objectives vary by industry ( in
absolute terms )

High Margin and Short Life

Cycle Products
•Pharmaceutical
•Fashion apparel
•Media & Entertainment
Customer
Response

Low Margin and Mature Products Capital Intensive Industries

• Food & Beverage • Semi-conductor fab
• Basic goods retail • Petrochemical
• Industrial supplies • Commodities (steel, paper,
coal)

Efficiency Asset Utilization

Competing is positioning against industry competitors on a
relative basis (best-in-class rather than peer average)

Absolute Objectives Relative Objectives

Customer
Response

Best Buy
Apple
IBM

Amazon

Efficiency Asset Utilization

Dell Wal-Mart

However, the competitive positioning will likely vary by product line as well as
supply chain within a company
4. Focuses on a few “tailored” business practices that
reinforce each other to support the operating model and best
achieve operational objectives.

Tailored (not best) business practices that:

– Align to performance objectives
– Fit
• Consistent ( make sense together)
• Reinforcing ( support each other)
• Cross-optimized (work together to achieve common
goals, 1+1=3)

– Leverage underlying operating principles for cost-benefit

Supply Chain Principles Illustrations

Fashion versus Basic Service Window Management:

Practices Supply Chains: Amazon and Cisco
Limited Brands

Operating Costs of cycle time and

Constraint Relaxation
Principles inventory tradeoff
Agenda

• SC2020 Excellence Supply Chain Research

• Excellent Supply Chain Framework

• Illustrations and Case Studies

• Strategy Alignment Process and Takeaways

Aligning Corporate Strategy and Operational Performance
Objectives

Illustrative Aligned Customer-Focused Corporate Strategy and

Operational Performance Objectives

Customer-focused Customer Response

performance objectives
• Highest supplier quality Customer-focused corporate strategy
standards • Highest quality products
• Shortest time-to-market • Most innovative
• Shortest manufacturing • Broadest product line
changeover times

Efficiency Asset Utilization

Aligning Corporate Strategy and Operational Performance
Objectives

Illustrative Non-Aligned Customer-Focused Corporate Strategy and

Operational Performance Objectives

Customer Response

Customer-focused corporate strategy

• Highest quality products
Efficiency and asset-focused • Most innovative
performance objectives: • Broadest product line
• Lowest procurement costs
• Highest plant utilization
• Lowest inventories

Efficiency Asset Utilization

Tailored Practices Aligned to Operational Performance
Objectives
Tailored practices need to align to strategically-aligned SC performance
objectives

SC performance objectives:
• Highest supplier quality standards
• Shortest time-to-market
• Shortest manufacturing changeover
times
Customer Response
Customer-focused corporate strategy
• Highest quality products
• Most innovative
• Broadest product line

Tailored Practices
•Core ‘strategic’ supplier program
•Collaborative development and
design
•Multi-product production lines
with quick changeover

Efficiency Asset Utilization

Dell Supply Chain Framework

Operating Model
• Direct sales to customers via web/phone
• Build-to-order manufacturing
• Box-level service

SC performance objectives: Customer Response

1. Lowest fulfillment costs
2. Lowest inventories
3. Lowest procurement costs

Corporate strategy
• Highest value-to-price
Tailored Practices
provider of commodity
• Consigned inventory
computers and accessories to
supplier hubs
price conscious customers
• Demand shaping
• Inbound transportation
collaboration

Efficiency Asset Utilization

Principles Illustration: Dell’s Tailored Practices

Inbound Consigned Demand

Practices Transportation Supplier Shaping
Collaboration Inv Hubs

Operating
Economies of Sphere of Supply Demand-
Principles Scale Influence Contracts Supply
Matching

Practices and principles support a competitive supply chain strategy focused on

low-costs, low inventories, and minimum cash-to-cash cycle
IBM Supply Chain Framework

Operating Model
Direct, single face to customer via
sales reps
Build-to-order manufacturing
Extensive pre- and post sales support

Customer Response
Corporate strategy
SC performance objectives: • Diversified and value-added
1. Highest customer satisfaction provider of networked
2. Lowest inventories technology solutions to
3. Lowest costs businesses

Tailored Practices
• Consolidated customer
fulfillment process
• Launch ‘buffer’
manufacturing
• Centralized
procurement
• Consolidated and
outsourced logistics Efficiency Asset Utilization

Supports a competitive supply chain strategy for high-end networked computer

customers over their lifetime of use
Wal-Mart Supply Chain Framework

Operating Model
• Lowest cost brick and mortar retailer with
supplier to retailer DC to store flows
• Large-format stores carrying a wide variety of
products (not necessarily brands and SKUs)
Customer Response

SC performance objectives:
1. Efficiency (e.g., supply chain
costs) Corporate strategy
2. Asset utilization • Everyday low pricing for
3. Customer response cost-conscious customers

Tailored Practices
• Vendor collaboration with co-
managed inventory programs
• Flow logistics distribution
including extensive cross-
docking, DSD and Efficiency Asset Utilization
differentiated flow
• Network design incorporating
large-sized distribution centers
and short-haul private fleets for
economies of scale

Supports a competitive supply chain strategy for price-conscious customer base

Agenda

• SC2020 Excellence Supply Chain Research

• Excellent Supply Chain Framework

• Illustrations and Case Studies

• Strategy Alignment Process and Takeaways

Strategy Alignment Process

Go-To Market
Strategy

Step 1
Supply Chain
• Discuss how supply chain strategy supports business strategy
Strategy • Identify supply chain competitive strategy elements

Operating
Step 2
Model • Develop operating model that supports SC
competitive strategy elements
Performance • Identify operational performance metrics
that are aligned with strategy
Objectives

Step 3
Tailored • Develop SC practices tailored to the
Practices operating model
• Discuss trade-offs and alignments
Key Takeaways

• Excellence means aligning your supply chain to your

corporate competitive strategy
• Align SC strategy to support, enhance and be an
integral part of corporate strategy
• Set operating model and operational performance
measures based on what you will excel in, and what
you won’t!!
• Implement a few tailored practices that reinforce each
other
 Food for Thought
What should Dell and Wal-Mart move to?

Thank you

Larry Lapide, Ph.D.

Director, Demand Management, MIT-CTL
llapide@mit.edu
Questions?