Value Chain Dynamics:

Business and Supply Chain

Chain
Strategy

in a Fast-Cl
t Clock
kspeed dW
World

ld

Professor Charles Fine

Massach
husetts Instiitute off Tech
T hnollogy

Sloan School of Management

Cambridge,
g , Massachusetts 02142

September 2010
 Supply Chains and Value Chains
2

Supply Chain
Value Chain
gement

Manag Design
S t
System D
Design
i
Order fulfillment Static
Reaction & Anticipation Core competences
-Core competences

-Inventory -Make/Buy

-Quality, cost & service -Relationship Design

-Flexibility Strategic Intent

-Strategic Intent
-Response times Dynamic
-Logistics -Fast Clockspeed

-Distribution -External Forces

-External Forces
-Procurement -Disintegration
-Forecasting -Dependence
-Transpportation -Capability development
-Capability
“The Physics of Flow”
-Disintermediation
“The Biology of Evolution”

 3
The Three Chains of Enterprise Design:
Fulfillment, Development, & Capability Chains
Capability Supply Chain
Developme

Supply Design

Develop
3-D Voice
Concurrent
ent Chain

of the
Engineering Launch Customer

Supply Produce Distribute Sell Customer

Fulfillment Supply Chain

 3-D Concurrent Engineering & 4

the imperative of concurrency

Process
Product
(for production Value Chain
(or Service)
& delivery)
(Partners/S ppliers)
(Partners/Suppliers)

Value Logistics
g
Detailed
D t il d Product/
P d t/ Unit Production
P d ti Chain & Coord
Design System Processes System Architecture System
Architecture
Specs Objectives Sourcing Information
Technology
Modular/ Systems Selection Inventory
M t i l
Materials E i
Equipmentt
Integral People Relationship Integration
Functions
Life Cycles Capacity
Develop
pment
Fulfillment

& Capab. Chains

Supply Chain

Fulfillment Architecture Technology

 5
“Gear Model” to support Roadmapping of

Value Chain Dynamics (VCD)

Corporate
Strategy Regulatory
Dynamics Policy
D
Dynamics
i
Technology Industry
& Innovation Structure
Customer Dynamics Dynamics
Preference
Dynamics

Business
Capital
Gears differ by size/speed Market
Cycle
Dynamics
Each has an engine & clutch Dynamics
MANUFACTURING STRATEGY FORMULATION 6

1. DRAFT MISSION STATEMENT (ADVISED BY BENCHMARKS)

2. SET OPERATING OBJECTIVES
--QUALITY

--COST
--COST

--LEAD TIMES
--FLEXIBILITY
--CUSTOMER SATISFACTION
--INNOVATIVENESS
3. DEVELOP POLICIES & INVESTMENTS
STRUCTURAL INFRASTRUCTURAL
CAPACITY ACQUIS. HUMAN RESOURCES
FACILITIES QUALITY ASSUR.
EQUIPMENT/TECH. PDTN. PLAN/CONT.
VERTICAL INTEG. PRODUCT DEVELOP.
PERF. MEAS/EVAL
CAPITAL ALLOC.
ORG. STRUCTURES.
 7
Major Manufacturing

Decision Categories

Categories
1. FACILITIES 6. INFORMATION TECHNOLOGIES
• size • use and level of investment
• location • parity or differentiation
• focus 7. SUPPLY CHAIN AND MATERIALS
2. CAPACITY • logistics facilities and methods
• amount • inventory policies
• timing • vendor relations
• type • production planning
3. VERTICAL INTEGRATION AND SUPPLIER 8. ORGANIZATION AND INCENTIVES
MANAGEMENT • structure
• direction • reporting levels
• extent • degree of centralization
• interfaces • role of staff
• collaboration • control/reward systems
4. PRODUCTION TECHNOLOGIES AND • costing systems
PROCESSES 9. BUSINESS PROCESSES
• equipment • product generation
• automati
t tion • interfaces
• interconnectedness • responsibilities
• scale • vendor development

• flexibility • order fulfillment

5. WORK FORCE AND MANAGEMENT • service and support

• wage policies • quality management, flexibility, and
• security other cross-cutting capabilities
• skill levels
 8
SAMPLE MANUFACTURING STRATEGY TEXT
MANUFACTURING VISION
MANUFACTURE WORLD-CLASS QUALITY AUTO COMPONENTS
IN THE PRESCRIBED VOLUMES, ON SCHEDULE, AT THE LOWEST
COST
MANUFACTURING MISSION
ACHIEVE WORLD
WORLD-CLASS
-CLASS STATUS (BY THE YEAR 20xx) IN
QUALITY COST, TIME, AND FLEXIBILITY WITH PEOPLE WHO
HAVE A SHARED VISION AND OBJECTIVES THAT ARE BASED ON
A CULTURE
UL URE OF CONTINUOUS
ON INUOUS PROCESS
RO ESS IMPROVEMENT
IM ROVEMEN
PERFORMANCE METRICS
1. QUALITY: PRODUCT& PROCESS
2. COST/PRODUCTIVITY
3. TIME
4. FLEXIBILITY
 9
SAMPLE MANUFACTURING STRATEGY FRAMEWORK (CONTINUED)

PROCESSES PEOPLE
-TECHNOLOGY -SKILLS, TRAINING, HIRING PRACTICES
-CAPABILITY -KNOWLEDGE, EXPERTISE, EMPOWERMENT
-CONTROL
CONTROL -PARTNERSHIP
PARTNERSHIP W/ ACCOUNTABILITY
-FLEXIBILITY -FLEXIBILITY
-STD. OPER. PROCS. -ENVIRONMENT

VALUE CHAIN
INTERNAL EXTERNAL
-PROCUREMENT/SUPPLY -WORLD-CLASS BENCHMARKS
-ENGINEERING -CUSTOMERS & DEALERS
-MARKETING/SALES -SUPPLIERS
-DESIGN
DESIGN OFFICE -GOVERNMENT

GOVERNMENT
-FINANCE -UNIVERSITIES

-LABOR RELATIONS
 10

Value Chain Dynamics as an

Operati
tions Strat
St tegy Lens

Outsourcing Value Chain Value Chain

T
Traps Architectures

Architectures R d
Roadmapping
i
(motivating strategic (refining strategic (implementing strategic
value chain desiggn)) value chain design) value chain design)
g )

Policy
Personal
Integral vs. Technology Dynamics
Corporate
Modular Open vs. Dynamics
(Commercial Closed
Aircraft) (Communications) Business
National
Dynamics
 11
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)

Corporate
Strategy Regulatory
Dynamics Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i D
Dynamics
i
Preference
Dynamics

Business
Capital
Interdependent sectors Market Cycle
represented
d as Dynamics Dynamics
intermeshed gears
 12

The Strategic Impact of Value Chain Design:

(Who lett Int

(Wh I tell Insid
I
ide?)
?)

1980: IBM designs a product, a process, & a value chain

Consumers/ Distribution OEM Subsystem

Users Channel(s) Suppliers

Intel

IBM
Intel Inside

Microsoft
The Outcome:
A phenomenally successful product design
A disastrous value chain design (for IBM)
 13
LESSONS FROM A FRUIT FLY:
THE PERSONAL COMPUTER

1. BEWARE OF INTEL INSIDE.

INSIDE
(Regardless of your industry)

2. TACTICAL MAKE/BUY:
MAKE/BUY:

IT MAY BE A LITTLE BIT CHEAPER OR FASTER

TO OUTSOURCE VERSUS INSOURCE.

3. STRATEGIC SOURCING:
VALUE CHAIN DESIGN CAN DETERMINE
THE FATE OF COMPANIES AND INDUSTRIES,
AND OF PROFIT AND POWER.
4. THE LOCUS OF VALUE CHAIN CONTROL

CAN SHIFT IN UNPREDICTABLE WAYS.

 14
Vertical Industry Structure

with Integral Product/System Architecture

Architecture

Computer Industry Structure, 1975-85

IBM DEC BUNCH

BUNCH

Microprocessors

All Produ

Alll Prod
Alll Prod
Operating Systems

Peripherals

Applications Software

ducts
ducts
ucts

Network Services

Assembled Hardware

(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)

 15
Horizontal Industry Structure

with Modular Product/System Architecture

Architecture

Computer Industry Structure, 1985-95

Microprocessors Intel Mac TI etc

Intel Moto AMD etc

Operating Systems
Microsoft Mac
ac Unix
Peripherals IntelEpson Mac TIetc etcetc
HP Seagate
Applications Software
Microsoft Lotus Novell etc
Network Services
AOL/Netscape Microsoft EDS etc
etc
Assembled Hardware
HP Compaq
C IBM D ll
Dell etc
etc
t
(A. Grove, Intel; and Farrell, Hunter & Saloner, Stanford)

 THE DYNAMICS OF PRODUCT ARCHITECTURE,

16

STANDARDS,AND VALUE CHAIN STRUCTURE:

“THE DOUBLE HELIX”

INTEGRAL PRODUCT MODULAR PRODUCT

NICHE VERTICAL INDUSTRY HORIZONTAL INDUSTRY
COMPETITORS PROPRIETARY STANDARDS OPEN STANDARDS
INNOVATION &
TECHNICAL
ADVANCES

HIGH-
SUPPLIER
DIMENSIONAL
MARKET
COMPLEXITY
POWER

PRESSURE TO INCENTIVE TO
ORGANIZATIONAL DIS-INTEGRATE INTEGRATE
RIGIDITIES PROPRIETARY
SYSTEM
PROFITABILITY

E
Examples:
l IBM,
IBM AAutos,
t E
Embraer/Boeing,
b /B i Nokia,
N ki Small
S ll Firms
Fi
Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
 17
What Drives Clockspeeds?
technology
gy/innovation push,, customer pull,,

system complexity, and regulation

Consumer
Handset or PC
Applications
Handset or PC
Platforms
Communications
Equipment
and Networks
Semiconductor
Components Semiconductor
Manufacturing
Equipment
 ALL COMPETITIVE ADVANTAGE

18

IS TEMPORARY

Autos:
Ford in 1920, GM in 1955, Toyota in 2000
Computing:
IBM in 1970, Wintel in 1990, Apple in 2010
World Dominion:
Greece in 500 BC, Rome in 100AD, G.B. in 1800
Sports:
Red Sox in 2007, Celtics in 2008, Yankees in 2009
The faster the clocksp
peed,, the shorter the reig
gn

 19

Value Chain Evolution in a Fast-Clockspeed World:

Study the Industry Fruitflies

Evolution in

in Evolution in

in
the natural world:
the industrial world:

FRUITFLIES INFOTAINMENT is faster than

evolve faster than MICROCHIPS is faster than
MAMMALS AUTOS evolve faster than
evolve faster than AIRCRAFT evolve faster than
REPTILES MINERAL EXTRACTION
THE KEY TOOL: THE KEY TOOL:
Cross-SPECIES
Cross-INDUSTRY

Benchmarking
Benchmarking
Benchmarking

g
of Dynamic Forces of Dynamic Forces
 20
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)
Corporate
Strategy
Dynamics Regulatory
Policy
y
Technology Dynamics Industry
Customer
Preference & Innovation Structure
D
Dynamics
i D
Dynamics
i
Dynamics

Business
Capital
Interdependent sectors Market Cycle
represented
d as Dynamics Dynamics
intermeshed gears
 Innovation along the Value Chain:

21

How (& why) do Autos & Electronics Differ?

Sales/Marketing Core
Production
/Distribution Technology
Consumers//
C Subsystem
S b t Suppliers
Product
Users Concept Suppliers

Minivan, Lean Hybrid Aluminum

AUTOS Add-ons Internet Production Eng
gine,, Bonding,
g,
SUV,
SUV
Crossover Active Carbon Fiber,
Suspension CAD tools
iPod, X-Box,
Palm,
C
Contract H l
Html Microprocessor,
Office,
ELEC- Napster, Amazon, Digital Photog.Manufacturing C++ Hard disk drive,
TRONICS Apple I Dell Photolithography
Mobile Phone
 Innovation Dynamics can be

RADICAL (disruptive) or INCREMENTAL (sustaining)

Maturity
nce

How to measure
orman

performance?
How to know
Takeoff where yyou are
Perfo

Disr ption
Disruption on the “S”?
Where in the
value chain?
Ferment Worse before
better?

Time

 Disruptive Process Innovation in Autos vs.

Disruptive Product Innovation in Electronics

Lean Production
orman
ce
Perfo

Mass Production
Process Innovators
--Ford
--Dell
Dell
Craft Production --Wal-mart
--Southwest Air
--Toyota
Toyota

Time

 THE CASE OF APPLE iPod/iPhone

24
Creative
Artists Applications
pp Networks Content
Closed to non- Closed to all Closed to
Apple apps; but one non-MP3,
Content then explosive carrier per non-Apple
P bli h
Publishers A St
App Store region; slowly f
formats
Growth opening

Content iTunes
homepage App
Marketing
Stores
Content
iTunes
Sales iTunes Retail
Content Stores
Listening Distrib.
accessories
Content & HW iPod/
C
Open, then
license Consumption iPhone
 25

What makes an innovation disruptive?

Performance Push
an overwhelmingly superior technology/process
(penicillin, mass production)
Customer Pull
new customers care about different measures of
performance
(
(wireless phones, personal computers))
Org
ganizational Comp
petencies
incumbents cannot do what the innovators can
(Dell supply chain, Southwest Air)
 26
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)

Corporate
Strategy Regulatory
Dynamics Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i D
Dynamics
i
Preference
Dynamics

Business
Capital
Interdependent sectors Market Cycle
represented
d as Dynamics Dynamics
intermeshed gears
 27
CUSTOMER PREFERENCE DYNAMICS:
P&G Value Propposition:

Premium Products at Premium Prices

Controlling the Channel Through Closeness to Customers:

consumer research, pricing, promotion, product development

Customers
Retailer

P&G
Retailer

R t il
Retailer

Wh t is the
What th rolle off brand
b d names vs. product
d t features?
t ?

Laundry Detergent; Mobile Phones; Motorcycles

 28
CUSTOMER PREFERENCE DYNAMICS:
Walmart Value Proposition:
p
Large Selection of Products at Very Low Prices
Controlling the Channel Through Closeness to Customers: Chain Proximity

Consumers WalMart
Retailer

Retailer
P&G
Retailer

Private Labels

Walmart Brands

Vertical Growth on the Double Helix

 29

Brand vs. Brand vs. Channel vs Channel:

Competing on fast-clockspeed
fast clockspeed retail

Consumers

WalMart
Sony

Best Buy
Samsung
 30
“Gear Model” to support Roadmapping of
Value Chain Dynamics (VCD)

Corporate
Strategy Regulatory
Dynamics Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i D
Dynamics
i
Preference
Dynamics

Business
Capital
Interdependent sectors Market Cycle
represented
d as Dynamics Dynamics
intermeshed gears
 31

Cisco’s End-to-End Integration

f its Fulfillment
for f Supply Chain
C
Early
E l investment
i t t in
i
Customers logistics supplier
partnerships for speed
and accuracy of
Cisco
product flow

Contract
Early investment in Manufacturers
Internet based
communication for Componentt
C
speed and accuracy of Suppliers &
Distributors
order information
 32
Cisco’s Strategy for

Technology Supply Chain Design

(I.e., Capabilities)

1.Integrate
1 I t t echnol
h logy aroundd the
th router
t to

t
t
be a communications network provider.

2 Leverage acquired technology with

2.
- sales muscle and reach
- end
end-to-end
to end IT
- outsourced manufacturing
- market growth
3. Leverage venture capital to supply R&D
Basic Design Principle: Acquisition

Relationship with Technology Chain

Partners

 33
Volatility Amplification in the Supply Chain:
“The Buullwhip
p Effect”
Eff

Customer Retailer Distributor Factory Tier 1 Supplier Equipment

Information lags
Deliveryy lags
g SOLUTIONS:
Over- and underordering Countercyclical Markets
Countercyclical Technologies
Misperceptions of feedback
Collaborative channel mgmt.
Lumpiness in ordering (Cincinnati Milacron & Boeing)
Chain accumulations
 34
Supply Chain Volatility Amplification:
Machine Tools at the tip
p of the Bullwhip
p
% Chg. GDP % Chg. Vehicle Production Index % Chg. Net New Orders Machine Tool Industry

“We are experiencing a 100-year flood.” J. Chambers, 4/16/01

80

60
ar
hange, Year to Yea

40

20
% Ch

0
1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991

-20

-40

-60
60

"Upstream Volatility in the Supply Chain: The Machine Tool Industry as a Case Study,"
-80 E. Anderson, C. Fine & G. Parker Production and Operations Management,
Vol. 9, No. 3, Fall 2000, pp. 239-261.
 35
Volatility in the Electronics &

Semiconductors Supply Chain

100.00

80.00

60.00
% Change, Year-to--Year

40 00
40.00

20.00

0.00

1961 1965 1969

1973 1977 1981 1985 1989 1993 1997 2001
-20.00
Year

-40.00

-60.00 Worldwide Semiconductor Manufacturing Equipment Sales

Worldwide Semiconductor Shipments
Electronics, Computing and Communications Equipment Output
GDP World GDP USA
 36
LESSONS FROM A FRUIT FLY:
CISCO SYSTEMS
1. KNOW YOUR LOCATION IN THE VALUE CHAIN
1
2. UNDERSTAND THE DYNAMICS
OF VALUE CHAIN FLUCTUATIONS
3. THINK CAREFULLY ABOUT THE ROLE
OF VERTICAL COLLABORATIVE RELATIONSHIPS
4 INFORMATION AND LOGISTICS SPEED DO NOT
4.
REPEAL BUSINESS CYCLES OR THE BULLWHIP.

Bonus Question:
How does clockspeed impact volatility?
 INDUSTRY CLOCKSPEED IS A COMPOSITE: 37

OF PRODUCT, PROCESS, AND ORGANIZATIONAL

CLOCKSPEEDS

Mobile Phone INDUSTRY CLOCKSPEED

THE THE
Mobile Phone Mobile Phone
product technology
THE MANUFACTURING
Mobile Phone COMPANY
organiizatiion
PRODUCTION
PROCESS
process technology
t h l
 38
Mobile Phone System CLOCKSPEED is a mix of

Transmission Standards,
Standards Software and Handsets

Mobile Phone System

TRANSMISSION
SOFTWARE
STANDARD
slow clockspeed APPLICATIONS HAND SET
medium clockspeed fast clockspeed
OPERATING SERVICES
SERVICES

SYSTEM fast clockspeed

slow clockspeed

ISSUE: THE FIRMS THAT ARE FORCED

TO RUN AT THE FASTEST CLOCKSPEED
ARE THE MOST LIKELY TO STAY AHEAD
OF THE GAME.
 39
Automobile CLOCKSPEED IS A MIX OF

ENGINE BODY & ELECTRONICS

ENGINE, ELECTRONICS

Automobile

ENGINE BODY ELECTRONICS

slow clocksp
peed medium clockspeed fast clockspeed

ISSUE: MOST AUTO FIRMS OPERATE AT

ENGINE OR BODY CLOCKSPEEDS; IN THE
FUTURE THEY WILL NEED TO RUN
AT ELECTRONICS CLOCKSPEED.
 40
“Gear Model” to support Roadmapping of

Value Chain Dynamics (VCD)

Corporate
Strategy Regulatory
Dynamics Policy
D
Dynamics
i
Technology Industry
& Innovation Structure
Customer Dynamics Dynamics
Preference
Dynamics

Business
Capital
Cycle
Interdependent sectors Market
Dynamics
y
represented
d as D namics
Dynamics
intermeshed gears
 41
Projects, Strategy, and Value Chains
Clocksp
peed drives

Business Strategy Cadence

CAPABILITIES enable & constrain PROJECTS;

PROJECTS build CAPABILITIES

PROJECT
CORE DESIGN
CAPABILITIES (New projects,
new processes,
new suppliers)

Leonard-Barton, Wellsprings of Knowledge

 Projects Serve Three Masters:

42

apab l t es, Customers,

Capabilities, ustomers, & Corporate
orporate Profit

rof t

CORE PROJECT
CAPABILITIES DESIGN
(New products,
new processes,
new suppliers)
 43
VALUE CHAIN DESIGN:
Three Components
1. Insourcing/OutSourcin
Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)

2. Partner Selection
(Choice of suppliers and partners for the chain)

3. The Contractual Relationship

(Arm’s
(Arm s length
length, joint venture,
venture long-term
long-term contract
contract,
strategic alliance, equity participation, etc.)
 3-D Concurrent Engineering & 44

the imperative of concurrency

Process

Product (for production Value Chain

(or Service) & delivery) (Partners/Suppliers)

(Partners/S ppliers)

Unit Production Value Logistics

Detailed
D t il d Product/
P d t/
Chain
System Processes System & Coord
Design Architecture System
Architecture Objectives
Specs Technology Sourcing Information
Modular/ y
Systems Selection
M t i l
Materials E i
Equipmentt I
Inventory
t
Integral People Relationship
Functions Integration
Life Cycles Capacity
Development Fulfillment
& Capab. Chains Supply
S l Chain
Ch i

Fulfillment Architecture Technology

 45

IMPLEMENTATION OF PROJECT DESIGN:

FRAME IT AS 3-D
3 D CONCURRENT ENGINEERING
ENGINEERING

PROJECT
DESIGN
Product
Process Value Chain
(Deliverable (Project Plan) (Partners/Suppliers)

Product Unit Value Logistics

Detailed /
Production Chain & Coord
Design Proces System Architec-
System System
ses ture
Architec Objectives
CORE Specs ture
Materials Modular Techn
T h
Systems
y
People
Sourcing
Selection
Information
Inventory
CAPABILITIES Functions /Integral ology Capacity Relation- Integration
Equip ship
Life ment
Cycles
Development
Chain Fulfillment
Supply
S l Chain
Ch i
 46

Do you have to think strategically

about every project?

project?

CORE PROJECT
CAPABILITIES DESIGN
(New products,
new processes,
new suppliers)
 47
ARCHITECTURES IN 3-D

INTEGRALITY VS. MODULARITY

IIntegral
t l product
d t architect
hit tures feature
t
close coupling among the elements
- Elements perform many functions
- Elements
El t are iin close
l spacial
i l proximity

i it
- Elements are tightly synchronized

- Ex: jet enggine,, air plane wing,g, microp

processor
Modular product architectures feature
separation among the elements
- Elements are interchangeable
- Elements are individually upgradeable
- Element interfaces are standardized
- System failures can be localized
- Ex: stereo system, desktop PC, bicycle
 48
VALUE CHAIN ARCHITECTURE

Integral value-chain architecture

features close proximity among its elements
- Proximityy metrics: Geograp
phic,, Orgganizational

Cultural, Electronic

- Example: Toyota city

- Example: Ma Bell (AT&T in New Jersey)

Jersey)
- Example: IBM mainframes & Hudson River Valley
Modular value-chain architecture features multiple,
i
interchangeable
h bl supplier
li and d standard
d d iinterfaces
f
- Example: Garment industry
- Examp ple: PC industry y
- Example: General Motors’ global sourcing
- Example: Telephones and telephone service
 49
ALIGN ARCHITECTURES

ACROSS SYSTEMS AND VALUE CHAINS

SUPPLY CHAIN / VALUE CHAIN ARCHITECTURE

(Geographic, Organizational, Cultural, Electronic proximity)
INTEGRAL MODULAR
ODUCT / SYSTEM ARCHIT ECTURE

Microprocessors
M
Mercedes
d Lucent P la id
Polaroid
& BMW vehicles Nortel

Chrysler (90’s)
Nokia Cisco

Digital Rights/
Dell PC
PC’s
s
PRO

M i Di
Music Distribution
t ib ti
Bicycles
 50
TPS Dynamics between

Continuous Improvement &

Respect for People (Stakeholders)

Motivated People
Drive faster Improvement

Respectt
R
Continuous
For
Improvement
People

Profits
P fit gett shared
h d
to reward and incentivize alignment

 51
The Evolution of Business Ecosystems
Operations (or “quantity”) Loop Ted Piepenbrock, MIT
Firm
Output
Modular Integral
Enterprises Enterprises 15
Product
markets
Short-term Speed
Customer
markets
& Flexibility
Enterprise
which 10
Capital Labor Capital Labor
Competitive
drive…
Firm Firm
markets markets markets markets

Supplier
Dynamics 5
markets Long-term Speed
Supplier
markets & Stability

Maximization of Maximization of
Shareholder Value Stakeholder Surplus 1950 1960 1970 1980 1990

which generates…
Enterprise
Firm
Architectural
Long-Term
Long--T
Term
erm
Forms
Performance

create…

dular 1
Industry Growing Markets

ar 2
Output (Economies of Scale)

Modular 3Modular 3
Modular 2 Modula
Mod
Modular 1
Integral Enterprise
Stable Markets
(Economies of Scope) Industrial
which
Dynamic
shapes…
shapes

M
Growing Markets Evolution
(Economies of Scale)

1900 1925 1950 1975 2000 Market Capitalization

 Dell Supply Chain
52

Global \ Demand/
Demand
Regional Supply
Management
Procurement Management
Continuity of Supply
Sales

Build to customer
ssspecifications
ssss
pecifications
Supplier
SLC Dell Customer
I I

Supplier

Materials ordering cycle Customer fulfillment

10-180+ days 2-5 days

Modular Product Architecture enables Modular Supply Chain

 HP/Flextronics vs. Dell Supply Chain 53

Supplier
Flex Flex Retailer Customer
I

Supplier

Retailer Customer
Materials ordering cycle Retailer fulfillment
f f inventory f lfill
fulfillment
t
10-180+ days 2-5 days 30+ days 30 min

Supplier
I SLC I
Dell Customer
Supplier

Materials ordering cycle Customer fulfillment

10-180+ days 2-5 days
Modular Product Architecture enables Modular Supply Chain

 54

Demand-Supply Chain Management

@ Dell

ƒ Demand
D dMManagementt:
ƒ Forecast = Buy = Sell
ƒ Buy to Plan, but Build to Order
• Inventory Velocity is a wonderful thing …
• Customers have immediate access to the latest
technology
gy.
• Suppliers get their products to market quickly

• Quality is improved with fewer touches.

• Cash is generated through negative cash cycle.

• Model efficiencies drive Market Share gain.

 55
Can “Dell Direct” Work for Autos?

• Appealing to OEM
OEM’s
s on Many
Dimensions
– Satisfy
y customer need for Speed
– Reduce Supply Line Inventories
– Reduce mismatches and discountingg

– Direct OEM-Customer Relationships (&

Data!)
– Information Transparency

Adapted from Prof. J.P. MacDuffie, IMVP & The Wharton School

 56

BUT,

A Car is not a Computer!!

• P
Personall • Car
C
Computer • ~ 4000 components
• ~50 components
p • 100 key y subsystems
y
• 8-10 key parts • 300 key suppliers
• 40 key suppliers • 12 month validation
• 24 hour burn-in • 1,000,000
, ,
• 100 design • variations
• variations • Integral
• Modular • Architecture
• A hi
Architecture

Adapted from Prof. J.P. MacDuffie, IMVP & The Wharton School

 In/Outsourcing: Sowing the Seeds

57

of Competence Development to develop

dependence for knowledge or dependence for capacity

capacity

Dependence Independence

Amount of Amount of
Work Work

+ Outsourced
knowledge + + Done In-house
knowledge +
+/or supply +/or supply
Supplier Internal
Capability Amount of Capability Amount of
A
Supplier Internal
Learning Learning

+ +
 Technology Dynamics in the Aircraft

58

Industry:

LEARNING FROM THE DINOSAURS

Japanese
p
+ appeal as
subcontractors U.S. firms’
appeal as
subcontractors
Japanese + +
Boeing outsources
Industry
Autonomy to Japan
(Mitsubishi Inside?)
+
Japanese U.S.
industry industry
size & size &
+
capability
- capability
 SOURCEABLE ELEMENTS
59

PROCESS ELEMENTS

ENGINEERING

ASSY

TEST
CONTROLLER
I4 V8
PRODUCTS
VALVETRAIN
V6

BLOCK

SUBSYSTEMS
 60

Strategic Make/Buy Decisions:

Assess Critical Knowledge & Product Architecture

INDEPENDENT FOR
DEPENDENT FOR
KNOWLEDGE & INDEPENDENT FOR
KNOWLEDGE
DEPENDENT FOR KNOWLEDGE & CAPACITY
& CAPACITY
CAPACITY
ODULAR

A BEST OVERKILL
POTENTIAL OUTSOURCING IN
TEM IS MO

OUTSOURCING OPPORTUNITY VERTICAL

TRAP INTEGRATION
TEGRAL IT

WORST CAN BEST

OUTSOURCING LIVE INSOURCING
ITEM IS INT

SITUATION WITH SITUATION

OUTSOURCING

Adapted from Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”
 Strategic Make/Buy Decisions:
61
Also consider Clockspeed & Supply Base Capability

DEPENDENT FOR DEPENDENT FOR INDEPENDENT FOR

KNOWLEDGE & CAPACITY CAPACITY ONLY KNOWLEDGE & CAPACITY
OSABLE

Clockspeed Clockspeed Clockspeed

(Modular)

Fast Slow Fast Slow Fast Slow

DECOMPO

ew Many
y

ew Many
y

ew Many
uppliers

uppliers

uppliers
OK
Watch
Su

Su

Su
Fe

it! Fe

Fe
Clockspeed Clockspeed Clockspeed
RAL

Fast Slow Fast Slow

INTEGR

Fast Slow
Slo
ew Many
y

w Many

w Many
uppliers

uppliers

Suppliers
Few

Few
Su
Fe

Su

Adapted from C. Fine, Clockspeed, Chap. 9

 62
Qualitative analysis of strategic

importance uses five key criteria

criteria

‹Value chain elements with high customer

Customer importance and fast clockspeed are generally
Importance: strategic (unless there are many capable
• High
• Medium suppliers)
• Low ‹ Competitive position is seldom the
Technology primary consideration for strategic
Clockspeed: importance, rather it serves as a
• Fast
• Medium “tie-breaker” when other criteria are
• Slow
Competitive in conflict
Position:
‹ When many capable • Advantage
• Parity
suppliers exist, knowledge • Disadvantage
may be considered
commodity and Capable Suppliers:
development should be • None
N Possible Decisions
• Few (Knowledge & Supply):
outsourced • Many
• Insource
‹ Architecture is considered a • Outsource
constraint for the sourcing decision Architecture: • Partner/Acquire
• Integral • Partial Insource
d l controls
model, t l the
th level
l l off • Modular
• Partial Outsource
engineering that must be kept in • Invest
house for integration purposes • Spin Off
• Develop Suppliers
Model developed by GMdifferently
Criteria are applied Powertrain, PRTM, &than
for Products Clockspeed, Inc.
for Subsystems
 63
Every decision requires qualitative and

quantitative analy
q ysis to reach a conclusion

Knowledg
ge

Supply

High
Improve Invest &

Qualitattive
Economics Build

Value
Strategic
Qualitative Model Importance
Customer
Importance:
Divest/ Harvest
¥ High
¥ Medium
¥ Low Outsource Investment
Technology

Low
w
Cl ockspeed:
Clocks peed:
¥Fa st
¥M edium
¥Sl ow
Competitive
Co m petiti ve
Posi ti on:
Position:

Low High
¥A dvantage
dvantage
¥Pa rity
rity

Quantitative

¥Di sadvantage
sadvantage

Value

Capable Suppl i ers:

¥N one
¥Fe w
¥Ma ny Possible Decisions:
¥In source
¥Ou tsource
Architecture: ¥P artner/Acquire
¥In tegral ¥P artial Insource
¥ Modular ¥P artial Outsource
¥I nvest
¥S pin Off
¥D
¥Develop
l Suppliers

li
Engine A

EVA PBIT
Revenue

Engines
EVA
−.
EVA

AS-IS

AS-IS

BIC

NOPAT
BIC

AS-IS
BMK COGS
AS-IS
BIC

AS-IS
BIC

Engine B

EVA

GMPT
AS-IS

Taxes
BIC

EVA

.
.
. Capital
Charge Net Assets
AS-IS
BMK
Working
W ki
Capital
Quantitative Model

+.

Transmissions −. X WACC

(Financial)
AS-IS

AS-IS

EVA
BIC

BMK

AS-IS Fixed
BMK
Assets
AS-IS
BIC

Model developed by GM Powertrain, PRTM, & Clockspeed, Inc.

 64

Value Chain Mapping

pp g

Org
ganizational Supply
pp y Chain

casting clay
Chrysler Eaton supplier supplier

Technology Supply Chain

casting clay
engines
g valve lifters manufacturing
g chemistry
process

Capability Chain

Supply Chain Quality assurance NVH engineering R&D

Management

Underl
U d lyiing Assumpti
tion: You have to draw

the maps before you can assess their dynamics.

 65

VALUE CHAIN DESIGN IS

THE ULTIMATE CORE COMPETENCY

COMPETENCY
Since all advantages are temporary,

the only lasting competency is to continuously build and

assemble capabilities chains.

KEY SUB-COMPETENCIES:
SUB COMPETENCIES
1. Forecasting the dynamic evolution of market
power and market opportunities
2. Anticipating Windows of Opportunity
3. 3-D
D Concurrent
C tEEngiineering:
i
Product, Process, Value Chain CAPABILITIES PROJECTS

Fortune Favors the Prepared Firm

 66
PROCESS FOR

VALUE CHAIN DESIGN

DESIGN

1. Benchmark the Fruit Flies DOUBLE HELIX

2. Map your Value Chain
-Organizational
Organizational Value Chain
Chain

-Technology Value Chain

BOEING

-Competence Chain

3. Dynamic Chain Analysis

at each node of each chain map
4. Identify
y Windows of Opportunity
pp y
5. Exploit Competency Development Dynamics
with 3-D Concurrent Engineering
CAPABILITIES PROJECTS
 67
In-depth Exercise 2:

Value Chain Analysis

Analysis
Consider these five industries or an industry of your choice:
-Food
-Defense aircraft
-Automobiles
Automobiles
-Handheld electronic organizers/communicators
-Music

At each table, pick ONE industry:

What are the key dependency relationships in the value chain?
Whatt are the
Wh th opporttunities
iti
for outtsourciing?
?
What are the windows of opportunity in the chain?

 68

“Takeaway
ys” from the day
y

1.Value Chains are dynamic

-industry
i d t structure
t t d i
dynamics

-technology & innovation dynamics

-customer
t andd channel
h l dynamics
d i

2.Innovation happens along the value chain

and
d in
i th
the value
l chain
h i model
d l itself.
it lf
3.All advantage is Temporary
4 Strategic
4. St t i S Sourcing
i isi a k key lleverage
point for supply chain design.
5 S
5.Supplyl Chain
Ch i organizations
i ti h
have multiple
lti l
strategic roles to play.
 69

All Conclusions are Tempporaryy

Clockspeeds are increasing almost everywhere

Value Chains are changing rapidly

Assessment of

value chain dynamics

dynamics

Roadmap

Construction

70
 71
“Gear Model” to support Roadmapping of

Value Chain Dynamics (VCD)

Corporate
Strategy Regulatory
Dynamics Policy
D
Dynamics
i
Technology Industry
& Innovation Structure
Customer Dynamics Dynamics
Preference
Dynamics

Business
Capital
Cycle
Interdependent sectors Market
Dynamics
y
represented
d as D namics
Dynamics
intermeshed gears
A long, long time a go in an
72

industry far away . . .

 Freight Railroads vs. Trucks
73

The Dynamics of Industry

Economics

and the Optimal Timing of

Deregulation

Deregulation
Share of Revenue

Railroads

“In the Zone”

Too early Too late

Trucks

1880 1910 1950 1980 2000

Regulation Shocks happen; Regulation If deregulation is

reins in Environment constrains SLOW LATE

SLOW, LATE, &
&

“monopoly” changes; response; PIECEMEAL; then

Substitutes deregulation Economic Dislocation;
mayarise timing is critical Incumbent
Collapse
 74
Histories: Dynamics of Regulation
Regulation Shocks Deregulation Mistakes
Environment
E i t Regulation harm
Reins in Happen Changes; Constrains timing is
“Monopoly” incumbents,
Substitutes response Critical consumers &
arise taxpayers

RailRoads Rockefellar Autos & Trucking Prices, 1958 Weak rail

& Morgan Highways arises Exit, vs. capabilities;
”Robber Innovation 1980 Trucking
Barons” dominant

Natural ”Natural” Oil Gas Low prices Long lag Shortages;

inhibit for new price swings;
Gas Monopoly Embargo; Demand LT consumer
Fall of Explodes new sources
costs of take or
I
Iran supply (1978 v 1989) pay contracts
t t

Money Deposits 1978

Banking Bank size Inflation S&L’s died;
in the Market Shrink; vs. $160B+
limited to
Funds Riskier 1989
limit power 1970’s Bailout
i
investments
t t

Internet & Wireless TELRIC Wireless, Wireless

Telecom AT&T
”natural” Moore’s Broadband pricing; BB, & VOIP success;
Law VOIP entry & exit; less ireline TBD
wireline
monopolyl
access fees constrained
than ILECs
 Conceptual Model: The Dynamics of

75

Regulation and Deregulation Processes

Environment
Shocks changes;
Perception Regulation Happen
Reins in Substitutes
off Monopoly
M l may arise
“Monopoly”
Regulation
constrains
incumbent
Deregulation is
Deregulation is response
SLOW, LATE, &
TOO EARLY and PIECEMEAL;
not well thought out; Railroads(1958 80)
Railroads(1958-80),
Electricity (Calif), Deregulation is Gas (1973-93),
CATV (1984) RAPID, TIMELY, & Banking (1978-99)
COMPREHENSIVE;
Airlines(1978),
Airlines(1978)
Wireless (1993) Economic
Costly mistakes; Dislocation;
re-regulation; Incumbent
Try,
y try,
y again.
g Collapse
Robust competition;
Large jump in Full, but Late,
consumer welfare Deregulation
 76

Collapse of the railroads

• number of Class I railroads dropped from 230 Æ 7 between 1907
1999
• railroad mileage declined from 254
• 254,000
000 Æ 99,000
99 000 between 1916
1999
• by the 1970s, every major Northeast railroad filed for bankruptcy
• By the 1970s,
1970s 21% of track
track-miles
miles were operated by bankrupt

railroads

• deferred maintenance and delayed capital expenditures

amounted to billions of dollars

• rate of accidents due to track or structure defects quadrupled

from 1966 to 1976

• BY 1976, 15% of track (50,000 miles) was operated at reduced

speeds (as slow as 10 miles per hour)
• standing derailments (when a train falls over when not moving)

became prevalent

• terminal facilities deteriorated

 77

Deregulation improved performance

• Inflation-adjusted rail
Class I Railroad Performance: 1964-2001 (1981 = 100)
rates have plunged 60%
from 1981-2001 300

• By 1999, railroads were 250

generating 58% more ton
miles than in 1979 Productivity
200

• In the 1990s, railroads Volume

stopped the erosion of 150

market share.
share From 1996
Staggers Act passed October 1980
through 1998, the
100
railroad’s market share
actually exceeded 40%
50
Revenue Price

0
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

Image by MIT OpenCourseWare.

 78
“Gear Model” to support Roadmapping of

Value Chain Dy
ynamics (VCD))

Corporate
Strategy Regulatory
Dynamics Policy
y
Technology Dynamics Industry
Structure
Customer & Innovation
D
Dynamics
i D
Dynamics
i
Preference
Dynamics

Business
Capital
Gears differ by size/speed Market Cycle
Each has an engine & clutch Dynamics Dynamics
 Gear Teeth Dynamics 79
Business Industry/ Regulatory Technology Consumer Corporate
cycles Organization Policy Preferences Strategy Clockspeed
Structure

Business
Cycles

Industry/
Organization
Structure

Regulatory
Policy

Technology

Consumer
Preferences

Corporate
Strategy

Clockspeed
 Gear Teeth Dynamics 80
Business Industry/ Regulatory Technology Consumer Corporate
cycles Organization Policy Preferences Strategy Clockspeed
Structure
Downturns downturns Downturn
Business stifle
trigger triggers
Cycles dis- R&D outsourcing;
integration investment Search for
smoothness
Industry/ Integration Integration/ Wrap
integrality
Organizationbuffers Disintegration services
slows
downturns
Structure around clockspeed
commodities
regulation
Regulatory slows deregulation
Policy incumbent speeds
innovation innovation
innovation innovation technology
gy
Technology Attacks Integration/ innovation
can innov drives
Disintegration slowdowns
incumbentsobsolete clockspeed
& supports regulations drive brand
integration investment
branding
Consumer
C slows
Preferences disintegration
branding project
Corporate slows frequency
Strategy disintegration drives Capab.
life
faster customer Capability
innovation power drives life drives
Clockspeed moderates clockspeed project
downturns frequency
 Mother Nature strikes

81

The Cell Phone Supply Chain

Chain

8:00 pm, Friday 17 March 2000: Lightning Strikes an ASIC

semiconductor plant of Philips in Albuquerque, New Mexico, USA
8:10 pm: Fire is exting
guished. Plant will be down for months.

Ericsson Cell Phones

Nokia Cell Phones

Image by MIT OpenCourseWare

Philips Image by MIT OpenCourseWare

Chip Factory

LESSON: RESPONSE SPEED

 Mother Nature strikes

82

The Cell Phone Supply Chain

Chain

NOKIA ERICSSON
Shipment discrepancies Problem undiscovered for
noticed within 3 days. weeks.
Philips is pushed hard.
hard Slow chain of command.
New supply sources. Slow response.

New chip design. Capacity already taken.

taken.
Global capacity grab. $400M revenue loss.
Exits phone manufacture.
Ericsson Cell Phones

Nokia Cell Phones

Image by MIT OpenCourseWare.

Philips

Chip Factory

Image by MIT OpenCourseWare.

LESSON: RESPONSE SPEED

 83

RFID tags push

the boundaries of the Edge
(Research Assistant: Natalie Klym)

1. DoD wartime needs will prime the pump

for RFID technology and applications.
2. Walmart will add to this effect: box & pallet.

3. Pharmacies will do the same for item tagging.

RFID tag
g Mobile phone chip
5¢ Microprocessor
$20 $800

10B/yr 1B/yr 40M/yr

What disruptions will be driven by

the explosion of the edge?

 84

VALUE CHAIN MAPPING

Exercise
Exercise

For each business: Energy

gy
Automotive
Key elements in the chain?
Who has power in the chain? Consumer Products
Who makes the profits Telecoms
in the chain?
Sources of power & profits Financial Services
(technology, brand, etc.)? Construction
Key dynamic processes
influencing chain power? Health Care
Locus of innovations? Food
Clockspeed Drivers?
Chemicals
 85
Moore’s Law

Transistors
a s sto s pe
er c
chip
p
109

108

8
?
Pentium 80786
107
Pro
o
80486
106
Pentium
80386
80286
105

8086

104 8080
4004
103
1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
Source: Joel Birnbaum, HP, Lecture at APS Centennial, Atlanta, 1999
 86

Roadmap for Electronic Devices

N b off chip
Number hi components
t
1018 295oK
Classical Age Quantum Age
1016

1014 77oK

4oK
1012 2010
SIA Roadmap 2005 Quantum State Switch
1010 2000
1995
108 Historical Trend
1990 CMOS
10 6
1980
104
1970
102
101 100 10-11 10-22 10-33
Feature size (microns)
Horst D. Simon
 Semiconductor
An Industry 87
+ Value Chain
Equipment
Industry
Industry
R&D & CapEx
R&D
+
Electronics
El t i
Industry R&D
Model
- - +
Semiconductor

+
Equipment
Industry Profits - Industry Electronics

+
Profits
+ - Industry Profits
+
+
+ +
Electronics
Prices
+
+
Equipment

Prices
Electronics
Industry
+ Innovation

-
Equipment + Semiconductor
Semiconductor + Electronics
Industry
Industry Industry
Volumes
+

+ +
Volumes Volumes
-
+ Equipment

Productivity World

W
GDP
ld
+
Applications
Capital
Demand
& Labor
(e.g., Toys,
Automotive) - Productivity
- Transistor +
Prices
W f F
Wafer Fab
b
+ Productivity
- Transistor (Trans/month/$)

© C. Fine, MIT Costs

-
 88
The Outsourcing Trap: A Novel of Four Families
• Navy Pilot: Crash, Investigation, SC education, “Columbo”
– Visits, Toyota, Dell, Zara & aircraft supply chain
• Pilot’s sister: MIT grad; laid off; discovers entrepreneurship
• Pilot’s wife: Policy analyst for Senator;
• Pilot’s son: outsources homework;; outsource capacity,
p y, not knowledge
g
• Pilot’s daughter: business student; Zara shopper

• Chinese Entrepreneur: (e.g., Morris Chang/Terry Gou)

– “Benevolent
Benevolent Father:”
Father: Chinese coexistence; Henry Ford; HongSing
• Ultimately brokers cooperation
• Warrior Daughter: Chinese domination; aggressive growth

• Defense contractor: Three Generations

– Grandfather (England), Father (USA), Grandson (affair w/Chinese daughter)
– Makes avionics systems; lobbies senator; Outsource to HongSing
– losing commercial business to Chinese
• U.S. Senator: Loses son in crash, orders investigation
– Pork to military contractors; but cost pressures as well
– How to keep good jobs in USA?
– Campaign contributions from Americans & Chinese
– “Caused” the death of his son
– Ultimately works on collaboration with Chinese CEO & Gov’t
• 3rd tier supplier: illegal outsourcing of circuit board
– Tells senators: “you made me do this”
 89

All Conclusions are Tempporaryy

Clockspeeds are increasing almost everywhere

Value Chains are changing rapidly

Assessment of

value chain dynamics

dynamics

Supply Chain Strategy

Development

MIT OpenCourseWare
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15.769 Operations Strategy

Fall 2010

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