Three Steps to Align Supply Chain & Business Strategy TIPS & TECHNIQUES

Supply Chain Drivers or data generated by the operations of the other four drivers. The supply chains that serve the electronics markets are some of the most responsive in the world. Companies in these supply chains from manufacturers, to distributors, to the big retail stores collect and share data about customer demand, production schedules, and inventory levels. Where efficiency is more the focus, less information about fewer activities can be collected. Companies may also elect to share less information among themselves so as not to risk having that information used against them. Please note, however, that these information efficiencies are only efficiencies in the short term and they become less efficient over time because the cost of information continues to drop and the cost of the other four drivers usually continues to rise. Over the longer term, those companies and supply chains that learn how to maximize the use of information to get optimal performance from the other drivers will gain the most market share and be the most profitable. Sunil Chopra is the IBM Distinguished Professor of Operations Management at Northwestern University’s Kellogg School of Management and a director of the Masters of Management in Manufacturing program. He is also co-author of Supply Chain Management, Second Edition, a definitive and widely recognized source book in the field.

EXECUTIVE INSIGHT
Wal-Mart and Dell Computers are two companies that have risen to prominence using a business strategy that offers low prices as a key selling point to their customers. This strategy requires that their supply chains be highly efficient in order to generate the cost savings needed to make a profit at the low prices they offer. Professor Chopra has followed these two companies and offers an analysis of how they have aligned their supply chains to support their business strategies. To begin with, he points out that Wal-Mart’s competitors opened stores in ones and twos and used demographic data to select store sites. Wal-Mart took a supply chain approach and would not even open a store in an area unless they determined that the area could support a distribution center (DC) and a sufficient number of stores to gain scale economies at the DC. Then they targeted specific business operations from which to get efficiencies. “Wal-Mart said 15 years ago they were going to replenish their stores much more efficiently. They began to replenish stores two times a week where their competition was replenishing two times a month. What this meant was that a Wal-Mart manager only had to forecast for half a week and an equally capable store manager elsewhere had to forecast sales and inventory needs for half a month—they couldn’t do as well. “Since they were replenishing more often, they pioneered the crossdocking technique in order to reduce the cost of small lot replenishment. They also said that they would own and control their own trucks and their computer systems because these were the two assets that they used to make their supply chain so efficient. They invested heavily in information technology and trucks—they bought a fleet of trucks. They made these into core competencies of the company. “When I look at Dell,” said Professor Chopra, “I see a company who was able to live through and learn from a big mistake they made early on. Their roots were as a direct sales company but then in the early 90s they tried to sell through retail stores and almost went broke. That drove them back to the direct model and they have not strayed since. “PCs are now much like cars; it is more of a replacement market than a growth market. Customers know what they want and they also want a good price. Dell’s message to the market is customization and great prices. They can support this strategy because they enjoy economies of scale and postpone assembly. They use a few large facilities to assemble PCs, they assemble to order and not to stock so inventory is kept very low. In a high change technology market they do not get stuck with obsolete inventory. Their shipping costs are high but there is enough profit margin to cover that. “This business model is finely tuned to the demands of the market, but what would happen if the PC market suddenly changed?” Professor Chopra painted a scenario that gives insight into how a company must always adjust its strategy and its supply chain to the demands of the market. “Low inventory is good in a technology market where there is a lot of churn and customers value customization. But what if the PC market is on the verge of standardization? The higher up we get in PC performance levels, the less the value of the next incremental improvement in performance. Dell and its competitors all use many of the same components to build their machines. If the market no longer values customization and simply wants the best price on a standard machine, then the Dell model doesn’t work as well. Build to stock and position inventory close to the customers via retail stores becomes a better model.” There is no one right model for a supply chain. Markets change and as they do, businesses need to reevaluate their business model and their strategy. “Since a company’s supply chain has a great impact on its ability to execute its business model successfully, that supply chain must always be adjusted as the business strategy changes.”

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