The Triple-A Supply Chain

by Hau L. Lee

Kelvin Lye Kwong Loong (RA6007578) Martin Pech (RA6007625)

E-Business and Supply Chain Management

2011-11-14

Agenda

Introduction Triple As - explanation Class Activity supply chain optimization Assignment - 7-eleven Case - Zara
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Introduction

What is the case about?

Fast and cost-effective does not ensure sustainable advantage

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Triple-A Supply Chain

Agility

Adaptability Alignment

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Agility

Quick respond to sudden short-term changes in supply or demand Unexpected disruptions handled smoothly Prompt recovery from shocks (natural disaster, epidemics)

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Agility

Methods

Promote flow of information with suppliers and

customers

Develop collaborative relationships with suppliers

Design for postponement

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Agility

Methods

Build inventory buffers by maintaining a

stockpile of inexpensive but key components

Have a dependable logistics system or partner Draw up contingency plans and develop crisis management teams

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Adaptability

Evolve over time as economic progress, political shifts, demographic trends, and

technological advances reshape

markets

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Adaptability

Methods

Monitor economic changes all over the world to

spot new supply bases and markets (especially in developing countries)

Use intermediaries to develop fresh suppliers

and logistics infrastructure

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Adaptability

Methods

Evaluate needs of ultimate consumers not just

immediate customers

Create flexible product design Determine where companies products stand in terms of technology cycles and product life

cycles

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Alignment

What does the word align mean?

To arrange in a line or so as to be parallel

Alignment in SC context?
Objective: Create incentives for better performances

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Alignment
Quotes by Prof. Lee:
Not sufficient to say Youre the best company in the supply chain.
Instead of company to company competition, we are now in an era of supply chain to supply chain competition Win-win relationship is the cornerstone of supply chain success

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Alignment

Common Scenarios without Alignment

Scenario 1
Each party maximize only its own interests

Overstocking, wastage, overspending E.g.: HPs IC Division vs Ink-jet Printer Division

IC Division Carry as little inventory as possible Printer Division Forced to keep large inventory due to low inventory of ICs.

Implication: Increases costs

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Alignment

Common Scenarios without Alignment

Scenario 2
Suppliers forced to bear huge costs of inventories

Suppliers/vendors hub owned by vendors Vendors role - maintain enough stock & replenish them on time using VMI Manufacturers shift inventory costs to vendors in order to reduce its own cost Vendors borrow money at higher interest rates to finance inventory costs. Implication: Costs in SC not reduced
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Alignment

Common Scenarios without Alignment

Scenario 2

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Alignment

Why is alignment needed for supply chain? To maximize a supply chains performance

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Alignment

What can be aligned among the parties involved in SC?

What it means Companies have equal access to forecasts, sales data and plans Manufacturer must define the roles and responsibilities of each partner so that there is no scope for conflict. When companies try to maximize returns, they also maximize the supply chains performance. Companies must try to predict the possible behaviour of supply chain partners in the light of their current incentives Partners act in ways that are closer to whats best for the entire supply chain.
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Ways 1. Align information 2. Align identities

3. Align incentives

4. Redesign incentives

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Alignment

How is alignment done in the real world?

Redefine the terms of their relationships so that firms share risks, costs, and rewards equitably

Example: RR Donnelley (magazine printing for HBR) Quality and reliability of supplies improve Firm can reduce waste and make delivery to customers on time. Firm encourages suppliers to suggest ways to improve processes and products How? Split any savings with suppliers.

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Alignment

How is alignment done in the real world?

Use intermediaries (Finance re-engineering) Who? Financial institutions such as banks Why them?

Can borrow money at a much lower interest rate and finance the purchase of the inventories. When manufacturers need them, banks can sell these inventories to the manufacturers. Vendors/suppliers can reduce its costs and manufacturers can get the inventory they need.
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Outcome?

Alignment

Real Life Case Toyota Prius case (explained by Prof Lee in his lecture at Stanford GSB) Youtube clip (34:47 39:09)

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Alignment

Methods

Exchange information and knowledge freely with

vendors and customers

Lay down roles, tasks and responsibilities clearly for suppliers and customers

Equitably share risks, costs and gains of

improvement initiatives

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Class Activity

Efficient SC dont adapt to changes in the structure of markets

Build efficient SC
Centralized with HQ:

Vendor

Procurement
Assembly Testing Order Fulfillment Retail
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Class Activity

Demonstrate change in market Adapt, optimize!

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The Triple-A Supply Chain

by Hau L. Lee

Break
Kelvin Lye Kwong Loong (RA6007578) Martin Pech (RA6007625)

E-Business and Supply Chain Management

2011-11-14

External Case: ZARA

Taken from
Rapid-Fire Fulfillment
By Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca

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External Case: ZARA

Background of Zara
Spanish

clothing and accessories retailer Based in Arteixo, Galicia Founded in 1975 by Amancio Ortega and Rosalia Mera Flagship chain store of the Inditex group Brands like Massimo Dutti, Pull and Bear, Oysho, Uterque, Stradivarius and Bershka Revenue: 7.071 billion euros in 2009 Present in 73 countries, more than 650 Zara stores worldwide

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External Case: ZARA

Story Behind Zara
A

huge order by a German wholesaler was cancelled in 1975 All Ortegas order is tied up in this order and there was no buyers No option but to sell the stuff on his own He opened a shop named Zara near his factory in La Coruna in Spain

Lesson for Ortega

To

be successful, You need to have five fingers touching the factory and five touching the customer. Meaning: Control what happens to your product until the customer buys it
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External Case: ZARA

Zaras Philosophy
Superresponsive

supply chain Design, prodice and deliver a new garment and put it on display in its stores worldwide in a mere 15 days Offer a large variety of the latest designs quickly and in limited quantities

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External Case: ZARA

Zaras Philosophy
Defies

most of the current conventional practices in Supply

Chain. a) Keep almost half of its production inhouse b) intentionally leaves extra capacity c) Manufactures and distributes products in small batches d) Manages all design, warehousing, distribution and logistic functions itself (instead of relying outside partners) e) Hold its retail stores to a rigid timetable for placing orders and receiving stock f) Put price tags of items before theyre shipped g) Leaves large areas empty in its expensive retail shops h) Tolerates, even encourages ocassional stockouts.

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External Case: ZARA

Zaras Self-Reinforcing System
Part 1: Close the communication loop
Transfer

both hard data and anecdotal information quickly and easily from shoppers to designers and production staff Example: Fast fashion system
Track

materials and products in real time every step of the way, including inventory on display in the stores
Goal:

close the information loop between the end users and the upstream operations of design, procurement, production and distribution as quickly and directly as possible

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External Case: ZARA

Zaras Self-Reinforcing System
Part 2: Stick to a rhythm across the entire SC
Spends

money on anything that helps to increase and enforce the speed and responsiveness of the chain as a whole

Part 3: Leverage your capital assets to increase SC flexibility

Make

major capital investments in production and distribution facilities Uses these facilities to increase the supply chains responsiveness to new and fluctuating demands Produces complicated products in-house and outsources the simple ones.

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Class Activity

Efficient SC dont adapt to changes in the structure of markets

Build efficient SC Demonstrate change in market

Adapt, optimize!

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Conclusion

Managers are the key person in making triple-A supply chain successful
Whats needed? - a fresh attitude and a new culture to achieve triple-A supply chain performance

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Conclusion
Suggestions to firm that wants to achieve triple-A performance 1. Give up the counterproductive efficiency mind-set (Agility) 2. Be prepared to keep changing networks (Adaptability) 3. Look out and take responsibility for the entire chain instead of looking out for personal interests only (Alignment)

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Conclusion
Adaptive Supply Chain
Market conditions and Business Cycles

Supply Chain Strategies

Demand and Supply Uncertainties

Technology and Product Life Cycle

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Conclusion
Supply Chain Alignment
Ways 1. Align information 2. Align identities
3. Align incentives

4. Redesign incentives

What it means Companies have equal access to forecasts, sales data and plans Manufacturer must define the roles and responsibilities of each partner so that there is no scope for conflict. When companies try to maximize returns, they also maximize the supply chains performance. Companies must try to predict the possible behaviour of supply chain partners in the light of their current incentives Partners act in ways that are closer to whats best for the entire supply chain.

E-Business and Supply Chain Management

2011-11-14