Essay: Review of Hau L. Lee’s “The Triple-A Supply Chain”

According to the article ‘The Triple-A Supply Chain’ the two holy grails of supply chain management: high speed and low cost, are not enough to give companies a sustainable competitive advantage over rival companies. In this article, the writer, also professor Hau L. Lee tries to find the answer to one general question: How could companies gain a sustainable competitive advantage over their rivals by optimizing the supply chain.

To answer this question Hau L. Lee first did some desk research. He found out that companies, whose supply chains became more cost-effective and efficient did not gain a sustainable competitive advantage over their rivals. Indeed, the performance of the supply chains deteriorated. He relates this to the growth of the percentage of products that were marked down in the United States. Were this percentage was 10 in 1980, it grew to 30 in 2000. Also surveys showed that consumer satisfaction with available products fell down in that specific period.

Efficient supply chains are not able to deliver the goods because the high-speed, low-cost supply chains are unable to respond to unexpected changes in demand or supply, because a lot of companies have centralized distribution and manufacturing facilities, due to generate scale economies. Also companies’ obsession to gain speed and reduce cost, leads to a break down in supply chains during the launch of new products because they decided to have no buffer stock, due to high inventory costs. Beside this, efficient supply chains often become uncompetitive because they do not adept to changes in the market structures, caused by external influences like earthquakes, terrorist attacks etc.

The conclusion is that efficient supply chains are not good enough to ensure that companies will do better than their competitors. Companies have to build agile, adaptable and aligned supply chains, also known as The Triple-A supply Chain, to gain a sustainable competitive advantage over their rivals. According to Hau L. Lee only companies that build all of this three into their supply chains, gain a sustainable competitive advantage over their rivals. In other words a company’s supply chain that is agile, adaptable and aligned leads to a sustainable competitive advantage over their rivals and the company will become better, faster than their competitors.

The research method that is used by professor Hau L. Lee to show that supply chains that are agile, adaptable and aligned gain a sustainable competitive advantage and are better than an efficient supply chain, is a qualitative research method. Professor Hau L. Lee gives a lot of examples of companies that have or an agile, or an adaptable, or an aligned, or a Triple-A supply chain. He does this by expand on each of those qualities and explain how companies can build those into their supply chains. He does this by examples of companies, that he has studied for ten years and compared to each other, and tell what went god and what went wrong.

The expanding of each of those qualities (agile, adaptable and alignment), leads to three hypotheses that are investigated by the author. These hypotheses are:

1. How can companies build agility into supply chains?

2. How can companies build an adaptable supply chain?

3. How can companies create alignment in supply chains?

The results of the investigation is that companies have to: First, create supply chains that respond to unexpected and sudden changes in markets. This agility is very important because both demand and supply fluctuate very rapidly and widely than they used to be because of external factors like terrorist attacks, disasters, wars, epidemics and computer viruses. So companies have to respond to that changes in demand and supply as quick as possible, by building agility into their supply chains by holding to six rules of thumb:

– Stimulate supply chain partners to provide data on changes in supply and demand quickly, so that every supply chain partner can respond immediately.

– Expand collaborative relationships with customers and suppliers, so companies can work together in designing processes, components and products. Also they can prepare backup plans. This will give companies a head start over rivals.

– Design products in a way that they share common processes and parts. This must delay the step at which products become different.

– Companies have to keep a small inventory of inexpensive, non-bulky products that could delay the manufacturing.

– Take care of a reliable logistics system that can empower companies to respond quickly to unexpected changes in needs.

– Set up a team that knows how to set up backup plans and contingency plans to tackle crises.

Second, create supply chains that can be cater structural changes in the market by modify the supply chain to the strategy that is followed by the company, to the products that are sold or to the used technologies by the company. Building such an adaptable supply chain requires two key factors: the ability to find trends and the capability to change supply networks. To find future patters, companies have to follow the following guidelines:

– Track different economies over the world the to provide yourself with the best supply chain base and markets.

– Use intermediaries for developing new suppliers and logistic infrastructures.

– Find out the needs of the ultimate customer and not the needs of the customer who is just before or after you in the supply chain.

– Companies must retain the opportunity to modify their supply chains by developing new suppliers that complement existing suppliers and by making product designers aware of the fact that supply chains are part of their product designs. Designers have to take commonality, postponement and standardization into their designs. Those three enable companies to fulfil engineering changes every time they adapt supply chains.

Third, create incentives for better performances. With this companies can create alignment of interest. This is important because if any company’s interest differ from the other companies in the supply chain, its behaviour will not maximize the supply chain’s performance. To create alignment with partners, companies could redefine the terms of their relationships, in a way that they share costs, risks and rewards. To do this companies have to complete the following steps:

– Align the information within the supply chain so that every companies has similar access to forecasts, sales data and plans.

– Align the identities and roles in the supply chain so that every partner knows his role and responsibility.

– Set up clear incentives and disincentives so that every partner tries to maximize the supply chain’s performance and do what is the best for the entire supply chain.

The scientifically relevance of the article is that Hau L. Lee give the possibility to fine-tune his theory and build better theories relating to get a sustainable competitive advantage by using the supply chain.

According to Hau L. Lee the practical relevance of his research is that if companies wanted to gain a sustainable competitive advantage over their rivals, they have to create a Triple-A Supply Chain instead of a supply chain that contains the two holy grails of it: high speed and low cost. To do this companies have to change their attitude pertaining to their efficient mind-set, instead of thinking it requires more technology and investment. They must take responsibility for the entire supply chain, something that cannot be done by technology but can only make happen by managers.

C.K. Prahalad and Gary Hamel: The Core Competence of the corporation. HBR, 1983

In the article ‘The core competence of the corporation’, written by C.K. Prahalad and Gary Hamel, the authors argue that diversified corporations should focus on their core competencies instead on focussing on their end products and strategic business units, also called SBU, to adept at inventing new markets and to enter emerging markets. Also a focus on the core competencies of the corporation will improve the capability of creating products that customers need, but yet have not imagined. This leads to the general question for this article: Will an organization perform better if the core competence is highlighted within the whole organization, and uses them to get a sustainable competitive advantage over their rivals?

To make this hypothesis clear, the authors, also the investigators of this hypothesis, have followed a dozen of diversified corporations that on one hand are focussing on the SBU’s and end products (companies like GTE) and on the other hand are focussing on the core competencies of the corporation (companies like NEC, Canon and Honda). At the beginning of the research the corporation that focussed on SBU’s and end products had more sales than the corporation that focused on the core competencies. But, as the research progressed, and markets changed, the sales of the corporation that focused on the core competencies grew and even overtake the sales of the corporation that focused on SBUs and end products. The reason for this, according to Hamel & Prahalad, is that a corporation that focuses on core competencies could easier adapt to changes in markets and customer needs than a corporation that focuses on end products and SBU’s.

A more specific reason for above-mentioned phenomenon is that company’s competitiveness on a short run, on the one hand, derives from the price/performance attributes of their current products. Where, on the other hand competitiveness on a long run derives from the ability of building the core competencies at lower costs and faster than competitors, so they can spawn unexpected products. Most of the companies that are able to build their core competencies faster and at lower costs than others are Japanese. This is not because Japanese managers are more capable than Western managers, but because America and European companies adherence to a concept that unnecessarily limits the ability of individual businesses because they want to fully exploit the technological capability that they possesses. And also do Japanese have companies control over their core products, because they have identified their core competencies. This control allows companies to build the evolution of applications and end markets, so they can multiply the number of application areas for their core product

To made clear the hypotheses Hamel & Prahalad used mainly case comparison studies. This has been found in the numerous examples of diversified corporations in the article, with which Hamel & Prahalad made clear why focussing on core competencies is so much better.

In order to investigate the main hypotheses Hamel & Prahalad used more sub hypotheses for support. The first is that the diversified corporation should by pictured as a large tree, where the trunk and major limbs are core products, the leaves are end products and SBUs, and last, the root system that provides stability, sustenance and nourishment is the core competence. The second is how companies should clarify core competencies. The third is how to build core competencies. And the last is how companies can cultivate a core competency mind-set.

The reason a diversified corporation has to be seen as a tree is because the core competencies are the collective learning in the organization. These competencies are the base of entering and adapting to markets. If a diversified corporation wants to focus on core competencies they have to clarify them. To do this

corporations have to define a clear competitive strategy at the level of an entire company and not at the level of a business. After defining a clear competitive strategy for the whole company, corporations have to identify their core competences that supports the company’s strategy by asking themselves to following questions: – Does the core competence provides access to a wide variety of markets? – Which opportunities will we lost in the future without the core competence? – Do customer benefits rest on the core competence? – How long could we stay dominating if we do not control the core competence? After identifying the core competencies, corporations should build on and enhance them by using the following guidelines: – To persevere leadership in the core competencies, companies have to invest in needed technologies and maximize their world manufacturing share in core products; the physical embodiment of the core competencies, that even could be found in other brand’s end products. – To enhance core competencies resources have to infuse throughout the different SBU’s in the corporation and create a wide variety of products from the core competencies. Now, most of the SBUs do not want to lend their core competencies or even hide them for other SBUs, within the same corporation! – Create strategic alliances to gain obtain access to the mainframe and more technologies that are needed to build and enhance the core competencies.

To encourage a core competence mind-set within the organization, corporations have to: – Stop thinking about SBUs as separate units within the company, because this will imprison resources in the SBUs and let managers hide core competences from other SBUs so that the corporation cannot pursue huge opportunities. – Gather managers, who can identify next-gen competencies. They have to decide how much investment each competence needs and how much staff and capital each department should contribute.

– Find which people and projects embody the corporation’s core competencies, and show the SBU’s that core competencies are not related to SBUs but to the whole corporation. People who embody them can be relocated among different SBUs.

The scientifically relevance of the article is to give other professors the opportunity to build on the theory. Professors can use this theory as their base for future researches. Also they can develop this theory to the current economic and strategic situation.

The practical relevance, according to the authors, is that corporations should consider themselves not as a collection of SBU’s but as a portfolio of core competencies. When corporations are focusing on those core competencies, it can create unique and integrated systems that increase the fit among the corporation’s SBUs, and diverse technology and production skills; A systemic advantage, which competitors cannot copy.

P. Kraljic: Purchasing must become Supply Management. HBR, 1983

In the article ”Purchasing must become Supply Management” Peter Kraljic offers a theory of how top managers can identify the scope of their own supply weakness and handle it with a comprehensive strategy to manage supply. Managers have do not have to simply monitoring current developments, but they have to make things happen to their own advantage. This, Peter Kraljic calls: From purchasing, as an operational function, to supply management, which is a strategic function.

To explain his theory of The Kraljic Portfolio Purchasing Model, Kraljic tells step by step how managers have to use his model. To support this explanation, Kraljic have drawn a lot of matrixes and exhibits, which shows the steps of the model in a figure.

The main reason why Kraljic came up with his Kraljic Portfolio Purchasing Model, is the following phenomenon, which can be seen as a causal relationship: Many of the purchasing managers’ outlooks and skills, that have be formed in a relative era twenty years ago, have still not changed, which leads to a purchasing department that lag behind other departments in acknowledge and adapting to worldwide economic and environmental changes. This attitude is not only outdated, but also it is very costly for the corporation.

The research method that Kraljic used to come up with his theory is a longitudinal case-study. Kraljic has searched for companies that changed their purchasing attitude to one that can cope with the changing economic and new opportunities because of new technologies.

To apply The Kraljic Portfolio Purchasing Model, corporations first have to diagnosing the case. Then they have to shape the supply strategy. And at last they have to strengthening the organization.

To determine which type of supply strategy a corporation needs to reduce their risks and to exploit their purchasing power, top managers have to diagnosing the case by assessing the corporations situation in terms of two variables: X. The complexity of the supply market; measured by the number of suppliers, number of materials substitution, entry barriers, pace of technology and logistic costs. And Y. the importance of purchasing, in terms of profit contribution, the percentage of the material in total costs and the value added by production line. This assessment has to give an answer to the following questions: 1. Does the company make good of the opportunity of collaboration between departments and subsidiaries? 2. Does the company do the most possible to avoid supply interruptions and bottlenecks? 3. How much action has taken to lessen unacceptable risks? 4. How can the corporation reach the best balance between cost and flexibility, by using the make-or-buy decisions? 5. Will cooperation with suppliers or competitors strengthen the long-term supply relations or capitalize on shared resources? After the assessment in the diagnosing case, corporations have to use a four stage approach to organize their strategies and with this minimize their supply vulnerabilities and get the most out of their potential buying power. This approach gives the company a simple framework in which they first classifies all its purchased components and materials in terms of supply risk and profit impact. Second they have to analyse the supply market for the components and materials. Third they have to decide its overall strategic supply position. And fourth they have to expand materials strategy and action plans. To classify materials and components, companies have to determine if the profit impact of a supply item is low or high and if the supply risk is low or high. After using this, companies can sort out all of

their purchased products into four categories: 1. Strategic: High profit impact and supply risk. The company have to support supply decisions of this items with annalistic techniques and microeconomic analysis. 2. Bottleneck: Low profit impact, high supply risk. The purchase of this products requires market analysis. 3. Leverage: High profit impact, low supply risk. The purchase of this type of products requires vendor and value analysis. 4. Noncritical: Low profit impact and supply risk. This products only requires simple market analysis and inventory optimization models are normally enough. In the second phase, the company have to weight their own power as a customer to the bargaining power of their suppliers. To do this, companies have to review the supply market and relative the strength of existing vendors. Then the company have to analyse their needs and supply lines, to measure their ability to get the supply terms they want.

After done this, in phase three companies have to position the products that are defined as strategic in phase 1, in the purchasing portfolio matrix. This matrix plots the strength of the supply market against the company’s buying power. The matrix contains three basic categories: 1. Exploit: The company’s buying power is dominant over the strength of the supply market. Here companies have to follow an aggressive strategy, because of the low risk of the supply. 2. Diversify: The strength of the market dominates the buying power of the company. Here companies have to increase spending on supplier relation or market research, or even think of backward integration. 3. Balance: Neither one is dominating the other. In this case, companies can find themselves in different roles regarding different suppliers and items.

In the last phase companies have to match a strategy with one of the three categories, mentioned in phase three. When the supplier’s strength outbalance the company’s strength, companies have to buy fragmented purchase volumes at one supplier and with this cover their full volume requirements. The reduce risk, companies should look for another supplier. When the company is stronger than the supplier, they can spread volumes out over different suppliers and make use of price advantages. In this case companies must concern a long-term relation with the supplier.

If companies successfully applied The Kraljic Portfolio Purchasing Model, they can strive for a separate purchase department, which is managed in isolation from other departments. To achieve this the purchase department must reflect the company’s strategy. The company should encourage entrepreneurship within the department, but as long as it is corresponding the company’s structure. Beside this, companies have to provide the purchase department with operational information, so they can keep in pace with changing demand. At last, if the company wants to meet the demands of the new supply strategy, an upgrade of skills and experience of the key purchasing people is required.

The scientifically relevance of the article is that other can improve The Kraljic Portfolio Purchasing Model. The Dutchman C.J. Gelderman expanded Kraljic’s Model and added new insights based on changes in purchasing. With Gelderman’s Purchasing Portfolio, companies can get an idea of how they can turn all their purchased components and materials into another category which are mentioned in phase one. This four categories are based on the profit impact of a supply item and the supply risk. Whether the practical relevance of the article is that the rewards of effective supply management are worth all the obstacles that companies have to surmount. The strategies deriving from the Kraljic Portfolio Purchasing Model; consisting of greater flexibility, enhanced strategic awareness and stronger entrepreneurial thinking in the supply range, can reduce the input costs and increase the supply security of any industrial company.

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