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Thursday, October 28, 2004his Harvard Business Review article.Great companies don't stick to the same supply networks when markets or strategies change - such organizations keep adapting their supply chains so they can adjust to changing needs to build a sustainable advantage. In addition to unexpected changes in supply and demand, supply chains also face near-permanent changes in markets. Structural shifts owing to economic progress, political and social change, demographic trends, and technological advances force companies adapt their supply chains, to stay competitive.
Lucent - Lucent twice woke up late to industry shifts, first to the rise of the Asian market and later to the advantages of outsourced manufacturing. Lucent recovered the first time, but the second time around, the company lost its leadership of the global telecommunications market because it didn't adapt quickly enough.
The best supply chains identify structural shifts, sometimes before they occur, by capturing the latest data, filtering out noise, and tracking key patterns. They then relocate facilities, change sources of supplies, and, if possible, outsource manufacturing.
HP - Hewlett-Packard set up both its R&D and manufacturing divisions in Vancouver, Washington for manufacturing pprinters. HP wanted the product development and production teams to work together because ink-jet technology was in its infancy, and the biggest printer market was in the United States. When demand grew in other parts of the world, HP set up manufacturing facilities in Spain and Singapore to cater to Europe and Asia. Although Vancouver remained the site where HP developed new printers, Singapore became the largest production facility because the company needed economies of scale to survive. By the mid-1990s, HP realized that printer-manufacturing technologies had matured and that it could outsource production to vendors completely. By doing so, HP was able to reduce costs and remain the leader in a highly competitive market.
Companies that adapt supply chains when they modify strategies often succeed in launching new products or breaking into new markets.
Microsoft - When Microsoft decided to enter the video game market, it chose to outsource hardware production to Singapore-based Flextronics. In early 2001, the vendor learned that the Xbox had to be in stores before December because Microsoft wanted to target Christmas shoppers. Flextronics reckoned that speed to market and technical support would be crucial for ensuring the product's successful launch. So it decided to make the Xbox at facilities in Mexico and Hungary and later to china helping Xbox to wrest 20% marketshare from Playstation 2.
Smart companies tailor supply chains to the nature of markets for products. They usually end up with more than one supply chain, which can be expensive, but they also get the best manufacturing and distribution capabilities for each offering.
Cisco - Cisco caters to the demand for standard, high-volume networking products by commissioning contract manufacturers in low-cost countries such as China. For its wide variety of mid-value items, Cisco uses vendors in low-cost countries to build core products but customizes those products itself in major markets such as the United States and Europe. For highly customized, low-volume products, Cisco uses vendors close to main markets, such as Mexico for the United States and Eastern European countries for Europe. Despite the fact that it uses three different supply chains at the same time, the company is careful not to become less agile. Because it uses flexible designs and standardized processes, Cisco can switch the manufacture of products from one supply network to another when necessary.
Gap - Gap, too, uses a three-pronged strategy. Gap set up Old Navy's manufacturing and sourcing in China to ensure cost efficiency, Gap's chain in Central America to guarantee speed and flexibility, and Banana Republic's supply network in Italy to maintain quality.
Toyota - Toyota was convinced that the market for the Prius, the hybrid car, would be different from that of other models because it embodied new technologies and was in its infancy. The Japanese automobile maker had expertise in tracking U.S. trends and geographical preferences, but it felt that it would be difficult to predict consumer response to a hybrid car. Besides, the Prius might appeal to particular consumer segments, such as technophiles and conservationists, which Toyota didn't know much about. Convinced that the uncertainties were too great to allocate the Prius to dealers based on past trends, Toyota decided to keep inventory in central stockyards. Dealers took orders from consumers and communicated them via the Internet. Toyota shipped cars from stockyards, and dealers delivered them to buyers. Although Toyota's transportation costs rose, it customized products to demand and managed inventory flawlessly.
Building an adaptable supply chain requires two key components: the ability to spot trends and the capability to change supply networks.
- Companies must retain the option to alter supply chains. To do that, they must do two things:
• They must develop new suppliers that complement existing ones.
• They must ensure that product design teams are aware of the supply chain implications of their designs. Designers must also be familiar with the three design-for-supply principles: commonality, postponement, and standardization.
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