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Designed from the customer in
Quality
Safest, most reliable products
Supply chain excellence and quality control
CHAPTER 1 Core Discipline 1: View Your Supply Chain as a Strategic Asset
Hewlett-Packard (HP) traditionally pursued an innovation-based strategy until an upstart competitor changed the industry dynamics. In 1997, HP and other printer manufacturers were taken by surprise by Lexmark s launch of a below-$100 printer. When Lexmark had doubled its market share by mid-1999, HP embarked on an ambitious program called Big Bang to sharply reduce product costs through new design and supply chain changes. The goal To compete directly with Lexmark on price. Big Bang was a big success. By 2002, HP had won back its market share.4 Efficiency and low cost are good things but not at the expense of service, innovation, or quality if one of those is a key element of your business strategy. Consider the low-cost offshore manufacturing that we discussed earlier. Most apparel manufacturers outsource their production to Southeast Asia, where contract manufacturers insist on fixed production schedules to minimize costs. This low-cost approach also results in low flexibility and can hurt margins at the retail level. If one style lags while another takes off, the retailers are limited in their ability to change volumes and mix. With too many of the wrong garments, the stores end up with marked-down inventory and eroded margins. Too often the missed revenue and reduced margins associated with a poorly aligned supply chain strategy are not included when assessing the total impact of supply chain strategic choices. Zara, the retailer owned by Spanish textile giant Inditex, chose a very different model. Zara positioned itself as the designer-boutique alternative for the price-conscious but trendy consumer. To deliver its strategy, it manufactures almost 50 percent of its garments in-house an industry exception. Although its manufacturing costs are 15 to 20 percent higher than the competiCompanies whose tion, Zara more than makes up for the cost differential by using its supply chain to primary strategy is ensure that merchandise in the stores innovation focus on matches what customers want.5
Competing on Innovation
Companies whose primary strategy is innovation focus on developing category killers must have products that benefit from significant consumer pull. And because their products are category killers, these companies can command a price premium,
developing category killers must have products that benefit from significant consumer pull.
Strategic Supply Chain Management
the innovator s advantage. Companies such as Sony, Nike, and L Or al seem to have a finger on the pulse of the consumer and are fast to market with new products that buyers want. The underlying source of power for such companies is unparalleled marketing and product development. How does the supply chain support a company that competes on innovation For new products and services, the window of opportunity before the fast followers start taking market share can be small. Innovative companies are acutely aware of the benefits of getting into a market early and gaining first-mover advantage, so new product introduction (NPI) is key. By getting new products to market faster, the supply chain can boost revenues and profits. This is why it s important for a company with innovation as a primary strategy to integrate the supply chain with the design chain, which we define as all the parties both inside and outside the enterprise that participate in defining and designing a new product or service. The challenge isn t just time to market, however. Time to volume is critical too. The faster a company can pump up production to meet demand, the greater are the profits, and the less likely imitators are to catch up. Creating strong demand for a new product and then being unable to meet that demand is one of the worst things that can happen to an innovation-driven company. Achieving that time-to-volume advantage is a major competitive weapon. Design chain/supply chain integration6 is critical to innovationdriven companies, ensuring the fast and sustainable launch of new products. Moving from product development to volume production at the target level of quality requires management of processes, assets, products, and information. Design chain/supply chain integration also ensures that when demand cranks up, the whole supply chain is ready that suppliers can handle your needs, that order-management systems support the new product information, and that sales channels and service people are trained. Consider again the example of clothing retailer Zara. While most of the industry focuses the supply chain on delivering the lowest purchase price, Zara s supply chain supports its primary innovation strategy. Designers and planners use point-of-sale information to adjust production plans and designs to focus on bestsellers. This translates into a much shorter time to market, higher revenues, and fewer markdowns.7 Between 2001 and 2002, when many fashion retailers were struggling to break even, Zara s performance translated into steady double-digit growth and healthy EBIT (earnings before income taxes) margins, growing from 18.1 to 18.5 percent.8 By combining innovation and cost performance, Zara
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