Operations P. 3

This article contends that companies' traditional approach to purchasing misses the function's significant potential to add value by driving innovation and superior long-term cost performance. As a former senior vice president of technical purchasing for BMW, the author oversaw the transformation of the department's mission from functional to strategic, and he offers insights about the transformation. Strategic purchasing, he says, can only be effective if the purchasing department constantly expands and updates its technical knowledge to preserve credibility with both suppliers and internal departments. Toward that end, BMW's purchasing agents spent up to 20% of their time training -- in everything from foreign languages to technical know-how to contract law. In addition, BMW began to hire industry experts and train them as buyers who had as much in-depth knowledge as the suppliers with whom they would be dealing. The author describes how BMW associates become involved at the early concept stage of product development, often suggesting how certain design features will affect the technical equipment at the factory or the level of investment that will be required to execute the design. They also suggest what types of materials, components and systems best meet end-user requirements.

For companies considering offshoring, there are dangers in taking too narrow a geographical view, say the authors. Every country presents a different mix of strengths and weaknesses. One country may, for instance, have very low labor costs but a high degree of political instability and a small domestic market. Another might offer a wealth of engineering talent but quickly rising labor rates. A third may have robust local markets but intrusive regulatory regimes and a weak transport infrastructure. Currency fluctuations may unexpectedly swell the costs of sourcing from one country, for instance, or a natural disaster may wreak havoc on a critical source of supplies. The authors suggest that offshoring is no different from any investment program that involves choices with widely divergent cost and benefit characteristics in that it makes sense to create a portfolio that balances risk and reward over both the short and long terms. Their research, canvassing 138 manufacturing executives in sectors ranging from automotive to consumer products to technology, confirms the wisdom of a portfolio approach. It reveals that while many companies confine their offshoring efforts to China and India, 96% of cost leaders are active in countries beyond those two, and nearly half of the leaders have offshore activities in three or more additional countries. The authors illustrate their argument with a description of the global outsourcing portfolio strategy of U.S.-based conglomerate Emerson Electric. They conclude with a brief discussion of a number of practical steps executives can take to ensure that their portfolios are constructed successfully.

How a textile manufacturer balances cost cutting with mass customization in its domestic facility.

Utopian visions of frictionless, knowledge-sharing, global supply chains are somewhat overstated.

In an attempt to increase both efficiency and service quality, more and more companies are outsourcing to third-party suppliers some key business processes, such as human resources, information technology and procurement. The universe of potential suppliers is diverse and growing, made up of locally based specialists, offshore providers with comparatively low labor costs, and global suppliers who are able to apply sophisticated management techniques and technology. The challenge for clients is to understand their own requirements and to identify providers whose capabilities and objectives are best aligned with their particular needs. Drawing on extensive research, the authors identify three potentially critical areas of supplier competency: delivery competency, transformation competency and relationship competency. Within that context, they discuss 12 capabilities through examples drawn from the outsourcing experiences of firms such as BAE Systems, Lloyd's of London, Deutsche Bank and Bank of America. By benchmarking supplier capabilities against its strategic and operational intent, a company can work to establish relationships that support its business objectives.

RESEARCH BRIEF: Emerging supply-chain e-technologies provide opportunities for growth "Ò

Leadership and management innovation must drive a comprehensive ethos of excellence.

Companies tend to assume that little can be done to reduce product costs once a design is set. This belief has shaped many cost-management programs across diverse products' life cycles. Because of it, firms will often focus on cost reduction during the design phase and cost containment during manufacturing. But are much of a product's costs truly locked in during design? Recent research suggests otherwise. In an extensive field study at the consumer-products division of Olympus Optical Co. Ltd., the authors found that the company is able to obtain significant cost reductions in manufacturing. Indeed, the research has demonstrated that costs can be aggressively managed throughout the product life cycle. Furthermore, the authors found that Olympus Optical applies various cost-management techniques in an integrated manner with the outputs of some techniques acting as inputs to others, thereby increasing the program's overall effectiveness. The observations suggest that companies competing aggressively on cost might consider adopting some form of an integrated cost-management program that spans the entire product life cycle.

Natural disasters, labor disputes, terrorism and more mundane risks can seriously disrupt or delay the flow of material, information and cash through an organization’s supply chain. The authors assert that how well a company fares against such threats will depend on its level of preparedness, and the type of disruption. Each supply-chain risk & #8212; to forecasts, information systems, intellectual property, procurement, inventory and capacity & #8212; has its own drivers and effective mitigation strategies. To avoid lost sales, increased costs or both, managers need to tailor proven risk-reduction strategies to their organizations. Managing supply-chain risk is difficult, however. Dell, Toyota, Motorola and other leading manufacturers excel at identifying and neutralizing supply-chain risks through a delicate balancing act: keeping inventory, capacity and related elements at appropriate levels across the entire supply chain in a rapidly changing environment. Organizations can prepare for or avoid delays by “smart sizing” their capacity and inventory. The manager serves as a kind of financial portfolio manager, seeking to achieve the highest achievable profits (reward) for varying levels of supply-chain risk. The authors recommend a powerful “what if?” team exercise called “stress testing” to identify potentially weak links in the supply chain. Armed with this shared understanding, companies can then select the best mitigation strategy: holding “reserves,” pooling inventory, using redundant suppliers, balancing capacity and inventory, implementing robust backup and recovery systems, adjusting pricing and incentives, bringing or keeping production in-house, and using Continuous Replenishment Programs (CRP), Collaborative Planning, Forecasting and Replenishment (CPFR) and other supply-chain initiatives.

According to conventional wisdom, businesses must offer something unique in order to compete successfully; the rub is that this task is becoming more difficult as products and services become more similar. The only solutions, this line of thinking continues, are to differentiate your offerings through branding and the communication of emotional values or to completely change your industry’s rules. While there is some truth in each of those assertions, the authors believe they have been overstated and overgeneralized and have distracted firms from listening to their customers and consistently delivering on the basics. They conclude that what customers want is not more differentiation but products and services that are simply better at providing generic “category benefits”– those routine benefits customers expect to get when they make a purchase. Failure at this, they contend, is one of the prime contributors to today’s continuing high levels of customer dissatisfaction. The good news is that this dilemma presents a low-risk, high-return opportunity for most businesses & #8212; provided top executives buck the conventional wisdom and rethink what people really want from a product or service.