Forging an excellent supply chain

This is the fourth module of the "Stanford Business School Executive Training Course" jointly organized by "CEConline" magazine and Stanford University Business School. More than 100 students from Guangdong, Shanghai, Zhejiang and other places Managers participated in the course sharing.

The following is the main content of Professor Li Xiaoliang's lecture that day.

3A Model

Professor Li Xiaoliang discovered the excellent supply chain through 15 years of research on more than 60 well-known companies Generally, it contains three characteristics: acuity, applicability and alignment. All three words start with A in English, so Professor Li abbreviated it as 3A.

Agility

Agility is responsiveness. Contains two elements: fast and responsive.

How fast? Including fast production, fast technology and fast action. For example, after a customer places an order, the supplier has a fast production speed, and the response speed to the customer is naturally fast; fast technology means informatization, which speeds up the speed of information exchange; fast action requires the organizational structure to adapt to the rapidly changing needs of the external market . For how to cultivate and improve agility, Professor Li gave the following two cases.

7-Eleven convenience store was established in the United States in 1927, and later opened branches in Japan, Taiwan, Hong Kong, Thailand, Canada, Singapore, mainland China and other places. In 1991, Ito Yokado, the parent company of Japan's "7-Eleven", acquired the American Southern Company. The 15,000 "7-Eleven" convenience stores around the world actually belong to the "7-Eleven" head office in Japan.

The annual sales of convenience stores in Japan reached 23.3 billion US dollars, and the out-of-stock rate was very low. In 2004, the inventory cycle rate was 55%, and the gross profit margin reached 30%. What is its magic weapon? Supply Chain Agility! The store has invested in an information system long before the popularization of the Internet, which can respond to sudden changes in customer needs, and at the same time, through data analysis, to understand the trend of customers' real needs.

Before the Internet was born in 1985, they used satellite technology to transmit the data of each retail store's purchases and sales to the headquarters, as well as to manufacturers and logistics outsourcing companies. The company's president, Suzuki, gets the latest information every week, and holds meetings with top management to analyze the reasons behind the information, that is, changes in demand trends.

Twenty years ago, the sales volume of women's stockings at the 7-Eleven convenience store in Japan ranked first in the Japanese market. Following this trend, a vice president suggested to Suzuki to sell cosmetics at 7-Eleven convenience stores. On the one hand, the customers of cosmetics and stockings are the same, and they are all women; on the other hand, cosmetics have high profits and can generate considerable income. But Suzuki did not decide directly, but asked the vice president to find out what was behind the data - who bought the stockings. The vice president finally found that middle-aged men bought the most stockings. It turns out that Japan is a country where machismo is more prevalent. Men work outside and women take care of their families. Most 7-Eleven convenience stores are located near subways, trams and train stations. Men pass through these places after get off work, so many housewives call The phone asked her husband to come back with stockings as he passed the convenience store. According to this analysis, the vice president suggested selling stockings near beer. Men like to buy beer when they are tired. If there are stockings next to the beer, they will buy a pair and go back.

Act quickly, but only if the reaction is right. The case of Spanish clothing retailer Zara also illustrates this point. Zara integrates agility into every link of the supply chain and has become the most profitable clothing brand in Europe. This company has created a flexible design process. Once the designer captures a possible trend, he starts to sketch and order fabrics, and realizes the rapid supply of small batches and varieties through the manufacturing process, which is different from the traditional clothing brand design clothing first, and then Realize the concept of stocking, and ultimately guide consumption by the store. At the same time, Zara has advanced sorting and material handling technologies to ensure that distribution does not become a bottleneck when responding to fluctuations in demand. The beauty of this supply chain is that they are very sensitive and responsive to changes in the market and customers.

In 2001, the 9/11 incident, Americans suffered a heavy heart blow, and everyone was reluctant to wear bright clothes. Because of their heavy hearts, they preferred to choose black, white, and gray clothes. According to the change of customer needs, Zara, in A collection of dark clothing was designed in 15 days, produced in small quantities in a Spanish factory, and then flown to the United States. Designers at other companies often take months to design clothes for the next season.

Other apparel companies in the U.S. have noticed this change in demand and have begun designing and producing the same type of clothing. However, when Christmas arrives in December, Americans gradually forget the grief of 9/11 and start wearing festive red or green clothes. Some American clothing companies outsource production to Bangladesh and India, and it takes several months for products to be completed from design to final delivery to stores. After dark-colored clothes are made, the best time for sales has passed.

While other companies were worried about large inventories, Zara used an agile supply chain to once again adapt to changing customer needs.

Adaptability

There are many factors that affect supply chains today. For example, market demand changes—suppliers need new products to meet the needs of different markets, and the emergence of new products brings changes to the supply chain; another example is the change in product life cycle—new products and mature products or those already in the late life cycle. Products have different requirements for the supply chain; and information technology, especially the Internet, has changed the supply chain and the way of business. People don’t need to go to the store to buy things, they can also be done online; changes in raw materials will also change the supply. chain relationship. There are also changes in customer needs, such as the delivery period, which used to be 3 months, but now it is 2 months or 1 month.

Sometimes, efficient supply chains are often less competitive, especially as they fail to adapt to changing market structures. Therefore, when the market or strategy changes, excellent companies do not necessarily have to stick to the original supply chain, but change in time.

An example is the Lucent switch business, which established an efficient supply chain in the 1980s by centrally sourcing, assembling, testing and fulfilling orders in Oklahoma City, USA. Most of Lucent's suppliers are in the United States, and this supply chain works very efficiently when most of its customers are in the Americas. But in the 1990s, when Asia became the world's fastest-growing market, Lucent didn't respond as quickly as other companies and set up factories in the Far East. The company also did not develop switches according to the needs of the Asian market, or improve existing products, because it takes a lot of practice and money to build a cross-continental supply chain. Lucent's problems were exacerbated when suppliers saw low labor costs in Asia and moved production equipment to Asia. "We have to airlift parts from Asia to Oklahoma City, and then airlift the finished product back to Asia," said Lucent's vice president of supply chain at the time. Not to make Lucent's problems any easier, it will require adjustments in the supply chain. In 1996, when Lucent set up joint ventures in Taiwan and Qingdao, China to manufacture switches, it began to redesign its supply chain and only began to gain a foothold in Asia.

South Korea's Posco ranked fifth in sales among global steel companies in 2005, with a profit margin of 18%, ranking first among the world's top five steel companies. Pohang Steel's 12 million tons per year Pohang Steel Plant and 16 million tons per year Gwangyang Steel Plant have achieved integrated steel manufacturing, that is, iron ore is smelted into pig iron and finally cast into different steels. Products are realized in one factory area. Integration significantly saves transportation time and transportation costs. The direct effect is that on the one hand, the speed of production is accelerated, and on the other hand, it also produces scale effects and maximizes profit margins. Posco is one of the world's leading steelmakers with its cost and technology competitive advantages in a rapidly changing global business environment.

But recently this model has also had problems, mainly because customer needs have changed, so the supply chain model has to change. In the past, POSCO was mainly European and American customers, but now the demand from Asian customers has increased greatly. For example, China's per capita steel consumption has increased by four times. At the same time, many countries are reluctant to import steel products produced by foreign countries in order to protect the domestic steel industry. These changes prompted Posco to adjust its supply chain from an integrated to a separate one.

Posco first formed a joint venture to establish a strategic alliance with iron ore suppliers in India, Brazil and Australia, and then planned to build a crude steel plant in Brazil and a 120,000-ton steel plant in India to target product sales For example, in 2002, a joint venture was established in Pittsburgh, the United States, and a finishing plant was established. In 2006, a cold rolling plant was established in Thailand to produce automotive steel plates. Establishment of a manufacturing plant in India for the production of electrical steel sheets.

The adjustment of the supply chain brings two advantages: crude steel is close to the iron ore producing area, and the finishing plant is close to the sales market, and the freight is cheap; secondly, the tariff problem of imported steel products in some countries is avoided, and the price is competitive. force.

As you can see, building an adaptable supply chain requires two key components: the ability to see trends, and the ability to change the supply network.

Consistency

A strong supply chain requires cooperation among the various manufacturers in the chain to achieve synergies. There are many ways of cooperation, such as agreement on new payment methods and billing periods during the economic crisis; useful and important information is shared with partners. The case of Toyota can bring inspiration to everyone.

Toyota launched the hybrid Prius in the United States in 2000. According to past experience, Toyota's cars are very popular in the US market, and dealers usually get the goods in cash, and the sales of cars have been very smooth. But the Prius isn't sold in the same market as the company's other models, it represents new technology, and it's still in its infancy. At that time, gasoline in the United States was relatively cheap, and Americans generally liked large cars, and were not sensitive to the low energy consumption and environmental protection of cars. Dealers feel that it is difficult to judge the consumer group and consumption of the Prius, and the risk of selling goods in cash is very high.

At the same time, Prius' parts are also very different from ordinary car parts. The dealers also sell accessories while selling cars, so they are very dissatisfied with this cooperation agreement, but they did not publicly say because of Toyota's strength. A vice president of Toyota came to the United States for inspection and realized that Toyota's strength could not be exchanged for the enthusiasm of dealers to sell Prius. Finally, he suggested to change the cooperation terms and return the products that the dealers could not sell. This greatly reduced the risk for dealers, who all pushed hard on Prius sales, and as a result the car was a hit in the US. This win-win relationship illustrates that supply chains must perform at their best when the interests of both parties are maximized.

Many of the above examples illustrate that supply chain efficiency and cost are important, but do not ensure that a company can outperform its peers. Companies can only differentiate themselves by creating supply chains that are agile, adaptable, and maintain a consistent pace.

3S Path

Professor Li believes that domestic enterprises need to innovate on the basis of 3A, but innovation is not necessarily limited to their own innovation. Helping customers to innovate is also an added value. We need to think more about how to add value and think more Let's look at 3S, namely Substitution, Square, and Structure. "The manufacturing capabilities of Chinese enterprises have been recognized by the world. If we have some innovation capabilities, design capabilities, and service capabilities, we can build different supply chains for customers in different markets and places. .The Chinese can no longer only earn a little hard manufacturing cost, but get more value and better serve customers." Li Xiaoliang said, "The story of TSMC is a good example."

When Zhang Zhongmou, Chairman and CEO of TSMC, met Li Xiaoliang, he talked about one of their beliefs, which is to be the first and last choice of customers. The "first choice" is that customers have chips to be mass-produced. The first manufacturer to think of OEM is TSMC, because TSMC is a leader in the chip manufacturing industry and a technology leader, which can provide high-quality products in large quantities and quickly. chip. "Final choice" means that after customers shop around, they finally choose TSMC after considering product quality, production capacity and service. At this time, price is no longer the final lever of choice, but the comprehensive score of products and services to gain customer recognition. Since 1997, TSMC has focused on developing customer service and partnerships, and has received a steady stream of orders even though its product prices are 10% to 30% higher than those of similar competitors.

"The most important thing we've learned is that foundry is a service-oriented industry, so we shape ourselves to be a service-oriented company. To be the best service company in chip foundry." TSMC Chairman Zhang Zhongmou said Shows how they add value.

As a chip supplier, in addition to leading in manufacturing and technology, TSMC also improves customer service from the following aspects: providing high-quality products while meeting delivery deadlines; allowing customers to share the latest technology; owning the market Intelligence, so as not to be caught off guard by customers; give customers maximum flexibility in production capacity; effectively build customers' confidence in doing business with TSMC. In terms of flexibility, TSMC surpasses most of its peers, and strives to provide flexibility services even if the cost is higher, including the extent to which customers are allowed to change the order quantity, the flexibility of customers to change the delivery date, and the production requirements of customers. The extent to which real-time changes can be made in the manufacturing process, with the flexibility to retain or cancel tasks during the manufacturing process.

TSMC has also developed a suite of value-added services for customers, such as wafer ride-sharing services. Semiconductor manufacturing requires the production of reticles, or molds, that contain precise images of integrated circuits that are used by chipmakers as masters to transfer these circuit images onto semiconductor wafers by optical image transfer. Since the dies on the wafer are fabricated one on top of the other, each die requires a unique reticle, and a single chip requires 40 reticles. The production cost of lithography is expensive, but in order to check the design before mass production, customers still need to place orders for lithography batches at the prototype stage. TSMC proposed the concept of multi-mode fast wafers, allowing multiple customers to share a set of lithography. Customers only need to log on to the TSMC website to obtain production planning information about the next multiplication/production batch, and order the lithography that needs to be produced for their design in the next feasible multiplication/batch. The benefit of this service is that it saves the customer a lot of cost and time, and promotes the speed of the customer's new product introduction. Since its launch in 1998, TSMC has provided more than 400 batches of rideshares for more than 3,000 devices, which have been well received by customers.

Through various forms of value-added services, such as design support, program library and intellectual property development, ultra-hot batch service and product cycle shortening, TSMC has achieved a win-win situation with its customers.

Using services to add value to the supply chain is a double-edged sword. While improving customer experience, it also faces risks. For example, there are many service links, which are prone to errors, and the content of services is too much. The increase in product cost changes If it is not well controlled, in general, it increases the difficulty of management. TSMC is also reviewing which services are necessary and which services are beyond the concept. It is not easy to decide this degree.

Professor Li Xiaoliang said that the evolution of most technologies goes through three stages: the first is substitution, the second is scale, and the third is structural change. For example, when the automobile was invented, it replaced the horse-drawn carriage. In the past, people rode a horse-drawn carriage, but the horse-drawn carriage was slow and uncomfortable, and the car was fast and traveled for a long time, so people immediately accepted the new means of transportation. The horse-drawn carriage was replaced, and eventually the mass use of the automobile led to a change in people's lifestyles. As the car becomes a common means of transportation and the road network is built, you can choose to live in a beautiful environment and then drive to work.

The same is true for the development of the supply chain. In the beginning, the brand company did its own manufacturing and logistics. With the construction of logistics companies and OEM factories, the company outsourced manufacturing and logistics. For example, Cisco outsourced the manufacturing of some routers to Foxconn, and Microsoft outsourced the production of Xbox360 to Flextronics. They have factories in Mexico, China, Hungary, and Brazil, replacing the production of the original brand company and forming economies of scale. Logistics companies provide logistics transportation arrangements and warehouses, which have significantly changed the structure of the supply chain.

A good idea also goes through three stages. For example, TSMC used to be a semiconductor manufacturing company. Later, it separated the development and manufacturing of chips, focused on technology improvement, became a technology leader in the chip manufacturing industry, and formed a scale effect; today it has transformed into a service, providing customers with design and quality services, which enhances the competitiveness of TSMC. If Chinese companies want to improve in the value chain, it is necessary to upgrade from the manufacturing link to the design link, or the demand link, that is, the brand marketing and service links. From passively accepting customer orders, to actively designing, manufacturing and providing high-quality services, we will expand our brand in the Chinese market and then compete in the international market.

Uncertainty Framework

How do different industries and companies of different sizes design the best supply chain? Professor Li believes that a simple and effective way to define product characteristics when designing the correct supply chain strategy is the "uncertainty framework".

Uncertainty of demand Uncertainty of demand is related to the predictability of demand for a product. Functional products have a long life cycle, so demand is relatively stable. The life cycle of innovative products is relatively short, and contains high innovation and fashion connotations, so it brings high unpredictability of demand. Fashion, high-end computers, the latest integrated circuits and mass customization products are typical innovative products, and household consumer goods, bulk food, oil and gas, and conventional clothing are typical functional products. There are obviously different supply chain strategies for functional and innovative products.

How to reduce demand uncertainty? In many cases, even if end-user demand for a product is stable, there may still be a distortion of the demand signal in the supply chain. The solution is to regain control of supply chain efficiency through information sharing and close collaboration. The Internet is the best way to achieve information sharing and synergy.

How to reduce supply uncertainty? The free exchange of information is the most effective way to reduce the risk of supply failures during product development through maturity and until the final stages of the product life cycle. If companies can cooperate with suppliers and tell them the forecast of products accepted by the market earlier, the problem of supply can be solved earlier. Secondly, if the risk is high, early reserves are also very important. The most important thing is to develop several more suppliers to ensure the diversification of supply, and at the same time form strategic partnerships with suppliers with high performance, large scale and good degree of cooperation.

Dealing with uncertainty, Benetton's delay strategy has had a noticeable effect. Benetton was founded in 1965, focusing on the production and sales of wool, cotton and knitted garments. The company has more than 5,000 stores worldwide and has become a leading innovator in the apparel industry. In the garment industry, the dyeing step generally begins after the manufacturer has purchased the raw material. After dyeing, the raw materials can be produced in a stream until the final product is completed and distributed. However, Benetton put dyeing at the end of the production process, that is, Benetton's rough products have no color, and they will be dyed with different colors in the later stage according to the needs of customers. This gives companies more flexibility in adjusting production in response to market demand, while inventories can be significantly reduced.

For textiles with large supply and stable sales, Benetton chooses stable factories for production and supply; for highly flexible new products, it adopts variable factories to gain flexibility and a high premium in the market. A dual responsive supply chain is a cakewalk for many companies.

Professor Li Xiaoliang's research found that the supply chain should keep up with changes in market demand, and appropriate and efficient supply chains should be adopted for different products, markets, time and product life cycles. Taking the uncertainty framework as the starting point to determine the basic strategy, considering the specific conditions, select the hybrid strategy and the dynamic strategy. The hybrid strategy can obtain efficiency and flexibility at the same time, while the dynamic strategy is more effective according to the change time and product life cycle.

Uncertainty about risks The launch of new products is generally accompanied by risks and is quite difficult. How to conduct a risk assessment, complemented by appropriate risk mitigation strategies, and collaborate with the right supply chain partners, is the key to a successful launch. Professor Li Xiaoliang used the cases of Microsoft Xbox360 and Cisco Viking routers to illustrate how to launch new products and how to cooperate with the supply chain in order to achieve success.

Microsoft released the Xbox 360 in both the US and Europe in November and December 2005, nearly a year before the Sony Playstation 3. How did they do it? It turned out that Microsoft gained some experience when it first launched the Xbox in 2001, which laid a good foundation for the subsequent launch of new products. Entering the video game market for the first time in 2001, Microsoft realized that in addition to design and functionality, speed to market and technical support were also very important to the success of new products. It chose factories in Mexico and Hungary to manufacture this product, mainly considering that the production location is relatively close to the target markets of the United States and Europe. The product received good feedback from the market after its launch in December 2001. However, in May 2002, Microsoft faced cost pressure when rival Sony lowered the price of the PlayStation 2 from $299 to $199. At this time, Flextronics, a Singapore-based company that manufactures Xbox, transferred its Xbox manufacturing business originally located in Hungary to Doumen, Zhuhai, China. The resulting cost savings enabled Microsoft to respond to Sony’s lower prices and gain an opportunity to fight against Sony. By 2003, Xbox had gained 20 percent of the video game market from PlayStation.

Through this cooperation, Microsoft realized that China's manufacturing capabilities are very strong, and the quality has fully reached the standards of the US and European markets. When they launched the Xbox 360, they did not hesitate. In 2005, they announced the three manufacturers responsible for the manufacture of the Xbox 360, namely Flextronics, a Taiwanese company Wistron, and a newly signed Canadian company Celestica. ). All three companies have set up manufacturing plants in the Pearl River Delta region of Guangdong, China, with Flextronics in Shenzhen and Zhuhai, Wistron in Zhongshan, and Celestica in Dongguan. The partnership allowed Microsoft not only to cut costs, but also to launch the Xbox 360 ahead of competitors in November 2005, gaining a price advantage and a first-mover advantage.

2008 was a tough battle for Cisco, the leader in the router market. In April, competitor Alcatel-Lucent (which was formed by the merger of Alcatel of France and Lucent of the United States in 2006) launched a service router with a total capacity of 1 megabyte. Cisco plans to launch the router ASR9000 in November, namely the Viking router. This advanced router can transmit up to 6.4 megabits per second of data, six times more than the competition, and it can combine voice, data, video and mobile traffic from different networks. 90% of the manufacturing of Cisco routers is outsourced, and it hopes to select the right supplier to build an efficient supply chain for the ASR9000. In the end, it chose China's Foxconn for three reasons: Foxconn's scale and agility in China; Foxconn's vertically integrated management and excellent design capabilities; Foxconn has a large factory in Shenzhen, and its standard production capabilities are very significant. In addition, raw materials such as all electronic components can be found in Shenzhen, where Foxconn is located, and the surrounding Pearl River Delta cities. All these prompted Cisco to cooperate with Foxconn.

During the cooperation, Foxconn began to intervene in the early design stage. The communication between the two parties was very smooth, and the quality control of the products was also very good. The Viking router finally launched successfully in November 2008, and by April 2009, sales had exploded. The efficient supply chain from design, manufacturing to logistics fully considers the core competitiveness of all parties, and finally Cisco's products also gain the advantage of cost innovation.