That is an integrated system! Supply chain members, in a similar manner, must react coherently to changes in the business environment to remain competitive. Supply chain integration is a continuous process that can be optimized only when OEMs, customers, and suppliers work together to improve their relationships and when all participants are aware of key activities at all levels in the chain.
First-tier suppliers can play a key role in. The following worldwide trends and forces are driving supply chains toward increased integration:. Increased cost competitiveness. Having substantially improved the efficiencies of internal operations, OEMs are seeking further cost reductions by improving efficiency and synergy within their supply chains. Shorter product life cycles. The Model-T Ford, for example, was competitive for many years. A personal computer PC is state of the art for less than a year, and the trend toward shorter product life cycles continues.
Faster product development cycles. Companies must reduce the development cycle times of their products to remain competitive. Early introduction of a new product is often rewarded with a large market share and sufficient unit volumes to drive costs down rapidly.
Globalization and customization of product offerings. Customers the world over can increasingly afford and are demanding a greater variety of products that address their specific needs. Mass customization has become the new marketing mantra. Higher overall quality.
Increasing customer affluence and tougher competition to supply their needs have led to demands for higher overall quality.
These increased demands on OEMs for improvements in product design, manufacturing, cost, distribution, and support are being imposed, in turn, on their supply chains. Dell Computer Corporation's success in the past few years and its growth relative to the rest of the PC industry made daily headlines throughout the s. Based on the premise that bypassing resellers, building products to order, and reducing inventories would result in a lower cost, more responsive business, Dell has grown into one of the.
Nevertheless, it is squeezed into such a narrow business niche that, from some perspectives, its very survival seems tenuous. Dell competes with many capable and, in some cases, lower cost competitors, has virtually no proprietary technology, and must deal with exceedingly robust suppliers, including Intel and Microsoft.
The heart of Dell's success is its integrated supply chain, which has enabled rapid product design, fabrication, and assembly, as well as direct shipment to customers.
Inventories have been dramatically reduced through extensive sharing of information, a prudent choice given the risk of technological obsolescence and reductions in the cost of materials that can exceed 50 percent a month. Even with reduced inventories, Dell's strategic use of information has made possible a dramatic reduction in the elapsed time from order to delivery, giving Dell a significant competitive advantage. Component inventories are monitored weekly throughout the supply chain and, when there are deviations from plan, the sales force steers customers, by means of discounts, if necessary, toward configurations for which there are adequate supplies.
Thus, abundant, timely information is used to work the front and back ends of the supply chain simultaneously. Speed is a critical factor in the computer industry, especially in the area of inventory. In the late s, Dell measured component inventories in weeks.
In , they were measured in days. They may soon be further reduced through real-time deliveries so that, as components are used, they are automatically and immediately replaced. The reduction in inventory not only lowers requirements for capital, it also enables rapid changeovers to new product configurations because no old parts must be used up.
Faster time to market for new products translates into increased revenues and profits. The change in emphasis from inventory levels to inventory velocity throughout the supply chain has been made possible, in part, by the Internet.
In Dell's new virtual corporation, inventories are reduced by use of timely information; emphasis on physical assets is being replaced by emphasis on intellectual capabilities; and proprietary business knowledge is being increasingly shared in open, collaborative relationships. This extensive integration of the supply chain can be viewed as a shift from vertical corporate integration to a virtually integrated corporation Magretta, Vertical integration was essential in the early years of computer manufacturing when the supplier base was not well established and assemblers had little choice but to design and build components and assemble the entire end product in house.
Proprietary component technologies were a main source of competitive advantage, although in some cases they had little to do with creating value for the customer. As the industry matured, multitudes of component suppliers became eager to. Leveraging investments by these suppliers has freed Dell to focus on delivering complete solutions to its customers. However, because these components are available to all PC assemblers, it has become harder to compete in terms of end-product differentiation.
Thus, a high premium has been placed on speed and process efficiency, blurring the traditional boundaries between supplier, manufacturer, and customer. For instance, peripherals, such as monitors, keyboards, speakers, and mice, need not be gathered in one location prior to shipment to the customer. Manufactured by separate suppliers and labeled with the Dell logo, shippers gather them from all over North America, match them overnight merge-in-transit , and deliver them as complete hardware sets to customers as if they had come from the same location.
This enables Dell to be highly selective in its capital investments and to focus on activities that create the most value for customers and shareholders.
By using a highly integrated supply chain, Dell has enjoyed many of the advantages of vertical integration while simultaneously benefiting from the investments, innovation, efficiencies, and specialization of highly focused suppliers.
Although the Dell model does not fit every situation,. By , the success of the Dell model, as might be expected, was causing problems for competitors, including Fujitsu America, which had large inventories and high shipping costs Washington Post , May 2, Customers had to wait 10 days for laptops, while competitors were delivering in five. In response, Fujitsu moved its distribution center from Portland, Oregon, to Memphis, Tennessee, and turned distribution over to FedEx Corporation, the parent company of Federal Express.
In direct response to orders, FedEx coordinates the shipment of components from worldwide suppliers, oversees the assembly of PCs, and ships them out, all in three or four days.
By early , the cycle time on the ground was eight to twelve hours, and the goal was to reduce it to four hours. Fujitsu has essentially eliminated geographic proximity as an issue and has made maximum use of the benefits of globalization, including low cost. Even with the premium price of express shipping, this modification of the Fujitsu supply chain saved the company millions of dollars, slashed inventories by about 90 percent, and increased profits by 25 percent.
Most important, these changes have enabled Fujitsu to compete effectively with Dell for Internet sales directly to consumers. However, as is evident from these examples, these innovations in supply chain integration can also impose large burdens on suppliers in terms of responsiveness, inventories, and management of their own supply chains. The costs, complexities, and risks of fully integrating and managing a highly integrated supply chain can be as substantial as the costs of integrating and operating a corporation of comparable size.
Thus, most supply chain integration efforts to date have been very limited in scope. Some of the major costs are listed below:. Opportunity costs i. Because the extent of interconnectedness and interdependency makes highly integrated chains increasingly vulnerable to disruptions, the risk. A highly integrated, interdependent supply chain that consists primarily of sole-source suppliers practicing just-in-time manufacturing with minimal inventories is highly reliant on the timely delivery of quality components and services.
Failure by one participant to deliver can rapidly bring other parts of the chain to a halt. This happens, on occasion, even to the best suppliers and logistics providers. Automakers, for example, who are under constant pressure to reduce costs, have tightened their supply chains to the point that they typically have less than a one-day supply of parts at final assembly facilities. Thus, a breakdown anywhere in the supply chain has the potential of bringing production to a halt e.
Potential threats, including storms, power outages, terrorism, computer hackers, disruptions in communications, and equipment breakdowns, can be very difficult to predict and costly to prepare for. In another example, the earthquake that shook Taiwan in September showed how a power supply disruption in one country can have worldwide reverberations through an entire industry. Damage to two electric power substations was the primary cause of a shutdown of Taiwan's computer-chip industry, which resulted in shortages of components and higher costs in the supply chains of OEMs around the world.
Supply chain participants must individually and collectively assess the probability of production-stopping events and their tolerance for risk, which must be balanced against the savings from increased sole-sourcing, tighter integration with remaining suppliers, and reduced inventories and production capacities.
Thus, although good communications and resource sharing can be helpful in preparing for and responding to disruptions, supply chain, participants must be careful to avoid unacceptable levels of risk in their zeal for integration. Small and medium-sized manufacturing enterprises should develop operating strategies based on an appropriate balance between supply chain performance and risk; assess the probability and effects of potential threats to their supply chains; and maintain sufficient though sometimes expensive slack, redundancy, and flexibility to keep the potential threats at manageable levels.
The most sought-after benefit, or return on investment, in supply chain integration is the cost savings that result from reductions in inventory. Inventories can be reduced by increasing the speed at which materials move through the supply chain and by reducing safety stocks.
For example, if the costs of maintaining inventory are approximately 1 percent per month and if an integrated supply chain can reduce inventory levels by 30 percent, the savings, shared among the participants, can be substantial. As its name implies, a DLN includes the three components GM was addressing: "digital" for technology enabled; "loyalty" for a focus on customers and on increasing their loyalty and lifetime value to GM; and "network" for coordinating and leveraging all supply and distribution chain partners to serve those customers.
Wagoner and his team believed their efforts would be fundamental to a sustainable, value-creating auto industry business model that would lead to increased efficiency and profitability. The group had made excellent progress, and Wagoner decided to get together with his team to take stock of where they stood in realizing their overall vision. But the words "industry business model is broken" stayed with him.
He wondered whether the investments in these myriad initiatives would actually pay off--and whether they would help fix the problem of low value creation. Brought to you by:. What's included: Educator Copy. Overview Included Materials. Details Pub Date: Mar 4, Discipline: Operations Management.
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