A SPECIAL REPORT Managingthe
1
Supply Chain Management A PPLE COMPUTERS was recently named the world’s top supply chain manager by international research firm AMR Research. The iconic computer and high-tech device maker topped a league that included household names such as Nokia, Dell, Procter & Gamble, IBM, Toyota, Tesco and Nike. Having come in second to Nokia last year, Apple swapped places with the Finnish phone maker thanks to its handling of the poten- tial supply chain headaches that followed the introduction of the iPhone. “With its iPhone, Apple could have stumbled meeting demand, or failed on quality. It did neither. Behind-the-scenes moves like tying up essential components well in advance and upgrading basic information systems have enabled Apple to handle the demands of its rabid fan base without having to fall back on their forgiveness for mistakes,” the AMR report said. Indeed, there are many out there who wish Apple hadn’t been so good at this. In the immediate aftermath of the US launch of the iPhone, speculators attempted to buy as many handsets as they could in the belief that a market shortage would drive up the price on the resale market. Sadly for them, Apple’s supply chain man- agers ensured that no such short- ages occurred, and prices actually fell following the launch. However, Apple’s supply chain excellence is about more than just accolades and product availability. Many industry insiders believe it is central to its resurgence and trans- formation in recent years. It may seem hard to believe now, but the maker of the iPod and the iPhone was seen as an industry basket case in the 1990s. In 1997, Apple reported losses of almost $2 billion and its share price languished around the $10 mark. Two years later, it was turning in profits of over $300 mil- lion and its share price had almost quadrupled. Many Apple disciples attribute this near miraculous turnaround to the return of its talismanic founder, Steve Jobs, in 1997. And it is true that Jobs deserves a fair share of the credit. When he retook the reins, Apple was manu- facturing 19 different product lines – many of them, like the Newton PDA, chronic loss makers. Jobs slashed 15 of these lines, cut thou- sands of jobs and closed produc- tion plants around the world. But he also made some addi- tions. Many consider the most vital of these his recruitment of former Compaq computer pur- chasing executive Timothy Cook. Supply chain had been one of Apple’s greatest weaknesses, with the company faring poorly in matching production to demand. As a result, the company either missed out on sales because it couldn’t fulfil demand, or piled up huge stocks that later had to be written off at a crippling cost. Cook set about tackling the evils of excess stock and insufficient supply. When he took over, the company had five weeks of inven- tory in its plants and was turning it over 10 times a year. This wasn’t far out of line with the industry, but Dell was way ahead with a turn- over of 40 times a year. That was set as the benchmark for Apple – now reached. Under Cook’s stewardship, the company’s processes have been transformed. While Apple prod- ucts state that they are designed in California, the company makes next to nothing. Almost all of its products are made in Taiwan and other Asian locations and shipped directly to customers. The trick is that the value add from this manu- facturing activity all goes to Apple in Cupertino, California. “The role of supply chain man- agement in Apple’s recovery is not spoken about at all enough,” says Edward Sweeney of the National Institute for Transport and Logis- tics (NITL). “Apple is a classic example of a company that started to get the three key areas – new product introduction, marketing and supply chain management – right at the same time. The com- pany now concentrates on the higher-value activities of new product design and marketing, through excellent supply chain management.” Apple’s Cork plant has seen a similar transformation. “When we set up the NITL in 1998, one of our first meetings was with Apple in Cork and we have maintained close contact ever since,” says Sweeney. “Back then, the plant was all about manufacturing. Now, there is almost no manufacturing there. It is now engaged almost entirely in innovation and supply chain management. “Apple is a great case study, almost a microcosm of the Irish economy: how things have devel- oped until now and how we might make things better through engaging in higher value activity,” he adds. “Some people look at Apple today and think it has been an overnight success. But it has only been an overnight success after more than five years of hard work on transforming its entire supply chain.” S UPPLY CHAIN manage- ment may not be a term to set the heart racing, but it is playing a central role in the ability of modern com- panies to compete. This is because it has evolved from simply organ- ising supplies of raw materials and the distribution of products to something that encompasses almost every part of the product life cycle, from design through to delivery. “It’s a phrase that’s often wrongly used,” says Martin Chris- topher, professor of marketing and logistics at Cranfield Business School in the UK. “We used to talk about it as dis- tribution and logistics, and in the past, we typically talked about opti- mising our activities. But organisa- tions are now operating within much wider networks which are a lot more complex. “Modern supply chain manage- ment is about the management of relationships in that network.” The focus has also changed. “The traditional way of viewing supply chain management was as a means of controlling costs,” says Christopher. “But now it is seen as something that can create value and serve the customer. At the end of every supply chain is a customer, and we have to make it more responsive to customer needs in a changing mar- ketplace.” This change is leading to a move towards more flexible – or agile, as Christopher says – supply chains. “We’re looking at flexible supply chains that can do lots more at low cost,” he says. “This used to be seen as a trade-off, that increased service meant increased cost, but it is no longer possible to increase prices like that.” He cites the example of a sup- plier to the grocery trade. The dominance of large retail multi- ples means that the customer is firmly in the driving seat. He also argues that markets are moving so quickly that the entire supply chain is being re-engineered. “Companies used to design prod- ucts and optimise their processes to meet their own needs. Now they have to do it for the customer – the supply chain has to be organised from the customer backwards.” What he is referring to is the mass customisation manufac- turing techniques being used by BMW, among others. Customers are able to order their cars with an almost limitless number of personal specifications and the production line is able to accommodate that, with the car delivered according to normal schedules. “It is no longer acceptable to behave like Ford, years ago: Model Ts in any colour, so long as it was black,” says Christopher. “The car industry is moving from a model where it made forecasts of demand and manufactured accord- ingly, to one where it is assembling to order. “And customers won’t wait three months for their car – they’ll go somewhere else. This requires an agile supply chain.” The agile supply chain is one which can respond rapidly to changes in the marketplace. According to Edward Sweeney of the National Institute of Trans- port and Logistics (NITL), this agility will be a key success factor. “We have done a lot of work in looking at what will be the suc- cessful business models of the future,” he says. “And what we have found is that the key areas will be new product introduction, marketing and supply chain management. Busi- nesses that are good at all three will be successful.” By new product introduction, he means the process of developing and designing new products. Mar- keting covers the management of the relationship with customers. “If you are communicating with your market and your customers, you will know what they want,” he explains. “If you do new product introduc- tion well, you’ll get those products to the market in a timely fashion. But you won’t be able to do this if you don’t get your supply chain management right.” This has opened the way for the creation of the so-called virtual cor- poration – one that designs and sells manufactured goods, but doesn’t actually manufacture any- thing. Sun Microsystems was among the first to take a strategic decision not to engage in volume manufac- turing, instead devoting its ener- gies to management of a high- quality supply chain of trusted part- ners who did everything, from the manufacture of components through to the assembly and delivery of finished products. IBM quickly followed and, during the early 1990s, got out of manufacturing insofar as it could. Today, Apple’s iPhones and iPods are made on its behalf in Taiwan while it concentrates on product development and marketing. And in this lies a significant opportunity for Ireland. With supply chain management now seen as such a key competitive dif- ferentiator, many companies are looking to buy in the skills needed through outsourcing. “For small and medium-sized companies, outsourcing can be a good solution – they are buying in a competency that they don’t have,” says Peter Smyth, head of supply chain with Accenture in Ire- land. “It’s a bit like a small Irish company exporting to Europe buying space on a container rather than buying a truck themselves.” For larger companies, it’s a question of where they see their core competencies. But whether they keep it in-house or choose to outsource, Ireland is a good loca- tion for this activity. “There are real opportunities for basing strategic supply chain management functions here,” says Kevin Vaughan of supply chain management outsourcing spe- cialist, Sercom Solutions. “We have customers in the US who are selling to UK customers. We source product in China for them from Ireland, and have it delivered to those customers. This is the concept of the virtual fac- tory, which allows companies to concentrate on their core skills while companies like Sercom manage the supply chain for them.” In other words, it matters little where products are manufactured – the supply chain management is located wherever the expertise lies. In this case, it is Ireland. And it looks like the need for this expertise will keep growing, thanks to rising oil prices. “As oil heads for $200 (about ¤127) a barrel, all the rules are changing,” says Smyth. “A $10 (about ¤6.40) increase in oil adds four cent per mile to distribution costs in the US and between seven and nine cents per mile in Europe. This means companies are going to manufacture more product closer to their customers and have more distribution centres to serve them. In the case of a European com- pany, supply chain costs would rise by 14 per cent if oil prices rose from $100 to $200 and they did nothing about it. However, by changing their manufacturing strategy and increasing their number of distribution depots they could reduce this to just 3.5 per cent. And this increase includes the costs of putting in extra production lines.” These changes are driving the need for increased agility, and with Ireland already home to the supply chain management bases of many major multinational companies as well as specialists like Sercom and PCH International, this may present more opportunities and challenges for our economy. Managing the business from top to bottom Timothy Cook, under whose stewardship Apple’s processes have been transformed In the new globalised marketplace, it is the companies that excel at supply chain management that will succeed – and outsourcing will allow them to concentrate on their core skills. Barry McCall reports Apple is a modern-day Cinderella story of supply chain management excellence, and a model for the future of Irish business. Barry McCall reports How Apple bit back Effective supply chain management ensures that a company has control over every facet of its operations Illustration: Getty Images “ Apple is a classic example of a company that started to get the three key areas of new product introduction, marketing and supply chain management right at the same time A boy celebrates after buying one of the first iPhones following their launch last year. Apple’s excellent supply chain management ensured that no shortages of the iPhone occurred after its US launch, and the product fell in price following its release. Photograph: Getty Images “ Companies used to design products and optimise their processes to meet their own needs – now they have to do it for the customer A SPECIAL REPORT Thursday, July 10, 2008 THE IRISH TIMES 23
Transcript of A SPECIAL REPORT Managingthe
Supply Chain Management
APPLE COMPUTERS wasrecently named the world’stop supply chain manager by
international research firm AMRResearch. The iconic computerand high-tech device makertopped a league that includedhousehold names such as Nokia,Dell, Procter & Gamble, IBM,Toyota, Tesco and Nike.
Having come in second to Nokialast year, Apple swapped placeswith the Finnish phone makerthanks to its handling of the poten-tial supply chain headaches thatfollowed the introduction of theiPhone.
“With its iPhone, Apple couldhave stumbled meeting demand,or failed on quality. It did neither.Behind-the-scenes moves liketying up essential componentswell in advance and upgradingbasic information systems haveenabled Apple to handle thedemands of its rabid fan basewithout having to fall back on theirforgiveness for mistakes,” theAMR report said.
Indeed, there are many outthere who wish Apple hadn’t beenso good at this. In the immediateaftermath of the US launch of theiPhone, speculators attempted tobuy as many handsets as theycould in the belief that a marketshortage would drive up the priceon the resale market. Sadly forthem, Apple’s supply chain man-agers ensured that no such short-ages occurred, and prices actuallyfell following the launch.
However, Apple’s supply chainexcellence is about more than justaccolades and product availability.Many industry insiders believe it is
central to its resurgence and trans-formation in recent years.
It may seem hard to believenow, but the maker of the iPodand the iPhone was seen as anindustry basket case in the 1990s.In 1997, Apple reported losses ofalmost $2 billion and its shareprice languished around the$10 mark. Two years later, it wasturning in profits of over $300 mil-lion and its share price had almostquadrupled.
Many Apple disciples attributethis near miraculous turnaroundto the return of its talismanicfounder, Steve Jobs, in 1997. Andit is true that Jobs deserves a fairshare of the credit. When heretook the reins, Apple was manu-facturing 19 different product lines– many of them, like the NewtonPDA, chronic loss makers. Jobsslashed 15 of these lines, cut thou-sands of jobs and closed produc-tion plants around the world.
But he also made some addi-tions. Many consider the mostvital of these his recruitment offormer Compaq computer pur-chasing executive Timothy Cook.Supply chain had been one ofApple’s greatest weaknesses, withthe company faring poorly inmatching production to demand.As a result, the company eithermissed out on sales because itcouldn’t fulfil demand, or piled uphuge stocks that later had to bewritten off at a crippling cost.
Cook set about tackling the evilsof excess stock and insufficientsupply. When he took over, thecompany had five weeks of inven-tory in its plants and was turning itover 10 times a year. This wasn’tfar out of line with the industry,but Dell was way ahead with a turn-over of 40 times a year. That wasset as the benchmark for Apple –now reached.
Under Cook’s stewardship, thecompany’s processes have beentransformed. While Apple prod-ucts state that they are designed inCalifornia, the company makesnext to nothing. Almost all of itsproducts are made in Taiwan andother Asian locations and shippeddirectly to customers. The trick isthat the value add from this manu-facturing activity all goes to Applein Cupertino, California.
“The role of supply chain man-
agement in Apple’s recovery is notspoken about at all enough,” saysEdward Sweeney of the NationalInstitute for Transport and Logis-tics (NITL). “Apple is a classicexample of a company that startedto get the three key areas – newproduct introduction, marketingand supply chain management –right at the same time. The com-pany now concentrates on thehigher-value activities of newproduct design and marketing,through excellent supply chainmanagement.”
Apple’s Cork plant has seen asimilar transformation. “When weset up the NITL in 1998, one of ourfirst meetings was with Apple inCork and we have maintainedclose contact ever since,” saysSweeney. “Back then, the plantwas all about manufacturing. Now,there is almost no manufacturingthere. It is now engaged almostentirely in innovation and supplychain management.
“Apple is a great case study,almost a microcosm of the Irisheconomy: how things have devel-oped until now and how we mightmake things better throughengaging in higher value activity,”he adds. “Some people look atApple today and think it has beenan overnight success. But it hasonly been an overnight successafter more than five years of hardwork on transforming its entiresupply chain.”
SUPPLY CHAIN manage-ment may not be a term toset the heart racing, but itis playing a central role inthe ability of modern com-
panies to compete. This is becauseit has evolved from simply organ-ising supplies of raw materials andthe distribution of products tosomething that encompassesalmost every part of the productlife cycle, from design through todelivery.
“It’s a phrase that’s oftenwrongly used,” says Martin Chris-topher, professor of marketingand logistics at Cranfield BusinessSchool in the UK.
“We used to talk about it as dis-tribution and logistics, and in thepast, we typically talked about opti-mising our activities. But organisa-tions are now operating withinmuch wider networks which are alot more complex.
“Modern supply chain manage-ment is about the management of
relationships in that network.”The focus has also changed.
“The traditional way of viewingsupply chain management was asa means of controlling costs,” saysChristopher.
“But now it is seen as somethingthat can create value and serve thecustomer. At the end of everysupply chain is a customer, and wehave to make it more responsive tocustomer needs in a changing mar-ketplace.”
This change is leading to a movetowards more flexible – or agile, asChristopher says – supply chains.“We’re looking at flexible supplychains that can do lots more at lowcost,” he says. “This used to beseen as a trade-off, that increasedservice meant increased cost, butit is no longer possible to increaseprices like that.”
He cites the example of a sup-plier to the grocery trade. Thedominance of large retail multi-ples means that the customer is
firmly in the driving seat. He alsoargues that markets are moving soquickly that the entire supplychain is being re-engineered.
“Companies used to design prod-ucts and optimise their processesto meet their own needs. Now theyhave to do it for the customer – thesupply chain has to be organisedfrom the customer backwards.”
What he is referring to is themass customisation manufac-turing techniques being used byBMW, among others.
Customers are able to ordertheir cars with an almost limitlessnumber of personal specificationsand the production line is able toaccommodate that, with the cardelivered according to normalschedules.
“It is no longer acceptable tobehave like Ford, years ago: ModelTs in any colour, so long as it wasblack,” says Christopher. “The carindustry is moving from a modelwhere it made forecasts ofdemand and manufactured accord-ingly, to one where it is assemblingto order.
“And customers won’t waitthree months for their car – they’llgo somewhere else. This requiresan agile supply chain.”
The agile supply chain is onewhich can respond rapidly tochanges in the marketplace.
According to Edward Sweeneyof the National Institute of Trans-
port and Logistics (NITL), thisagility will be a key success factor.“We have done a lot of work inlooking at what will be the suc-cessful business models of thefuture,” he says.
“And what we have found is thatthe key areas will be new productintroduction, marketing andsupply chain management. Busi-nesses that are good at all threewill be successful.”
By new product introduction, hemeans the process of developingand designing new products. Mar-
keting covers the management ofthe relationship with customers.“If you are communicating withyour market and your customers,you will know what they want,” heexplains.
“If you do new product introduc-tion well, you’ll get those productsto the market in a timely fashion.But you won’t be able to do this ifyou don’t get your supply chainmanagement right.”
This has opened the way for thecreation of the so-called virtual cor-poration – one that designs and
sells manufactured goods, butdoesn’t actually manufacture any-thing.
Sun Microsystems was amongthe first to take a strategic decisionnot to engage in volume manufac-turing, instead devoting its ener-gies to management of a high-quality supply chain of trusted part-ners who did everything, from themanufacture of componentsthrough to the assembly anddelivery of finished products.
IBM quickly followed and,during the early 1990s, got out of
manufacturing insofar as it could.Today, Apple’s iPhones and iPodsare made on its behalf in Taiwanwhile it concentrates on productdevelopment and marketing.
And in this lies a significantopportunity for Ireland. Withsupply chain management nowseen as such a key competitive dif-ferentiator, many companies arelooking to buy in the skills neededthrough outsourcing.
“For small and medium-sizedcompanies, outsourcing can be agood solution – they are buying in
a competency that they don’thave,” says Peter Smyth, head ofsupply chain with Accenture in Ire-land. “It’s a bit like a small Irishcompany exporting to Europebuying space on a container ratherthan buying a truck themselves.”
For larger companies, it’s aquestion of where they see theircore competencies. But whetherthey keep it in-house or choose tooutsource, Ireland is a good loca-tion for this activity.
“There are real opportunitiesfor basing strategic supply chainmanagement functions here,” saysKevin Vaughan of supply chainmanagement outsourcing spe-cialist, Sercom Solutions.
“We have customers in the USwho are selling to UK customers.We source product in China forthem from Ireland, and have itdelivered to those customers. Thisis the concept of the virtual fac-tory, which allows companies toconcentrate on their core skillswhile companies like Sercommanage the supply chain forthem.”
In other words, it matters littlewhere products are manufactured– the supply chain management islocated wherever the expertiselies. In this case, it is Ireland.
And it looks like the need forthis expertise will keep growing,thanks to rising oil prices.
“As oil heads for $200 (about¤127) a barrel, all the rules arechanging,” says Smyth. “A $10(about ¤6.40) increase in oil addsfour cent per mile to distributioncosts in the US and between sevenand nine cents per mile in Europe.This means companies are going tomanufacture more product closerto their customers and have moredistribution centres to serve them.
In the case of a European com-pany, supply chain costs wouldrise by 14 per cent if oil prices rosefrom $100 to $200 and they didnothing about it. However, bychanging their manufacturingstrategy and increasing theirnumber of distribution depotsthey could reduce this to just3.5 per cent. And this increaseincludes the costs of putting inextra production lines.”
These changes are driving theneed for increased agility, and withIreland already home to the supplychain management bases of manymajor multinational companies aswell as specialists like Sercom andPCH International, this maypresent more opportunities andchallenges for our economy.
Managing thebusiness fromtop to bottom
Timothy Cook, under whosestewardship Apple’s processeshave been transformed
In the new globalised marketplace, it is the companies that excel at supplychain management that will succeed – and outsourcing will allow them toconcentrate on their core skills. Barry McCall reports
Apple is a modern-dayCinderella story ofsupply chainmanagementexcellence, and amodel for the future ofIrish business.Barry McCall reports
How Apple bit back
Effective supply chainmanagement ensures that acompany has control over everyfacet of its operationsIllustration: Getty Images
“Apple is aclassic example
of a company thatstarted to get the threekey areas of newproduct introduction,marketing and supplychain managementright at the same time
A boy celebrates after buying one of the first iPhones following their launch last year. Apple’sexcellent supply chain management ensured that no shortages of the iPhone occurred after its USlaunch, and the product fell in price following its release. Photograph: Getty Images
“Companies used to designproducts and optimise their
processes to meet their own needs– now they have to do it for thecustomer
A SPECIAL REPORT
Thursday, July 10, 2008 THE IRISH TIMES 23
