1. Creating World-Class Supply Chains
Matthias Holweg Ph.D.
Judge Business School
University of Cambridge
World Bank - Knowledge Economy Forum VI
Cambridge, April

2. Outline Supply chain mangement The automotive industry Conclusions
Why is it important?
Features of high-performing supply chains
The role of technology
The automotive industry
Global trends
The case of Slovakia
Conclusions
Policy recommendations

3. Outline Supply chain mangement The automotive industry Conclusions
Why is it important?
Features of high-performing supply chains
The role of technology
The automotive industry
Global trends
The case of Slovakia
Conclusions
Policy recommendations

4. Why do we talk about it?
Traditional thinking: competition is driven by the 4P’s
Today: supply chain capabilities determine competitiveness!
Wal-Mart versus K-Mart
Compaq/HP versus Dell
A final product is not the sole achievement of the OEM
Customer experience is determined by supply chain: quality, cost, delivery
Significant proportion of value sourced from suppliers!
Supply chains are connected systems:
Competitiveness of one tier is a function of the supply and distribution functions, i.e. surrounding tiers.
“Value Chains compete, not individual companies!”
(Christopher 1992)
Wal mart, 50% turnover through VMI
Dell 59 days payment cycle
PRODUCT
The business has to produce a product that people want to buy. They have to decide which ‘market segment’ they are aiming at – age, income, geographical location etc. They then have to differentiate their product so that it is slightly different from what is on offer at present so that people can be persuaded to ‘give them a try’.
PROMOTION
Customers have to be made aware of the product. The two main considerations are target market and cost. A new business will not be able to afford to advertise on national television, for instance and would not wish to because its market will be local to start with. Leaflets, billboards, advertisements in local newspapers, Yellow Pages and ‘word of mouth’ would be more appropriate.
PRICE
The price must be high enough to cover costs and make a profit but low enough to attract customers. There are a number of possible pricing strategies. The most commonly used are:
PENETRATION PRICING – charging a low price, possibly not quite covering costs, to gain a position in the market. This is quite popular with new businesses trying to get a ‘toehold’.
CREAMING – the opposite to penetration pricing, this involves charging a deliberately high price to persuade people that the product is of high quality. Luxury car makers often use this strategy
COST PLUS PRICING – this is the most common form of pricing. Costs are totalled and a margin is added on for profit to make the total price.
PLACE
The business must have a location that it can afford, and that is convenient and suitable for customers and any supplier.

5. The Essence of Supply Chain Management
The essence of SCM: 2+2=5
Conventional thinking: optimise your own operations..
..but sum of local optima is not a global optimum.
Synergy is a systems effect
The differential benefit of SCM is the value you derive by not simply managing individual pieces, but the entire system
Goal:
“to manage upstream and downstream relationships with suppliers and customers in order to create enhanced value in the final market place at less cost to the supply chain as a whole” (M Christopher)

6. “Islands of Excellence” or Optimal Supply Chain?
100
Max
Average
Raw Materials
and components
21%
Assembly
Plant 6%
Distribution
73%
Min
Days of Inventory 50
What we are saving in manufacturing, we are loosing in distribution!
Comment by Ralph Borsodi (1929): “..in 50 years between 1870 and 1920 the cost of distributing necessities and luxuries has nearly trebled, while production costs have gone down by one-fifth. … What we are saving in production we are losing in distribution.”
Dispatch
Customer
Raw Material
Assembly WIP
On-site Parts
Distribution
Bought-in Parts
In-house Parts
Finished Parts
Assembly WIP
Inbound Transit
Pre-Assembly WIP
Outbound Transit
Source: Holweg and Pil, “The Second Century”, MIT Press 2004

7. Features of High-performing Supply Chains
Long-term collaborative relationships
Trust and commitment, respect of the right of mutual existence
Single or dual sourcing
Component volume is adjusted according to performance
Constant positive pressure by dual sourcing
Improvement
Collaboration with suppliers on operational improvement; example: Toyota’s Supplier Support Center (TSSC) in Kentucky
Annual cost reductions are realised in collaboration, not isolation
Operations and logistics
Level production schedules to avoid spikes in the supply chain
Milk-round delivery systems that can handle mixed-load, small-lot deliveries
Disciplined system of JIT delivery windows at the plant; suppliers deliver only what is needed, even if this compromises load efficiency in transport

8. A Cry from the (US) Supplier Heart
“There is little chance that beating the hell out of the supplier base, breaking contracts,....not paying your tooling bills,...is going to get to the root cause of your problem, Big Three. You know the same suppliers raked over the coals, and used as a whipping boy to explain the Big Three's cost problem, are the same suppliers investing, building partnerships and earning a good return with the vehicle producers that have the growing market share. There is a discontinuity here. But it is also very clear,...the sheer mass,...the investment,...the involvement between suppliers and the traditional Big Three can only lead to one conclusion. Our futures are inexplicably tied, and neither can afford the other to fail.” Tim Leuliette, President/CEO of Metaldyne, August 12, 2002

9. The Role of Technology The ‘Holy Grail’ in curing supply chain ills?
Example: ‘Bullwhip problem’
Demand visibility is key: RFID / AutoID, EDI, EDIFACT, EPOS, CPFR
…yet they only work if the planning systems use this information!
Example: transaction costs in automotive
COVISINT (est. 2000) and the B2B/e-commerce revolution
Predicted savings of $1,000 per vehicle in transaction costs!
The Role of Technology
Technology alone is not a sufficient, it can assist problem solving
If the underlying processes are not capable, technology will fail
It is a means to an end, not an end in itself!
Covisint: 4 CEOs in 3 years.

10. Outline Supply chain mangement The automotive industry Conclusions
Why is it important?
Features of high-performing supply chains
The role of technology
The automotive industry
Global trends
The case of Slovakia
Conclusions
Policy recommendations

11. Production by Region
CAGR of 1.85% per annum..

12. Auto Industry: Major Trends
Overall global growth by 1.85% CAGR since 1975
Substitution of production with adjacent low-cost regions
Major growth of production in China ( : x5.2), and India ( : x1.7), - 4% in Western Europe
Auto industry is regionalising, not globalising!
What does this mean for the dynamics of competition?
Competing in a global, distributed industry:
Future competition on cost is a futile battle..
Rely on quality? Brand? Design? Proximity to customer?

13. Continuous Window of Opportunity
Established
Player
Product
Features
Market
Demand
New
Entrant
Time
Any labour cost advantage is temporary!
Source: adapted from Christensen (1997)

14. The Auto Industry in Emerging Countries
Automotive industry very attractive
Job multiplier of 5-7 for every assembly job
Technology transfer
Many subsidies, but questions of long-term viability!
The case of Slovakia’s auto industry
VW Bratislava, PSA Trnava, Kia Zilina, growing cluster CZ, PL, HU
5m inhabitants, c.900k production, domestic sales of <80k units
Challenges
Logistics: lead-time to customer, reliability of supply
Labour shortage, migration and rising compensation
Migration further east is inevitable
Domestic demand in Russia, growing labour cost differential

15. Outline Supply chain mangement The automotive industry Conclusions
Why is it important?
Features of high-performing supply chains
The role of technology
The automotive industry
Global trends
The case of Slovakia
Conclusions
Policy recommendations

16. Conclusion: Supply Chain ‘Enemies’
Common logic behind all SCM initiatives!
Inventory & delays
Time worsens ‘swing’ of amplification
Decision delays require stock
Safety stock decisions send false signals
Unreliability or uncertainty
Any kind of uncertainty needs to be covered with inventory
Unreliable processes cause unreliable delivery
Hand-offs or decision points
Every hand-off or tier in the system bears danger of distortion!
‘Inventory is a substitute for information’

17. Policy Recommendations
Infrastructure is a always a concern..
…but uncertainty is a sure killer of any location decision!
Customs clearance
Currency
Regulation (labour, traffic, taxation)
Crime & bribes
Supply chains are connected systems:
Labour cost differential is only a short-term advantage
Strong need to attract suppliers, not just manufacturers!
Need to build local competencies, rather than “screw-driver factories”
Domestic demand is not essential if logistics systems work

18. Centre for Competitiveness and Innovation, Judge Business School, Univ
Centre for Competitiveness and Innovation, Judge Business School, Univ. of Cambridge International Motor Vehicle Program Massachusetts Institute of Technology