Maturity Model for Industrial Supply Chains Hameri, A. P., McKay, K. N., & Wiers, V. C. (2013, January). A maturity model for industrial supply chains. In Supply Chain Forum: An International Journal (Vol. 14, No. 3, pp. 2-15). Taylor & Francis.
Ari-Pekka Hameri 1, Kenneth N. McKay 2 and Vincent C.S. Wiers 3 Revised version October 2012 / Re-revised December 2012
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Faculty of Business and Economics, Department of Management, University of Lausanne, Internef, Lausanne 1015 Switzerland, e-mail:
[email protected]
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Department of Management Sciences, University of Waterloo, Waterloo, ON, Canada, e-mail:
[email protected]
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Corresponding Author, Eindhoven University of Technology, School of Industrial Engineering, Subdepartment Operations, Planning, Accounting, and Control, PO Box 513, Eindhoven 5600MB, The Netherlands, e-mail:
[email protected], phone: +31 629010573
Keywords: Supply Chain Management, Maturity Models, Case Studies, Supply Chain Strategy,
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Maturity Model for Industrial Supply Chains Abstract This paper takes an evolutionary view of supply chains to suggest a series of distinct, contextual phases for supply chain execution and what maturity might mean at each phase. For example, what is best practice in a mature industry might not be best practice in a pioneering situation. Three industry examples, from automotive, electronics and shipbuilding industries, are used to illustrate different phases through which supply chains can evolve and how each phase can differ in the details. Each phase of evolution is described and a preliminary taxonomy is presented to set up the maturity model for industrial supply chains. The model is based on six steps of which first three are regional and concern initial sourcing, chain organization and expansion. The following three steps concern international and global operations with chain restructuring and redesign, ending to lean supply chain management.
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1 Introduction From the initial innovator’s dream and start-up to mature entities, firms and industries constantly evolve. The precise evolutionary process is likely unique per situation, but megatrends can be observed that dominate a certain time period in the life-cycle. For example, during initial phases the volumes are likely to be relatively low, standards not yet established, key tasks and aspects done internally with many secondary items and tasks outsourced, and a lack of clarity might exist about what suppliers will be the ‘best’ to work with, what processes are to be chosen, and what materials to use. As time goes on, the choices and decisions differ as the situation develops. The sales volumes will hopefully increase, certain outsourced activities may be brought in house, vertical integration might be considered, and functional layouts may be adopted in the ‘factory’. The vendor base will also likely change as specialties are developed, volumes increase, and possibly multiple customers are interacted with. With even more time, the volume and market share might increase and process layouts, focused factories, rationalization of make/buy, and strategic relationships with vendors may be seen. Historical research into the practice of manufacturing processes and management has identified a number of these megatrends and practices that appear to repeat over time, in the same sequence, from the 1700’s to the present day and places the trends in a cyclic taxonomy (e.g., research supporting McKay 2003, McKay and Wiers 2004, and Koenigsberg and McKay 2010, McKay 2010). Examples from history, such as Singer’s sewing machine venture in the 1800’s and his competitors (Hounshell 1984) suggest that what is best practice in one cycle is not necessarily the best for another. In Singer’s situation, several of his competitors strove for what would be considered best practice in a mature situation and focused on the best factory system and machining techniques. Singer focused on sales and quickly won market share and dominated the industry. His main competitors at the time either went bankrupt or went into other industries such as tool making. In this paper, we will focus on the supply chain and attempt to describe a maturity framework with which to view the relationship between manufacturers and suppliers. It is 3
suggested that such a framework can be used to guide the development of appropriate maturity models per evolutionary cycle. Matching supply chain evolution to manufacturing evolution is not a straight forward process as it is possible for a firm to progress through a number of phases such as the start-up, systemization, and expansion phases with perhaps less than optimal practices and survive without using ‘best practices’. For example, government intervention can create trade barriers, the owners might have deep pockets and are willing to forego normal profit margins and so forth. Furthermore, the phrase ‘best practice’ itself suggests that not all firms are engaged in the best practice when they should be. A supply chain represents the entities and processes which form the sequence of interdependencies required to produce a product or service. SCM maturity models are often used to assess a chain’s characteristics and performance outcomes against what is considered best practice. This exercise helps organizations design or modify the supply chain. On the surface this is rational and it is hard to fault the underlying decision process. If a certain firm or a group of firms is doing X and the firms are considered successful, the inclination to replicate the winning processes and methods associated with X is strong. However, in this paper it will be argued that processes and methods must have a context for them to make sense and this contextual positioning is absent in the SCM design and maturity model literatures. That is, what is considered best practice in an industry will change with time and the environmental situation. In this paper we will use an evolutionary view of manufacturing megatrends to anchor a maturity model for industrial supply chains with series of distinct, contextual phases for which certain ‘best practice’ practices are different and for which different SCM design criteria are needed. Brickley et al. (1997) discuss firm failures and challenges related to management fads and perceived best practices (e.g., TQM, JIT). They argue that most of the best practice and other new strategy implementation projects fail to take into account all of the three critical components of organizational architecture: assignment of decision rights, performance evaluation systems, and compensation systems. We extend this argument by suggesting that best practices must also be applied appropriately in the suitable evolutionary context. At one extreme is the start-up or pioneering phase of an industry, and at the 4
other end is the high-volume commodity situation with aggressive, global competition. For example, the best practice for supply chain management for a new company engaged in alternative energy is likely to be different than the best practice for an established automobile supplier producing traditional batteries, independent of volume differences. The following sections briefly review the SCM maturity model literature, the proposed maturity model with evolutionary context, and three short examples to illustrate the phases of the model. The paper concludes with proposed maturity concepts for each evolutionary stage.
2 Literature review: SCM in context Since Supply Chain Management became a popular topic both in academia and in industrial practice in the 1990s, many papers have been written on supply chain management. Giunipero et al. (2008) noted that most papers of the papers they reviewed were about strategy. Supply chain management writers usually advocate that firms should increase efforts on integration, collaboration, coordination, centralization, et cetera. A more integrated supply chain would lead to lower integral costs, a higher service level, and less waste (e.g. Frohlich & Westbrook, 2001). Some papers are more focused on academic aspects, whereas some papers have real value in practice (Ahlstedt & Hameri, 2004). Another frequent theme is that the more information is shared between parties, the better the decisions being taken in the supply chain will be. For example, IBM (2006) describes 5 stages of a supply chain, starting with a ‘static supply chain’ which can evolve into an ‘on demand supply chain’. The message in the paper is that all companies should strive for an ‘on demand’ situation, which is characterized by information sharing, collaboration, alignment. The paper by Lockamy and McCormack (2004) describes four phases of maturity: Defined, Linked, Integrated, Extended, which is similar to the IBM report – more outward facing, more collaboration, and more alignment is what every company should strive for. Written from the perspective of benchmarking, Simatupang and Sridharan (2004) also suggest that information sharing, decision synchronization and incentive alignment should be aspired to in supply 5
chains. Many more of these examples can be mentioned, such as (Beamon, 1998), Christopher and Ryals (1999), Hicks et al. (2000), Croom (2001), Kehoe and Boughton (2001), Lamming et al. (2001), Lockamy et al. (2000), Hahn et al. (2000), Olhager and Selldin (2004), Lim and Palvia (2001). From the literature, it can be concluded that the strategic directions of supply chain management, such as integration, seems to be relatively undisputed. Although the benefits of integration and information sharing are valid and recognized by most experts, most papers do not make a distinction on when it is wise to integrate and when not to – supply chain management appears to be a synonym for supply chain integration, independent from the context. The supply chain analyses and maturity models (e.g. ) are focused on the supply chain itself, looking towards a certain ‘benchmark’ capability independent of the industry or firm context. The literature reviewed appears to implicitly assume that supply chains can be designed, deployed, operated, and evaluated in an isolated fashion. This assumption is the main challenge of this paper. One possible reason for the lack of situational context is suggested by the review on supply chain research by Giunipero et al. (2008). They conclude that most of the research is focused on one tier relationships (manufacturer – main supplier) and not on the second and third tiers, the methodological analysis is limited, a limited focus on global chains is taken, and that there is a lack of longitudinal studies. The Giunipero et al. paper indicates that longitudinal studies could identify ‘megatrends’ that capture multitiered buyer-supplier relationships over a product life-cycle but do not provide a model of such trends. For the last several decades, most of the major manufacturing industries can be probably considered to have been in a reasonable mature, high volume, and stable situation (e.g., electronics, automotive, consumer goods). The top tier relationships have been well established in these sectors and it is reasonable to look for similarities and benchmark across this general tableau. However, what should others do, such as those involved in alternative energy production, introducing a new medical instrument for surgical procedures, or innovating with low volume 3D printing consider as reasonable benchmarks or best practice? 6
The concept of situational context is not totally absent in the literature. Some discussions on inter-firm relationships can be found in literature. For example, in a review of supply chain literature, Tan (2001) summarizes that integrated supply management requires a massive commitment, and that trusting suppliers may be good business sense, but for many firms, hostility may still be more profitable, even in the long run. In this same line of thought, Hill (2009), discusses how unethical behavior will damage the trust between supplier and buyer. These types of situational or contextual discussions raise the question ‘how to distinguish between the situations where one should or should not integrate?’ However, there might also be different strategies if both firms are in start-up mode, or if one is in a mature situation and the other is not. How should the inter-relationships be shaped when the different entities are at different points in their evolution? These are topics not addressed by the supply chain maturity models. In a review on operations strategy research by Boyer et al. (2005) it is stated that strategic evolution studies focus on incremental change, but questions on substantial changes typically remain unanswered. Citing: “How should companies recognize when they are due for a ‘non-incremental’ change of strategy? How should this strategy be pursued? Research on strategic evolution should seek to examine a few companies in depth over a long period of time in order to document and analyze evolutionary patterns.” Recent work such as de Oliveira et al. (2011) attempts to address some of these issues. The de Oliveira et al. work reviews the maturity models commonly found in the literature and proposes another model – SCPM3 (Supply Chain Process Management Maturity Model) which also includes the identification of important areas, and discusses “what best practices are fully matured and in use at what maturity level?” They analyzed 90 process capabilities and have proposed that certain scoring on the capabilities indicate turning points or indicators for moving between levels. They also state in their conclusion “A company can complete the assessment … place themselves on the maturity model… can develop an action plan to improve process maturity incorporating best practices only as they are relevant to reaching the next maturity level… avoiding getting ahead of themselves and trying to implement best practices that do not have the precedence components in place.” The de Oliveira et al. discussion does not include any mention 7
of the larger industrial context and what practices make sense. The evolution of the supply chain is discussed (as all SCM maturity models discussions do), but without any guidance relating to the maturity of the industry. The evolutionary framework and maturity meta-model we formulate attempts to close the gap by introducing a situational evolution schema for supply chain management. In other words: assuming that as industries evolve over time, their supply chains go through a set of phases (i.e., the megatrends suggested by Giunipero et al. 2008), and in every phase of increasing industrial maturity there are SCM strategies or best practices that make sense for the involved companies. It is suggested that the proposed framework and model helps to provide insights about how to evaluate, design, and set objectives for the supply chain based on the situational context defined by the two players (manufacturer and supplier).
3 Evolution of manufacturing and supply chain management Since the beginning of the Industrial Revolution, industry has been a process of taking an idea, perhaps new in its totality, or taking it from the craft level, and creating enterprises to deliver the manufactured entity to a customer base; in an ever increasing efficient and effective fashion. The megatrends and past practices in production control and general manufacturing management has been the subject of past research (McKay 2003, McKay and Wiers 2004, and Koenigsberg and McKay 2010, McKay 2010) and the general megatrends and general cycles of manufacturing behavior are summarized in Table 1 below. Insert table 1 here The above table represents a general taxonomy or trend map that many industries and firms have travelled, as supported by the historical research underlying the cited works. The phases are not discrete and are formed by practices being developed (often re-invented) by a small number of entities and when proven successful become a best practice for others to adopt and copy. Unless a firm and its management are self-reflective (and aware of past trends and patterns), it is likely that a firm will not be consciously 8
aware of the cycles and the major phases. They will know that the current competitive pressures force them to a certain focal point for waste reduction or process change, but will be otherwise unaware of the cycles. The cycles are generally driven by competitive pressures on manufacturing and distribution costs, desire for control over the firm’s own destiny, and the desire for growth (not always related to competitive pressures). This cyclic research was general in nature and did not focus on any specific topic, such as supply chain management. However, it was clear from the historical research that different SCM practices were used by the industry leaders at different points in time. Using Table 1 and the historical research as a base, a proposed set of SCM cycles is shown in Table 2. Insert table 2 here
3.1 Initial Sourcing It appears that a common approach in successful start-up ventures is to outsource almost everything except final assembly and any key proprietary intellectual property (methods, processes, or functionality). In this early stage, management attention is focused on the business launch, getting the new idea sorted out to the level of being delivered and attention should not be diverted elsewhere. Suppliers are picked on a number of criteria including closeness (for the inevitable number of iterations of back/forth cycles), and the basic ability of delivering without excessive interaction. In this phase the best practice of SCM management appeared to have been: a) do what you have to do, not what you want to do, and b) picking suppliers capable of working effectively and efficiently with a new venture. A maturity model for the first phase would focus on these and similar ideas.
3.2 Chain Organization The best SCM practice as firms evolved from start-up to organized structures appear to be the a) establishment of policies, procedures (for ordering, incoming, dealing with quality issues, communicating protocols, etc.), and b) the re-examination of the vendor base. As the volumes increased, not all vendors wanted to, or could scale up. Furthermore, as the situation evolved the weak competitors in the vendor 9
base either merged or exited the market. The third practice that appeared to dominate was the in-house production of items formerly outsourced – ‘we can make it better and cheaper ourselves, and have control over it’. The best firms seemed to be able to time the in-house migration to minimize their own development and learning costs by waiting for the technology and processes to stabilize. If the move is too early, the firm’s efforts are diverted away from the main product and processes.
3.3 Chain Expansion At this point in time there are few, large structural differences to be seen in SCM policies and operations. There are local competitors and since there is this commonality, the basic costs, skills, and infrastructure are similar for all competitors. The business focus is on competition using features and functionality. Relationships are firmed up with the One Tier suppliers and as the product mix increases, the number of suppliers increase. The best SCM practice during this period appears to be a) analysis of part proliferation and simplification in an attempt to control the variety of parts and suppliers, and b) two way interaction with the key One Tier suppliers on both product and process levels.
3.4 Chain Restructuring This phase is mainly driven by lower cost caused by foreign competition or by ‘large’ entities entering the market place. The different labor force costs, manufacturing infrastructure, lack of past service obligations, and so forth imply that the established firms must consider drastic changes. The types of best SCM changes introduced are a) JIT beyond One Tier, b) global sourcing at the component and subsystem level (design and supply), and c) key metrics focused on supplier responsiveness.
3.5 Chain Redesign Chain restructuring is usually sufficient for a period of time to ward off the foreign competitors and retain dominance. However, the competition is also not static and is moving forward on efficiency and effectiveness. To compete, a common practice appears to be a renewed focus on the customer, customization, and an increase in build and flow complexity – a major SCM redesign cycle. This results 10
in the best SCM practices a) strategic alliances with suppliers with larger or more complex subsystems outsourced, b) extending process and build reviews on key suppliers and their suppliers several level deep, and c) renewed focus on simplification and part proliferation (reducing supplier base, redundancy).
3.6 Lean SCM Inevitably there are competitors who will have a higher risk tolerance and will push the limits of ‘lean’. There will also be suppliers who will purchase and merge with their own competitors reducing the size of the core SC base. Suppliers will attempt to increase their value added component by offering complementary services or products, as will the manufacturer. If taken too far, the lean chains are fragile and any perturbation will cause severe outages and production stoppages. Best practice in this stage balances risk and efficiency: a) reduction in SC base, but with pre-established contingency planning, b) extreme integration of supplier, manufacturer processes and communication to the point of creating factories within (or beside) factories, c) distributed manufacturing for regional demand (trading off energy, resources, labour, governmental, and transportation factors) and d) ensuring sufficient on-demand capability for key resources by utilizing them in normal periods for lower priority complementary activities – not sitting idle, but available if the need arises for the main business activity.
3.7 Framework summary The six phases follow the logical progression from start-up and initial sourcing activities where there are few competitive threats, to a global industry perspective with a high volume and high mix profile. The framework does not imply that every firm must and will follow this path and it is possible that certain developments will restart a phase or dramatically move a firm or industry to a different phase. The framework suggests that there are periods of time when certain SCM practices seem to naturally evolve and that the best practices make sense at that time. The six phases of supply chain maturity can be aggregated to two key periods of time that become evident from the historical literature – local and regional competition, and global. This is illustrated in Table 3. 11
Insert Table 3 here This means the phases in supply chain evolution can be separated into a pre-global or a post-regional period. This distinction is important as it implies larger markets, greater distances to and from markets, regional customization, cultures, and languages, and regional competitors (and possibly other global competitors). The supply chain is more likely to get deeper and more complex in the global situation compared to the regional setting. As the firm or industry matures from a regional to global situation, supply chain management is expected to become tighter and become a higher focus for the firm – evolving from ad hoc waste reduction, through reduction within the four walls of a factory, through reduction on directly control supply chain elements, to reduction of waste associated with arm’s length supply chain elements – travelling upstream as far as possible. The latter situation matches that experienced by mature firms in a commodity situation. SCM evolution models and assessment tools such as the BPO (business process orientation) and SCOR (supply chain operations) models (see e.g. Lockamy and McCormack 2004) appear to make sense for these situations. The following initial maturity model for industrial supply chains is a starting point for further research and refinement and is illustrated in Figure 1. To illustrate the framework, three example industry situations have been chosen. After the examples are briefly presented, the framework will be discussed using the examples as a context. Insert figure 1 here
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4 Example contextual situations 4.1 Longitudinal case study method The examples are presented using a longitudinal case study method. Capturing the richness and complexity of the processes studied is virtually impossible by means of a cross-sectional study (Yin 1989). The case method is better suited to analyzing complex longitudinal phenomena such as interorganizational evolution and technological development and exchange of resources and organizational capabilities in supply chains (Eisenhardt 1989, Glaser et al. 1967). The evolutionary patterns or megatrends are the focus of analysis for the cases. A similar approach has been used to analyze other supply chain aspects, such as security (Hintsa & Hameri, 2009). It should be noted that, in these kinds of grounded theory studies, the use of existing literature has been somewhat controversial, for in a pure grounded theory study the findings should emerge from the data only (Glaser et al. 1967). However, every researcher enters the field with a body of literature, that he or she has read, and that acts as a cognitive lens shaping his/her perception (Strauss et al. 1998). Thus, claiming ignorance of existing literature only disguises the biases that every researcher carries. In this paper we explicitly try to relate our work on the existing theories of supply chain networks, and by using various data sources we aim to document the patterns of supply chain evolution as industries emerge and evolve towards their maturity with highly competitive environments.
4.2 Case selection The industrial situations have been chosen with a strong technological and manufacturing component, as the progress of technology also drives the evolution of supply chains. Each of the case industries was analyzed longitudinally and qualitatively through literature resources, and was augmented with interviews and the personal involvement of the authors with companies operating in these industries over the past two decades. The insights and observations made of each industry were triangulated in order to explore
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the proposed phased schema. In our study, we considered the important theoretical dimensions to be the following: •
in what kind of industry the supplier networks have evolved, i.e. the industries should be mature, but also address low-volume high-mix, and high-volume low-mix to ensure coverage of mainstream practices; namely assembly, process, one-of-a-kind etc. in order to depict the overall dynamics of maturing supply chains;
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the time horizon of each case should be long enough to cover the whole evolutionary span from a primitive and rudimentary industry towards an established and globally competitive industry;
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the case industry should be something that is a sizeable concern and not a niche industry, and one that has once emerged and is still, after several decades, a vital industry with numerous multinational companies operating in it with an impact to global economy;
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the industries should combine manufacturing with strong technological development, which has affected the industry itself and its suppler networks as new innovations have been introduced.
The industries chosen were shipbuilding, automotive, and electronics. They all are mature industries that have industrial history spanning over hundred years, in additionthe three selected case industries satisfy the above listed criteria. The case industries differ from each other in terms of variety, volume, processes, and supply chain structure and execution making them complementary to test the developed maturity model for industrial supply chains: •
Ship builders work on a few vessels at a time with a high level of customization – a very large product with a high number of elements and with a high cost.
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Automotive manufacturers may have models measured in the dozens and the volume of each in the hundreds of thousands with options to be selected but little (if any) individual customization.
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Electronics manufacturers may have a product portfolio with many thousands of items ranging from batteries to entertainment devices to household appliances to personal computers. 14
Together, the three industries cover a broad spectrum of volume, cost, variety, and supply chain complexity options. This coverage assists with pattern triangulation over time and across industrial situations. Other case industries could have been used, yet for the purpose to test the developed maturity model these industries cover all facets of the megatrends through which all industries evolve. To summarize, ship building is characterized by projects composed of complex one-of-a-kind products. In the automotive case, the industry is highly competitive with continuous competition towards improved operational practices and cost effectiveness. In electronics, the focus is on retail distribution and high volume production with almost no build time options (exception being computer options selected at order time). Each case is illustrated through historical lens by detailing main steps and changes over time. The idea is not be exhaustive in describing main change drivers, but to show various periods through which the supply chains have evolved to the ones we study today.
5 Case Descriptions 5.1 Automotive The automotive industry is now over a century old and has had the luxury of being studied throughout its history, providing us a rich repository of data and observations. The period since 1985 has been documented extensively, focusing on the evolution from the more traditional American style of manufacturer to that of the Japanese model (e.g. Schonberger 1990 & 2007; Stalk and Hout 2003). A. The early years were characterized by high demand and capacity constraints – they could sell what they could make. Variety and options did not matter as illustrated by Ford’s success with the Model-T (e.g., Ford and Crowther 1922, Ford and Crowther 1926). B. Best practice in the supply chain during the 1910s was Ford’s tight control on suppliers with respect to design and build (Robbins & Folts 1932). While many believe that Ford built almost all of the Model-T, two-thirds was in fact outsourced as noted by Robbins and Folts. By the mid 15
1920s, the best practice for the supply chain was different, it was a buyer’s market, and Ford’s best practice of the 1910s was no longer the best in class. C. The Model-A had extreme challenges when being introduced in 1926 and Ford had to adopt a different supply chain strategy. During this period there was excess production capacity, instability of demand, lowering of prices, increased competition, and rapid changes occurring in the products’ styles and features (Folts 1949). By 1929, just before the big crash, the Model-A was being produced and selling at the desired full-capacity volumes, matching that of the ModelT at its peak. Ford had successfully evolved their complete production system including the supply chain and it was based on a sustained sales level of approximately four million vehicles. Unfortunately for Ford, the depression created an economic situation that was more fitting to the smaller division model of competitors (i.e., GM) and Ford’s best practice for high volume was short-lived. There was a best-practice in the 1910s, the 1920s, and the 1930s – each different.
After World War II, the described cycle repeats: the automotive market was once again in a seller’s market with a pent up demand, huge capacity, and the American situation was considered best-practice for high-volume and low-mix situations (Anglo-American Council On Productivity 1949, 1953). The supply chain was geared towards supplying materials at any cost and to keep the plants running. The situation evolved again with concentrated competition in the 1980s as Japanese automotive manufacturers entered the market with a relatively small number of models and options targeting niche markets. The North American supply chains were forced to abandon former best practice and develop leaner and more effective supply chains. Modern day supply chains in automotive industry are marked with multi-tier structures with crossorganizational information and material flows. Products are based on platforms and modules, which have radically shaped the supply network to clusters of dedicated competencies. Final assembly of a car is 16
basically based on the assembly of modules produced by the supplier network, and the efficient management of this network forms crucial part of the competitiveness of the car manufacturer.
5.2 Electronics Our second high-volume industry is consumer electronics, and the history of cellular telephony in Europe provides excellent examples of supply chain evolution. While the automobile has many large subsystems composed of other subsystems, the consumer electronic supply chain for a cellular phone is relatively shallow. There is a shell, some form of power supply, the transmission mechanism, some computer circuits with custom and standard chips, a display and key/input device, speaker, and a microphone. There might be other items, but within a scale of magnitude, the item does not have a very deep chain compared to the automobile. A. The emergence of information and telecommunication technologies in Europe was strongly characterized by protectionist efforts that paved the ground for major national players in different companies (Baldauf et al. 2001). Most European countries of 1970s and 1980s were protecting their own industry champion from open competition, for example, in The Netherlands Phillips, in Britain British Telecom, in Sweden Ericsson, in Germany Siemens etc. (Servaes 2003). This protectionist approach was justified with numerous reasons ranging from fostering local employment and industry creation, to nurturing national competitiveness, and to military interests. B. Gradually the competition was opened and in some countries, completely free competition was introduced in early 1990s. During the period of protectionism, the sourcing of components was made either locally or through global sourcing as the basic components were accessible to almost everybody in the industry as standard building blocks. As for the end products though, the entry barriers where high and local monopolies were secured for a limited number of carriers and associated cellular device providers; thus creating a well defined base demand through numerous 17
governmental and military contracts (Romanainen 2001). In some countries, like Finland, the telecommunication market had been open already in early 1980s, making the local players more competitive and better able to face global competition. C. Both up- and downstream supply chains became international and they incorporated different logistics partners as the chains became aggregated and specialized while trying to be globally competitive. With many more competitors (just like the automotive situation of the 1920s), new products were introduced at an increased rate and this put additional stress on the supply chain; flow speed, responsiveness, and low inventory levels in order them to be efficient in similar manner us in any other commodity business (Häikiö 2002). While volumes were constantly increasing through the commoditizing of the products, the companies needed to introduce novel supply chain management techniques to stay competitive. These included, among many other things, electronic data transfer, channel management, postponement, modular design and contract manufacturing. While these ideas had been used in other industries (e.g., automotive, food, carpet making), the use of these ideas was new to the electronics industry. Not all of the firms were able to evolve their manufacturing and business model and many companies and brand names disappeared through bankruptcies, mergers, and acquisitions (Paja 2001). D. By the end of this millennium’s first decade, the market for mobile phones and related network equipment has been saturated, although the renewal and upgrading rates have been intensifying through new technological innovations and services offered via mobile devices. Supply chains have become complex and their structures in terms of material flows, ownership and managerial responsibilities vary from one company to another, even within one company depending on the delivery requirements. A study by Heikkilä (2002) lead to the proposition that a variety of demand and supply chain structures in telecommunication industries were required to cover the entire universe of customer needs and situations
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although the underlying product delivered was the same in all cases. A successful company would need to understand the importance of supply chain constructs such as the duration of the relationship, levels of trust, and customer perceptions of the support received from the supplier. The company would also have to understand the nature of demand in determining whether a given chain should be more focused on efficiency or market mediation (i.e., customer satisfaction). This means that best practice in the 1990s and early 2000s is not the best practice for the new market realities.
5.3 Shipbuilding Shipbuilding has been a dominant manufacturing activity throughout history. The manufacturing pattern is interesting in that during war time the production is focused and turns into a high volume, repetitive enterprise and in peace time the production is low volume and more customized with the war machine manufacturing facilities idled or dismembered. It is also an industry where governments have actively influenced production – especially in war time. A. Historically, governments and emperors were financing and managing the production of ships and, perhaps the Venetian arsenal was the first concentrated and competitive environment where design innovations, specialization and unique circumstances boosted the activity towards modern competitive shipbuilding (Davis 2007). The arsenal was very instrumental in the commercial success of Venice and Lane (1934) provides descriptions of the arsenal process from the 1400s and 1500s. Lane describes how the galleys were mass produced in stages in a flow line model similar to the moving assembly line. In 1570 one record showed one hundred galleys being produced in fifty-five days. B. Since the 1400s, major wars have been catalysts to the industry and innovation. In the post World War II era, commercial shipping became a global activity with the help of new technologies and logistical innovations like container shipping. During the last four to five decades, shipbuilding
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has been transforming into a competitive and lean industry. The evolutionary process in Europe forms the basis of this case description. C. During the post World War II period, roughly till the end of 1970s, ships together with most of their parts, components and major subassemblies, including the final assembly, were all produced and managed at the same physical location, which usually housed long traditions in maritime activity. Supplier relations were limited to experts, who also did their work at the shipyard. The production was tightly bound to the physical yard area, where various departments were producing engines, furniture, electric equipment, etc., even up to the manufacturing of ropes. The focus was in the division of labor through functional departments in order to achieve cost efficiencies. Specialization was driving technology development, and the processes were divided according to traditional functional layouts, i.e. work divided to departments housing similar operations leading to complex material flows between them. Following World War II there was a large demand for certain types of vessels (or re-fitting), similar to the demand experienced by automotive manufacturing, and in countries that suffered less damage than others, the yards were working with high levels of capacity utilization D. Over time, various departments started to evolve around the main modules needed for the ship. These departments became more independent and some of them spun-out of the yard and found customers also outside of the shipbuilding value chain. One contributing factor was the softening of demand as the pent up requirement diminished. Shipbuilding was then not always a continuous affair and firms found that they occasionally had excess or idled capacity; an opportunity to exploit. Through their specialization and technology focus, their dependence on the shipyard diminished and they started seeking growth through serving other networks than the one supplying the shipyards. An example of this is a supplier that spun-off the yard to provide ventilation systems for other shipyards, which eventually started to supply large office buildings because of their superior quality (more stringent regulations exist for the construction of ships 20
than buildings). Together with a further technology focus, these supplier companies sought for better customer service and technological integration to other value chains. E. This development has gradually produced a multi-layered supplier network in Europe, which today is producing roughly four times the revenue the shipyards are producing (Hameri and Paatela 2005). Examples of such companies range from the already mentioned ventilation system producer, to the industrial kitchen and the food storage system supplier, to several computer service firms, which all operate in international markets to supply their products and services to other industries than shipbuilding.
5.4 Discussion From the cases it can be observed that all three industries have gone through similar evolutionary phases roughly mapping onto each maturity level, although differences in emphasis exist. The Initial Sourcing phenomenon was less visible in telecommunication, as this is a more shallow production process and the volumes were larger from the outset; exploiting the already existing electronics industry infrastructure and complementary technology. The differences between an industry in the second phase (Chain Organization) and one in the third (Chain Expansion) was highlighted in the Anglo-American productivity studies after World War II (AngloAmerican Council On Productivity, 1949, 1953) in which the British situation was suffering from part proliferation and complexity that made industries cumbersome, complex, and expensive, which is typical of the third phase. This was compared to the American situation that was perceived to be lean, unburdened by variety, and very efficient – the impact of World War II leaving America in a second phase situation and not yet bloated by feature and function variety. The American industries were also able to expand and dominate beyond their regional base by using scale and the huge war machine capacity without worrying about supply chain efficiency. In fact, materials were stockpiled during the
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1950s and managed this way because of possible shortages associated with the Korean War. Best practice was to have large inventories when it was a seller’s market and there were few competitors. The further evolution of the supply chain can be potentially explained by the emergence of complex supplier networks. For shipbuilding this means that sub-assembly work disappeared from the yard and was carried out in the supplier network with a multi-tier structure. The nature of running the supply chain becomes more and more focused on the control of managing supplier relationships and distributed projects within the supplier network. Today close to 90% of the end product value of a ship is produced by the supplier network, and similar developments can be observed in automotive and electronics. This current scenario for suppliers in many supply chains has consequences for the firms involved and is representative of our next to last phase. In this Chain Redesign phase, suppliers are now capable of serving several industrial networks, and are less vulnerable to demand fluctuations in one industry, like the supply networks shaped by modularity in automotive and shipbuilding industries show. Their demand portfolio is distributed and has a better risk exposure. This goes for all three industries studied: suppliers delivering more and more complete modules to an assembly point (e.g., Smart Car assembly complex in which key suppliers reside next to the assembly line, see Lee and Yuksel 2003, or ever smaller number of firms making DVD mechanisms or hard disk drives, see Sanchez & Collins 2001). Actual car assembly is left to the final producer, and even that is about to change – in fashion, many companies just orchestrate the chain and do not own any facility themselves. In the final phase we have been able to isolate (Lean SCM), competitive pressures are strong enough that efficiency and effectiveness becomes paramount and firms are once again forced to restructure the supply chain. This phase exhibits focused chains of dedicated, sleek, supply flows with the absolute minimum of conflict and shared resources. In some cases such as automotive, the seeds and concepts already exist and are just extended to a greater depth and breadth of the supply chain. For example, there have been specialized and dedicated supply factories built beside assembly plants – supplying one and only one
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assembly plant. Everything in the plant is customized and specialized to the task at hand and the plant does not have to serve multiple customers. While these dedicated plants were noteworthy in the late 1980s, they are more and more common now and the supply chain becomes more and more focused. A form of horizontal integration will occur during the general evolution as low-volume, high-mix situations mature. Specialized machines and expertise will form in smaller entities and as they grow or deal with fluctuations in demand, start to offer their services to other industries or situations (e.g, the shipbuilding case example). The firms may be specialists in a process or in a product line that can also be used in a different industry. Best practices will vary for the vertical and horizontal cases. Based on the literature review of evolution models, the majority of the models appear to be suitable for the vertical, high-volume industries situated at this maturity phase – chain integration. Best practice for the low-volume, high-mix industries would be somewhat different; a portfolio of industries being serviced, flexibility in vendor relationships that match the demand and variety fluctuations, and so forth. As the supply chains become extremely lean, they appear to take on the characteristics of a focused factory (e.g., Skinner 1974). In what we will call “focused chains”, a plant supplies one and only one assembler and supplies the assembler with one and only one product type or constrained product family. Everything is concentrated on this one relationship and the vendor’s attention and resources are not split between competing customers or situations. Robb (1910) described the concept of dedicated organizational entities within a larger entity that provided the fastest response and highest level of effectiveness and efficiency. In the late 1980s we saw an extreme example of this type of thinking at an automotive supplier. In a normal retail mall, beside other small businesses, occupying a normal ‘store’ size location were two small machine lines manufacturing axles for windshield wiper motors. One type of axel per machine line, a handful of workers in total and the whole enterprise dedicated to this one activity. A focused chain seems 23
to be the next natural phase after vertical integration, and it is not suitable for horizontal or low-volume situations. Focused factories were a natural situation to consider when volumes were sufficient for a small variety of items to make and the process had to be as efficient as possible with all unnecessary waste removed. It is suggested that more focused chains will be considered for the mature, commodity situations.
6 Conclusions Using the historical review and historical case studies, we have illustrated that different phases and best practices occur at different points in time as an industry matures, and how there appear to be repeated patterns, both within and between industries. This phased evolution model has a theoretical and practical use: firstly, the model will assist practitioners with understanding their current situation and possibly setting a suitable trajectory for their future, and secondly, researchers will be assisted in the crafting of research activities, understanding the different requirements at different phases. The model also implies that caution must be used when applying a benchmark biased towards one industry (say automotive) for another (consumer electronics), because different levels of maturity may exist in different industries. The three industrial examples described in this paper illustrate the phases and demonstrate what is considered best practice and mature, and what is not best practice or mature at another point in time. It is further complicated by changing situations, where past practices once considered obsolete become best practices once again (e.g., automotive industry). Therefore, although the historical viewpoint might suggest this now and then, it is not a simple case of maturity being thought of in terms of age or elapsed time. The six evolutionary phases form a phased schema for positioning evolution models in context. The body of existing evolution models and benchmarks appear to be well positioned for assessing and guiding 24
practice at the chain integration phase for vertical high-volume situations. We were unable to find models or benchmarks specifically targeted towards the other phases or the horizontal, low-volume version of chain integration. For example, de Oliveira et al. (2011) do not discuss these aspects. We suggest that research efforts may be warranted in the creation of multiple models, placing them into a phased scheme similar to that proposed. Substantial effort would be required to survey and benchmark the different strata and to organize the findings into usable models. The SCPM3 model (de Oliverira et al. 2011) might be a starting point. It is an example of a SCM maturity model possibly suitable for the highest levels of manufacturing maturity, providing a path and guidance for firms at that level. The goal for many mature industries is definitely towards the SCPM3 fifth and highest level. Future research could be performed to see if each of their levels can be mapped to presented maturity levels with a high degree of confidence and if the SCPM3 assessment tool for a level could capture the actual benchmark target for each maturity level. The research would have to take into account the situational context of a start-up phase, etc. and might require adjustment of the SCPM3 assessment tool. While we have pointed out potential best practices for each of the phases, these observations are based on historical review and personal experience and are not based on a thorough empirical study. As such, the suggestions must be taken as preliminary and exploratory in nature.
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Manufacturing Evolution (adapted from McKay 2003, McKay & Wiers, 2004, Koenigsberg & McKay 2010, McKay 2010) Phase Trends and Best Practice New technology, possibly new methods, materials, processes Firms focus on key production and outsource remaining items Small product variety Pioneering Little competition if any, major attention is on sales, market share High margins Waste is efficient Formal structures are introduced, professional management introduced Standards for material, operating procedures Systemization Reduce chaotic waste, processes are the key agenda items More variety begins to be introduced, options offered Some vertical integration starts Some work brought in-house from vendors Start of competition – local 2nd generation equipment Specialization, functional layouts begin to appear Some awareness of customer’s wishes Technology and Process More flexibility, options No real focus on added waste reduction Focus on features and functions Main competition using same methods, technology, skills Competition (cherry pickers) – often off-shore, foreign Competition using older generation technology, low labor costs Non-essential work and processes start to be outsourced Internal Efficiency Process flows are introduced for high volume flow Focus on internal efficiencies Continuous improvement activities are introduced Shorter horizon – immediate gain Focus on vendor efficiency, cost Just-in-time (hand to mouth) widely adopted internally and System Level Re-engineering externally Extensive cost reduction, continuous improvement activities More involvement with vendors on design, manufacturing processes All waste looked at throughout SC Little inventory held anywhere in chain SC is fragile and exposes risk to environmental, other issues Fiscal quarter impact focused upon Focused Chains Rationalization again performed for in-house, outsourcing Strategic alliances with vendors for black-box Lean techniques used for all critical components, subsystems Complementary services and products investigated, launched
Table 1: Evolutionary phases for manufacturing
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General Phase
SCM Phase
Pioneering
Initial Sourcing
Systemization
Chain Organization
Technology and Process
Chain Expansion
Internal Efficiency
Chain Restructuring
System-Level Re-engineering
Chain Redesign
Focused Chains
Lean SCM
SCM Trends and Best Practice Limited outsourcing of key components Outsourcing of secondary parts, subcomponents Protection of intellectual property SC performance is not part of the agenda Important that a product is delivered, not when High inventory levels are not a key issue, high is good Internal inventory control and organization are issues Low activity of extended SCM processes SC base might decrease as vertical integration is done Standards are developed for materials, shipping Best-in-class practices discussed, copied for systemizing Local competition, sales creates geographic hubs for SC Incidental SC efficiency, no real use of SC concepts yet Regional expansion handled by existing SC infrastructure Types of product and services increase, SC base grows Past service becomes a requirement – internal and SC One tier relationships focused upon – sole source Core competence is a theme Outsourcing, rationalization activities External design and build for minor subsystems Responsiveness of supplier is key Obligations pushed out to One Tier suppliers (JIT) Modularity of systems Global sourcing SC redesign driven by internal needs, not optimal for SC Customization – customer intimacy Strategic alliances with suppliers Subcontract modules, design Mergers, reduction of core SC base SC base increases in complementary product areas Inflexibility introduced via relationships, low inventory
Table 2: Evolutionary phases for SCM
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Supply Chain Phase
Regional/Global
1. Initial Sourcing 2. Chain Organization
Local/Regional
3. Chain Expansion 4. Chain Restructuring 5. Chain Redesign
Global
6. Lean SCM
Table 3: Regional and Global Supply Chain Phases
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Focused chains
Product variety & Industry maturity
Regional • serving domestic/small market • limited product offering • innovative product • aim to satisfy demand expectations Restructuring
• building of supplier relationships Explosion
Start-up
• product variety • vendor relations • outsourcing based on cost Systemization • focus on first tier in up- and down • increase volume stream • reduce waste • product design, • simplification modularity • standard operating procedures • economies of scale • initiation of supplier relationship building
• satisfy demand • build capability • improve product • focus on innovation • in-house operation • manage intellectual property
• supplier partnerships • vertical and horizontal integration • focus on inventory turns and performance
• variety handled through dedicated value chain • transparent control and data sharing Integration • high level supplier • end-to-end visibility relationships in the supply chain • channel management, product segments • knowledge base and information sharing
Global • focused factories and supply channels • up- and down stream supply chain integration • customized products, dedicated channels • efficiency through speed and low inventories
Time & volume
Figure 1. Maturity model for industrial supply chains.
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