Every now and then, this old gal has an ah ha moment. As I write this week on the book, Bricks Matter, I believe that supply chain failure gave birth to supply chain horizontal processes. I believe that it was failure not success that propelled the industry forward.
The most common horizontal processes are revenue management, supplier development, sales and operations planning (S&OP) and corporate social responsibility (CSR). They give form and purpose to the supply chain. The adoption of these practices did not happen easily. I believe that as supply chain leaders stumbled forward, the industry learned the importance of horizontal processes (albeit the hard way). If you agree, do you believe that these were the most pivotal case studies of the last 25 years?
- Things don’t always go better with Coca-Cola. Today, when you read the Coca-Cola website, you see a commitment: “We believe that our first responsibility is to manage our own water resources in our operations wisely. Our nearly 900 bottling plants around the world rely on water as it is the most important ingredient in our beverages. Water is also used for beverage manufacturing processes such as rinsing, cleaning, heating and cooling. In 2008, on average we used 2.43 liters of water to produce a one liter beverage. One liter goes into the beverage itself, and 1.43 liters are used for manufacturing processes such as rinsing, cleaning, and cooling. We are nearly half way to our 2012 goal of 2.17 liters per liter which will be a 20 percent improvement.” However, in March 2004, the $16 million dollar Coca-Cola bottling plant was shut down by local officials in Kerala India citing a drastic decline in both the quantity and quality of water available to farmers. Was the water decline due to drought or over-usage? There was a raging debate in the Indian court systems. It dragged on for years. The brand image was tarnished. As the case moved through the Indian court systems, the Coca-Cola Company became laser focused on building Corporate Social Responsibility (CSR) systems. This failure accelerated the adoption of CSR practices for water and energy in food and beverage manufacturing.
- Cisco Stumbles and then Builds Strong Supply Chain Processes. The dot-com era was a speculative market bubble over the period of 1995–2000 (with a height on March 10, 2000). During the mid-to-late 1990s, due to their market capitalizations, Cisco Systems, Dell, Intel and Microsoft were known as “the Four Horsemen of the NASDAQ”. In this period, a combination of rapidly increasing stock prices, market confidence on future profits, speculation in individual stocks along with widely available capital created a wild-wild west environment where many investors were willing to overlook traditional metrics in favor of confidence in future technological advancements. Caught in this ecommerce hype, Cisco Systems did not see the bubble getting ready to burst. Buoyed in the draft of the up-market, Cisco Systems built inventory for a booming market, but they did not see the market downturn. As a result, Cisco Systems was forced to write-off 2.25 billion in inventory charges in April 2001. Shares fell 6%. They stumbled. The answer? The Company built strong horizontal process to connect Sales and Operations Planning (S&OP) to contract manufacturing. Based on this process evolution, they were one of the first companies to sense the downturn in December 2007. They were one of the few in their sector to weather the storm of the Great Recession in 2008 with no write-offs. This failure created a demand-driven culture built on horizontal process excellence.
- Samsung Dodges a Bullet and Learns the Value of Inventory. In 1995, soaring worldwide demand coupled with tight capacity pushed prices of four megabit dynamic random access memory devices (DRAMs) upwards. As a consequence, DRAM manufacturers over-invested in new fabrication capacity. Recognizing an impending price collapse in December 1995, the president of Samsung’s semiconductor business informed the manufacturing department of the urgent need to reduce cycle time. The huge work-in-process inventory was expected to lose its value rapidly. A project team was formed and a new process was born. It was termed SLIM (short cycle time and low inventory in manufacturing). Between 1996 and 1999, Samsung implemented SLIM in its entire semiconductor manufacturing facilities. It reduced manufacturing cycle times to fabricate DRAMs from more than 80 days to less than 30. Considering the decline of DRAM prices, SLIM enabled Samsung to capture an additional $1 billion in sales. This process innovation was a wake-up call for the Samsung management team that powered innovation in horizontal process evolution. As a result, the leadership team at Samsung were innovators in inventory management and supply chain processes championing horizontal process evolution of S&OP, revenue management and supplier development. Their goal was to never have to write-off inventory. This failure created a culture of inventory management.
- A Fire changes an Industry. Nokia moves Ahead. In March 2000, a lightning bolt struck a high-voltage electricity line in New Mexico, USA. As power fluctuated across the state, a fire broke out in a fabrication line of the Royal Philips Electronics radio frequency chip manufacturing plant in Albuquerque. The plant was a primary supplier for Nokia and its archrival, Ericsson. The two companies accounted for 40% of the plant’s shipments. Plant personnel reacted quickly and extinguished the fire within ten minutes. However, smoke and water had contaminated the “clean room environment” where millions of chips were stored for shipment. Four thousand miles away, at a Nokia plant outside Helsinki, a production planner who was following a well-defined process for inbound materials failed to get a routine signal from Philips. He contacted the top component purchasing manager. Recognizing that Philips’ problem could affect the production of several million mobile phones, Nokia took three key steps. They mobilized to help Philips. The company responded by rearranging its manufacturing plans in factories as far away as Shanghai. A second team focused on the redesign of chips to be produced in alternate factories while a third team searched and found two alternate suppliers. Due to Nokia’s initial sensing of the problem and its rapid and effective response in the third quarter of 2000, its profits rose 42% as it expanded its share of the global market to 30%. Its quarterly statements and annual report for 2000 did not even mention the fire. In contrast, on July 20, 2000, Ericsson reported that the fire and component shortages had caused a second-quarter operating loss of $200 million in its mobile phone division. Annual earnings were lowered by between $333 million and $445 million. Six months later, it reported divisional annual losses of $1.68 billion, a 3% loss of market share, and corporate operating losses of $167 million. It also announced the outsourcing of cell phone manufacturing to Flextronics and the elimination of several thousand jobs; Flextronics took over Ericsson’s plants in Brazil, Malaysia, Sweden, the U.K., and the U.S. In April 2001, it signed a Memorandum of Understanding to create Sony Ericsson; the informal negotiations that led to this step had started at the height of the crisis in July 2000, though Ericsson had denied it in public. The deal was finalized in October 2001. This failure gave birth to supplier development processes.
I believe that brick by brick, these horizontal processes bridge the gap between customer’s customer and supplier’s supplier. Do you agree that these are the most pivotal stories? Or would you add more?
Please send me your comments. I am heads down writing this week at my desk in Baltimore. 50,000 more words to finish before March 1st.
