Case Study — Applying the Frameworks

A case study for a company we’ll refer to as “Acme” illustrates how to con-struct an activity system for “innovative” and “functional” products. The case was also described in a previous publication.² Acme had long manufac-tured a widely used line of aircraft fasteners, a product field in which Acme was a pioneer and technical leader. Many of Acme’s competitors were licens-ees of its technology.

Fasteners are the “glue” that holds the aircraft together — so they are essen-tial components, even though they represent only about 2% of the aircraft sales price. Acme’s products also included the tools aircraft manufacturers use to install the fasteners. So the fastener/tooling combination represented a fastener “system.” Design of the tooling — along with the product design

— determined the cost of fastener installation. Customers respected Acme for the quality of its product, but usually based their purchase decision on sup-ply chain criteria like price and availability. All suppliers of Acme’s technol-ogy were certified to quality standards. Unlike other fastener companies, Acme maintained technical services to support its technologies. But quality and technical services — while desirable — seemed to carry little weight in most purchasing decisions.

Acme’s profit had languished in a cyclical downturn in the commercial air-craft market. A recent boom in business brought profitless prosperity. Boeing, a price-driven buyer, dominated this market. Many licensees enjoyed lower costs and greater market share, including sales to Boeing.

Most producers and customers like Boeing believed fasteners to be func-tional products. This was partially due to the long life of the airframes that used fasteners and the difficulty of certifying any variation in the way the

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craft were put together. So there was an inherent obstacle to replacing exist-ing products that were specified in the initial design.

However, there was some innovation in the industry in both fastener design and the tools for their installation. The purpose of this development was to reduce the total cost of installation. This total cost included not only the price of the fastener but also the labor associated with installing it. Sur-veyed aircraft companies reckoned this additional labor to be several times the cost of the fastener itself.

The supply chain for fasteners was also in a state of flux. Many non-Boeing customers were also turning to distributors for fasteners — rather than buy fasteners directly from producers like Acme. This displaced manufacturers from dealing directly with the aircraft manufacturers that were the end-users of fasteners. For these users, buying from distributors brought lower inven-tory, just-in-time delivery to assembly lines, and reduced purchasing over-head. Customers also imposed strict service standards for replenishing stocks on distributors.

Despite these changes in industry supply chains, Acme maintained a one-size-fits-all supply chain approach based on its historic direct-sales channel from Acme to the aircraft manufacturer. There were no accommodations for emerging industry segments. Lack of innovative products and ignoring new supply chains caused most of Acme’s products to fall into the D quadrant of the product grid (refer to Figure 6.1). Particularly vexing to customers in a time of tight supply were long lead times for Acme’s products.

The following sections illustrate how a supply chain redesign, using the conceptual frameworks of Porter and Fisher (described in Chapter 6), might improve Acme’s competitive position. The next sections step through the Porter framework for constructing an activity system using Acme as an example.

7.2.1 Select Strategic Themes to Underpin Your Strategy

Porter’s framework begins with strategic themes. Strategic themes are the cor-nerstones of the activity system. Porter observes that the themes require clear choices regarding how to compete. This is a difficult but necessary step not to be taken lightly. Too often, companies try to be all things to all people. Failure to choose how one will compete implies there’s no strategy at all.

The choices for Acme centered on the four themes listed in the left-hand column of Table 7.1. The table shows the “as-is” choice implicit in the way Acme operated. These positions had evolved historically and were not the result of conscious strategy decisions along the way. The last two columns illustrate the range of options from the high to the low end. Various compet-itors had chosen to compete along the spectrum from high to low. Most suc-cessful competitors had made conscience choices.

Acme had choices in each of these areas. A possible set of choices could include those shown in Table 7.2 and depicted in Figure 7.1.

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Figure 7.1 displays an Acme decision to maintain its technical leadership position (theme 1) while adding flexibility to its production and customer service systems (themes 2 and 3). Profitable operations require a new finan-cial approach (theme 4). So pursuit of measures to assure that prices and costs align became a choice to be made.

Deceptively simple in concept, the four boxes represent real choices for Acme. As an example, Acme could choose to forgo its technical leadership position. That would produce a dramatically different company and supply chain. Gone would be laboratories, the engineering department, and a tech-nically adept sales force capable of troubleshooting customer problems. It would treat all its products as “functional,” choosing to compete on price alone. It would operate as a “no frills” company, delivering little more than plain “vanilla” product. And several successful competitors did just that.

The flexible production and customer service themes (2 and 3) required major changes in the way Acme managed its capital resources and scheduled its

oper-TABLE 7.1

Themes for Acme’s Strategy

Theme Acme “As-Is” High End Low End

1. Technical leadership Provide a variety of resources — engineers, laboratories, etc.

Cutting edge Copy cat

2. Flexible production Inflexible scheduling. First

Strategic Choices for Strategy

Theme Strategic Choice

Technical leadership Maintain technical leadership position. Find ways to more fully exploit the advantage from laboratories and engineering department.

Flexible production Deploy production capability to match service levels.

Customized service options Develop different levels of service for each customer segment.

High contribution focus Price products and services to meet profitability goals.

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ations. These changes reflect focused strategies aimed at the emerging role of distributors in the supply chain. For Acme, this could mean three strategies:

• A Boeing-specific strategy

• A strategy for other aircraft makers

• A distributor strategy

Each segment had different needs. For example, distributors want fast delivery of a variety of products. Price is secondary. Boeing wants long pro-duction runs and low cost.

With the complexity introduced by this strategy comes the need for better accounting. So pursuit of contribution could be a theme. Note this isn’t contri-bution margin. The goal of increased contribution allows for both high- and low-margin business. To qualify, a low-margin business with high volume would be desirable. The choice of margin would require Acme to do a better job of measuring and managing prices and costs. Acme had tended to view high-margin business as desirable without regard to the volume.

7.2.2 Define Unique Activities to Support These Streams

With strategic themes in place, Acme had to develop supporting activities and processes that implemented those themes. Figure 7.2 shows some of the activities Acme might have pursued to implement the strategic themes.

A renewed investment in product R&D supports the theme of technical leadership. Also, product R&D and consulting support the technical leader-ship theme. Acme reckoned its technical position was unique in the industry.

That capability would have value to customers needing new solutions and

FIGURE 7.1

Acme’s four strategic themes. (Reprinted with permission of CRC Press, LLC.) SL2732C07.fm Page 63 Wednesday, July 19, 2000 10:19 AM

64 Handbook of Supply Chain Management

advice on the use of the product. But it ought to “pay its way” instead of being given away. Acme faced the choice of many software firms. This choice was to support paying customers through the product “break in” period and then charge for services thereafter.

Because demand had increased dramatically, Acme needed to use all the plant and equipment capacity available. The utilization maximization activ-ity supports this goal. It includes a number of measures like improved main-tenance, reduced set up, and cellular manufacturing to get more from scarce machine and personnel capacity. This activity was also important to help Acme get ahead of its backlog and reduce its lead times.

Varied scheduling and finished goods support flexible production and cus-tomized service options themes. Acme had a policy not to carry finished goods inventory and build only to order. But this added to the long lead times for all its products. By selecting products for inventory, Acme could satisfy at least a portion of its customers’ requirements quickly. The products would be what Fisher refers to as functional products. These are the products whose market demand is certain. Introducing varied scheduling would add predict-ability to production schedules and enable better management of production priorities.

In an environment of scarcity, offering different levels of availability is a strategic application of supply chain thinking. It recognizes that immediate availability has a value over delivery in 6 months. A supply chain providing product today at a higher price would solve some customers’ needs. Other customers could choose to wait their turns in the queue. Of course, the pre-mium for short-term response will vary with the ebb and flow of market demand. At peaks in demand, the availability brings a premium price. At low points, it’s an edge in a more competitive marketplace.

FIGURE 7.2

Supporting activities for Acme’s strategy. (Reprinted with permission of CRC Press, LLC.) SL2732C07.fm Page 64 Wednesday, July 19, 2000 10:19 AM

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Flexible interfaces between Acme and its customers broadened the con-tracting and transaction options available to customer segments. On-line ordering and production tracking are examples. The existing Acme customer interface system formed over time when end-users placed direct orders.

These options would especially accommodate the needs of the growing dis-tributor channel in the supply chain. Each disdis-tributor had a unique customer base with varying demands for product and replenishment. Acme could

“tune” its production system to these needs with more options.

Activity costing would help Acme understand which sales are “profitable.”

Profitability would be measured here in terms of total contribution. Acme served many customers with a wide product range. But Acme had little left in the way of profit, despite resurgent demand. Activity costs would point to the profitable and unprofitable businesses. Activity costs would also support service-based pricing. Service-based pricing would mean more services should cost more. It maintains that non-product supply chain services have value. A customer drawing heavily on readily available finished goods inventory and technical support, for example, should pay more.

7.2.3 Make Sure the Activities Fit Together

As we indicated at the beginning of this chapter, Porter maintains that sus-tainable advantage comes from “fit” between activities. In adapting this idea to supply chains, we can describe three flavors of fit:

• First order: fit between the activity and strategic theme. In the activity map, activity costing fits the notion of measuring contri-bution on different pieces of the business. Its application is as an internal control to evaluate product and customer profitability.

Product R&D is another example of first-order fit. The product R&D activity supports the technical leadership theme alone.

• Second order: reinforcing activities. This type of fit is between activities where one activity supports another. For example, activity costing also reinforces another activity, service-based pricing.

Activity costs provide the data to set prices. Changing the way scheduling is done (varied scheduling activity) will enable main-tenance of finished goods inventory (finished goods activity).

• Third order: optimization of effort across the activities and with suppliers and distribution channels. Third-order fit includes the elements often referred to as “supply chain integration.” Flexible production and finished goods provide options for distributor cus-tomers competing with just-in-time contracts. Flexible interfaces increase the ability to link up with the supply chains of Acme’s customers — notably distributors.

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It is “fit” that provides sustainable competitive advantage, according to Porter. Competitors can usually imitate the individual activities of successful companies. But they ignore the impact of second- and third-order fit — the greatest contributors to competitive position. To dislodge their successful adversary they must copy not just one, but multiple, activities and link them effectively. This is many times more difficult than imitating a single activity.