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Supply Chain Excellence Is All About Providing "Transformed Solutions"
In a globalised economy, businesses are employing innovative methods to create value in the supply chain process. What results is a higher market share, increased sales growth, impressive profits, outstanding customer service, and most importantly, superior shareholder value.

No one knows this better than operations, information and technology professor Hau L. Lee of Stanford University’s Graduate School of Business. Lee is also co-director of the Stanford Global Supply Chain Management Forum, an industry-academic consortium to advance the theory and practice of global supply chain management. Lee recently delivered a keynote address on “Creating Value with Supply Chain Excellence” at the Value-Chain Seminar 2007, organised by the School of Information Systems, Singapore Management University. Lee talked to Knowledge@SMU about how supply chain innovations could be developed and realised, using a framework he designed on “Value-Creation Evolutions”.

Knowledge@SMU: Can you explain how the Value-Creation Evolutions framework works?

Lee: Every company has a supply chain. It could be a physical supply chain, which involves sourcing, manufacturing, distribution and logistics, or a service supply chain. The first thing companies should do is to ensure that the supply chain is done well. That means eliminating waste, removing inefficiencies, and not having any value-added activities. However, all this is purely a margin improvement exercise. Often times, what we have found is that once a good process is in place, it will enable companies to respond to the different needs of their customers. And these are where the opportunities lie. Any time there is an external disturbance and companies respond accordingly -- when their competitors cannot do so -- they will be able to grab that market share. Once they gain market share, it is very hard for competitors to grab it back. Essentially, companies should try and be responsive, through using the supply chain process, to take advantage of unexpected events. This is what agility is about.

It is not just a question of unexpected events, however. In being agile, companies which have many customers with different needs and geographies, will realise they can serve more customers with more customised solutions. Those solutions will allow them to reach out to markets that they have not been able to reach out to before. The next stage is to think about what the customer needs. Is it just the product or is there a way that they want certain things done? For instance, let’s say I am a cement company and my customers buy cement from me. The customers need cement not because they want to store it at home but because they are constructing something. So, can I do something that would make their construction easier? Can I help them buy other things and put these together for them? That is what “transformed solutions” are about.

I think the more mature companies will go down the path of providing more complete solutions. As start-ups, most companies have a single product and they will want to make that well and efficiently. But mature companies must evolve for that is the way to create intimacy and stickiness with the customer, making it harder for them to switch loyalties. Once companies provide complete solutions, for example by helping customers design and manage projects, it is harder for customers to make that switch.

Knowledge@SMU: Does this model apply to companies across the world?

Lee: Yes, I definitely think so. In the advanced economies, you can see more examples. However, there are also examples from emerging economies such as ITC e-Choupal from India, and Netafim from Israel. Having said that, businesses can still be built through being efficient. Emerging economies tend to have more inefficiencies. For instance, according to the World Bank Global Logistics Indicators Survey 2005, in the Democratic Republic of Congo 42 signatures are required for a typical export transaction. This is compared to only two signatures required in Singapore. You can start building a business simply because you are able to do things faster and on a less costly basis. Down the road, the best way to defend the business is to transform it into a company that sources for and provides customised solutions.

Knowledge@SMU: How can Asian companies learn from this model?

Lee: I think the model is, in a way, more important for Asian companies. Firstly, Asia is hugely diverse. When you talk about the differences between Vietnam, Thailand, Indonesia, China -- and even inside China -- that diversity is multiple times what can be seen in the US and Europe. That means that the ability to provide customised solutions is even more important.

Secondly, since Asia is an emerging region, there is diversity not just in terms of needs but in capabilities as well. In Asia there are companies that are mature, and there those that are ‘mom-and-pop shops’. Mature companies are mainly concerned about receiving the product. From there, they turn it into a complete end-product. But the other companies have a lot more needs than that. Hence this solution concept is important. Many of these companies do not just need the product; they need the complete solution, the whole thing so as to make it as part of their offering. That’s why I think, in Asia, this path is even more important because the needs for customisation and solutions are even higher due to the diversity in needs and capabilities.

Knowledge@SMU: Do you believe that following the model can help ‘mom-and-pop shops’ progress towards become mature companies?

Lee: Yes. ‘Mom-and-pop shops’, if served well, can become bigger, stronger and eventually climb the ladder to become powerful. In a way, the model also helps to balance the extreme difference. If we don’t have these types of solutions, only the mature, big companies will continue to thrive. How then, can the ‘mom-and-pop shops’ survive? Look at the US economy. Why is it still strong? I think it’s because there are still a lot of start-ups that have the potential to become giants. Because the economy has so many solution providers, the start-ups can leverage on the solution providers. Even if I am a small company, there are logistic companies that can provide me with logistics solutions. That way, even if I don’t have those capabilities, I can still compete with the giant companies which have elaborate logistics capabilities. And that enables the whole economy to grow.

Knowledge@SMU: Can you cite an example in the Asian context?

Lee: Look at some of the giants in China such as Lenovo. They all started as small businesses. Lenovo was started by a small group of people from Qinghua University in Beijing. It was a ‘mom-and-pop shop’. Back then, the electronics industry was already quite mature. That presented Lenovo with the opportunity to leverage on the tonnes of component manufacturers already in the Chinese industrial parks. But why are they there? Because the HPs, Flextronics and Solectrons of the world have built these giant industrial parks. These component suppliers are very smart. Not only do they support HP and the likes, but if there is a little company that needs support because it does not have HP’s expertise and capabilities, they modify their solutions and serve them. They are adaptable and able to serve small companies as well. Now these little guys have become big guys. Lenovo was able to leverage on the logistics and supply network that was built for the large companies.

Knowledge@SMU: How important is the role of the supply chain ‘architect’ you"ve put forward?

Lee: I think it is important because with globalisation, the supply and customer base increases significantly. Globalisation means companies are not tied to one supplier, but possibly to a big network of suppliers. So which one should they choose? When do they use them? How do they use them? All these become more complex. So now we need people who design supply chains. That’s why I call them ‘architects’.

Knowledge@SMU: Do you haveany tips for practitioners in the supply chain and logistics industry?

Lee: I think the most important tip is that the knowledge practitioners receive has to be constantly going through transformation. Just as we say a supply chain needs to be transformed, knowledgetoo needs to be transformed. What is regarded as a good supply chain today might not be a good supply chain tomorrow. This is because the technology, needs or even customers change. What is good today is no longer good tomorrow. My advice to professionals is to constantly seek new learning and transform their learning to adapt to the needs of the future. There is also no one-size knowledge or best practice or innovation. Continuous transformation is the key.

Knowledge@SMU: What do you see as a future trend in the supply chain business?

Lee: It is not definitive but I think it needs more knowledge workers. If I can predict the trend, the knowledge worker will be important, particularly knowledge workers who are able to use information smartly. It is not just about passing information quickly. It is not just differentiation. Supply chain professionals will be knowledge workers. They will know how to design the supply chain, adapt it and see to changing needs. We need that additional layer of professionals to coordinate the process and have a macro view of things.