I recently ran into a supply chain executive who shared a common frustration with me. He indicated that once again, the sales staff had committed to orders that were not yet loaded to production and now required expedites for several long-lead subassemblies. Less than five years ago, many of the subassemblies were built in-house. Today, they are sourced overseas and, according to him, the "supply" rarely matches his "demands." However, his leadership team expects operations to function like a utility-"If you need more light, turn up the dial! What's the big deal?" Clearly, he is not running a supply chain that is a strategic asset for his company...are you?

The concept of a strategic supply chain is nothing new-routinely, Dell and Wal-Mart are mentioned as leaders in this area. Without a doubt, these two companies have proactively shaped their supply chain organizations, processes, infrastructure, and relationships to create dominant leadership in their respective markets. Doing so has allowed Dell to expand beyond PCs and laptops to servers, network equipment, and consumer products. Wal-Mart has pioneered the deployment of leading-edge technologies within its supply chain to lower the transactional and management costs of materials management.

Not every company can be a Dell or a Wal-Mart; but they can convert their supply chain operations from a utility mindset to a business differentiator.

It is clear what constitutes the basic supply chain: core business processes of Plan, Source, Make, Deliver, and Return; a supporting infrastructure; skilled resources that can operate those processes and infrastructure; a network of factories and distribution sites; a set of qualified suppliers; and a set of buying customers. Several factors influence the complexity of the supply chain: its global breadth and reach, the reliability and responsiveness of its supply base, the quality of the product design, and its position of power in the overall value chain. How a company configures and manages its supply chain in light of these factors determines whether it operates a strategic asset or delivers utility service.

Leadership and accountability

The first requirement for converting your supply chain from a mere utility to a strategic asset is clear leadership. It is true that you need support from your CEO, CFO, CIO, Sales, and R&D, but leadership for a strategic supply chain has to start with you, the supply chain executive. You are responsible for converting the business strategy into an operations strategy. What are the business imperatives and priorities: innovation, cost, service/delivery, quality? What are your true competencies, those services and operations that a customer will pay you a premium for? What are your current constraints: is capital diverted to product development, channel expansion, mergers/acquisitions? What are your operating expectations in terms of speed, cost, and asset utilization? Defining a clear path through these questions and establishing the ensuing vision for your staff is the right starting point. Next is deploying a concise metrics package that reinforces the desired outcomes. Finally, you need to demonstrate willingness to maintain accountability-both with your company and your external suppliers.

Customer alignment

In addition to leadership, you should understand how your supply chain impacts customers...or how it can impact customers. Most customers favor "better, cheaper, now"; these become the building blocks for your supply chain configuration. Your ability to integrate your supply chain with your customer's should be the differentiator. Finding ways to increase total asset productivity, decrease end-to-end cash cycle times, or more tightly link your supply response to your customer's demand are ways to create differentiating value. Taking the time to work with your leading sales executives, those that foster a working business relationship with key customers, can provide insights into what matters most to your supply chain configuration.

The Toyota Production System (TPS), based on lean manufacturing principles that "pull" product through the supply chain based on demand signals, is well-known to supply chain executives. With TPS, the constant effort to eliminate "muda" (or waste) creates ever shorter cycle times with higher process reliability and flexibility.

A recent article (Jonathan Fahey, "Just in Time Meets Just Right," Forbes, July 5, 2004) outlined Toyota's efforts to leverage TPS to deliver custom-ordered cars in near build-to-stock lead times, thereby creating value for its dealers and customers. When buying a car, people want a specific model/color/finish combination. For example, if the dealer is stocked out of the Solar Yellow color, the customer either buys his/her second choice, goes to another dealer, or leaves the system. Toyota wants to prevent losing or disappointing any potential customer without increasing inventory investment.

To accomplish this, Toyota analyzed its current production processes and found that by modifying the paint process to use self-contained canisters, it could prevent clean-up delays when switching from dark to light colors. Additionally, by linking dealers to a global network, Toyota can clearly communicate the current scheduled sequence for inventory on order and allow dealers to postpone color and finish. Dealers can now make on-the-fly changes to the next car allocated in the schedule to their dealership. Instead of waiting weeks for a custom-color car, the customer can now get it within days. Everyone wins with this type of supply chain solution aligned to customer needs.

Solution simplicity

Too often, meeting multiple customers' needs results in a complex supply chain with multiple, competing order fulfillment processes. By propagating supply chain configurations based on each customer's preference, companies generate additional overhead, create order conflicts, and prevent operations from getting ahead of day-to-day emergencies to establish true core competency.

Establishing a strategic supply chain requires simplicity, which forces your supply chain staff to consider the most fundamental aspects of supply chain configuration. Driving supply chain simplicity requires you to evaluate your network: Do you have too many nodes to effectively manage? What points of aggregation exist that could reduce span-of-control while increasing operating leverage? Have you simply left assets in place for historic reasons (or because consolidating them would require tough decisions)? Have you thought through what your suppliers should be doing for you...and their underlying capabilities? How can you merge "like" customer requirements to create greater scale for your operations?

A recent client provides a vivid example of supply chain simplification. Prior to an extremely large government order, this OEM ran a job shop with a supply base consisting of many sole-source and single-source suppliers. Given the order, the OEM needed to increase production 10-fold within three quarters. The COO recognized most production would require outsourcing, given internal factory constraints.

The first thought was that outsourcing would follow traditional lines, that is, each contract manufacturer would be responsible for turnkey production. Working with the leadership team, we quickly recognized that multiple sources of demand would wreak havoc on the supply base and possibly jeopardize the company's ability to meet customer expectations.

As a means of simplifying the supply chain, we opted to separate the contract manufacturing operations into "materials management" and "production." We selected a lead contract manufacturer to aggregate all material supply, implement lean material handling techniques, and host inventory on its recently upgraded ERP system. This turnkey material supplier fed carbon-copy lean manufacturing lines at the OEM and contract manufacturers. With this simplified solution, our client consistently ramped production across its supply chain network quarter-over-quarter, enabled suppliers to keep pace with the growing demand, and implemented leading-edge practices on a variable cost basis.

Converting your supply chain from a utility to a strategic asset takes persistence. It requires that you and your staff ask tough questions and make difficult decisions. It requires that you constructively work with sales, R&D, suppliers, and customers to tailor your supply chain to win in today's market and enable tomorrow's. It combines leadership, accountability, customer alignment, and simplification as the foundation for day-to-day operations. It requires work, but the result will be worth it-not only "better, faster, cheaper," but the ability to create additional value for your customers and suppliers.