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A R T I C L E

The Triple-A Supply
Chain

by Hau L. Lee

Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

1

Article Summary

2

The Triple-A Supply Chain

A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

12

Further Reading

Product 8096

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The 21st Century
Supply Chain The Articles

HBR Spotlight

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Managing the modern supply chain is
a job that involves specialists in manu-
facturing, purchasing, and distribution,
of course. But today it is also vital to
the work of chief financial officers, chief
information officers, operations and
customer service executives, and cer-
tainly chief executives. Changes in sup-
ply chain management have been truly
revolutionary, and the pace of progress
shows no sign of moderating. In our
increasingly interconnected and inter-
dependent global economy, the pro-
cess of delivering supplies and finished
goods (and information and other
business services) from one place to
another is accomplished by means of
mind-boggling technological innova-
tions, clever new applications of old
ideas, seemingly magical mathematics,
powerful software, and old-fashioned
concrete, steel, and muscle.

An end-to-end, top-to-bottom transfor-
mation of the twenty-first-century
supply chain is shaping the agenda for
senior managers now and will continue
to do so for years to come. With this
special series of articles,

Harvard Business
Review

examines how corporations’
strategies and structures are changing
and how those changes are manifest in
their supply chains.

The Triple-A Supply Chain

by Hau L. Lee
October 2004

The best supply chains aren’t just fast and cost-effective. They are also agile and adaptable,
and they ensure that all their companies’ interests stay aligned.

Reprint R0410F; OnPoint 8096

Leading a Supply Chain Turnaround

by Reuben E. Slone
October 2004

Five years ago, salespeople at Whirlpool said the company’s supply chain staff were “sales
disablers.” Now, Whirlpool excels at getting the right product to the right place at the right
time—while keeping inventory low. What made the difference?

Reprint R0410G

Aligning Incentives in Supply Chains

by V.G. Narayanan and Ananth Raman
November 2004

A supply chain stays tight only if every company in the chain has reasons to pull in the
same direction.

Reprint R0411F; OnPoint 8363

Rapid-Fire Fulfillment

by Kasra Ferdows, Michael A. Lewis, and Jose A.D. Machuca
November 2004

Spanish clothier Zara turns the rules of supply chain management on their head. The result?
A superresponsive network and profit margins that are the envy of the industry.

Reprint R0411G

Building Deep Supplier Relationships

by Jeffrey K. Liker and Thomas Y. Choi
December 2004

Two Japanese automakers have had stunning success building relationships with North
American suppliers—often the same supplier companies that have had contentious dealings
with Detroit’s Big Three. What are Toyota and Honda doing right that their American
counterparts are missing?

Reprint R0412G

We’re in This Together

by Douglas M. Lambert and A. Michael Knemeyer
December 2004

If your latest supply chain partnership failed to live up to expectations, as so many do, it’s
probably because you never stated your expectations in the first place.

Reprint R0412H

The Triple-A Supply Chain

page 1

The Idea in Brief The Idea in Practice

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The holy grails of supply chain manage-
ment are high speed and low cost—or are
they? Though necessary, they aren’t suffi-
cient to give companies a sustainable com-
petitive advantage over rivals. Consider
these disturbing statistics: Though U.S. sup-
ply chains became significantly faster and
cheaper between 1980 and 2000, product
markdowns owing to excess inventory
jumped from 10% to 30% of total units
sold—while customer satisfaction with
product availability plummeted.

But some companies—Wal-Mart,
Amazon.com, Dell Computer—have
bucked these trends. How? Their supply
chains aren’t

just

fast and cost-effective.
They’re also:

Agile:

They respond quickly to sudden
changes in supply or demand. They han-
dle unexpected external disruptions
smoothly and cost-efficiently. And they
recover promptly from shocks such as
natural disasters, epidemics, and com-
puter viruses.

Adaptable:

They evolve over time as
economic progress, political shifts, de-
mographic trends, and technological ad-
vances reshape markets.

Aligned:

They align the interests of all
participating firms in the supply chain
with their own. As each player maximizes
its own interests, it optimizes the chain’s
performance as well.

To achieve sustainable competitive advan-
tage, your supply chain needs

all three

of
these qualities. Apply the following prac-
tices to create agility, adaptability,

and

alignment.

AGILITY

Objective:

Respond to short-term changes in
demand or supply quickly.

Methods:

Continuously provide supply chain partners
with data on changes in supply and de-
mand so they can respond promptly.

Collaborate with suppliers and customers
to redesign processes, components, and
products in ways that give you a head start
over rivals.

Finish products only when you have accu-
rate information on customer preferences.

Keep a small inventory of inexpensive, non-
bulky product components to prevent
manufacturing delays.

ADAPTABILITY

Objective:

Adjust supply chain design to ac-
commodate market changes.

Methods:

Track economic changes, especially in de-
veloping countries.

Use intermediaries to find reliable vendors
in unfamiliar parts of the world.

Create flexibility by ensuring that different
products use the same components and
production processes.

Create different supply chains for different
product lines, to optimize capabilities for
each. For example, with highly customized,
low-volume products, use vendors close to
your main markets. For standard, high-vol-
ume products, commission contract manu-
facturers in low-cost countries.

ALIGNMENT

Objectives:

Establish incentives for supply
chain partners to improve performance of the
entire chain.

Methods:

Provide all partners with equal access to
forecasts, sales data, and plans.

Clarify partners’ roles and responsibilities to
avoid conflict.

Redefine partnership terms to share risks,
costs, and rewards for improving supply
chain performance.

Align incentives so that players maximize
overall chain performance while also maxi-
mizing their returns from the partnership.

Example:

Convenience-store chain Seven-Eleven
Japan (SEJ) builds supply chain

agility

by
using real-time systems to detect changes
in customer preferences and track sales and
customer data at every store. Satellite con-
nections link stores with distribution cen-
ters, suppliers, and logistics providers. SEJ
reallocates inventory among stores and re-
configures store shelves three times daily to
cater to different customer groups at differ-
ent hours.

SEJ’s

adaptability

is legendary. Within six
hours after the 1995 Kobe earthquake, SEJ
overcame highway gridlock by mobilizing
helicopters and motorcycles to deliver
64,000 rice balls to its stores in the belea-
guered city.

SEJ fosters

alignment

by making partners’
incentives and disincentives clear. For ex-
ample, when carriers fail to deliver on time,
they pay a penalty. But SEJ also helps carri-
ers save money by forgoing the typical
time-consuming requirement that store
managers verify all contents of each deliv-
ery truck.

The Triple-A Supply
Chain

by Hau L. Lee

harvard business review • october 2004 page 2

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The best supply chains aren’t just fast and cost-effective. They are also

agile and adaptable, and they ensure that all their companies’ interests

stay aligned.

During the past decade and a half, I’ve studied
from the inside more than 60 leading compa-
nies that focused on building and rebuilding
supply chains to deliver goods and services to
consumers as quickly and inexpensively as
possible. Those firms invested in state-of-the-
art technologies, and when that proved to be
inadequate, they hired top-notch talent to
boost supply chain performance. Many com-
panies also teamed up to streamline processes,
lay down technical standards, and invest in in-
frastructure they could share. For instance, in
the early 1990s, American apparel companies
started a Quick Response initiative, grocery
companies in Europe and the United States
touted a program called Efficient Consumer
Response, and the U.S. food service industry
embarked on an Efficient Foodservice Re-
sponse program.

All those companies and initiatives persistently
aimed at greater speed and cost-effectiveness—
the popular grails of supply chain manage-
ment. Of course, companies’ quests changed
with the industrial cycle: When business was

booming, executives concentrated on maxi-
mizing speed, and when the economy headed
south, firms desperately tried to minimize
supply costs.

As time went by, however, I observed one
fundamental problem that most companies
and experts seemed to ignore: Ceteris paribus,
companies whose supply chains became more
efficient and cost-effective didn’t gain a sus-
tainable advantage over their rivals. In fact,
the performance of those supply chains
steadily deteriorated. For instance, despite
the increased efficiency of many companies’
supply chains, the percentage of products
that were marked down in the United States
rose from less than 10% in 1980 to more than
30% in 2000, and surveys show that consumer
satisfaction with product availability fell
sharply during the same period.

Evidently, it isn’t by becoming more effi-
cient that the supply chains of Wal-Mart,
Dell, and Amazon have given those compa-
nies an edge over their competitors. Accord-
ing to my research, top-performing supply

The Triple-A Supply Chain

harvard business review • october 2004 page 3

Hau L. Lee

([email protected]) is
the Thoma Professor of Operations,
Information, and Technology at the
Stanford Graduate School of Business in
Stanford, California, and the codirector
of the Stanford Global Supply Chain
Management Forum. He is the coeditor
(with Terry P. Harrison and John J. Neale)
of

The Practice of Supply Chain Man-
agement: Where Theory and Applica-
tion Converge

(Kluwer Academic Pub-
lishers, 2003).

chains possess three very different qualities.
First, great supply chains are agile. They react
speedily to sudden changes in demand or sup-
ply. Second, they adapt over time as market
structures and strategies evolve. Third, they
align the interests of all the firms in the sup-
ply network so that companies optimize the
chain’s performance when they maximize
their interests. Only supply chains that are ag-
ile, adaptable, and aligned provide companies
with sustainable competitive advantage.

The Perils of Efficiency

Why haven’t efficient supply chains been able
to deliver the goods? For several reasons.
High-speed, low-cost supply chains are unable
to respond to unexpected changes in demand
or supply. Many companies have centralized
manufacturing and distribution facilities to
generate scale economies, and they deliver
only container loads of products to customers
to minimize transportation time, freight costs,
and the number of deliveries. When demand
for a particular brand, pack size, or assortment
rises without warning, these organizations are
unable to react even if they have the items in
stock. According to two studies I helped con-
duct in the 1990s, the required merchandise
was often already in factory stockyards,
packed and ready to ship, but it couldn’t be
moved until each container was full. That
“best” practice delayed shipments by a week
or more, forcing stocked-out stores to turn
away consumers. No wonder then that, ac-
cording to another recent research report,
when companies announce product promo-
tions, stock outs rise to 15%, on average, even
when executives have primed supply chains to
handle demand fluctuations.

When manufacturers eventually deliver ad-
ditional merchandise, it results in excess inven-
tory because most distributors don’t need a
container load to satisfy the increased demand.
To get rid of the stockpile, companies mark
down those products sooner than they had
planned to. That’s partly why department
stores sell as much as a third of their merchan-
dise at discounted prices. Those markdowns
not only reduce companies’ profits but also
erode brand equity and anger loyal customers
who bought the items at full price in the recent
past (sound familiar?).

Companies’ obsession with speed and costs
also causes supply chains to break down during

the launch of new products. Some years ago, I
studied a well-known consumer electronics
firm that decided not to create a buffer stock
before launching an innovative new product. It
wanted to keep inventory costs low, particu-
larly since it hadn’t been able to generate an
accurate demand forecast. When demand rose
soon after the gizmo’s launch and fell sharply
thereafter, the company pressured vendors to
boost production and then to slash output.
When demand shot up again a few weeks later,
executives enthusiastically told vendors to step
up production once more. Five days later, sup-
plies of the new product dried up as if some-
one had turned off a tap.

The shocked electronics giant discovered
that vendors had been so busy ramping pro-
duction up and down that they hadn’t found
time to fix bugs in both the components’ man-
ufacturing and the product’s assembly pro-
cesses. When the suppliers tried to boost out-
put a second time, product defects rose to
unacceptable levels, and some vendors, includ-
ing the main assembler, had to shut down pro-
duction lines for more than a week. By the
time the suppliers could fix the glitches and re-
start production, the innovation was all but
dead. If the electronics company had given
suppliers a steady, higher-than-needed manu-
facturing schedule until both the line and de-
mand had stabilized, it would have initially
had higher inventory costs, but the product
would still be around.

Efficient supply chains often become un-
competitive because they don’t adapt to
changes in the structures of markets. Consider
Lucent’s Electronic Switching Systems division,
which set up a fast and cost-effective supply
chain in the late 1980s by centralizing compo-
nent procurement, assembly and testing, and
order fulfillment in Oklahoma City. The supply
chain worked brilliantly as long as most of the
demand for digital switches emanated from
the Americas and as long as Lucent’s vendors
were mostly in the United States. However, in
the 1990s, when Asia became the world’s fast-
est-growing market, Lucent’s response times in-
creased because it hadn’t set up a plant in the
Far East. Furthermore, the company couldn’t
customize switches or carry out modifications
because of the amount of time and money it
took the supply chain to do those things across
continents.

Lucent’s troubles deepened when vendors

mailto:[email protected]

The Triple-A Supply Chain

harvard business review • october 2004 page 4

shifted manufacturing facilities from the
United States to Asia to take advantage of the
lower labor costs there. “We had to fly compo-
nents from Asia to Oklahoma City and fly
them back again to Asia as finished products.
That was costly and time consuming,” Lucent’s
then head of manufacturing told me. With
tongue firmly in cheek, he added, “Neither
components nor products earned frequent-
flyer miles.” When Lucent redesigned its supply
chain in 1996 by setting up joint ventures in
Taiwan and China to manufacture digital
switches, it did manage to gain ground in Asia.

In this and many other cases, the conclusion
would be the same: Supply chain efficiency is
necessary, but it isn’t enough to ensure that
firms will do better than their rivals. Only
those companies that build agile, adaptable,
and aligned supply chains get ahead of the
competition, as I pointed out earlier. In this ar-
ticle, I’ll expand on each of those qualities and
explain how companies can build them into
supply chains without having to make trade-
offs. In fact, I’ll show that any two of these di-
mensions alone aren’t enough. Only compa-
nies that build all three into supply chains be-
come better faster than their rivals. I’ll
conclude by describing how Seven-Eleven
Japan has become one of the world’s most
profitable retailers by building a truly “triple-A”
supply chain.

Fostering Agility

Great companies create supply chains that re-

spond to sudden and unexpected changes in
markets. Agility is critical, because in most in-
dustries, both demand and supply fluctuate
more rapidly and widely than they used to.
Most supply chains cope by playing speed
against costs, but agile ones respond both
quickly and cost-efficiently.

Most companies continue to focus on the
speed and costs of their supply chains without
realizing that they pay a big price for disregard-
ing agility. (See the sidebar “The Importance of
Being Agile.”) In the 1990s, whenever Intel un-
veiled new microprocessors, Compaq took
more time than its rivals to launch the next
generation of PCs because of a long design cy-
cle. The company lost mind share because it
could never count early adopters, who create
the buzz around high-tech products, among its
consumers. Worse, it was unable to compete
on price. Because its products stayed in the
pipeline for a long time, the company had a
large inventory of raw materials. That meant
Compaq didn’t reap much benefit when com-
ponent prices fell, and it couldn’t cut PC prices
as much as its rivals were able to. When ven-
dors announced changes in engineering speci-
fications, Compaq incurred more reworking
costs than other manufacturers because of its
larger work-in-progress inventory. The lack of
an agile supply chain caused Compaq to lose
PC market share throughout the decade.

By contrast, smart companies use agile sup-
ply chains to differentiate themselves from ri-
vals. For instance, H&M, Mango, and Zara

Building the Triple-A Supply Chain

Agility

Objectives:

Respond to short-term changes in demand or
supply quickly; handle external disruptions
smoothly.

Methods:

Promote flow of information with suppliers
and customers.

Develop collaborative relationships with
suppliers.

Design for postponement.

Build inventory buffers by maintaining a
stockpile of inexpensive but key components.

Have a dependable logistics system or partner.

Draw up contingency plans and develop
crisis management teams.

Adaptability

Objectives:

Adjust supply chain’s design to meet struc-
tural shifts in markets; modify supply network
to strategies, products, and technologies.

Methods:

Monitor economies all over the world to
spot new supply bases and markets.

Use intermediaries to develop fresh
suppliers and logistics infrastructure.

Evaluate needs of ultimate consumers—
not just immediate customers.

Create flexible product designs.

Determine where companies’ products
stand in terms of technology cycles and
product life cycles.

Alignment

Objective:

Create incentives for better performance.

Methods:

Exchange information and knowledge freely
with vendors and customers.

Lay down roles, tasks, and responsibilities
clearly for suppliers and customers.

Equitably share risks, costs, and gains of
improvement initiatives.

The Triple-A Supply Chain

harvard business review • october 2004 page 5

have become Europe’s most profitable apparel
brands by building agility into every link of
their supply chains. At one end of their prod-
uct pipelines, the three companies have cre-
ated agile design processes. As soon as design-
ers spot possible trends, they create sketches
and order fabrics. That gives them a head start
over competitors because fabric suppliers re-
quire the longest lead times. However, the
companies finalize designs and manufacture
garments only after they get reliable data
from stores. That allows them to make prod-
ucts that meet consumer tastes and reduces
the number of items they must sell at a dis-
count. At the other end of the pipeline, all
three companies have superefficient distribu-
tion centers. They use state-of-the-art sorting
and material-handling technologies to ensure
that distribution doesn’t become a bottle-
neck when they must respond to demand
fluctuations. H&M, Mango, and Zara have all
grown at more than 20% annually since 1990,
and their double-digit net profit margins are
the envy of the industry.

Agility has become more critical in the past
few years because sudden shocks to supply

chains have become frequent. The terrorist at-
tack in New York in 2001, the dockworkers’
strike in California in 2002, and the SARS epi-
demic in Asia in 2003, for instance, disrupted
many companies’ supply chains. While the
threat from natural disasters, terrorism, wars,
epidemics, and computer viruses has intensi-
fied in recent years, partly because supply lines
now traverse the globe, my research shows
that most supply chains are incapable of cop-
ing with emergencies. Only three years have
passed since 9/11, but U.S. companies have all
but forgotten the importance of drawing up
contingency plans for times of crisis.

Without a doubt, agile supply chains re-
cover quickly from sudden setbacks. In Sep-
tember 1999, an earthquake in Taiwan delayed
shipments of computer components to the
United States by weeks and, in some cases, by
months. Most PC manufacturers, such as Com-
paq, Apple, and Gateway, couldn’t deliver
products to customers on time and incurred
their wrath. One exception was Dell, which
changed the prices of PC configurations over-
night. That allowed the company to steer con-
sumer demand away from hardware built with
components that weren’t available toward ma-
chines that didn’t use those parts. Dell could
do that because it got data on the earthquake
damage early, sized up the extent of vendors’
problems quickly, and implemented the plans
it had drawn up to cope with such eventuali-
ties immediately. Not surprisingly, Dell gained
market share in the earthquake’s aftermath.

Nokia and Ericsson provided a study in
contrasts when in March 2000, a Philips facil-
ity in Albuquerque, New Mexico, went up in
flames. The plant made radio frequency (RF)
chips, key components for mobile telephones,
for both Scandinavian companies. When the
fire damaged the plant, Nokia’s managers
quickly carried out design changes so that
other companies could manufacture similar
RF chips and contacted backup sources. Two
suppliers, one in Japan and another in the
United States, asked for just five days’ lead
time to respond to Nokia. Ericsson, mean-
while, had been weeding out backup suppli-
ers because it wanted to trim costs. It didn’t
have a plan B in place and was unable to find
new chip suppliers. Not only did Ericsson
have to scale back production for months
after the fire, but it also had to delay the
launch of a major new product. The bottom

The Importance of Being Agile

Most companies overlook the idea that
supply chains should be agile. That’s un-
derstandable; adaptability and alignment
are more novel concepts than agility is.
However, even if your supply chain is
both adaptable and aligned, it’s danger-
ous to disregard agility.

In 1995, Hewlett-Packard teamed up
with Canon to design and launch ink-jet
printers. At the outset, the American
company aligned its interests with those
of its Japanese partner. While HP took on
the responsibility of producing printed
circuit boards (or “formaters”), Canon
agreed to manufacture engines for the
LaserJet series. That was an equitable di-
vision of responsibilities, and the two
R&D teams learned to work together
closely. After launching the LaserJet, HP
and Canon quickly adapted the supply
network to the product’s markets. HP
used its manufacturing facilities in Idaho
and Italy to support the LaserJet, and

Canon used plants in West Virginia and
Tokyo.

But HP and Canon failed to anticipate
one problem. To keep costs down, Canon
agreed to alter the number of engines it
produced, but only if HP communicated
changes well in advance—say, six or
more months before printers entered the
market. However, HP could estimate de-
mand accurately only three or fewer
months before printers hit the market. At
that stage, Canon could modify its manu-
facturing schedule by just a few percent-
age points. As a result, the supply chain
couldn’t cope with sudden fluctuations in
demand. So when there was an unex-
pected drop in demand for the LaserJet
III toward the end of its life cycle, HP was
stuck with a huge and expensive surplus
of printer engines: the infamous LaserJet
mountain. Having an adaptable and
aligned supply chain didn’t help HP over-
come its lack of agility.

The Triple-A Supply Chain

harvard business review • october 2004 page 6

line: Nokia stole market share from Ericsson
because it had a more agile supply chain.

Companies can build agility into supply
chains by adhering to six rules of thumb:

• Provide data on changes in supply and de-
mand to partners continuously so they can re-
spond quickly. For instance, Cisco recently cre-
ated an e-hub, which connects suppliers and
the company via the Internet. This allows all
the firms to have the same demand and supply
data at the same time, to spot changes in de-
mand or supply problems immediately, and to
respond in a concerted fashion. Ensuring that
there are no information delays is the first step
in creating an agile supply chain.

• Develop collaborative relationships with
suppliers and customers so that companies
work together to design or redesign processes,
components, and products as well as to prepare
backup plans. For instance, Taiwan Semicon-
ductor Manufacturing Company (TSMC), the
world’s largest semiconductor foundry, gives
suppliers and customers proprietary tools, data,
and models so they can execute design and en-
gineering changes quickly and accurately.

• Design products so that they share com-
mon parts and processes initially and differ sub-
stantially only by the end of the production
process. I call this strategy “postponement.”
(See the 1997 HBR article I coauthored with Ed-
ward Feitzinger, “Mass Customization at
Hewlett-Packard: The Power of Postpone-
ment.”) This is often the best way to respond
quickly to demand fluctuations because it al-
lows firms to finish products only when they
have accurate information on consumer prefer-
ences. Xilinx, the world’s largest maker of pro-
grammable logic chips, has perfected the art of
postponement. Customers can program the
company’s integrated circuits via the Internet
for different applications after purchasing the
basic product. Xilinx rarely runs into inventory
problems as a result.

• Keep a small inventory of inexpensive,
nonbulky components that are often the cause
of bottlenecks. For example, apparel manufac-
turers H&M, Mango, and Zara maintain sup-
plies of accessories such as decorative buttons,
zippers, hooks, and snaps so that they can finish
clothes even if supply chains break down.

• Build a dependable logistics system that
can enable your company to regroup quickly in
response to unexpected needs. Companies
don’t need to invest in logistics systems them-
selves to reap this benefit; they can strike alli-
ances with third-party logistics providers.

• Put together a team that knows how to in-
voke backup plans. Of course, that’s only possi-
ble only if companies have trained managers
and prepared contingency plans to tackle cri-
ses, as Dell and Nokia demonstrated.

Adapting Your Supply Chain

Great companies don’t stick to the same sup-
ply networks when markets or strategies
change. Rather, such organizations keep
adapting their supply chains so they can adjust
to changing needs. Adaptation can be tough,
but it’s critical in developing a supply chain
that delivers a sustainable advantage.

Most companies don’t realize that in addi-
tion to unexpected changes in supply and de-
mand, supply chains also face near-permanent
changes in markets. Those structural shifts usu-
ally occur because of economic progress, politi-
cal and social change, demographic trends, and
technological advances. Unless companies
adapt their supply chains, they won’t stay com-
petitive for very long. Lucent twice woke up

Adaptation of the Fittest

Many executives ask me, with a twinkle
in their eye, if companies must really
keep adapting supply chains. Compa-
nies may find it tough to accept the idea
that they have to keep changing, but
they really have no choice.

Just ask Lucent. In the mid-1990s,
when the American telecommunications
giant realized that it could make inroads
in Asia only if had local manufacturing
facilities, it overhauled its supply chain.
Lucent set up plants in Taiwan and
China, which allowed the company to
customize switches as inexpensively and
quickly as rivals Siemens and Alcatel
could. To align the interests of parent
and subsidiaries, Lucent executives
stopped charging the Asian ventures in-
flated prices for modules that the com-
pany shipped from the United States. By
the late 1990s, Lucent had recaptured
market share in China, Taiwan, India,
and Indonesia.

Unhappily, the story doesn’t end

there, because Lucent stopped adapting
its supply chain. The company didn’t re-
alize that many medium-sized manufac-
turers had developed the technology
and expertise to produce components
and subassemblies for digital switches
and that because of economies of scale,
they could do so at a fraction of the inte-
grated manufacturers’ costs. Realizing
where the future lay, competitors ag-
gressively outsourced the manufacture
of switching systems. Because of the re-
sulting cost savings, they were able to
quote lower prices than Lucent. Mean-
while, Lucent was reluctant to outsource
its manufacturing because it had in-
vested in its own factories. Ultimately,
however, Lucent had no option but to
shut down its Taiwan factory in 2002
and create an outsourced supply chain.
The company’s adaptation came too late
for Lucent to regain control of the global
market, even though the supply chain
was agile and aligned.

The Triple-A Supply Chain

harvard business review • october 2004 page 7

late to industry shifts, first to the rise of the
Asian market and later to the advantages of
outsourced manufacturing. (See the sidebar
“Adaptation of the Fittest.”) Lucent recovered
the first time, but the second time around, the
company lost its leadership of the global tele-
communications market because it didn’t
adapt quickly enough.

The best supply chains identify structural
shifts, sometimes before they occur, by captur-
ing the latest data, filtering out noise, and
tracking key patterns. They then relocate facili-
ties, change sources of supplies, and, if possi-
ble, outsource manufacturing. For instance,
when Hewlett-Packard started making ink-jet
printers in the 1980s, it set up both its R&D
and manufacturing divisions in Vancouver,
Washington. HP wanted the product develop-
ment and production teams to work together
because ink-jet technology was in its infancy,
and the biggest printer market was in the
United States. When demand grew in other
parts of the world, HP set up manufacturing
facilities in Spain and Singapore to cater to Eu-
rope and Asia. Although Vancouver remained
the site where HP developed new printers, Sin-
gapore became the largest production facility
because the company needed economies of
scale to survive. By the mid-1990s, HP realized
that printer-manufacturing technologies had
matured and that it could outsource produc-
tion to vendors completely. By doing so, HP
was able to reduce costs and remain the leader
in a highly competitive market.

Adaptation needn’t be just a defensive tac-
tic. Companies that adapt supply chains when
they modify strategies often succeed in
launching new products or breaking into new
markets. Three years ago, when Microsoft de-
cided to enter the video game market, it
chose to outsource hardware production to
Singapore-based Flextronics. In early 2001,
the vendor learned that the Xbox had to be in
stores before December because Microsoft
wanted to target Christmas shoppers. Flex-
tronics reckoned that speed to market and
technical support would be crucial for ensur-
ing the product’s successful launch. So it de-
cided to make the Xbox at facilities in Mexico
and Hungary. The sites were relatively expen-
sive, but they boasted engineers who could
help Microsoft make design changes and
modify engineering specs quickly. Mexico and
Hungary were also close to the Xbox’s biggest

target markets, the United States and Europe.
Microsoft was able to launch the product in
record time and mounted a stiff challenge to
market leader Sony’s PlayStation 2. Sony
fought back by offering deep discounts on the
product. Realizing that speed would not be as
critical for medium-term survival as costs
would be, Flextronics shifted the Xbox’s sup-
ply chain to China. The resulting cost savings
allowed Microsoft to match Sony’s discounts
and gave it a fighting chance. By 2003, the
Xbox had wrested a 20% share of the video
game market from PlayStation 2.

Smart companies tailor supply chains to the
nature of markets for products. They usually
end up with more than one supply chain,
which can be expensive, but they also get the
best manufacturing and distribution capabili-
ties for each offering. For instance, Cisco caters
to the demand for standard, high-volume net-
working products by commissioning contract
manufacturers in low-cost countries such as
China. For its wide variety of mid-value items,
Cisco uses vendors in low-cost countries to
build core products but customizes those prod-
ucts itself in major markets such as the United
States and Europe. For highly customized, low-
volume products, Cisco uses vendors close to
main markets, such as Mexico for the United
States and Eastern European countries for Eu-
rope. Despite the fact that it uses three differ-
ent supply chains at the same time, the com-
pany is careful not to become less agile.
Because it uses flexible designs and standard-
ized processes, Cisco can switch the manufac-
ture of products from one supply network to
another when necessary.

Gap, too, uses a three-pronged strategy. It
aims the Old Navy brand at cost-conscious con-
sumers, the Gap line at trendy buyers, and the
Banana Republic collection at consumers who
want clothing of higher quality. Rather than
using the same supply chain for all three
brands, Gap set up Old Navy’s manufacturing
and sourcing in China to ensure cost efficiency,
Gap’s chain in Central America to guarantee
speed and flexibility, and Banana Republic’s
supply network in Italy to maintain quality.
The company consequently incurs higher over-
heads, lower scale economies in purchasing
and manufacturing, and larger transportation
costs than it would if it used just one supply
chain. However, since its brands cater to differ-
ent consumer segments, Gap uses different

The best supply chains

identify structural shifts,

sometimes before they

occur, by capturing the

latest data, filtering out

noise, and tracking key

patterns.

The Triple-A Supply Chain

harvard business review • october 2004 page 8

kinds of supply networks to maintain distinc-
tive positions. The adaptation has worked.
Many consumers don’t realize that Gap owns
all three brands, and the three chains serve as
backups in case of emergency.

Sometimes it’s difficult for companies to de-
fine the appropriate markets, especially when
they are launching innovative new products.
The trick is to remember that products em-
body different levels of technology. For in-
stance, after records came cassettes and then
CDs. Videotapes were followed by DVDs, and
almost anything analog is now or will soon be-
come digital. Also, every product is at a certain
stage of its life cycle, whether it’s at the infant,
ramp-up, mature, or end-of-life stage. By map-
ping either or both of those characteristics to
supply chain partners, manufacturing net-
work, and distribution system, companies can
develop optimal supply chains for every prod-
uct or service they offer.

For example, Toyota was convinced that the
market for the Prius, the hybrid car it launched
in the United States in 2000, would be differ-
ent from that of other models because it em-
bodied new technologies and was in its in-
fancy. The Japanese automobile maker had
expertise in tracking U.S. trends and geograph-
ical preferences, but it felt that it would be dif-
ficult to predict consumer response to a hybrid
car. Besides, the Prius might appeal to particu-
lar consumer segments, such as technophiles
and conservationists, which Toyota didn’t
know much about. Convinced that the uncer-
tainties were too great to allocate the Prius to
dealers based on past trends, Toyota decided to
keep inventory in central stockyards. Dealers
took orders from consumers and communi-
cated them via the Internet. Toyota shipped
cars from stockyards, and dealers delivered
them to buyers.

Although Toyota’s transportation costs rose,
it customized products to demand and man-
aged inventory flawlessly. In 2002, for exam-
ple, the number of Toyotas on the road in
Northern California and the Southeast were
7% and 20%, respectively. However, Toyota
sold 25% of its Prius output in Northern Cali-
fornia and only 6% in the Southeast. Had Toy-
ota not adapted its distribution system to the
product, it would have faced stock outs in
Northern California and been saddled with ex-
cess inventory in the Southeast, which may
well have resulted in the product’s failure.

Building an adaptable supply chain requires
two key components: the ability to spot trends
and the capability to change supply networks.
To identify future patterns, it’s necessary to fol-
low some guidelines:

• Track economic changes, especially in de-
veloping countries, because as nations open up
their economies to global competition, the
costs, skills, and risks of global supply chain op-
erations change. This liberalization results in
the rise of specialized firms, and companies
must periodically check to see if they can out-
source more stages of operation. Before doing
so, however, they must make sure that the in-
frastructure to link them with vendors and cus-
tomers is in place. Global electronics vendors,
such as Flextronics, Solectron, and Foxcom,
have become adept at gathering data and
adapting supply networks.

• Decipher the needs of your ultimate con-
sumers—not just your immediate customers.
Otherwise, you may fall victim to the “bullwhip
effect,” which amplifies and distorts demand
fluctuations. For years, semiconductor manu-
facturers responded to customer forecasts and
created gluts in markets. But when they started
tracking demand for chip-based products, the
manufacturers overcame the problem. For in-
stance, in 2003, there were neither big inven-
tory buildups nor shortages of semiconductors.

At the same time, companies must retain
the option to alter supply chains. To do that,
they must do two things:

• They must develop new suppliers that
complement existing ones. When smart firms
work in relatively unknown parts of the world,
they use intermediaries like Li & Fung, the
Hong Kong–based supply chain architects, to
find reliable vendors.

• They must ensure that product design
teams are aware of the supply chain implica-
tions of their designs. Designers must also be fa-
miliar with the three design-for-supply princi-
ples: commonality, which ensures that products
share components; postponement, which de-
lays the step at which products become differ-
ent; and standardization, which ensures that
components and processes for different prod-
ucts are the same. These principles allow firms
to execute engineering changes whenever they
adapt supply chains.

Creating the Right Alignment

Great companies take care to align the inter-

The Triple-A Supply Chain

harvard business review • october 2004 page 9

ests of all the firms in their supply chain with
their own. That’s critical, because every firm—
be it a supplier, an assembler, a distributor, or
a retailer—tries to maximize only its own in-
terests. (See the sidebar “The Confinement of
Nonalignment.”) If any company’s interests
differ from those of the other organizations in
the supply chain, its actions will not maximize
the chain’s performance.

Misaligned interests can cause havoc even
if supply chain partners are divisions of the
same company, as HP discovered. In the late
1980s, HP’s integrated circuit (IC) division
tried to carry as little inventory as possible,
partly because that was one of its key success
factors. Those low inventory levels often re-
sulted in long lead times in the supply of ICs
to HP’s ink-jet printer division. Since the divi-
sion couldn’t afford to keep customers wait-
ing, it created a large inventory of printers to
cope with the lead times in supplies. Both di-
visions were content, but from HP’s view-
point, it would have been far less expensive to
have a greater inventory of lower-cost ICs and
fewer stocks of expensive printers. That didn’t
happen, simply because HP’s supply chain
didn’t align the interests of the divisions with
those of the company.

Lack of alignment causes the failure of
many supply chain practices. For example, sev-
eral high-tech companies, including Flextron-
ics, Solectron, Cisco, and 3Com, have set up
supplier hubs close to their assembly plants.
Vendors maintain just enough stock at the
hubs to support manufacturers’ needs, and
they replenish the hubs without waiting for or-
ders. Such vendor-managed inventory (VMI)
systems allow suppliers to track the consump-
tion of components, reduce transportation
costs, and, since vendors can use the same hub
to support several manufacturers, derive scale
benefits. When VMI offers so many advan-
tages, why hasn’t it always reduced costs?

The problem starts with the fact that suppli-
ers own components until they physically
enter the manufacturers’ assembly plants and
therefore bear the costs of inventories for
longer periods than they used to. Many suppli-
ers are small and medium-sized companies
that must borrow money to finance invento-
ries at higher interest rates than large manu-
facturers pay. Thus, manufacturers have re-
duced costs by shifting the ownership of
inventories to vendors, but supply chains bear
higher costs because vendors’ costs have risen.
In fact, some VMI systems have generated fric-
tion because manufacturers have refused to
share costs with vendors.

One way companies align their partners’ in-
terests with their own is by redefining the
terms of their relationships so that firms share
risks, costs, and rewards equitably. For in-
stance, the world’s largest printer, RR Donnel-
ley (which prints this magazine) recognized in
the late 1990s that its supply chain perfor-
mance relied heavily on paper-and-ink suppli-
ers. If the quality and reliability of supplies im-
proved, the company could reduce waste and
make deliveries to customers on time. Like
many other firms, RR Donnelley encouraged
suppliers to come up with suggestions for im-
proving processes and products. To align their
interests with its own, however, the company
also offered to split any resulting savings with
suppliers. Not surprisingly, supplier-initiated
improvements have helped enhance RR Don-
nelley’s supply chain ever since.

Sometimes the process of alignment in-
volves the use of intermediaries. In the case of
VMI, for instance, some financial institutions
now buy components from suppliers at hubs
and sell them to manufacturers. Everyone ben-

The Confinement of Nonalignment

It’s not easy for executives to accept that
different firms in the same supply chain
can have different interests, or that in-
terest nonalignment can lead to inven-
tory problems as dire as those that may
arise through a lack of agility or a lack of
adaptability. But the story of Cisco’s sup-
ply chain clinches the argument.

All through the 1990s, everyone re-
garded Cisco’s supply chain as almost in-
fallible. The company was among the
first to make use of the Internet to com-
municate with suppliers and customers,
automate work flows among trading
partners, and use solutions such as re-
mote product testing, which allowed
suppliers to deliver quality results with a
minimum of manual input. Cisco out-
sourced the manufacturing of most of its
networking products and worked closely
with contract manufacturers to select

the right locations to support its needs.
If ever there were a supply chain that
was agile and adaptable, Cisco’s was it.

Why then did Cisco have to write off
$2.25 billion of inventory in 2001? There
were several factors at play, but the main
culprit was the misalignment of Cisco’s
interests with those of its contract man-
ufacturers. The contractors accumulated
a large amount of inventory for months
without factoring in the demand for
Cisco’s products. Even when the growth
of the U.S. economy slowed down, the
contractors continued to produce and
store inventory at the same pace. Fi-
nally, Cisco found it couldn’t use most of
the inventory of raw materials because
demand had fallen sharply. The com-
pany had to sell the raw materials off as
scrap.

The Triple-A Supply Chain

harvard business review • october 2004 page 10

efits because the intermediaries’ financing
costs are lower than the vendors’ costs. Al-
though such an arrangement requires trust
and commitment on the part of suppliers, fi-
nancial intermediaries, and manufacturers, it
is a powerful way to align the interests of com-
panies in supply chains.

Automaker Saturn’s service parts supply
chain, one of the best in the industry, is a great
example of incentive alignment that has led to
outstanding results. Instead of causing heart-
burn, the system works well because Saturn
aligned the interests of everyone in the
chain—especially consumers.

Saturn has relieved car dealers of the bur-
den of managing service parts inventories. The
company uses a central system to make stock-
ing and replenishment decisions for dealers,
who have the right to accept, reject, or modify
the company’s suggestions. Saturn doesn’t just
monitor its performance in delivering service
parts to dealers, even though that is the com-
pany’s only responsibility. Instead, Saturn
holds its managers and the dealers jointly ac-
countable for the quality of service the vehicle
owners experience. For example, the company
tracks the off-the-shelf availability of parts at
the dealers as the relevant metric. Saturn also
measures its Service Parts Operation (SPO) di-
vision on the profits that dealers make from
service parts as well as on the number of emer-
gency orders that dealers place. That’s because
when a dealer doesn’t have a part, Saturn
transfers it from another dealer and bears the
shipping costs. The SPO division can’t over-
stock dealers because Saturn shares the costs
of excess inventory with them. If no one buys a
particular part from a dealer for nine months,
Saturn will buy it back as obsolete inventory.

That kind of alignment produces two re-
sults. First, everyone in the chain has the same
objective: to deliver the best service to con-
sumers. While the off-the-shelf availability of
service parts in the automobile industry ranges
from 70% to 80%, service part availability at
Saturn’s dealers is 92.5%. After taking transfers
from other retailers into account, the same-day
availability of spare parts is actually 94%. Sec-
ond, the right to decide about inventory re-
plenishment rests with Saturn, which is in the
best position to make those decisions. The
company shares the risks of stock outs or over-
stocks with dealers, so it has an interest in
making the best possible decisions. Fittingly,

the inventory turnover (a measure of how effi-
cient inventory management is, calculated by
dividing the annual cost of inventory sold by
the average inventory) of spare parts at Sat-
urn’s dealers is seven times a year while it is
only between one and five times a year for
other automobile companies’ dealers.

Like Saturn, clever companies create align-
ment in supply chains in several ways. They
start with the alignment of information, so
that all the companies in a supply chain have
equal access to forecasts, sales data, and plans.
Next they align identities; in other words, the
manufacturer must define the roles and re-
sponsibilities of each partner so that there is
no scope for conflict. Then companies must
align incentives, so that when companies try to
maximize returns, they also maximize the sup-
ply chain’s performance. To ensure that hap-
pens, companies must try to predict the possi-
ble behavior of supply chain partners in the
light of their current incentives. Companies
often perform such analyses to predict what
competitors would do if they raised prices or
entered a new segment; they need to do the
same with their supply chain partners. Then
they must redesign incentives so partners act
in ways that are closer to what’s best for the en-
tire supply chain.

Seven-Eleven Japan’s Three Aces

Seven-Eleven Japan (SEJ) is an example of how
a company that builds its supply chain on agil-
ity, adaptability, and alignment stays ahead of
its rivals. The $21 billion convenience store
chain has remarkably low stock out rates and
in 2004 had an inventory turnover of 55. With
gross profit margins of 30%, SEJ is also one of
the most profitable retailers in the world. Just
how has the 9,000-store retailer managed to
sustain performance for more than a decade?

The company has designed its supply chain
to respond to quick changes in demand—not
to focus on fast or cheap deliveries. It has in-
vested in real-time systems to detect changes
in customer preference and tracks data on
sales and consumers (gender and age) at every
store. Well before the Internet era began, SEJ
used satellite connections and ISDN lines to
link all its stores with distribution centers, sup-
pliers, and logistics providers. The data allow
the supply chain to detect fluctuations in de-
mand between stores, to alert suppliers to po-
tential shifts in requirements, to help reallo-

The Triple-A Supply Chain

harvard business review • october 2004 page 11

cate inventory among stores, and to ensure
that the company restocks at the right time.
SEJ schedules deliveries to each store within a
ten-minute margin. If a truck is late by more
than 30 minutes, the carrier has to pay a pen-
alty equal to the gross margin of the products
carried to the store. Employees reconfigure
store shelves at least three times daily so that
storefronts cater to different consumer seg-
ments and demands at different hours.

SEJ has adapted its supply chain to its strat-
egy over time. Some years ago, the company
decided to concentrate stores in key locations
instead of building outlets all over the country.
But doing so increased the possibility of traffic
congestion every time the company replen-
ished stores. The problem became more acute
when SEJ decided to resupply stores three or
more times a day. To minimize delays due to
traffic snarls, the company adapted its distribu-
tion system. It asked its suppliers from the
same region to consolidate shipments in a sin-
gle truck instead of using several of them. That
minimized the number of trucks going to its
distribution centers, which is where SEJ cross-
docks products for delivery to stores. The com-
pany has also expanded the kinds of vehicles it
uses from trucks to motorcycles, boats, and
even helicopters. The effectiveness of the com-
pany’s logistics system is legendary. Less than
six hours after the Kobe earthquake on Janu-
ary 17, 1995, when relief trucks were crawling
at two miles per hour on the highways, SEJ
used seven helicopters and 125 motorcycles to
deliver 64,000 rice balls to the city.

Fundamental to the supply chain’s opera-
tion is the close alignment between Seven-
Eleven Japan’s interests and those of its part-
ners. The incentives and disincentives are
clear: Make Seven-Eleven Japan successful, and
share the rewards. Fail to deliver on time, and
pay a penalty. That may seem harsh, but the
company balances the equation by trusting its
partners. For instance, when carriers deliver
products to stores, no one verifies the truck’s

contents. That allows carriers to save time and
money, since drivers don’t have to wait after
dropping off merchandise.

When Seven-Eleven Japan spots business
opportunities, it works with suppliers to de-
velop products and shares revenues with them.
For instance, two years ago, SEJ created an e-
commerce company, 7dream.com, with six
partners. The new organization allows con-
sumers to order products online or through
kiosks at SEJ stores and pick up the merchan-
dise at any Seven-Eleven. The partners benefit
from SEJ’s logistics network, which delivers
products to stores efficiently, as well as from
the convenient location of stores. By encourag-
ing partners to set up multimedia kiosks to
produce games, tickets, or CDs in its shops,
Seven-Eleven Japan has become a manufactur-
ing outlet for partners. The company could not
have aligned the interests of its partners more
closely with those of its own.

• • •

When I describe the triple-A supply chain to
companies, most of them immediately assume
it will require more technology and invest-
ment. Nothing could be further from the
truth. Most firms already have the infrastruc-
ture in place to create triple-A supply chains.
What they need is a fresh attitude and a new
culture to get their supply chains to deliver tri-
ple-A performance. Companies must give up
the efficiency mind-set, which is counterpro-
ductive; be prepared to keep changing net-
works; and, instead of looking out for their in-
terests alone, take responsibility for the entire
chain. This can be challenging for companies
because there are no technologies that can do
those things; only managers can make them
happen.

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Further Reading

A R T I C L E S

Fast, Global, and Entrepreneurial: Supply
Chain Management, Hong Kong Style

by Joan Magretta

Harvard Business Review

October 2002
Product no. 2020

Li & Fung, the Hong Kong–based multina-
tional trading company, embodies supply
chain agility, adaptability, and alignment. In-
stead of owning factories, it partners with a
worldwide network of thousands of indepen-
dent suppliers—filling customers’ orders by
selecting the best partners for each part of the
job. It thus adds value at every link in the sup-
ply chain. At the front end, it provides design,
engineering, and production-planning ser-
vices. In the middle stages, it organizes raw-
material and component sourcing. At the
back end, it offers quality control, testing, and
logistics services. Li & Fung’s basic operating
units consist of small, entrepreneurial divisions
serving just one large customer or several
smaller but similar ones. The company creates
or collapses divisions as markets change.

Supply Chain Challenges: Building
Relationships

by Scott Beth, David N. Burt,
William Copacino, Chris Gopal,
Hau L. Lee, Robert Porter Lynch,
Sandra Morris, and Julia Kirby

Harvard Business Review

July 2003
Product no. R0307E

In this article, a panel of experts—practitio-
ners from Intel, Intuit, and Unisys; leading aca-
demics; and consultants—maintain that rela-
tionships have become more important than
technology in supply chain management.
New opportunities and challenges arising
from globalization are requiring companies to
establish partnerships with new types of sup-
pliers and to break down internal barriers to
cross-functional collaboration. By focusing on
relationships, leading supply chain performers

are reaping tremendous gains in all variables
affecting shareholder value—such as cost,
customer service, asset productivity, and reve-
nue generation. Through these means, lead-
ers are widening the gap between themselves
and their rivals—in almost every industry.

Leading a Supply Chain Turnaround

by Reuben E. Slone

Harvard Business Review

October 2004
Product no. R0410G

This article provides another example of a
company that has built agility, adaptability,
and alignment in its supply chain. Less than
five years ago, salespeople at Whirlpool were
in the habit of referring to their supply chain
organization as the “sales disablers.” Now, the
company excels at getting product to the
right place at the right time—while also man-
aging to keep inventories low. What made the
difference? As Reuben Slone of Whirlpool ex-
plains, he and his colleagues devised the right
supply chain strategy, sold the plan internally,
and executed it relentlessly. Slone not only de-
scribes how to develop world-class supply
chain capabilities; he offers valuable advice for
leaders in any turnaround situation.

http://www.hbr.org

mailto:[email protected]

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1

P271: Global Business Analysis: SCM
Class-04

Mfg Structure

Scott Dobos

Learning Objectives
Within “alignment” and OM Structure we discuss the importance
of selecting the appropriate architecture as these decisions
have long-term ramifications.

OM Architecture

– How Architecture supports the value proposition

– The strategic importance of process within Architecture

– Understanding Process Taxonomy, Trade-offs and Terms

2

2

Intro and Architecture

• Need Alignment across the firm

• Mfg Process Structures, Layout and Strategy
affect cost and flexibility

• Mfg perspective is often at odds with Marketing
within Customer Accommodation

• Each Market Orientation provides a set of lead
times from which to respond to the customer

• Manufacturing Structures and Strategies must
align within themselves and to the Market
Orientation.

• Operations Layout will drive process requirements

• Overall Architecture decisions affect Customer
Accommodation

Mfg Process Structures
1. Project
2. Job Shop
3. Batch
4. Repetitive Process
5. Continuous Process
6. Mass Customization
7. Cellular Mfg

Market Orientation and
Manufacturing Strategy
1. Engineer to Order (ETO)
2. Make to Order (MTO)
3. Assemble to Order (ATO)
4. Make to Stock (MTS)

Operations Layout
1. Fixed-Position
2. Process
3. Product
4. Cellular

3

Understanding the Strategic
Importance of Operations…

(Quick Review)

4

3

All Companies Compete On…

(1) Customer Value Proposition

(2) Product
Characteristics

(4) Process
Capability

(6) Process
Design

(5) Which is
determined by
the way the
system is
designed

(3) Which is set by
Business Strategy
and completely
determined by:

5

Importance of Alignment

 Firm Strategy

 Capabilities / Core Competencies

 Process Architecture (TODAY)

 Sales & Operations Planning Process

6

Fit: Value Proposition / Critical Customer / Capabilities

4

There are (3) fundamental discrepancies between the
provider (manufacturer) and customer:
1. Space: Different locations of mfg and consumption
2. Time: Production and consumption not connected
3. Quantity & Assortment: Want to mfg large

quantities with little variety

The Problem from Customer Accommodation is
ultimately driven by manufacturing constraints.

Customer Accommodation

7

Balances the following with Customer
requirements:

•Volumes (Economies of Scale)
•Varieties (Economy of Scope)
•Constraints: Capacity / Equipment / Setup
•Lead Times

With perceived value and what they are willing to pay

Manufacturing Perspective

8

5

Process Architecture

Critical to the Value Proposition

Architecture:
• Structure
• Market Orientation
• Operations Layout

Structure of a Process
Structure: Organization of inputs, activities, and outputs

– Sequencing, positioning, and linking of process activities
should be tied to performance outcome priorities

– Process Capabilities are limited by the structure

Typical manufacturing process structures:
– Project
– Job Shop
– Batch Shop
– Repetitive
– Assembly Line (Continuous Flow)
– Mass Customization
– Cellular

10

6

Product-Process Matrix

High

Variety

Flexibility

Cost

Low

Cellular
Manufacturing

Mass
Customization

Project

Job Shop

Batch

Continuous
Process

Repetitive
Process

Low Volume High

Managing Operations Across the SC
Swink, Melnyk, Cooper, Hartley
Figure 5.2

11

Trade-Offs:
Economies of scale
Economies of scope
Lead Time
Capacity
Cost
Flexibility

IV.
Continuous

Flow

III.
Assembly

Line

II.
Batch

I.
Job

Shop

Low
Volume,
One of a

Kind

Multiple
Products,

Low
Volume

Few
Major

Products,
Higher
Volume

High
Volume,

High
Standard-

ization

Glasses
French Restaurant

Heavy
Equipment

Coffee Shop

Automobile
Assembly

Burger King

Oil
Refinery

Flexibility (High)
Variety (High)

Unit Cost (High)

Flexibility (Low)
Variety (Low)

Unit Cost (Low)

Product / Process Matrix

12

7

Process types vary across several important dimensions:
Job Shop Batch Line Flow Continuous Flow

Product Flexibility

Need for Skilled Labor

Type of Equipment

Quality / Inspection

Material Flow

Level of WIP Inventory

Notion of Capacity

Unit Cost

High Low

High Low || High

General Specialized

More / Manual Less / In-Process

Jumbled Linear

High Low

Fuzzy / Inputs Precise / Outputs

High Low

PROCESS FLEXIBILITY

PRODUCT STANDARDIZATION

13

Impact of process choice on facility layout

Job Shop

Line Flow

Power
Train

Body
Assembly

Engine
Mount

Paint
Shop

Mustang
Line

Power
Train

Body
Assembly

Engine
Mount

Paint
Shop

Taurus
Line

Milling
Equipment

Drills

Lathes
Finishing

Equipment

1 2

3

4

5

6

7

1

2

3

4

Product A

Product B

14

8

Process Architecture

Critical to the Value Proposition

Architecture:
• Structure
• Market Orientation
• Operations Layout

Market Orientation

Determines how the firm fulfills individual customer
orders:

1.Engineer to Order (ETO)
2.Make to Order (MTO)
3.Assemble to Order (ATO)
4.Make to Stock (MTS)

16

9

Given a Process Type, There are
Different Strategies for Triggering Production

Finished
Goods

Raw
Materials

Inventory

Slower FasterResponse Time

Make To
Order

MTS: Manufacture
entire product prior to
receiving customer
order.

ATO: Build modules
prior to receiving order;
assemble product after
receiving customer
order.

MTO: Begin
production only after
receiving a customer
order.

Assemble
To Order

Make To
Stock

High LowLabor Skill Level

General SpecializedType of Equipment

17

Manufacturing Strategies:
1. Make-to-Stock (MTS) / Make-to-Plan (MTP)
2. Make-to-Order (MTO)
3. Assemble-to-Order (ATO)
4. Engineer-to-Order (ETO)

Manufacturing Structures and Strategies must align within
themselves and to the Market Orientation.

Manufacturing Process Characteristics (Table 5.1)

18

10

Lead Time Performance

Differing market orientations have different
elements of Order-to-Delivery (OTD) lead time

–Engineer to Order (ETO): design and make to customer
specifications

–Make to Order (MTO): make to customer demand from
raw materials and components

–Assemble to Order (ATO): assemble to customer demand
from generic subassemblies

–Make to Stock (MTS): build and stock in anticipation of
customer demand

19

Lead Time Performance Managing Operations Across the SC
Swink, Melnyk, Cooper, Hartley

20

11

Manufacturing Strategy Tradeoffs

21

Process Architecture

Critical to the Value Proposition

Architecture:
• Structure
• Market Orientation
• Operations Layout

12

Operations Layout
The physical layout of an operation impacts cost, time,
and flexibility.

• Four basic types of layouts:
– Fixed position: product cannot be moved during

production

– Process layout: groups together similar resources

– Product layout: resources arranged by regularly
occurring sequence of activities

– Cellular layout: arranges workstations to form a number
of small assembly lines

23

242424

1

P271: Global Business Analysis: SCM
Class-01

Introduction to the Field

Scott Dobos
Summer 2022

Highly Recommended to Attend First Class

Class Updates

1. PLEASE Ask Questions anytime
2. Web-based Summer class

• 18-classes in 24-days
• Dynamic environment
• Need to get organized and stay current

3. Set Course Expectations and How to Succeed
• It is Ops with RCCA and processes…
• Plan ahead and see me if you have any personal issues

4. Everything is loaded in Canvas
• Modules drives it

5. My slide deck is different than yours:
• I leave-out info to facilitate class discussion
• I don’t give you all the slides to save your print-que
• I do NOT re-post full slide decks at the end of class
• Print the Slides: Take notes on the slides

6. With no textbook there tends to be more slides and readings to create the
foundation

2

2

Learning Objectives
We start by discussing the structure of the course and how-to-

succeed.

We then introduce the topics of SCM and OM

Class-01: Intro to Course & OM / SCM
1. To set class expectations and how to succeed
2. Introduce both OM & SCM
3. Discuss the evolution of OM / SCM
4. Appreciate the various transformations within business

3

About Me and You
• Instructor:

– Scott Dobos
• Office Phone: 855-5730

• Cell Phone: 812-219-4313

• Email: [email protected] (Do not send Canvas mail)

• Office Hours –By Appointment

– My Background

• Student Backgrounds

4

3

Student Bio then Resume
(Due for Class-02) in Canvas Assignments

Submit as a single-file the following:
Page-1: Bio

• Student Name:
• Nick Name: Name you wished to be called
• Pronunciation (if helpful)
• Expected Graduation:
• Major(s):
• Hometown:
• Do you have a job/internship for this summer?

– If Yes, with Whom doing what:
– If No, what field are you pursuing? Are you interested in Supply Chain jobs?

• Do you have an issue with the Exam on Friday, May 27th at 4:05PM?
• Class Content Desires and/or Concerns?
• Any Personal Issues (DSS) you want to make Professor aware:

– Please follow-up with an email and/or meeting

• List any IU Supported Activities that may need my consideration
– For any individual assignments or exams, please send me a note ASAP if you will require any

special arrangements. Thank you for representing IU!

Page-2: Resume (Please include your current resume)

5

Important Norms
1. Courtesy / Respect

2. Honesty and Pointed Feedback

3. Classroom Learning Environment

4. Please join a minute early to Zoom

5. It is the listener’s responsibility to communicate issues with clarity:
Volume, Equipment, Slide Format

6. Quality of work matters most as I accept late assignments for a smaller
penalty than poor work.

7. See Syllabus: IP of classroom content on the web

8. Ask Questions ! ! !

Any more to add?

6

4

Class Goals
1. Cover General Material (real world terminology)

• Appreciation of OM / SCM
• Intro to ICORE

2. Create better decision makers within dynamic world
3. Better Prepare / Inform Students for after IU

– Interviewing: Internships and Perm Placement

4. Make a better class for following semesters
5. Get you out-of Comfort Zone

– Building Courageous Leaders: Provide Ambiguity promoting Tenacity…

6. Get Qualitative Thought Process
– Quantitative Math is at a “Manager” Level

7. Ability for students to succeed based on effort
8. To be Equitable / Fair to all Students

Any Others?

7

Syllabus Points

Grading and Deliverables
• Exam (Essay and Quiz) (30%)
• Quizzes (15%)
• AR’s (25%)
• Team Case Analysis (20%)
• Participation (10%)

Assignments submitted via Canvas

Class durations will fluctuate

8

5

The Journey
• Need to understand: Strategy

– Firm Strategy (Value Prop: Responsive / Efficient / Sustainable)

– Stakeholder Mgmt (including Critical Customers)

– Capabilities: Internal OM Structure / Architecture

– Fit / Agile / Adaptable / Aligned

• Need to understand: Integrated Logistics
– Transportation

– Inventory

– Network Design: Channel Mgmt

• In order to answer: Sourcing
– Across the SC is the eco-system

– What: Make / Buy: Procurement

– Where: Make / Buy

• While Balancing (OE): Speed, Cost and Flexibility

– Profit / Cash / Continuity / Resiliency / Risk / Innovation

Class Structure
Designed as the introductory course to SCM and How Business
Works in a Global arena. This class is a pre-cursor to ICORE.

1. Strategy Alignment

2. What to Make / What to Buy

3. Where to Make (Domestic / International)

4. How to Justify (Models)

Foundational
Class Material

(Exam)

Application

10

6

This is loaded in the Syllabus

11

12

Next Class:
– Wednesday, 5/11  Corporate Structure

– Live Session

– Due: Bio and then Resume (Canvas Assignments)

– Due: AR01: Triple-A SC

Upcoming Dates:
– Thursday, 5/12  Mfg Structure (Video)

– Video Session Only

– Due: AR02: What is Strategy

– Friday, 5/14  Industry 4.0 (Video)
– Video Session: Q&A Office Hours

– Due: AR03: Industry 4.0

– Quiz-1 (Opens Thursday & Due on Friday)  Includes Class-4 Video

– Monday, 5/16  Services
– Live Session

– Due: AR04: Service 4.0

– Tuesday, 5/17  Team Project Rollout
– Live Session

– Due: AR05: Cognitive Circular Ecosystems

Today (05/10): Class-01

7

AR01 is due next class
1. Instructions are loaded for each in Canvas

2. Format counts  Single Space and font-11

• Answer each question separately

• Bullet points are encouraged
3. 1-page max  Estimate 30-minutes

• Show the thought process & effort
4. % Lengths will vary based on the article and interest
5. Please rate each article for interest and relevance. Evaluation should be related to OM

and SCM as some readings introduce the topic
• Remember this is not a case

6. Do NOT cut/paste (using Turn-it-In)
7. Please do not submit any assignments to me via email.

8. Post Early: I will grade AR’s early with option to re-submit

• Do not need current class material to complete.

• When in doubt on a term?

9. No right/wrong answer. Again, give some thought and show effort

You should get 5 out of 5 (Full Credit)

When you hear “Operations
Management” what do you think of?

14

8

A Textbook Definition:
• Operations management is the design, operation,

and improvement of the systems (and resources)
that creates the firm’s primary products and services.

15

The Toyota Production System is an integrated socio-technical system, developed by Toyota, that comprises its
management philosophy and practices. The TPS is a management system that organizes all internal functions and includes
interaction with suppliers and customers.

16

• Supply Chain (SC): the global network of organizations and activities involved in
designing, transforming, consuming and disposing of goods and services.

• Supply Chain Management (SCM): is management of the processes and
relationships in a supply chain

• Integrated Logistics serves to link and synchronize the overall supply chain as a
continuous process and is essential for effective supply chain connectivity.

– Pure “Logistics” involves material
– Integrated includes information and material

• Sourcing:
– Verb for Procurement
– Decision: By who and where

What is SCM and Logistics: Definitions

9

Major Supply Chain Areas

SOURCING LOGISTICS

PRODUCTIONPLANNING SERVICE
DEMAND PLANNING SERVICE OPERATIONS

SUPPLY RATIONALIZATION

MATERIAL MANAGEMENT

PROCESS IMPROVEMENTPROJECT MANAGEMENT

NETWORK DESIGN & OPTIMIZATIONGLOBAL OUTSOURCING

FACILITY LOCATION

COMPETITION  GLOBALIZATION

17

Forces Driving Resource Role Shifting

18

10

Why it matters…
• “Companies that excel in supply-chain operations perform better in almost

every financial measure of success.”
• “Where supply chain excellence improves demand-forecast accuracy,

companies have a 5% higher profit margin, 15% less inventory, and a
35% shorter cash-to-cash cycle.”

• Improving one metric of supply chain excellence, “perfect orders”, by 3%
results in roughly 1% increase in the companies overall profit margin

AMR Research,

19

Aligned

The Three A’s*

Agile

Adaptable
Sustainable

Supply
Chain

Advantage

Agile supply chains respond quickly
to sudden changes in supply or
demand. They handle unexpected
external disruptions smoothly and
cost effectively.

Adaptable supply chains evolve over
time as economic progress, political
shifts, demographic trends, and
technological advances reshape
markets

* For more details see HBR October 2004, H.L. Lee

Alignment of the interests of all
supply chain participants means that
as each player maximizes its own
interests, it optimizes the supply
chain’s performance.

20

11

Supply Chain Evolution

21

Servitization of Products:
In its simplest terms, servitization refers to industries using
their products to sell “outcome as a service” rather than a one-off sale.
… Manufacturing businesses can offer additional services to supplement
their traditional products such as maintenance, keeping a fleet of
vehicles on the road as a service.

How SCM Changed…

A
n

n
u

a
l

%
D

e
fl

a
ti

o
n

1

2

3

4

5

– 2

– 1

Time

Above Average
• Cross-functional

sourcing involvement
• Supply base

rationalization
• More sophisticated

negotiations
• Supplier development
• Strong emphasis on

“faster & cheaper”Traditional
• SCM = “buying things”
• Strong organization

silos
• Minimal measurement

Point of
Diminishing

Return

No SCM—
Just Buying

World-Class

• Process discipline

• Contributions from all
functional areas within
the firm (design,
manufacturing,
finance, etc…)

• Appropriate response
to globalization

• Supplier quality &
productivity

• Leveraging
technological
innovations

P P

P
T Aligned

Agile

Adaptable

SCM as
transaction

SCM as
service

SCM as
orchestration

SCM as
transformation

SCM as
innovation

Tactical Competence

1

2

3

4
5

22

12

System Thinking…

• Business isn’t a collection of silos…

• Business isn’t a “one function” game

• Business IS a set of inter-related components

• Understanding the components and optimizing the
linkages between them is of utmost importance

23

OM > MFG

• Manufacturing

• New Product Development
– (including R& D Processes)

• Service Management

• Supply Chain Management

• Channel Management

• Execution Oriented Functions

D
e
c
is

io
n

M
a
k
in

g

R
e
s
o

u
rc

e
A

llo
c
a
tio

n

E
x
e
c
u

tio
n

24

13

The Big Question…

• How will we make decisions

• How will we allocate resources

• How will we execute

In order to…

25

Meet it’s need for survival, profitability, growth, stakeholder value…

What is a Transformation System?

InputsInputs OutputsOutputs

A transformation system is series of steps that
transform inputs into desired outputs.

• Resource Decisions (Structural and Infrastructural)
• Processes Design (Network of activities & buffers)
• Execution

26

14

Transformations

• Physical–manufacturing

• Locational–transportation

• Financial–retailing

• Storage–warehousing

• Physiological–health care

• Informational–telecommunications

27

Current Issues in OM
• Coordinate the relationships between mutually supportive but separate

organizations.

• Increased co-production of goods and services.

• Optimizing global supplier, production and distribution networks.

• Managing the customers experience during the service encounter

• Raising the awareness of supply chain and operations as a significant
competitive weapon.

• Focus on knowledge-based assets (importance of data & transparency)

• Sustainability and the “triple bottom line”

• Supply Chain Risk Management

28

15

29

SCM: Great as Primary Major
OM: Great as Complimentary

Placements:
• Consulting
• Cummins
• Grainger
• Lilly
• Toyota
• Whirlpool
• Boeing / RR
• JP Morgan
• TI
• Target / Walmart

30

1

P271: Global Business Analysis: SCM
Class-02

Corporate Structure Alignment & Lifecycle Innovation

Scott Dobos
Summer 2022

DUE: Bio then Resume (Canvas Assignments)
AR01 (Canvas Assignments)

Quiz-1
Quiz-1 will be available from Thursday, 5/13 at 5:10PM to Friday at 11:59PM.

This covers material from Week-1:

– Class-1

– Class-2

– Class-3 Video

– Class-4 Video

– Quizzes are non-cumulative

– No AR’s this week are included

• Multiple Choice: Which of the following is FALSE

– You are searching for the single FALSE statement

– Or all statements are TRUE

• There are eight questions. You will have 40-minutes. You will see one question at a
time. Each question will lock after you answer.

• Open Book and Open Notes. Any online source web material is NOT permitted. I
strongly suggest that you review the class material prior to opening the exam.

• This assignment will be graded (and potentially curved) based on your peers.

• This is an independent assignment. Review the Kelley Conduct Code as any
violations will be dealt with swiftly.

2

3

Today (05/11): Class-02
Next Class:

– Thursday, 5/12  Mfg Structure (Video)
– Video Session Only

– Due: AR02: What is Strategy

Upcoming Dates:
– Friday, 5/13  Industry 4.0 (Video)

– Video Session: Q&A Office Hours

– Due: AR03: Industry 4.0

– Quiz-1 (Opens Thursday & Due on Friday)  Includes Class-4 Video

– Monday, 5/16  Services
– Live Session

– Due: AR04: Service 4.0

– Tuesday, 5/17  Team Project Rollout
– Live Session

– Due: AR05: Cognitive Circular Ecosystems

– Wednesday, 5/18  Team Project Rollout
– Live Session

– Due: AR06: Reinvention of Procurement

Learning Objectives
We understand the importance of fit, focus and alignment to

support innovation across the firm.

Class-02 OM Strategy and Lifecycle Innovation
1. Definition of OM Strategy and Fit
2. Product Life Cycles
3. Creating Innovation
4. Creating OM Focus
5. Ultimately creating Alignment across the firm…

4

3

Operations Strategy

Operations Strategy: a set of competitive priorities
coupled with supply chain structural and infrastructural design
choices:

intended to create capabilities that support a set of value
propositions targeted to address the needs of critical
customers

Establishes:
– the competitive objectives of an organization

– the specific performance target and means

5

Developing an Operations Strategy

(3) Pieces to Developing an Ops Strategy:

• Critical Customer: critical to firm’s success and
receives firm’s focus

• Value Proposition: tangible and intangibles
that customers expect from a firm

• Capabilities: what a firm does well, defines
types of problems a firm can proficiently address

6

4

Capabilities

Capabilities: Unique and superior abilities based
upon the firm’s routines, skills and processes

– Processes

– Planning systems

– Technology

– People and culture

– Supply chain relationships

7

Core Capabilities

Core Capabilities: Enable firm to meet customer
expectations and are difficult for competitors to imitate

– Rare or unique

– Hard to imitate

– Valuable

– Few substitute

• Fit: Alignment with capabilities, value proposition
and critical customer

8

5

Product Life Cycle Definitions

A pattern of sales growth and decline over the period in
which the product is offered

• Launch: introduction into the market and may require SC
process innovation

• Growth: increasing demand, flexible SC, more data from
customers, increasing standardization

• Maturity: demand and product stabilization, increasing
importance of cost, process innovation to increase SC
efficiency

• Decline: changing technology or customer needs, declining
demand, potential phase in of a replacement product

10

6

Product Life Cycle

Launch Growth Maturity Decline

Product
Sales

Major product innovations

Initial process innovations

Major process innovations

Incremental product innovations

Incremental
product redesign

New product
launch

Next generation or
replacement
product

OM Flexibility
to support

Product Innovation

OM Efficiency
by Process Innovation

11

Innovation Across the Product Life Cycle

Launch
• Intense design

and development

• May need SC
process innovation

Decline
• Market/technology

changes

• Pressure to reduce
cost and capacity

• Incremental
projects to extend
life

• Introduction of next
generation
products

Maturity
• Demand stabilizes

• Product stabilizes

• Emphasis on cost

• Process innovation
needed to increase
SC efficiency

Growth
• Customer data aids

in the refinement of
product

• Product changes,
but moving toward
standardization

• Process innovation
postponed

• SC flexibility due to
high mix/low volume,
increasing capacity

12

7

Innovation Strategy

13

Radical
Breakthroughs

Innovation Portfolio Planning

Next
Generation
or Platform

Enhancements,
hybrids,

and derivatives

Research
and advanced
development

Extent of
Process Change

New core process

Next generation
of core process

Single-department
upgrade

Tuning and
incremental chgs

Extent of Product Change

New core
product

Next
Generation of
core product

Derivative or
enhancement

Addition
to product
family

(Playing in the “Sandbox”)

14

8

Concurrent Engineering
• The simultaneous design and development of all the

processes and information needed

• Integrates and facilitates cross-functional communication

• Often requires more up-front commitments of development
resources

• Benefits:
– Complete the project faster and introduce the product sooner

– Product sustaining and warranty costs can be drastically reduced

– Production and sales support costs can be lowered

15

More up-front
spending to
speed Mkt

Intro and save
$ later

16

Concurrent
Engineering

9

Marketplace

Corporate Strategy

Operations Strategy

Operations management

Marketing StrategyFinance Strategy

People Plants Parts Processes

Planning & control systems

Production System

Inputs:
Materials

Customers

Outputs:
Products

Services

OM Strategy in Context:

17

Strategy Hierarchy: Walt Disney
Example

Functional

Business Unit

Corporate Walt Disney Inc.

Media
Networks

OM MKT FIN

Parks &
Resorts

Etc.

Studio Ent.

Ect.

Consumer
Products

Ect.

Interactive
Media

Ect.

There can also be a “hierarchy within OM strategy…

18

10

The Hierarchy of OM Strategy

Hayes and Wheelwright (1984)

Depending on the importance of operations and the maturity of the
organization, OM strategy will play one of four possible roles.

19

Resilience: The capacity to recover quickly from difficulties; toughness

11

The Textbook (Directed)
Approach to Creating Operations
Management Strategy
1. Determine the long-term objectives of

the operations of the organization (verify
alignment with corporate strategy.)

2. Develop a detailed plan (structure,
milestones, KPIs, etc.) to meet those
objectives.

Example: Novartis R&D from 2004-2012
Result: When OM applied to R&D, pipeline doubled

21

Directed

Emergent

Leadership
• Mission
• Vision

Execution
• Resource Allocation
• Process and Capabilities

Operations Strategy
• Aligning Resources
• Driving and Responding to Strategy

Iansiti and Serels 2013

The Reality of Alignment…

22

Realized

12

Focus on OM Performance
Objectives (Outputs)

1. Cost

2. Quality

3. Delivery

4. Flexibility

23

Focus on OM Resources (Inputs)

1. Physical: Tangible property, plant and equipment

2. Human

3. IP, software and methods

4. Ecosystem: Stakeholder Relationship Management

5. Financial

24

13

Focus on OM Structural
Decision Areas
Structural decisions are infrequent, require substantial financial investments, and are
difficult to reverse.

1. Capacity

2. Facilities: Location, size and specialization

3. Scope: Vertical Integration and position in SC

4. Information and Process Technology

25

Focus on OM Infrastructural
Decision Areas

Infrastructural decisions are the many small choices, the sum of which
impact overall results.

1. Workforce

2. Organization

3. Quality

4. Production Planning and Distribution

5. Product and Process Development

26

14

The Benefits of Focus

1. Operational Specialization

2. Efficiency (increased productivity)

3. Economies of Scale

4. Learning

27

Overall: 

Flexibility
Upstream/Downstream
Utilization
ROA

Entire Process (not silo POV)
Flexibility
Speed
Transparency
Efficiency: IT/AI

Career Pathing
Movement/Experiences
Culture

15

Alignment…

• Of corporate and operations strategy

• Of corporate and business unit strategy

• Of business unit and functional strategy

29

What is…
An OM Value Chain

The complete set of activities (within a firm) that adds
value to the product or service being created.

30

16

Value Stream Mapping:
a lean-management method for analyzing the
current state and designing a future state for the
series of events that take a product or service
from the beginning of the specific process until it
reaches the customer.

Both value and non-value added steps

Objectives: Synchronization and value creation
with a customer focus

Alignment: Synchronization
Transparency
Efficiency $
Speed
Building Capabilities
Customer Value

32

P271 Exam Essay 
Summer 2022 

To successfully complete this assignment you should draw from the following 
class materials: 

 Class‐1 
 Class‐2 
 Class‐3 
 AR01: Triple‐A SC 
 AR02: What is Strategy 

For the Apple iPhone: 
A. What is Apple’s overall corporate strategy? 
B. What are Apple’s OM Strategy Pieces?  Does Apple have fit? 
C. What are the Architecture Components 
D. What are Apple’s Core Capabilities 
E. Explain in detail: Is Apple a Triple‐A SC?  Why or why not? 

Format: 

 Single‐space (zero) 
 11‐font 
 2‐page maximum 
 Use the terminology from class.   
 Be sure to explain/define each piece. 
 You may use bullet points.   
 Use bold/underline to highlight important terms and concepts.   
 An INSTANT ZERO will be assigned for any form of cut/paste.   
 Note that Turn‐it‐In is being used.