Technology Innovation & Global Supply Chain Logistics

Professor Keebom KangGraduate School of Business &

Public PolicyNaval Postgraduate SchoolMonterey, California, USA

kkang@nps.edu

Topics • Technology Innovation

– Different types of technologies– Hard tech (Intel) vs. Soft tech (Microsoft, Wal-Mart, Dell)

• Globalization• Marketing/ Financing/Brand Recognition • Supply Chain Logistics

– Transportation– Information Technology (RFID, GPS, Internet)

• Case studies– Starbucks, De Beers, Dell, Wal-Mart and other global companies– How they adopted tech innovation to be the key players in the

global markets.• Concluding Remarks

Slide show

• Technology and Globalization• Global Supply Chain• Value Creation• Cases on Starbucks, Nike, Victoria Secret,

etc.

Evolution of Global Economy• 1950-1960s

– transition of science and technology in military applications to the commercial sector

– automobile, highway, recreation, hotel chains, fast-food

– computer technology (mainframe)– The Wonder Years in the U. S.

• 1970s– 1973 and 1978 oil embargoes: crude oil prices

directly affected transportation costs – Investment capital started moved out of U.S. – Beginning of Global competition.

• 1980 – now– More computing power for efficient operations – Transition from mainframe computer to mini to

PC to (wireless) integrated network– Better supply and more efficient way of

utilizing energy have lowered the energy cost. – Cheaper transportation pushed the

Globalization Supply Chain – better Information Systems tremendously

reduced the inventory cost (e.g., RFID/GPS/Internet)

Evolution of Korean Industrialization in the Global

Markets

Technology• Technology is changing the distribution of jobs

– Middle class maintenance jobs disappear e.g., Farmers, factory workers, telephone operators

– ATM, self-service check-in at the airport, etc appear• Technology has generated enormous wealth• W/o education and training you cannot take advantage

of technology• CEO’s salary is increased while laying off workers• Need to understand the s-curve of tech growth

– telephone – Computer (mainframe – mini – pc – integrated

network --??)

S-curve in technology growth: Value Creation

• Would you invest to Kodak? • Survivors of the Fittest (new value creation):

– IBM, Rolex, Mont Blanc, Parker• Extinct: AT&T, Data General, DEC, Xerox• Airline industry (Delta, UA, SW, JB,…)

– Next chapter in airline industry• Auto industry

– Transportation + communication (e.g., OnStar) + entertainment – Next chapter in auto industry

• e.g., AutoIndia, Dell model?• Hybrid, Next generation fuel?

• Steel industry, ship building industry, …

Automobile Technology• Science and Engineering

– manufacturing, reliability– Material, metallurgy (e.g., magnesium)– Ergonomics, safety (seatbelt, airbag, windshields,

tire)– Electrical and Electronics (CDs, Radio, hybrid)– Communication and IT (RF, GPS, Internet,

Onstar.com)• Infrastructure:

– Traffic rules and regulations– Dealerships, Gas Stations, repair shops

• Finance, Insurance, Lawyers

Automobile Tech (continued)

• Supplies of steel and (synthetic) rubber• Pollution control and Waste Management (junk cars,

used oil, …)• Efficient part supplies • Road and highway construction, intelligent transportation

system • Medical technology: Collision related treatment

– (Orthopedic, Plastic surgery, neurosurgery, …)• Complementors:

– Restaurants, motels– Emergency rooms for traffic accidents– Rental car companies– Parking and parking management

Value Creation from Technology Innovation

• CPA firms– Accounting to financial consulting/advice

• Travel agency– Selling tickets to travel consulting/advice

• E-Bay, Amazon.com, Yahoo, Google• Strategic Alliances (complementors)

– Wal-Mart and McDonald’s, Wal-Mart and P&G– FedEx and Kinko’s– HP and UPS / Cisco and FedEx– Airlines, hotels, tourism (Orbitz.com)– Tourism/ import-export business and government agencies

(passport control, customs)– TV and sports events (e.g., Olympic games, golf tournaments)

Globalization• Globalization is doing the same thing as in technology • Better transportation and communication and global

financial market• Access to cheap commodity• Korea’s and Japan’s manufacturing jobs moved to China

– China is experiencing reduction in manufacturing labor demand due to technology and competition

– Labor intensive jobs are being moved to Bangladesh and Vietnam

• More wealth is generated from the global markets• Uneven distribution of wealth, Income gap widens (have

and have-nots) • Beneficiaries: educated and connected groups (countries,

individuals)• Survivor of the Fittest individual/groups/countries• Snap back and snap break (Robert Reich)

Silicon Valley as an example

• Success stories of technology & globalization• Human capital and education

– Why not in Boston? • Mix of global culture with American

entrepreneurship and work ethics– What if Bill Gates was born in Korea?

• Severe competition– Where are the best players?

• Open to global labor, brain and finance• Infrastructure

Most Significant Contribution of Modern Technology to Our Society• Healthy and longer life• What follows next

– Entertainment and leisure business (sports, tourism, gourmet food, music, cinema, fashion)

– Health care system– Bio-medical and pharmaceutical (diet pills, boldness,

etc) – Insurance and investment– social security and welfare system problems

Challenges to Korean Globalization

• Expensive labor market• Lack of core technology• Lack of foreign language proficiency• Lack of global concepts• More women in workforce including military

(child care, lower birth rate)• Elderly and social security• Education system • Immigration and racial problems

Motivation in SCM

Current Situation

Sales Strategy

Prod’n Strategy

Sales $10 $ ? $10 Production $8 (80%) $ (80%) $ ? Marketing $1 (10%) $ (10%) $ (10%)Net Income $1 $2 $2

What would sales & production costs have to What would sales & production costs have to be to be to doubledouble net income? Which is easier?net income? Which is easier?

Percentages are % of sales.Percentages are % of sales.

Solution

Current Situation

Sales Strategy

Prod’n Strategy

Sales $10 $20 $10 Production 8 16 7 Mktg (10%) 1 2 1 Net Income 1 2 2

Increase sales 100%Increase sales 100% Reduce production costs by 12%Reduce production costs by 12%

Reducing production costs is more feasible.Reducing production costs is more feasible.

Supply ChainDo it faster and better than your competitor.

ConsumerMfg.Supplier Retailer

CashFlow

OrderFlowInformation

Mat'l FlowVISA®

Credit Flow

Wholesaler

Little’ Law: Relating Operational Measures

• Inventory = Throughput x Cycle TimeI = R x T

• Turnover = Throughput / Inventory= 1/ T

Inventory, I[units]

Throughput (Flow rate), R[units/hr]

... ...... ......

Cycle Time (Flow Time), T [hrs]

Source: MBPF

Time is Money• Importance of Little’s Law in managing inventory

– Inventory = Throughput x Cycle Time– Replace mass with speed and information– Reduce footprint

• Example– Cycle Time: 50 days– Inventory value: $ 5 billion– 1 day reduction = 2 % reduction in cycle time– Inventory savings: $ 5 B * 2% = $ 100 M

Time is Money• ABC Airline has 774 aircraft. The Standard Depot

Level Maintenance (SDLM) must be done every 4 year. The desired SDLM turn-around time is 6 month. Because of the aging aircraft and other reasons, the SLDM takes longer; currently it takes 12 months. How many additional aircraft must be purchased to maintain the same level of operational availability (in terms of the number of mission capable aircraft) to compensate for the longer turn-around-time?

Desired Ao = 4 / (4 + 0.5) = 0.889 No of FMC AC = 774 * 0.889 = 688

Current Ao = 4 / (4 + 1) = 0.8

• To have 688 MC aircraft at this level of Ao, the company needs 688 * (1 / 0.8) = 860 (Aircraft).

• Thus, 86 (= 860 – 774) more aircraft are required to maintain the same level of readiness (in terms of the number of MC aircraft). Conversely if the SDLM can be done in 6 months rather than one year, the company can maintain the same level of readiness with 86 less aircraft.

What if maintenance is required every 5 years?Ao = 5/(5+0.5) = 0.909

Supply Chain Logistics: The Magnitude

• In 2004, American companies spent 8-9% of its GDP of $12T in supply-related activities

• In 2000, 10% of its GDP of $10T (or).– Transportation 5.9%– Inventory 3.8%– Management 0.3%

• The business logistics cost is going down– US GDP in 1980: $2.8T (nominal)– Logistics cost $450B (16% of GDP)– Transportation (7.6%) & Inventory (7.9%)

Supply Chain Challenges

• Achieving Global Optimization– Conflicting objectives– Complex network of facilities– System variation over time

• Managing Uncertainty– Uncertainty in demand– Matching supply and demand

Supply Chain Strategy:Cost-Responsiveness Efficient

Frontier

Responsiveness

High

High

Low

Low

Cost

The Responsiveness Spectrum

Highly efficient

Somewhat efficient

Somewhat responsive

Highly responsive

Integrated steel mills: Production scheduled weeks or months in

advance with little variety or

flexibility

Hanes apparel: A traditional

make-to-stock manufacturer

with production lead time of

several weeks

Most automotive production: Delivering a

large variety of products in a

couple of weeks

Dell: Custom-made PCs and

servers in a few days

Comparison of Efficient & Responsive SCEfficient Supply Chain Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Product design strategy Maximize performance at a minimum product cost

Create modularity to allow postponement of product differentiation

Pricing strategy Lower margins because price is a prime customer driver

Higher margins, as price is not a prime customer driver

Manufacturing strategy Lower costs through high utilization Maintain capacity flexibility to meet unexpected demand

Inventory strategy Minimize inventory to lower cost Maintain buffer inventory to meet unexpected demand

Lead time strategy Reduce but not at the expense of costs

Aggressively reduce even if the costs are significant

Supplier strategy Select based on cost and quality Select based on speed, flexibility, and quality

Transportation strategy Greater reliance on low cost modes Greater reliance on responsive modes

Adapted from Marshall L. Fisher, “What Is the Right Supply Chain for Your Product?” Harvard Business Review (March-Apr 1997), 83-93.

• The Long Pipeline

CustomerFlowMaterial

Average Cycle Time = 66 weeks

The Apparel Industry:Quick-Response (QR) Movement

TextileProduction

Apparel Retail

• QR is aimed at reducing cycle time

Effect of Lead Time on Retailer’s Stocking Decision

• Why QR Works? – Reducing lead time to reduce forecast error

-40

-20

0

+20

+40

Timee-26 -16 Star t ofsessonWeeks Weeks

ForecastError

Supply Chain Network

RawMaterial

IntermediateProductPlants

FinalProductPlants

DistributionCentes

Warehouses

CustomerZones

= Inventory Stocking Point

= Production Location

Network Design Decisions• Manufacturing Plants

– How many?– Where?– How large?– Charter?

• Distribution Centers/Warehouses– How many?– Where?– How large?– Market allocation?

• Material Flows– Flows of raw material, intermediate, final product

• Supplier - Customer Relations– Partnerships and cooperation– Coordinated decisions

• Impact of competition and exogenous factors

Tradeoffs in SC Networks

Vendors

Plants

DistributionCenters

CustomerZones

Transportation and Distribution in Supply Chains

• Transportation is a significant component of the total supply chain cost. For some organizations, transportation is 20 to 40% of the product cost.

• Delays may stop production. • There are two parties in a transportation

decision – shipper and carrier. Factors affecting a shipper’s decision include transportation cost paid to carrier/s, inventory cost, facility cost, loading/unloading and other processing cost, and service level cost.

• Supply chains use following primary modes of transportation (with 1998 cost (cents/ton-mile) shown in parenthesis): air (59), Truck-FTL (9), Truck-LTL (25), Rail (2.5), Water (0.75), Pipeline (1.4). Transportation players using primary modes include intermodal carriers and package carriers.

• Transportation economies are usually obtained by using warehouse as a consolidation point, a break-bulk center, or a mixed warehouse.

• Three major distribution strategies include direct shipment, cross-docking and warehousing.

Transportation Analysis• Hub and Spokes (H&S) System

– Airport hubs: • Atlanta, Dallas/Ft. Worth, Chicago, • Frankfurt, London, Paris• Incheon/Seoul, Tokyo, Singapore, Hong Kong

• Global competition on logistics hubs – Airport hub, seaport hub, financial hub

• Important factors to become a Log Hub??

Airline Hub and Spoke System

Logistics Hub• Reliable transportation systems and efficient

customs and regulatory agencies • Info technology, communication• Finance, insurance and law firms• Affordable labor supply and educated human

resources• Political and economic stability and safety• Cost of living and tax incentives • Business support (foreign language translation,

convention centers, local transportation, etc.)• Entertainment facilities (restaurants, hotels,

theme/rec parks)

Inventory in Supply Chains

• The concepts of economic order quantity (I.e. cycle inventory) to deal with economies of scale, and safety inventory to deal with uncertain demand were reviewed earlier. We will now review the concepts related to determining appropriate order policies and level of product availability so as to increase overall profitability.

• Significant managerial levers are:– Improved forecasting to reduce demand uncertainty,– Reducing replenishment lead time so that multiple orders may be

placed in the selling season,– Postpone product differentiation closer to the time of sale,– Tailored sourcing where high-cost quick response supplier is used

as a back up to low-cost long lead time supplier, and– Using supply contracts with provisions for buyback or quantity

flexibility.

Dell Computer Corp.

• Dell is known for direct sales of customized PCs at reasonable prices. Uses telephones and Internet Web site.

• Major loss in 1993 from inventory write-downs. Dramatic turnaround since then by focusing on supply chain management.

• Key supply chain strategies in managing flows (product, info, cash)– Provide large variety of customized products at reasonable prices –

made to order PCs (i.e. demand pull order/manufacturing cycle)– Direct contact with customers gives better ability to understand

customer needs and create more accurate demand forecast. – Bottom up monthly forecast - incentives tied to accuracy– When in doubt over-forecast at high end.

– Proactive demand management. Sales force armed with information on lead time for all configurations and stock positions.Sales (75% forecast, 15% expedite, 10% demand management)

– Buy to plan - Build to order– JIT procurement to reduce inventory: 7 days of sales (versus 25

days of sales for Compaq). Declining parts prices. By ordering JIT, Dell saves 6% cost of parts (parts are newer).

Dell Computer Corp. (continued)• Key supply chain strategies (continued)

– JIT assembly: majority of components are warehoused within 15 minutes distance of Dell factory.

– Supplier scorecard (20% cost, 25% quality, 20% technology, 35% delivery and flexibility). Number of suppliers down from 90 in 1996 to 25 in 1999.

– Suppliers receive real time information on inventory and demand forecast – able to improve production and inventory decisions.

– Synchronized shipment: UPS manages monitor inventory and ships to synchronize with Dell-assembled machine. Avoid double shipment to save $ 30.

– Future: Virtual integration of supply chain (through information sharing) to eliminate inventory (Buy to Order is the goal).

• Increased velocity operations: sale to cash in less than 2 days (Gateway - 15 days, Compaq -35 days). Receives cash from customer five days before it pays to suppliers. Return on invested capital in 1998 was 190% (Compaq 20%). Think about the capital cost (float) of the

annual the annnnual revenue of $40 Billion

Comparing Dell and Ford Supply Chain

.

Wal-Mart Case Study

• Wal-Mart ($263B annual revenue in 2003: #1 in the Global Fortune 500)– Market Capitalization ($253B out of $377B

retail/department store sector in the US: 2002)– Fast Turnaround time using Crossdocking

• web.nps.navy.mil/~krgue/Crossdocking/crossdocking.html• web.nps.navy.mil/~krgue/Crossdocking/Crossdock_Designer/crossdock

_designer.html

– Advanced information systems (POS to manufacturing)

– Vendor managed inventory control

Wal-MartCorporate Strategy

(Gain competitive advantage by) providing customers with high availability of reasonable quality products at

competitive prices

Operations Strategy– Short cycle time to

improve responsiveness– Low inventory levels

Supply Chain Operations– Hub & Spoke structure– Cross docking– EDI– Fast transportation system– Communication between

retail storesSource: MBPF

Wal-Mart (continued)• Supply Chain Structure: Hub-and-spoke arrangement of one

distribution center surrounded by several stores.– Invest in trucks that are highly utilized to deliver goods to

stores and to pick up goods from suppliers– Mixed truckload of goods– Cross-docking– Order pooling at distribution center to reduce variance– Every day low price (EDLP) to avoid demand peaks

• Improved targeting of products to markets

• Higher sales per square foot as compared to competitors

• Information technology: DC had visibility into sales. Replenishes goods every 3.5 days (as opposed to 2 weeks for other retailers). Maintains smaller inventory at stores while providing better service.

• Supplier Relations: Partnership with P&G -- vendor managed inventory (VMI). Share sales information with P&G using EDI.

S S

S DC S

S S

Bullwhip EffectDemand Forecast Updating - Forecast Error Compounding

Example: Pampers

forecast time

WalMart

forecast time

P&G - Dist

forecast time

P&G - Fact

forecast time

3M - Supplier

TAV via RF/GPS/Internet (from www.savi.com)

The Value Net(Brandenburger and Nalebuff)

Customers.

Complementors

Suppliers

Competitors Company

The Value Net(Brandenburger and Nalebuff)

Customers.

Complementors

Suppliers

Competitors Nintendo

Acclaim, Electronic Arts (software)

Richoh, Sharp (microchips), Disney (game characters)

Atari, Commodore (hardware)

Toys “R” Us, Wal-Mart

The Value Net(Brandenburger and Nalebuff)

Customers.

Complementors

Suppliers

Competitors The University

Other colleges, K-12 education, housing, airlines, hotels, computers, local employees, copy shops

Faculty, staff, administrators, publishers

other colleges, on-line ed institutions, private enterprise

Students, parents, government, companies

Concluding Remarks• Value Creation • Importance of Human Resources (e.g., U.S.

College/Graduate Schools)• Education• Ability to System Approach and

Analytical/Critical Thinking• Global Thinking• Dominance of English Language• Need for linguists (language and culture)