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Manufacturing: In praise of 30/70 and the loose-tight relationship

March 24, 2008

In the last two decades, a number of key influences have reshaped the world marketplace – and the places we live and work.

When a computer maker in China, a shipper in the U.S., and a call center in India all serve the same customer, it’s a sure sign the global village is at hand.

In his book The World is Flat, Thomas Friedman outlines the 10 “flatteners” that have changed the world.

They include open sourcing, off-shoring, outsourcing, and supply chaining.¹

These flat influencers have helped create a level playing field, where everyone is connected and many participate.

Here, peer networks, horizontal management, multiple contributors, and equal opportunities win the day.

Flat is everywhere

Evidence of flat is percolating up in a lot of places.

In the workplace, management is looking at collaboration and peer moderation as a way to mobilize labor, improve operations, and make better decisions.

Meanwhile, the internet is driving online marketers to adopt new strategies.

In a “facilitating medium” where things get done through participation, mass conformity takes a back seat to the need for “individual self-expression.”

According to cultural marketing expert Patricia Martin, “this marks the first time in history that mass communication is a dialogue, not a monologue.”²

When the world is your factory

Supply chains are all about “horizontalization.”

For manufacturers these days, the world is a factory, with operations and suppliers spread around the globe.

In fact, with the help of work flows and outsourcing, it’s now possible for a company to assemble, build, and deliver a product without owning a single production plant.

Li & Fung Trading, for example, produces clothing and other goods.

It taps into a network of suppliers and factories around the world to handle its production: buttons from China, zippers from Japan, and yarn from Pakistan. The garment itself might be sewn in Bangladesh.

The company doesn’t own the production floor or the chain; it simply manages the process.³

The global production line: Dell computers

As another illustration, Thomas Friedman tells the story of how his Dell laptop came to be.

It begins with a phone call, where a sales rep inputs the order and billing information into the system.

The order then goes to the Dell notebook factory in Malaysia, where parts are gathered from nearby supplier logistics centers and assembled.

Once completed, the computer is boxed and air-freighted overseas to a UPS plant in the U.S., and from there, delivered to Friedman’s door.

Have parts, will travel

Where do the Dell computer parts originate?

The 30 components are developed by a global network of suppliers.

The microprocessor might come from Costa Rica, the graphics card from China, memory from Germany, the battery from Mexico, the power cord from India, and so on.

The total number of suppliers required to build and ship Friedman’s computer: some 400 companies in North America, Europe, and Asia.

“This supply chain symphony – from my order over the phone to production to delivery to my house – is one of the wonders of the flat world,” writes Friedman.⁴

Orchestrating the chain

Global supplier chains hold out big potential for production, cost management, and efficiencies.

At the same time, any missteps can have far-reaching consequences: think Mattel toy recalls.

Orchestrating them requires more than just mastering logistics.

“We need to redesign our management, enterprises, and thinking for this new flat world,” suggest Victor and William Fung and Yorum Wind in their paper, Competing in a Flat World: The Perils and Promise of Global Supply Chains.⁵

Their strategy: focus on networks, find a balance between control and empowerment, and optimize value through integration.

They call this “network orchestration.”

The 30/70 rule

Fung and Wind outline some basic management principles to “ensure the network remains fluid enough to respond to changes, yet still gets the job done.”

One is the 30/70 rule. That is, try to gain at least 30 percent of a supplier’s business, but not more than 70 percent.

This creates a loose-tight relationship and allows the supplier to work with other companies, enhancing the overall network.

Such a web of relationships can also lessen the chances of a company being sidelined by a parts or production delay from a single supplier.

Build around the customer

Another key strategy is to build the supply chain around the customer.

The network orchestrator should be an extension of the customer’s organization.

The idea is to create and manage the links that tie the customer to the broader supply chain.

An example might be what Friedman calls “demand shaping.”

On a given day, an unexpected number of customers might order Dell notebooks with 40-Gbyte hard drives – good for business, but overall supply is going to run short.

So an automated signal is relayed to marketing and sales.

They in turn begin to offer deals on 60-GByte drives, and even throw in a free carrying case, to persuade customers to purchase something different.

Using promotions like this, the company can “reshape the demand for any part of any notebook or desktop to correspond with the projected supply in its global supply chain.”⁶

Look beyond the factory

Finally, manufacturing efficiencies have “squeezed most of the excess out of the factory,” say Fung and Wind.

Fortunately, in the era of flat, there are significant opportunities for improvement beyond the factory door or production line.

In terms of value creation, these “soft dollars” outside the business can bring bigger gains.

Organizations should go after them by leveraging the chain in terms of things like improving logistics and reducing markdowns.

Connect the dots

To compete in a flat world, it’s not enough for companies to monitor their own initiatives.

They also have to gain transparency into the whole supplier network.

“It's that full look at the entire value chain that really separates the leaders from everyone else,” says environmental consultant Andrew Winston.

Witness the case of IKEA, which has some 100 employees devoted to managing supply chain issues.

Fung and Wind sum it up this way: “The flat world presents different challenges and opportunities.

“It is not only the competencies that you have but also the competencies that you can connect to (...) they will allow you the flexibility to respond to future challenges.”

Eye on the chain

Technology can help. For one, companies should make IT investments to link their own ERP systems and those of their suppliers to develop a cross-functional perspective, says The McKinsey Quarterly.⁷

Beyond data systems, business intelligence helps to open the door for large-scale collaboration.

Reporting and analysis allow organizations to draw insight from their supplier network – to monitor operations and help make sense of complexity.

They not only stay on top of issues and opportunities across the chain.

They can share decisions and strategies with other players, mark progress, and even shift priorities as markets or trends change.

Summary

With global supply chains, companies can leverage the power of the many to improve their bottom line.

The trick is to gain tighter integration with the supplier network and adopt the collaborative principles of a flat world.

By doing so, they can improve production, meet demand, and better serve customers – wherever they may be.

Find Out More Related story: How operations can win at the margins Download the white paper: Overcoming Barriers to Supply Chain Performance Cognos Solutions for Manufacturing

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Sources

¹ Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-first Century, Farrar, Straus and Giroux, New York, 2006.

² Patricia Martin, The RenGen Manifesto, ChangeThis, November 7, 2007

³ Victor Fung, William Fung, and Yorum Wind, Competing in a Flat World: The Perils and Promise of Global Supply Chains, ChangeThis, November 14, 2007.

⁴ Friedman, Ibid.

⁵ Fung and Wind, Ibid.

⁶ Friedman, Ibid.

⁷ Aditya Pande, Ramesh Raman, Vats Srivatsan. Recapturing Your Supply Chain. The McKinsey Quarterly. Spring 2006.