Achieving Competitive Edge by Driving Lean Culture in Supply Chain Management

Introduction
The world market today is characterized as an intense competitive market. The ongoing process of
globalization, privatization and free trade has been pressurizing the firms to compete at global level
at all possible fronts. So universal are the expectations that even a small firm could scout around the
global market competing on the basis of differentiation. Improvements of internal processes are no
longer sufficient. In a competitive market the threads of both efficiency and responsiveness span
across the chain of raw material to the end user. A slack at any point of the chain could impact the
competitiveness of the firm. The domain of competition is no longer limited to the internal
boundaries of the firms. Rather it has shifted to the entire supply chain. Firms that can effectively
manage the supply chain by aligning it with the competitive strategy of the business can enjoy a
competitive edge over the others. One of the core aspects of effective supply chain management
(SCM) is developing lean culture in the extended supply chain.
According to a McKinsey Research report companies with high performing supply chain achieve an
edge over its competitors through effective management practices1. Deloitte sees lean supply chain
management as a practically implementable practice that could create significant shareholders
value. Bain and Company claims that rapidly emerging technologies, industry consolidation through
merger and acquisitions and shorter product life cycles have made supply chain management a
complex and dynamic challenge2. Firms that have understood the complex issues of supply chain
integration and have acquired the management expertise to inculcate lean culture in their supply
chain can achieve low cost advantage coupled with higher responsiveness. A well-designed,
systematic and integrated supply chain with lean culture becomes an edge when it comes to
competition. Such a competitive edge will be difficult to imitate and the firm with the right supply
chain strategy will lead the market. Thus, supply chain is no longer being seen as a pure cost
reduction centre, but a platform to create value for all the stakeholders of the firm. Achieving
competitive edge through supply chain by driving lean culture will require broad strategic approach
based on a long term view.
Global Market and Lean Culture in SCM
The global market demands flexibility, variety, quality, reliability, resiliency all at a low cost. The
supply chain management for the global market requires a judicious mix of efficiency and
responsive. Mass production is being replaced by mass customization; the competitive landscape is
evolving continuously. The global customer is leveraging information sources like internet for tracing
and comparing the product features and qualities. Technological innovation has given birth to newer
supply chain models like that of e-bay, Dell and Amazon.
Globalization provides firms a wider opportunity set to source raw materials and resources, provides
access to a larger consumer base. At the same time it increases the risk of supply disruptions. Hence,
supply chain management requires greater management capability to identify opportunities
throughout the entire globe and also to factor the risks associated with uncertain global disruptions
1

Bruce Constantine, Brian D. Ruwadi, and Joshua Wine , Management practices that drive supply chain,
February 2009, McKinsey Quaterly.
2
http://www.bain.com/bainweb/Consulting_Expertise/capabilities_detail.asp?capID=15

into each supply chain decisions. This requires management aptness to design a resilient supply
chain. Yossi Seffi in a Havard Business Review article emphasizes that supply chain resilience is more
than merely managing the risks; ability to manage risk means being in better position that
competitors and to gain strategic advantages from disruptions3. Lean culture of the chain is the
foundation of such a resilient supply chain.

SCM strategy for Competitive Edge:

Unfortunately the understanding and implementation of supply chain management concepts are at
a crude state. Many firms view supply chain a way to achieve high speed and low cost. But supply
chain is a broader concept and covers multiple business dynamics beyond high speed and low cost.
Firms that focus only on speed and efficiency may lose out due to piling inventory. On the other
hand companies like Amazon, Dell and Wal-Mart have cracked the codes of SCM.
Only speed and efficiency are not sufficient to provide firms competitive edge. Effective SCM also
requires Alignment, Agility and Adaptability4. Refer figure

Alignment
Alignment within the supply chain requires the firms to establish incentives for the supply chain
partners to improve performance of the entire chain. The roles and domains of activity of each
partner have to be clarified. This will avoid conflict. The risk and rewards in the chain should be
shared proportionately in the chain. Information sharing and collaborative planning and forecasting
provides scopes to align the supply chain for a common goal.
3
4

Yossi Seffi, Building a resilient supply chain, Havard Business Review, Oct 2005, Vol 1, No 8
Hau L Lee, The Triple A Supply Chain, Havard Business Review, Oct 2004

Agility
Agility refers to the ability to respond to short term changes in demand dynamics quickly and
effectively. It requires timely sharing of information amongst supply chain members. Agility in supply
chain is agility of all the members of the chain. Collaboration with customers, supply chain partners,
academicians to improve the agility of the chain provides an edge over the rivals. Precise
information on customer preference is prerequisite for effective SCM. But when customer demand
changes in short term, the chain should be able to achieve to deliver the customer expectations.
Producing finished product only when customer preference is accurate and reliable saves obsolence
cost. The response time for unpredictable change in customer demand could be minimized by
keeping a balanced inventory of basic components.
Adaptability
Adaptability of a supply chain is its ability to track market changes and to adjust with the evolving
market dynamics. Supply chain has to undergo a continuous organizational mutation to be adaptive.
Tracking economic changes, technological breakthroughs, sensing the social-political-cultural
morphism of the market helps in the process of adaptation. Supply chains need to identify their
resource base, ability to use the same resource base in future needs are crucial.
Various consulting firms including McKinsey & Company, Bain and Company, BCG have analyzed
supply chain related industry best practices. Some of the dominant industry best practices are:

Link supply chain strategy with company strategy

Once the business strategy and competitive strategy are decided it is imperative to align the
supply chain strategy with the business strategies. The competitive strategies could be
mapped with the supply chain requirements. The strategy at the business level could be
divided into smaller supply chain process and sub-processes. Aspirations and expectations
needs to be communicated at each sub-process level.
Modify supply chain design for strategic fit
All products in a supply chain do not necessarily have the same level of profitability,
complexity and flow dynamics. Hence, the supply chain could demand segmentation and
design modifications. Value adding sub-processes needs extra emphasis while the non-value
adding sub-processes could be truncated. Customer service requirements, efficiencyresponsiveness tradeoffs are crucial decisions that decide the degree of strategic fit.
Build strong planning and forecasting team
Accurate planning and demand forecasting will eliminate wastes, improve both efficiency
and responsiveness. However, these activities within an organization will require the
Herculean attempts of integrating the operations, sales and finance functions together. The
same model has to be integrated with other players of the chain. Only collaborative planning
can minimize the errors in forecasting and planning.
Role Assignment and Accountability
The responsibility, authority for each sub-process has to be identified. The responsibilities
and accountability should be documented in unambiguous term. The reporting structure,
final decision authority should be clear within the supply chain.
Performance evaluation, Feedback and Continuous Improvement

Evaluation of the performance is critical for improvements of the supply chain practices. The
performance of various processes and sub-processes needs to be evaluates against the
previously decided objectives. Evaluation process will generates feedback for the entire
model. After analyzing the performance gaps and feedback, the required modifications
could be implemented in the supply chain for continuous improvement.

SCM for competitive edge

Retail Sector
Spanish retail giant Zara has developed a supply chain culture that works by defying the traditional
wisdom of SCM. Despite a huge size of 650 stores in around 50 countries, Zara has successfully
achieved supply chain collaboration such that the complete cycle of design, production and delivery
is achieved in only fifteen days. Zara stores always provide customers new products in limited
supply. Limited supply forces the customer to go for faster purchase decision in fear of losing the
latest fashion. On the other hand Zara ensures rapid replenishment once the customer purchases
any item. Innovative designs are essential to drive customer for latest fashion. Zara creates around
40,000 designs annually out of them 10,000 are produced. Size and colour variation makes those
10,000 designs into 300,000 SKUs. Zara relies on constant information sharing throughout the chain.
Organization structure, operational procedures, performance appraisal systems,office layouts of
Zara all are designed to make information transfer easy and accurate. Zara's has a cadre of 200
designers. In order to reduce response time all these designers sit right in the midst of the
production process. It keeps cushion capacity for faster response. At very high capacity utilization
levels the waiting time increases significantly. Hence, the account for the variability of demand Zara
maintains excess capacity unutilized. Zara has systematically deployed Information technology to
achieve supply chain effectiveness. The connection between the retail stores is supported by
customized handheld computers support. Frequent introduction of new products in a continuous
basis in small quantities, reduces the high costs associated with stock-out of any particular item. Zara
has mastered the ability to make a virtue of stock-outs. Empty racks don't drive customers to other
stores because Zaras target customers in a Zara store always find new things to choose from.

Real Estate
With growing growth rates of the emerging economies the real estate business is witnessing a
substantial boom. Competition for infrastructure building project in emerging economies forces the
construction companies to be competitive. Construction clients are demanding faster, more
responsive construction processes and higher quality facilities, thereby placing pressure on the
supply chain. Sourcing raw materials like steel, sand, cement etc. requires a strong co-ordination and
inventory management. A supply chain for a typical residential building is provided in the figure
below:

Slough Estate of the UK is an outstanding example how supply chain concepts are applied in
construction companies for competitive edge.

Vrijhoef and Koskela have identified the domains where supply chain concepts could provide a
competitive edge to a construction company5. These are:

Cost reduction (especially logistical costs), lead-time and inventory in the supply chain. In
view of the large share of these costs in construction, supply chain focus could provide huge
advantage.
Supply chain focus may could impact the site activities in reducing site costs and duration,
the primary consideration being material (and labor) flows to the site for the sake of
avoiding disturbances in the workflow.
SCM could be used for transferring activities from the site to upstream stages of the supply
chain. This will help to avoid the inferior conditions of site, or to achieve wider concurrency
between activities, which is not possible in site construction with its many technical
dependencies. This will reduce the total costs and duration.

Ruben Vrijhoef1 and Lauri Koskela, Roles of Supply Chain Management in Construction, Proceedings IGLC 7,
26-28 July 1999, University of California, Berkeley, CA, USA, Page 133-145