1.5 Macro Perspectives and Current Trends

Clockspeed describes how quickly products, technologies, processes and industries change.

A high clockspeed means short life cycles and frequent changes.

For example:

• Aircraft: about 20 years

• Cars: about 3–5 years

• Sports shoes: less than one year

• PCs and smartphones: about six months

A higher clockspeed means

1. Increasing volatility - Demand becomes more uncertain and fluctuates more strongly, especially as information moves upstream. This is linked to the Bullwhip Effect.

2. Decreasing cycle times Products, technologies and customer needs change faster, so companies have less time to react.

Supply chains must deal with more uncertainty while reacting in less time.

Cognition #1:

Competitive advantages are (only) temporary

Cognition #2:

Clock speeds affect the size of the decision time window (the higher the clockspeed, the smaller the decision window)

Cognition #3:

The business environment of supply chain management is not static - the general conditions are constantly changing

The two main drivers are:

• Technological innovation

• Increasing competitive pressure

The model shows that industries move repeatedly between:

• Integrated products and vertical industries

• Modular products and horizontal industries

Industries do not remain permanently in one structure.

INTEGRATED PRODUCT:

An integrated product has parts that are closely connected and designed specifically to work together. E.g. Iphone or Fighter Jets

Changing one part may require changes to many other parts.

VERTICAL INDUSTRY

In a vertical industry, one company controls many stages of the value chain, such as development, components, production and distribution.

EXAMPLE: NIche software that caters to one specific industry

• An integrated product and vertical industry example involves software or hardware specifically tailored for a single, distinct industry rather than a broad, generic function.

• -> Example: Procore Technologies, which provides an integrated project management and financial platform purpose-built solely for the construction industry.

MODULAR PRODUCT:

A modular product consists of separate modules connected through defined interfaces.

-> Individual modules can be changed without redesigning the complete product.

HORIZONTAL INDUSTRY:

In a horizontal industry, different specialized companies provide different modules or stages of production.

-> EXAMPLE: one company may produce chips, another software and another the final device.

Integrated systems (company does almost everything in-house) may become:

• Too complex

• Too rigid

• Too slow

• Difficult to manage

Modularization creates more specialization and flexibility.

Suppliers may gain too much power, coordination may become difficult and disruptive technlogies can affect the overall system may become less profitable.

Companies may therefore integrate important activities again.

Sustaining technology improves an existing technology step by step.

Disruptive technology creates a new technological path and can replace the old technology.

The closer a company is to the final customer, the higher the clockspeed usually becomes.

Customer-facing products and services change more frequently.

It must be:

• Responsive

• Flexible

• Well coordinated

• Supported by fast information exchange

It is the decision whether an activity should be:

• Performed internally, or

• Purchased from another company

The decision depends on costs, competencies, risks and strategic importance.

The ability of a company to produce a good or service at a lower opportunity cost than its competitors

-> drives global trade and outsourcing, allowing businesses to specialize in their core strengths while sourcing other components efficiently.

Even a company that is better at everything can benefit from specialization and trade.

Internal value-add share measures how much value is created inside the company.

In-house production depth measures how much physical production is completed internally.

Outsourcing:

Outsourcing is an organizational shift.

-> An activity is transferred to another company.

Offshoring:

Offshoring is a geographical shift.

-> An activity is moved to another country.

Yes. Outsourcing + Offshoring can be done individually or combined.

• Outsourcing without offshoring: another domestic company performs the activity.

• Offshoring without outsourcing: the company uses its own foreign subsidiary.

• Both together: a foreign supplier performs the activity -> outsourcing in a foreign country

Nearshoring means moving activities to a nearby foreign country.

It normally provides smaller time-zone, cultural and legal differences than distant offshoring.

1. Horizontal scope — which products or business areas are affected

2. Vertical scope — which value-chain stages are affected

3. Intensity — how much of the activity is transferred

Notes:

Horizontal, vertical, and intensity are the three core dimensions used to analyze a global business strategy. Answer How, Where, and How Much

Horizontal Dimensions- This relates to how many different business processes or services a company hands over to outside partners or moves to other countries.

Vertical dimension - This refers to where the control of the work sits. It asks whether a company manages the work itself in another country (captive/in-house) or pays a separate company to do it (outsourcing).

Intensity- This measures how deeply a company relies on outside partners or foreign workers to get its work done

1. Volume split: The same product is produced at different sites.

   
   

2. Assortment split: Different products are produced at different sites.

   
   

3. Process split: Different production steps are located at different sites.

Complementarity: Each location performs a different activity.

Redundancy: Several locations can perform the same activity.

Redundancy improves resilience but normally increases costs.

A core competence:

• Creates high customer value

• Clearly differentiates the company from competitors

Core competencies should normally remain inside the company.

1. Standard: Low customer value and low differentiation

2. Underutilized: High customer value but low differentiation

3. Challenge: High differentiation but low customer value

4. Core competence: High customer value and high differentiation

Competencies can be assessed according to customer value and

differentation from the competition

Vertical integration means controlling more stages of the value chain.

• Backward integration: Moving toward suppliers

• Forward integration: Moving toward customers

Horizontal integration means combining companies that operate at the same stage of the value chain.

Example: one car manufacturer buys another car manufacturer.

1. Lower costs

2. Access to new talents/expertiese

3. Faster scaling

4. Greater flexibility

5. Company can focus on core competencies

6. Possible 24-hour operations

1. More complexity: higher Supplier dependency + loss of knowledge

2. Possible Quality problems

3. Possible Hidden costs

4. Communication difficulties

5. Legal and data-protection risks

6. Geopolitical risks

Outsourcing does not automatically remove complexity.

LEGO learned that global production requires:

• Standardized processes

• Clear documentation

• Reduced product complexity

• A supplier whose business model fits LEGO’s needs

• Protection of important internal production knowledge

The Bullwhip Effect means that small changes in customer demand create increasingly large order fluctuations upstream in the supply chain.

• Excess inventory

• Shortages and backorders

• Low delivery service

• Unstable production

• Poor capacity utilization

• High logistics costs

1. Lack of transparency

2. Long lead times

3. Forecasting errors

4. Batch ordering

5. Minimum order quantities

6. Promotions and price fluctuations

7. Hoarding

8. Shortage gaming

1. Supply-chain members often see only the orders of the next company, not real customer demand.

   -> They may interpret temporary order changes as permanent demand changes.

1. Companies must forecast further into the future.

   -> Long-term forecasts are less accurate, so companies order more safety stock and react more strongly.

1. Companies collect several small requirements and place one large order.

   -> This creates artificial peaks and valleys in demand.

1. Customers buy more during the discount and less afterwards.

   -> The upstream supplier may incorrectly believe that normal demand has increased.

1. Hoarding means ordering more than is currently needed because shortages or price increases are expected.

1. shortage gaming: When products are scarce, customers may exaggerate orders to receive a larger allocation.

   -> Later, they cancel the unnecessary orders.

   
   

Each company protects its own inventory and service level.

However, these local decisions can create excessive stock and instability in the complete supply chain.

1. Share real customer-demand information

2. Reduce lead times

3. Order smaller quantities more frequently

4. Avoid large price promotions

5. Use stable pricing

6. Improve collaboration and forecasting

7. Build strategic partnerships

1. Clockspeed increases downstream, closer to the customer. —> Customer preferences, products and technologies change quickly, so companies have less time to react.

2. Demand volatility increases upstream because of the Bullwhip Effect. Small changes in customer demand become larger order fluctuations for wholesalers, factories and suppliers.

   
   

The final lesson is:

A supply chain must become faster and better coordinated, because markets change quickly while demand information becomes more distorted as it moves upstream.