In a discussion I had not long ago with supply chain leaders from several Fortune 500 firms, I was surprised to find them embracing a dichotomy. On the one hand, they acknowledged that complexity in their supply chains tended to make firms less profitable, not more profitable. On the other hand, they actively embraced “supply chain complexity” as a “competitive advantage.”
“How could this be?” I thought to myself.
As I listened to these supply chain executives describe what they meant, I came to understand that the “competitive advantage” of which they were speaking stemmed from the complexity of the supply chain itself. And, that they measured the complexity of the supply chain mostly around the number of nodes in the supply chain—how many trading partners were involved in delivering the final product to the consumer.
I was somewhat inclined to agree with them.
However, why was this so-called “competitive advantage” working against them when it came to creating long-term improvements in the overall performance of the companies themselves?
Many of the facts and figures presented at the 2013 Supply Chain Insights Summit (held in Phoenix, AZ) regarding Fortune 500 companies indicated stagnation—little or no significant improvement over the last decade or longer for many of these firms. Lora Cecere’s comments at the Summit affirmed that a great many of these companies “are stuck,” unable to find a path to ongoing improvement.
I have come to believe that many supply chain managers and executives fail to distinguish between what I will call “necessary complexity”—even, advantageous complexity—and “self-imposed complexity.”
When products (or services—I will use “products” inclusively) are created that inescapably demand many nodes in the supply chain to reach the consumer, then the firm that masters this complexity is likely to have a competitive advantage for some period of time.
It is likely, however, that the ability to successfully manage this complexity is not a durable competitive advantage.
Before long, others will learn to manage the complexity successfully, as well. Or, others will innovate a way to meet the consumers’ demand with less complexity, higher quality, or achieve some other competitive advantage.
Self-imposed complexity, however, is never a competitive advantage.
Consider the case of Toyota.
In the 1930s, the leaders of Toyota Motor Corporation, a small Japanese company that made simple trucks—and made them poorly—visited Ford and General Motors to learn more about assembly lines. They were shocked by what they saw. By controlling the whole value chain, Ford's River Rouge complex was able to shrink the lead time from melting iron to making cars. Assembly lines dedicated to the same types of cars allowed for standardization that improved productivity and quality, so much so that Ford was ten times more productive than Toyota, with quality that was thirty times better. To complicate matters, Toyota didn't serve a large market and couldn't dictate what consumers would buy, which made mass production problematic, and it had nowhere near Ford's financial resources.
World War II made things worse, destroying industries—including Toyota's suppliers—and leaving Japanese consumers with little money to spend. Once again, Toyota's leaders decided to learn from their American counterparts, devoting twelve weeks to studying U.S. production processes. The year was 1950, the year Taylor's scientific management system may have peaked and its successor was born. [1]
In 1950, Ford Motor Company and the U.S. automakers (in general) “held all the cards,” and had all the advantages over Japanese firms.
By 1980, Toyota had overtaken [Ford Motor Company].
In the early '80s, Toyota decided to open its first overseas manufacturing plant in the United States. It approached Ford, the company it admired and had learned so much from, and offered 25 percent of Toyota for $2 billion. Ford declined. Toyota then partnered with General Motors, taking over a plant in Fremont, California, that had been closed in 1982 when it claimed the worst quality and productivity of any GM plant, absenteeism above 20 percent, and a contentious local union. Toyota reopened the Fremont line in 1984 as New United Motor Manufacturing Inc. (NUMMI). Against GM's advice, it brought back the same union and the same workers.
Two years later, NUMMI had higher quality and productivity than any GM plant, absenteeism had dropped to 3 percent, and worker satisfaction was best-in-class. Toyota continued to improve. By the 1990s, its quality and productivity were each at least 50 percent better than Ford's. In 2004, more than half of the top ten selling cars in the U.S were made by Toyota, and its operating profit was greater than that of Ford, GM, and DaimlerChrysler combined. Today, it is the world's most respected automotive company, according to Fortune, and one of the top ten companies of any kind worldwide. [2]
Here were two different firms manufacturing the same product (motor vehicles) who must be faced with very similar external supply chain complexities. They consume the same kinds of raw materials. They use many of the same components from an essentials point of view—wiring harnesses, brake pads, body parts, ad nauseum.
Yet, Toyota set about systematically slashing away relentlessly at self-imposed, non-essential complexity.
What was Toyota’s reward for doing so?
“In 2004, …its operating profit was greater than that of Ford, GM, and DaimlerChrysler combined.”
That’s a nice reward.
We are firm believers in inherent simplicity. We find that most U.S. companies have self-imposed complexity and that a great deal of that self-imposed complexity today stems from their belief that ERP (enterprise resource planning) should be the center of their enterprise.
Some are even under the errant impression that more data will help them manage better—and that if they could just get all the data, that they could manage flawlessly. This is the siren call of poorly considered technology investments and the drive toward ever-increasing self-imposed complexity.
Many of these firms have come to rely upon “invisible management” systems—things that happen “in a black box” that many in management do not even fully comprehend and could not describe properly if called upon to do so.
Toyota took the opposite path: Toyota has relied upon simple “visible management” systems—systems developed by the workers themselves; systems that are clearly understood; and systems that are inherently trusted by those who must rely upon them for day-to-day productivity.
Today, even though the firm I work for sells ERP systems, we are helping more and more companies take steps toward inherent simplicity—and helping them increase profitability and smooth the flow of goods in their supply chains, at the same time.
We would like to hear your comments on this topic. Please leave them here, or feel free to contact us directly, if you prefer.
[1] Koenemann, Ken (2013-01-15). Think Sync: The Competitive Advantage of a Lean Value Chain (Kindle Locations 193-201). TBM Consulting Group. Kindle Edition.
[2] Ibid. Kindle Locations 230-240