The holy grails of supply chain management are high speed and low cost--or are they?

Though necessary, they aren't sufficient to give companies a sustainable competitive advantage over rivals. Consider these disturbing statistics: Though U.S. supply chains became significantly faster and cheaper between 1980 and 2000, product markdowns owing to excess inventory jumped from 10% to 30% of total units sold--while customer satisfaction with product availability plummeted.


But some companies--Wal-Mart, Amazon.com, Dell Computer--have bucked these trends. How? Their supply chains aren't just fast and cost-effective. They're also:

Agile: They respond quickly to sudden changes in supply or demand. They handle unexpected external disruptions smoothly and cost-efficiently. And they recover promptly from shocks such as natural disasters, epidemics, and computer viruses.

Adaptable: They evolve over time as economic progress, political shifts, demographic trends, and technological advances reshape markets.

Aligned: They align the interests of all participating firms in the supply chain with their own. As each player maximizes its own interests, it optimizes the chain's performance as well.

To achieve sustainable competitive advantage, your supply chain needs all three of these qualities. Apply the following practices to create agility, adaptability, and alignment.

The Idea in Practice

Agility
Objective: Respond to short-term changes in demand or supply quickly.

Methods:

· Continuously provide supply chain partners with data on changes in supply and demand so they can respond promptly.
· Collaborate with suppliers and customers to redesign processes, components, and products in ways that give you a head start over rivals.
· Finish products only when you have accurate information on customer preferences.
· Keep a small inventory of inexpensive, nonbulky product components to prevent manufacturing delays.

Adaptability
Objective: Adjust supply chain design to accommodate market changes.

Methods:
· Track economic changes, especially in developing countries.
· Use intermediaries to find reliable vendors in unfamiliar parts of the world.
· Create flexibility by ensuring that different products use the same components and production processes.
· Create different supply chains for different product lines, to optimize capabilities for each. For example, with highly customized, low-volume products, use vendors close to your main markets. For standard, high-volume products, commission contract manufacturers in low-cost countries.

Alignment
Objectives: Establish incentives for supply chain partners to improve performance of the entire chain.

Methods:
· Provide all partners with equal access to forecasts, sales data, and plans.
· Clarify partners' roles and responsibilities to avoid conflict.
· Redefine partnership terms to share risks, costs, and rewards for improving supply chain performance.
· Align incentives so that players maximize overall chain performance while also maximizing their returns from the partnership.

Convenience-store chain Seven Eleven Japan (SEJ) builds supply chain agility by using real-time systems to detect changes in customer preferences and track sales and customer data at every store. Satellite connections link stores with distribution centers, suppliers, and logistics providers. SEJ reallocates inventory among stores and reconfigures store shelves three times daily to cater to different customer groups at different hours.

SEJ's adaptability is legendary. Within six hours after the 1995 Kobe earthquake, SEJ overcame highway gridlock by mobilizing helicopters and motorcycles to deliver 64,000 rice balls to its stores in the beleaguered city.

SEJ fosters alignment by making partners' incentives and disincentives clear. For example, when carriers fail to deliver on time, they pay a penalty. But SEJ also helps carriers save money by forgoing the typical time-consuming requirement that store managers verify all contents of each delivery truck.

Copyright 2004 HBS Publishing courtesy of the Young Entrepreneurs Association of Jamaicawww.yeajamaica.com