Missing Links?

In the early 1990s, one of Chrysler's hottest products was the Jeep Grand Cherokee. The procurement and supply department decided to determine how reliable its suppliers were and began mapping out all the sources for the Jeep's engine. One of its components was a roller-lifter valve made by Eaton Corp.

But the raw metal castings for this piece came from a small shop near the Eaton factory. The castings company, in turn, got the unique clay it used in its foundry from another supplier. When Chrysler visited that source, it discovered the company had been losing money on its clay and its owner had decided--without telling anyone else--to change his business. Imagine the reaction of the Chrysler executives when he informed them that he was planning to process the clay into kitty litter instead! If Chrysler hadn't been keeping tabs on its suppliers, it could have lost a lot of time and money trying to replace its clay supplier.

The supply chain, with all its implications, is the subject of Clockspeed: Winning Industry Control in the Age of Temporary Advantage (Perseus Books) by Charles H. Fine, who notes that any weak link in a company's economic chain--up to ultimate suppliers and down to final consumers--could endanger its health, as it did Chrysler's.

Fine also argues that there's no such thing as permanent dominance of one company in an industry because there are predictable cycles of change in customer-supplier relationships. Starting with intense competition in a new industry, some companies become stronger because they have proprietary solutions or power over scarce resources, or because they bundle something valuable with less important offerings to gain control. Eventually, a few major players emerge and are served by everyone else.

But that honeymoon rarely lasts long. Typically, says Fine, industry leaders become bureaucratic and arrogant and don't see the new wave of competition coming. Schwinn, the bicycle leader from the 1890s to the 1970s, dismissed the mountain bike trend--a trend that helped drive the company into bankruptcy. IBM gave away the future of PCs when it picked Microsoft and Intel as suppliers--now everyone is more concerned with the "Intel Inside" label than the computer itself.

"Nature abhors a monopoly," Fine observes, adding that by studying past cycles, you can predict where your industry is headed and foresee emerging opportunities that could eventually put you in the driver's seat.

Fine, a professor of management at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Massachusetts, also consults for some of the world's largest corporations, including General Motors, Intel and Nortel Networks. The case studies in Clockspeed come primarily from those and other industry giants, but Fine believes the lessons learned by the big guys are also crucial for small companies as they claw their way to the top.

If you're serious about these issues, you have to read Fine's book--several times--because it delves deep into the jungle of corporate intellectualism, the stuff of giants that we can only touch on here. More important, these issues can't be treated as just another interesting management theory. If Fine's right, your survival depends on paying attention to the dynamics of the supply chain and implementing changes in the way you do business.

Scott S. Smith:You believe entrepreneurs need to change the way they deal with their suppliers. Why is that?

Charles H. Fine: Often they just deal directly with the first tier [of suppliers], and not in the way they need to. Most familiar is the organizational chain: which companies are supplying what products and services. When you map this out in a sophisticated way, you'll realize who is making lots of money at the points of scarcity. You also begin to see what the interrelationships are.

Then you need to do a technology chain, so you can see who is dependent on which critical technologies. You don't need to know everything about a company whose technology plays a small role in the chain--you just need to be aware of the role it plays.

Finally, you need to draw a capabilities tree, showing who is providing which capabilities. For example, your company might be dependent on FedEx for shipping or on a certain accounting software. Those controlling important information have more power in the chain. Your company has to decide what its core capabilities are and what it's better off outsourcing to someone else in the chain.

Smith:Give us a real-life example of how this process happens.

Fine: The Japanese company Shimano controlled more than 90 percent of the component business for derailleur-equipped bikes, building market share by integrating traditionally modular parts and bundling unrelated products. In 1988, [a company called] SRAM developed Grip Shift, a mechanism allowing cyclists to shift gears by rotating a dial on their handle bars rather than pushing two levers up or down, as they had to do with Shimano's system, which has 100 pieces. Grip Shift only has 20 pieces, and just two of them move, so [the mechanism] doesn't wear out as easily and it weighs less. SRAM persuaded one "insignificant" company [to incorporate the Grip Shift in its bikes]. It was slow to be accepted, but by 1995, Grip Shift had gained 60 percent of the shifter market.

Smith:How can a company put the information it gathers about the supply chain to use in the way it produces goods?

Fine: Traditionally, the product development department comes up with great ideas without much regard to how they are to be sourced. For instance, Intel's engineers once designed a [complicated] chip package, and it turned out there wasn't enough machine-tool capacity in the entire world to manufacture the packages.

You need to think about the three dimensions of what is called concurrent engineering: People involved in product development need to work hand-in-hand with those responsible for procurement and for the manufacturing process, or you can run into trouble. Besides, when you have employees from different departments talk to each other, you can get unexpected positive outcomes from their varied perspectives.

The main point is, you don't want to make yourself vulnerable to suppliers. As much as 80 percent of a product's life-cycle cost is determined by decisions made early in the design process.

Smith:When a business works with outside companies, are there tricks to making the process run more smoothly?

Fine: You want what we call proximity. One [kind of proximity] is geographic--you're in the same physical area--which is why Silicon Valley works so well. Or you might look for cultural proximity--similarities in the ways things are done, the same language, and so on. You might set up electronic proximity--lots of e-mail, faxing and videoconferencing. This [proximity] will improve the process.

Smith:What are some methods of product-costing and accounting that small companies might not know about?

Fine: Most would know about traditional overhead accounting, where you lump together all your costs as overhead and smear them across all your products. A better method is the activity-based method, which lines up costs with specific activities so that if you decide to outsource all your software, you can take into account the costs of your people working with outsiders to make sure their modules fit with your hardware. Make sure you aren't spending extra money trying to make different systems work together.

There's also bottleneck costing, which looks at where your production process is being held up and costing you because of delays. It might be that the software and hardware development departments are efficient, but testing is overloaded, so you'd realize you have to add capacity there.

Smith:Where would you place your bets on future opportunities for small companies?

Fine: Powerful computers and the Internet could stimulate entry into movie production and distribution. Entrepreneurs are likely to make driving to the video store obsolete.

Retailing is going to change dramatically because of the Internet. I'm not even sure Wal-Mart will survive as it is. Most Internet start-ups and dot-coms will fail, but collectively they will change the way we live.

Telecommunications in its broadest sense is very exciting because everyone wants to be more wired, more in touch, and they'll pay for it. And biotech has enormous potential because the major pharmaceutical corporations have [compartmentalized] so that there are a lot of little openings, lots of outsourcing.

Finally, I see the automobile becoming our information center. The executive who has to drive to meetings should be able to process material by plugging in his laptop. A mother should be able to keep track of her kids while she's shopping. The car will become the central nervous center for all the information in our lives.

Scott S. Smith writes about business issues for a variety of publications, including Investor's Business Daily.

Scott S. Smith writes abouth business issues for a variety of publications, including Investor's Business Daily