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Keynote Presentation: Intelligent Supply Management

ISM's 87th Annual International Supply Management Conference

San Francisco, CA
May 2002


Roberta J. Duffy

Dr. Hau L. Lee
Kleiner Perkins, Mayfield, Sequoia Capital Professor of the Department of Management Science and Engineering, and Professor of Operations, Information and Technology at the Graduate School of Business at Stanford University

Chicken noodle soup, green Volvos, and fashionable sweaters were just a few of the topics that came up during the opening keynote address of ISM's 87th Annual International Supply Management Conference. Hau L. Lee, professor from Stanford University, gave attendees some insights to intelligent supply management, as it has applied in various instances for the food, automotive, and apparel industries. "Our job is not just taking one task and improving it, but to produce intelligence that can create more value," says Lee. Specifically, he discussed his theories of how technological innovations result in effects of substitution, scale, and structure.

For example, when the automobile was first introduced, the substitution effect transpired as people would substitute a car for a horse on a given trip. Then, the effects of scale kick in when people realize that farther travel and more extensive travel is possible using automobiles than horses. Finally, structural effects take place when other industries emerge, such as highway, suburbs, and shopping malls, as a result of increased automobile traffic.

These structural effects should be the prime goal should be the ultimate goals as supply managers strive to make improvements, for the structural changes create the most value through intelligent procurement and supply chain coordination. Furthermore, there are three types of structural changes that can take place.

  • Vertical supply chain coordination: supply managers coordinate with various links up and down the supply chain
  • Horizontal supply chain coordination: supply managers coordinate efforts with similar organizations for intelligent dual sourcing and responses
  • Supply chain coordination from one function to another: supply managers link with design and demand management professionals in sales and marketing

Here's where chicken soup comes in. Lee told attendees about a sales promotion that Campbell's Soup ran --- which ultimately failed due a lack of supply chain coordination between functions. Chicken soup sales peak during the winter months and at one point, Campbell's ran a promotion to specifically push chicken noodle soup sales even more during this time period. However, unbeknownst to the marketing department, this promotion actually created more costs on the supply side. For example, because so much chicken had to be purchased ahead of time in anticipation of the demand, more freezer space was required. More labor costs were incurred during the peak production period. Production schedules of other items had to be altered (at a costs) to accommodate the chicken noodle run. These and other factors meant that whatever extra revenue was produced by the sales promotion were ultimately erased by the increased supply chain costs. This example shows the vital role that cross-functional supply chain integration can play.

Later, in a "by-invitation-only" session, part of ISM's Power Conference, Lee elaborated on these topics and stressed the three critical elements for an organization's integration:

  • Communication
  • Performance measures (particularly those that go beyond the "traditional" measurements
  • Incentive alignment

He said that one way to motivate supply management departments for process improvements is to hold them accountable for performance measurements of links that are further down the chain (such as an auto manufacturer being responsible for dealership activities). This works because the supplier is then motivated to assist the "customer" to improve its processes.

For more information from Hau Lee's research, see the following links.

By Roberta J. Duffy, editor of Inside Supply Management

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