Wednesday, January 25, 2012

Supply Chain Collaboration Analysis

Problems that can arise when each part of a supply chain focuses solely on its own profits when making decisions:

The goal of maximizing only company profits, rather than those of the supply chain, can result in different members of a supply chain working at cross-purposes. For example, a company that makes a minor price cut at the distributor level to increase its profits may cause a major problem for vendors supplying raw materials as small changes are magnified at each level of the supply chain. Or, a company with an intracompany interfunctional view may pressure another partner in the supply chain to hold inventory in order to reduce the dominant party’s costs without regard for where inventories are best held.  If the parties in such a situation do not collaborate, one may respond to implied uncertainty by increasing inventory levels (and costs) unnecessarily, thus reducing supply chain surplus.  Because of the complex interrelationship of inventory held at various sites, the companies should work together to manage inventory throughout the supply chain effectively.

Actions that can help a retailer and a manufacturer work together to improve their overall performance:

Actions that enable a retailer and a manufacturer to work together to improve overall performance include the retailer’s sharing meaningful point-of-sale data, its sales forecasts and methods, and in-store and warehouse inventory.  The manufacturer with this information is better able to improve the production process by reducing material costs, determine quantity based on total supply chain costs, avoid stockouts, and respond quicker to changing customer demand and market changes.  Retailers, who have access to similar types of information from the manufacturer, can also make decisions that more positively affect the supply chain, such as the timing of sales promotions.   Collaborative forecasting and coordination, rather than independent forecasting by a retailer and a manufacturer based on the individual cost structure of each, increases supply chain efficiency and competitiveness.

Copyright 2012 James L. Alyea. All Rights Reserved.

How a Supply Chain Affects the Profitability of a Major Company

The primary objective of a supply chain is to satisfy customer needs while also generating profit for itself.  There is only one source of revenue for any supply chain:  the customer.  The key to success of a supply chain is achieving strategic fit between a firm’s competitive and supply chain strategies.  A company may fail if the supply chain design and all of the core functional strategies are not aligned with the firm’s overall competitive strategy to achieve strategic fit.  A lack of strategic fit can result in conflicts regarding different customer needs and priorities within the firm or across the supply chain, which leads to reducing supply chain surplus and decreasing supply chain profitability.  As stated in the text, in today’s world a company is intimately linked to its supply chain, and “a company’s partners in the supply chain may well determine the company’s success.”  

A company needs to find a balance between having a responsive supply chain and an efficient one.  This balance ultimately comes from the customers’ needs. An efficient supply chain lowers cost by eliminating some of its responsive capabilities.  For example, an efficient supply chain may carry less inventory and maintain a level load on the warehouse to lower picking and packing costs.  The responsive supply chain responds quickly to customers, and offers higher margins because price is not a primary concern.  The failure to achieve a strategic fit by finding the right balance between efficiency and responsiveness of a supply chain is a main reason companies fail to succeed.

Copyright 2012 James L. Alyea. All Rights Reserved.

Monday, January 9, 2012

The Pros and Cons of Outsourcing in Supply Chain Management

 “Outsourcing,” the practice of one firm hiring another to perform tasks that were originally performed in-house, is often viewed a way of maintaining or increasing a firm’s competitiveness.  With a general goal of lowering costs and/or streamlining workflow, a firm is able to concentrate on strengthening its core competencies.   Others view outsourcing, both domestically and internationally, in a negative light, questioning its effect on America’s workforce and economy.  Weidenbaum’s emphasis in the above-titled 2005 article is on the pros and cons of the overseas outsourcing of the activities of a firm, which has become a controversial issue in the U.S. and is becoming more so in light of the upcoming 2012 presidential election.
Why companies began outsourcing.  
Many service companies began creating jobs abroad to gain access to overseas markets, many of which have grown quickly, while some domestic markets have become mature, if not saturated.  For example, approximately 60 percent of the revenue of American information technology markets originates overseas.  Leading firms in various industries, such as banking and consumer products, report that their foreign revenues exceed those of their domestic sales.  U.S. companies also began hiring specialized workers overseas in response to U.S. immigration limits that hindered their ability to find qualified workers, particularly in science and engineering.  In so doing, many companies became accustomed to using modern technology to shift the location of work, as well as to the benefits of lower operating costs and pay scales in foreign countries.  Additionally, telecommuting paved the way to extend the process of shifting work to new suppliers, both at home and abroad.  Overseas outsourcing has accelerated in recent years due to globalization and to technological changes, primarily in the telecommunications and transportation sectors.

Advantages of outsourcing
Fundamentally, businesses that outsource are able to focus resources on core business processes in order to operate efficiently in an increasingly competitive global marketplace.  Expertise can often be acquired at a lower cost than hiring in-house when tasks are outsourced to vendors with special equipment and knowledge.  In addition, outsourcing certain parts of a company’s business process to a specialist facilitates risk-sharing and better analysis of risk-mitigating strategies.  Cost reductions can generate new market opportunities for U.S. companies and thus generate additional jobs domestically.   Large software companies such as Microsoft and Oracle have simultaneously increased outsourcing and their domestic payrolls.  Other advantages include the ability to provide constant coverage for consumers who require 24-hour support, especially when foreign and domestic competitors are doing so.

Limits and dangers of outsourcing
Companies who join the “outsourcing” bandwagon may be surprised by unexpected costs and complications, particularly in the overseas arena.  Research reveals that almost one-half of outsourcing agreements end up being terminated for a variety of reasons (Lutchen, 2004).  Some overseas vendors encounter financial difficulties or are acquired by firms with different procedures and priorities.  Unreliable suppliers may put current work aside when a more important client is gained, or they may have rapid turnover of skilled employees who find jobs with more desirable firms.  Typical Indian operations in business processing often lose 15 to 20 percent of their workforce annually.  Moreover, overseas managers often do not understand American business practices such as high quality-control and expectations for prompt delivery of goods and performance of services.  Dell, for example, moved its customer-support call center back to the U.S. in 2003 after consumers revolted against receiving vague, hard-to-understand answers to technical questions from non-native English speakers (Morphy, 2006).  Boeing’s 2007 scheduled release of its 787 Dreamliner aircraft was delayed more than three years by problems caused by a complex supply chain of over 50 global suppliers and a splintered international engineering team (Peterson, 2011).

U.S. firms may also encounter a variety of unanticipated difficulties in foreign nations such as arcane legal systems, theft of intellectual property, requirements of tax and regulatory agencies, and political upheavals such as the riots that accompanied the overthrow of Indonesia’s president in 1998.  Furthermore, they may encounter corrupt officials in the public sector.  In the mid-1990s, officials of a Halliburton subsidiary were involved in a Nigerian joint venture project that resulted in a decades-long bribery scheme to secure contracts in Nigeria (Olorunyomi & Mojeed, 2009).  Other costly complications and hidden costs may arise such as a lack of reliable sources of electricity, transportation networks that need to be upgraded, or business customs that must be observed.

Net effect on the U. S
Over the years, far more new jobs have been created in the U.S. than have been outsourced.  The current debate on overseas outsourcing frequently focuses on short-term job losses  in industries such manufacturing, while ignoring long-term benefits to consumers and businesses.   Outsourcing helps companies stay competitive, resulting in more investment and, in turn, the creation of new or better jobs.   In the long run,  outsourcing is not a zero sum game, but rather one where net gains are positive.

Copyright 2012 James L. Alyea. All Rights Reserved.


Introduction to the outsourcing & offshoring industry. (2011).  Plunkett Research, Ltd.  Retrieved from

Lutchen, M. D. (2004, May).  Outsourcing IT headaches is no answer.  Chief Executive.  Retrieved from

Morphy, E. (2006, January 30).  Dell pumps up Indian outsourcing operations.  CRM Buyer. Retrieved from

Olorunyomi, D. & Mojeed, M. (2009, May 1).  The Halliburton bribe takers. Retrieved from Halliburton_bribe_takers_.csp#

Peterson, K. (2011, January).  A wing and a prayer:  outsourcing at Boeing.  Reuters.  Retrieved from

Weidenbaum, M. (2005,  July-August).  Outsourcing:  pros and cons.  Business Horizons.  Retrieved from

Sunday, January 8, 2012

Supply Chain Analysis of Off-Shoring and Outsourcing

“Outsourcing,” the purchase of a value-creating activity from an external supplier, can refer to work provided by companies in the U.S. or in other countries.  It may be viewed as a strategy by which a firm achieves desired results by collaborating with other firms.  “Offshore outsourcing” (off-shoring) is a special case of outsourcing in which a firm sends an activity to be performed by a business in a foreign country.  The authors describe outsourcing as “the result of a deconstruction of the value chain” that was developed in the 1990s by researchers to explain  strategies used by successful companies to achieve competitive advantage, whereas off-shoring is described as based on the idea of comparative advantage, a nineteenth century concept related to specialization within a country.  With the digitalization of production, a process by which a firm can break jobs into smaller pieces, outsourcing may also be based on comparative advantage.

Outsourcing is a business practice used to lower costs by many Fortune 500 companies, such as Microsoft, IBM, Hewlett-Packard, and AT&T.  Firms also undertake outsourcing because they do not have the resources and capabilities of carrying out all activities better than competitors.  By outsourcing those activities in which they do not have a competitive advantage, firms can concentrate on building core competencies to achieve a strategic advantage over competitors in delivering new products and services.  Dell, for example, outsources most of its manufacturing in order to concentrate on online sales, an activity in which it has a core competency.  Software giant Microsoft and Netscape Communications Corp. have outsourced “rote work” everywhere from Ireland to India (Madigan, K. & Mandel, M., 2003). 

Today, with the pervasiveness of new technologies and reduction in telecommunications and transportation costs, almost every function or activity in a firm’s value chain can be performed at various worldwide locations.  For many companies, only a few jobs may need to be done on-site.  This has led to a sharp increase in outsourcing and off-shoring of manufactured goods as well as of certain types of business services such as information technology, accounting, technical/customer support, medical billing, and human resources functions that are routine in nature.  Factors leading this increase have been the opening of a number of developing countries, worldwide improvements in productivity, and a fall in the costs of logistics and of the transaction costs of exchanging information with other entities.  For manufacturing, China has emerged as the clear leader in attracting off-shoring activities of foreign companies, while India is currently the leader in the case of services.

Despite outsourcing’s overriding benefits of lowering a firm’s cost structure and enhancing its ability to achieve a competitive advantage in an intensely competitive global marketplace, much fear about the effect on the U.S. economy of lower wages and the loss of jobs to off-shoring  has been generated by critics.  In response, the authors state that “fears about job losses may be somewhat exaggerated.”  They point out that most job losses from 2000 to 2004 were due to a recession, not off-shoring, and that according to government statistics, off-shored jobs are responsible for well under one percent of official unemployment statistics (qtd. from The Economist, Mar. 13, 2004).   Additionally, studies in 2003 and in 2004 are cited to support the claim that off-shoring could result in a net gain for the U.S. economy.  In reviewing more recent studies, I found that the above data is outdated in light of the rapidly accelerating pace of off-shoring and thus merits further study.  Nonetheless, living standards around the world are rising, in part, because of offshore outsourcing:  overall, workers in emerging and in developing nations are gradually obtaining new and higher-paying jobs, while U.S. consumers are able to buy products  and services that are cheaper than if they were made or provided domestically.

Copyright 2012 James L. Alyea. All Rights Reserved.


Kahai, S., Sara, T., & Kahai, P. (2011, January-February).  Off-Shoring and outsourcing.  Journal of Applied Business Research, 27 (1), 113-121.  Retrieved from

Madigan, K. & Mandel, M. (2003, August 18).  Outsourcing jobs:  is it bad?  Business Week,
3846, 36-38.  Retrieved from…

Maughan, A., Ford., & Stamp, N. (2011,  January).  Global sourcing trends in 2011.  Morrison & Foerster Global Sourcing Group.  Retrieved from

Ottaviano, F., Peri., G., & Wright, G.  (2010, November 18).  Immigration, offshoring, and US jobs.  Vox.  Retrieved from

Overby, S. (2010, December 20).  11 outstanding trends to watch in 2011.  Retrieved from

“Statistics related to offshore outsourcing.”  (2010, November).  Retrieved from

Monday, January 2, 2012

A Supply Chain Case Study on Thriving in a Networked World

On March 17, 2000, lightning hit a power line in Albuquerque, New Mexico, and caused a fire at the Philips (Philips Electronics, NV of the Netherlands) radio frequency chip manufacturing plant.  Although the fire was extinguished within ten minutes, millions of microchips were damaged, which triggered  a far-reaching chain of consequences for two of Europe’s largest electronics companies:  Nokia Corp. in Finland and Telefon AB L.M. Ericsson in Sweden.  The damaged chips were crucial components in the mobile phones that both companies sold worldwide.  Their dramatically different responses to the disruption in the flow of chips inspired one Norwegian supply chain researcher to title the incident “Ericsson versus Nokia – the now classic case of supply chain disruption,”  a clear illustration of how to and how not to handle supply chain disruptions h(Husdal, 2008).  
Philips’ response
Philips’ first action was to notify its 30-plus customers that would temporarily be affected by delays in chip production.  The fire had been minor, and key personnel projected that the cleanup would take about a week.  Three days after the fire, both Nokia and Ericsson received the same phone call from Philips about the disruption to its shipments.  Since Nokia and Ericsson accounted for 40 percent of the plant’s shipments, Philips also decided these two companies’ orders would be filled first when the plant resumed operations.   However, it took Philips six weeks to restart production and months to catch up on its production schedule.  With the cell phone market growing at over 40 percent annually, this was a delay which neither company could afford.

Nokia’s response.   
Even before the call from Philips about the problem, Nokia’s Chief Component Purchasing Manager had noticed a problem with Philips’ shipments.  In a culture that encouraged bad news to travel fast, he promptly notified the company’s senior officials (DeAngelis, 2010).  Nokia’s production planner began a daily check of the production status of the parts needed from Philips instead of the customary once-a-week check required by Nokia’s advanced monitoring process.  Nokia was scheduled to roll out a new generation of four million handsets that depended upon Philips’ chips (Sheffi, 2005).   As soon as it became apparent that the delay would be prolonged, Nokia implemented the response routines it had developed for such situations, and a team of 30 supply chain managers and officials was assembled to spread out over Europe, Asia, and the U. S. to work the problem.

Within two weeks, Nokia had taken three key steps.  Nokia first tied up spare capacity at other Philips’ plants and every other supplier it could find.   Within five days, two of Nokia’s current suppliers of other parts had responded.  Secondly, because Nokia’s cell phones were based on a modular product design concept, it was able to reconfigure its basic phones to accept slightly different chips from other suppliers in the U.S. and Japan.  Lastly, a team of Nokia and Philips engineers collaborated to develop alternative plans.  As Nokia’s top trouble-shooter stated, “For a little period of time, Philips and Nokia would operate as one company regarding these components” (DeAngelis, 2010).  Nokia was thus able to maintain production and satisfy customer demand.  By year end, its profits had risen 42 percent, and its share of the global market had increased from 27 to 30 percent (Sheffi, 2005).

Ericsson’s response
Ericsson was not so fortunate.  Ericsson’s managers had not noticed any discrepancies in Philips’ shipments prior to its phone call, and lower-level employees did not communicate news of Philips’ problem to their bosses.  They assumed Philips would ship the parts after a one-week delay and did not investigate further.  Even when Ericsson realized the seriousness of its problem at the end of March, the head of the mobile phone division did not get involved until early April.  By then¸ the company had few options.  Nokia had tied up Philips’ and other suppliers’ free capacity.  Ericsson had no other source of supply because several years earlier it had decided to buy key components from a single source to cut costs and to simplify its supply chain.  As later stated  by Ericsson’s Marketing Director for Consumer Goods, the company did not have a “Plan B” (DeAngelis, 2005).   The impact of Philips’ shutdown took more than nine months to resolve.  At the end of 2000, Ericsson reported a US $2.34 billion loss in its mobile phone division (Sheffi, 2005).  The following year, the company announced plans to begin withdrawal from the mobile phone production market, and it eventually merged with Sony in order to survive.

End result
Lost sales amounted to most of the financial hit suffered by Philips because direct damage to the plant was covered by insurance.   The impact to Philips was relatively minor compared to the impact on its customers.   Ericsson bore the brunt of the disruption because it did not have alternative suppliers, and it did not proactively manage supply chain risk.  Ericsson subsequently signed on secondary suppliers for key parts  and now has a completely different supply chain risk management system in place.  Nokia demonstrated a classic textbook solution to the supply chain disruption, not only surviving  but also emerging in a much stronger market position than before the fire.

Copyright 2012 James L. Alyea. All Rights Reserved.


DeAngelis, S. (2010).  The split second disruption to the supply chain.  Enterra Insights.  Retrieved from

Hopkins, K. (2011, December 21).  Value opportunity three:  improving the ability to fulfill demand.  Bloomberg Business Week, special advertising section.  Retrieved from

Husdal, J. (2008).  Ericsson versus Nokia – the now classic case of supply chain disruption.  Retrieved from…

Latour, A.  (2001, January 29).  Trial by fire:  a blaze in Albuquerque sets off major crisis for cell-phone giants.  Wall Street Journal.  Retrieved from
Mukherjee, A. (2008, October 1).  The fire that changed an industry:  a case study on thriving in a networked world.  Financial Times Press.  Retrieved from

Sheffi, Y. (2005).  Big lessons from small disruptions.   The resiliant enterprise.  Retrieved from

Tang, C. (2006, March).  Robust strategies for mitigating supply chain disruptions.  International Journal of Logistics Research and Applications, Vol. 9, Issue 1.  Retrieved from

About Jimmy Alyea (James Alyea):
JimmyAlyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of BusinessAdministration degree.  Follow JimmyAlyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

Supply Chain Analysis of Why Nissan’s Disaster Recovery Bested Rivals

The “Big Three” automakers in Japan--Toyota, Honda, and Nissan--all suffered immensely from the devastating earthquake and tsunami that struck northern Japan on March 11, 2011.  Although most Japanese automakers did not see their factories heavily damaged, most were forced to halt a large portion of their production, both inside and outside Japan, when deliveries of hundreds of parts from the country’s devastated northeast were cut off.   Followed by the widespread November flooding in Thailand that impacted numerous assembly and component manufacturing companies, the disruption to the industry’s complex automotive supply chain has spread well beyond Japan’s borders.  These natural disasters wreaked havoc on the bottom lines of auto giants Toyota, the world’s largest automaker and Japan’s biggest company, and Honda, Japan’s fourth largest company.  However, Nissan, the perennial “also-ran” of the Big Three, has overcome the crisis much quicker and gained market share at the expense of its two most acclaimed rivals.

As industry analysts tracked recovery during the following months, they noted that Nissan fared better and more effectively than Toyota and Honda.  No one action by Nissan’s management stands out as a determining factor in its successful recovery during the past year, but rather a series of deft moves set Nissan apart from its rivals almost from the outset of the twin catastrophes.  Almost immediately after feeling the effects of the earthquake at its Yokohama headquarters, Nissan key executives gathered for a crisis management meeting.  Teams were quickly dispatched to different Nissan outlets to help the company determine which Nissan models would be most affected by the disaster (Curtis, 2011).  Additionally, within a week, Nissan’s CEO Carlos Ghosn was on television decisively assessing the damage at one of Nissan’s two severely damaged engine plants and telling reporters precisely when the plant would reopen.  Although Ghosn’s comments most likely served to stir local authorities into action, such transparency is rarely seen in Japan’s corporate world.

Analyst Rebecca Lindland of HIS/Global Insight pointed out that unlike its competitors, Nissan “got its assembly plants and suppliers up and running sooner.”  Nissan benefitted greatly from its standardizing parts worldwide and from its strategy of using common parts such as its low cost, V-platform for vehicles in emerging markets.  Lindland also commented that Honda was hampered in restarting production because although it had two first-tier suppliers, both sources were hit by the same shortage of materials (Levin, 2011).  Even Toyota noted that Nissan seems to have been less affected than its major rivals.  As pointed out in a recent Wall Street Journal article, a senior Toyota executive made the statement that the auto giant could “learn a thing or two from Nissan’s handling of [supply chain] disruptions in Thailand. . . ” (Simms, 2011).  Such a compliment is unprecedented in a culture that goes to great lengths not to praise or criticize peers, much less fierce rivals.  A writer for Procurement Leaders responded by commenting, “. . . but the compliments are well deserved and should have been extended to how Nissan handled the Japan quake, after which it restarted production months before its rivals” (Rae, 2011).

Other factors cited by industry analysts that have worked in Nissan’s favor during the crisis include the fact Nissan’s corporate organization is structured differently from that of Toyota and Honda, whose boardrooms are exclusively Japanese.  With Brazilian-Lebanese-French businessman Carlos Ghosn as CEO and several foreign-born executives on Nissan’s board, including British-born Colin Dodge, Nissan’s Chief Recovery Officer after the post-Lehman financial world, Nissan’s crisis management team appeared more streetwise and quick-thinking than that of its major rivals.  A top spokesman at Nissan’s Yokohama headquarters stated that one of Nissan’s strengths that helped meet the disaster challenges so successfully was the company’s working together cross-functionally for quick and focused recovery actions.

 Nissan, also supplemented with a strong portfolio of products and the advantage of broad, efficient global “monozukuri,” (a Japanese word that means manufacturing), has managed to outdo its rivals in dealing with the catastrophic adversities of 2011.  However, Nissan cannot count on Toyota and Honda floundering forever.  As Levin (2011) succinctly summarized,  “being the underdog was easy.  Maintaining the lead—that’s the hard part.”

Copyright 2012 James L. Alyea. All Rights Reserved.


Curtis, M. (2011, December 23). It has been a test to how fast Japanese automaker Nissan to
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Simms, J (2011, November 18).  Nissan’s fast responders.  Wall Street Journal.  Retrieved from