Chapter 9: Clockspeed-based Strategies for Supply Chain Design

Charles H. Fine

Biologists study fruit flies because their fast rates of evolution permit rapid learning that can then be applied to understanding the genetics of slower-clockspeed species—like humans (Lawrence 1992, Gladwell 1996). During the past decade, I have been studying the supply chains of the industrial equivalent of fruit flies—fastclockspeed industries, such as Internet services, personal computers, and multimedia entertainment—in search of robust principles for supply chain design. The most important lesson from the industrial fruit flies is one that should prove heartening to the supply chain community. I phrase it as follows:The ultimate core competency of an organization is "supply chain design", which I define as choosing what capabilities along the value chain to invest in and develop internally and which to allocate for development by suppliers. In a fast-clockspeed world, that means designing and redesigning the firm's chain of capabilities for a series of competitive advantages (often quite temporary) in a rapidly evolving world.

Beware of Intel Inside

Consider the evolution of one of the information-rich fruit flies of the late twentieth century—the computer industry. In the early 1980s, when IBM launched its first personal computer (PC), the company pretty much was the entire computer industry. IBM was a technologically deep organization that designed and produced its super-sophisticated mainframe products almost exclusively with internal capabilities. But the PC presented IBM with a special "three-dimensional concurrent engineering" challenge: The company needed to create a new product, a new process to manufacture it, and a new supply chain to feed that process and distribute the product.

To keep costs low and increase speed to market, IBM chose a modular product design with a modular supply chain design, built around major components furnished by two virtually unknown companies: Intel and Microsoft. By 1998, the fastevolving personal computer had gone through seven microprocessor generations: 8088, 286, 386, 486, and Pentium I, II, and III. Still a powerful, profitable, and influential company by the standards of the computer industry, IBM had nonetheless been far outdistanced by its two hand-picked suppliers, who had taken the lion's share of the profits and industry clout that flowed from IBM's standard-setting product. IBM's suppliers also won the allegiance of millions of customers who came to care far more about the supplier's logo—"Intel Inside" or "Windows 95"—than about the brand name of the company that assembled the components and shipped the final product. The power in the chain had shifted, as had the financial rewards (Baldwin and Clark 1999, Grove 1996).

The IBM-Intel-Microsoft saga provides a rich set of lessons from the fruit flies: When designing your supply chain, whatever your industry, beware of the phenomenon of "Intel Inside". Furthermore, understand that make-vs.-buy decisions should not be made primarily on which supply option is a little bit cheaper or a little bit faster to market. Rather, supply chain design needs to be recognized as a strategic activity that can determine the fates of companies and industries—and of profits and power. Finally, we observe that the element of the supply chain that controls the chain can shift over time: In computers, it was first the OEM and later the component makers who wielded the most clout in the chain.

These lessons apply equally well to slower clockspeed industries such as automobiles. The role of electronics subsystems in cars, for example, has evolved dramatically since the 1960s, when little more than a vehicle's lights, radio, windshield wipers, and starter motor were electrically controlled. Today, the dollar value of a car's electronics is overtaking the value of its steel body, for example, and the electronic system rivals the steel body as one of the most important subsystems. In fact, virtually all the features that affect customers' perceptions of a vehicle are—or soon will be—mediated by electronics. Those features include acceleration, braking, steering, handling, and seating, as well as the communication, information, and entertainment systems (Womack et al. 1990).

Of course, the evolution of the importance of electronics in the car has profound implications for the relative power and value of various players in the automotive value chain. The relatively slow clockspeed of the automotive landscape gives industry players some time for deliberation and choice. But there may come a day when customers choose automobiles based on whether it sports a logo saying "Denso Inside", "Delphi Inside", or "Bosch Inside" rather than by the name of the company that stamped and welded the sheet metal.