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Network Orchestration: Creating and Managing Global Supply Chains Without Owning Them

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22_ _ch17.qxd 3/11/09 9:12 AM Page Network Orchestration: Creating and Managing Global Supply Chains Without Owning Them Yoram (Jerry) Wind Victor Fung William Fung Abstract If you accept,
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22_ _ch17.qxd 3/11/09 9:12 AM Page Network Orchestration: Creating and Managing Global Supply Chains Without Owning Them Yoram (Jerry) Wind Victor Fung William Fung Abstract If you accept, in the words of Thomas Friedman, that the world is flat, how do you need to reshape your organization, management, and thinking for this new terrain? This chapter offers strategies and insights on the capability for network orchestration that is essential in designing and managing networks that are centrally controlled. While most management education is focused on competition at the firm level, competition today is increasingly network against network. This changes the way we approach strategy, supply chains, building competencies, and managing enterprises. The authors examine the strategies used by successful networked companies in diverse industries. Effective network orchestration requires balancing control with empowerment of customers, suppliers, and entrepreneurial managers; and building value more from integration than specialization. While the traditional focus of core competencies has been at the firm level, the rise of networked organizations means that companies need to take a broader view. Success is based less on the competencies that the organization owns than those that it can connect to. The authors point out that this means core competencies in network orchestration and learning may become increasingly important because these meta-competencies allow organizations to assemble and flexibly reconfigure the competencies needed to fulfill a customer-driven value chain. 299 22_ _ch17.qxd 3/11/09 9:12 AM Page THE NETWORK CHALLENGE The emerging Flat World, as described by Thomas Friedman (2005), presents tremendous opportunities for companies to create networked enterprises. Instead of owning capabilities and assets, companies can connect to these assets fluidly around the globe through connections to other partners. Although organizations have always engaged in partnerships, in this world these partnerships are much broader and more fluid. Companies are using networks to create supply chains that stretch more broadly than ever. This creates opportunities to build flexible global enterprises that can be reconfigured quickly in a fast-changing world. For example, if Li & Fung Trading receives an order for 100,000 men s dress shirts today, the best place to source the yarn might be Korea, the buttons might come from China, and the weaving might best be done in Taiwan, but in two factories to speed production, while Pakistan might be the best place for the cut, make, and trim (CMT), using three different factories to speed up the process. If the same order came in a month later, it might result in a completely different supply chain. Suppose Pakistan faced political unrest at that point the entire supply chain could be shifted to another factory in another country. The supply chain is evoked by the customer. Like a message routed through the Internet, the project moves along the best specific path chosen from a broader network. Li & Fung can select the right supply chain from a network of approximately 10,000 suppliers around the globe. The reason this can be done is that Li & Fung is a networked organization. Although it supplies more than US$14 billion in clothing, toys, and other products for top U.S. brands, it does not own a single factory or employ a single seamstress. It accomplishes all of this through what we call network orchestration. 1 This approach shifts the view of the organization and its competencies. Although the focus in the past may have been on building and protecting the core competencies that the firm owns, the focus in such a networked organization is much more on the competencies that the organization can connect to. The meta-competency at connecting is network orchestration. Li & Fung has become a leading supplier without owning competencies in manufacturing. Instead, it has a competency in orchestration that allows the company to draw together many manufacturers and other partners into a flexible and adaptable supply chain. In addition to this capability, companies need the capacity to adapt over time to a rapidly changing environment. This demands capabilities in learning and innovation. With this set of broad capabilities orchestration, learning, and 1 John Hagel and John Seely Brown first described Li & Fung s approach as process orchestration in their book The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization, Boston: Harvard Business School Press, 2005. 22_ _ch17.qxd 3/11/09 9:12 AM Page 301 CHAPTER 17 NETWORK ORCHESTRATION 301 innovation networked organizations can connect to the other specific capabilities they need to create value for customers. Unbundling Supply Chains As explored by Serguei Netessine in Chapter 13, Supply Webs: Managing, Organizing, and Capitalizing on Global Networks of Supplies, traditional supply chains have been transformed into global supply networks. The supply chain and supply chain management have been an essential part of classic business strategy. Michael Porter recognized that these chains delivered not only products but also value, leading to the concept of the value chain (Porter 1985). This allowed managers to consider how value is added at each step along the chain. Supply chains increasingly are moving from mechanistic and deterministic models to what John Gattorna (2006) calls living supply chains. As he writes, Whether we accept it or not, we are already shifting from Newtonian-like thinking to a more organic model. These are supply chains that have the flexibility to respond to the dynamically changing needs of customers and consumers. The way value is created and shared in these value webs is also more complex. In the past, transaction costs represented a limiting factor in making supply chains more flexible and global. The cost of coordinating with different partners and transporting goods and information around the world made it cheaper to keep manufacturing within a single factory, or at least close by. Globalization, improved communications, computing and the Internet, and low-cost shipping reduced transaction costs and contributed to the rise of borderless manufacturing. As transaction costs have dropped significantly, this has led to the unbundling of the supply chain. Since Henry Ford set up his famous assembly line near Detroit, the most efficient way to run a factory was to put everything under one roof. Then, companies such as Toyota opened the front doors of the factory and put their suppliers just outside the gates. This created Toyota City. The suppliers were still geographically co-located on the same campus, but they were separate companies outside the factory. Dell and other companies then engaged in global sourcing, purchasing computer chips and other technology from Asia. As global logistics and coordination have improved, these suppliers can now be virtually anywhere. In fact, right outside the factory gates now means anywhere on the planet. Boeing s 777 jet is assembled from three million parts from more than 900 22_ _ch17.qxd 3/11/09 9:12 AM Page THE NETWORK CHALLENGE suppliers from 17 countries around the world. 2 Boeing primarily produces the wings and fuselage, as well as assembling the aircraft. Most of the plane s components are outsourced around the globe. For its 787, the company is also outsourcing systems for collision avoidance and landing in zero visibility to Indian engineers at HCL Technologies outside New Delhi. This not only allows the company to find best-in-class providers for each component but also gives each of these nations a vested interest in the success of the aircraft. This, of course, helps in spreading risk and making global sales. Companies realized that the supply chain could be broken up and spread across the globe. They could do more than source products or components from other parts of the world. They could put stages of the supply chain in different parts of the world and coordinate them centrally. This meant breaking up the processes of the supply chain, farming them out to different companies in different locations, and then managing these dispersed processes. This is what John Hagel and John Seely Brown (2001) have referred to as process orchestration. Through orchestration, companies could optimize the overall supply chain to deliver the right product to the right place at the right time at the right price. Henry Ford s factory was built on the principle of division of labor. The new principle was orchestrated dispersion of labor. Henry Ford s factory was based on large operations that offered economies of scale, whereas orchestration is based on assembling armies of small and medium business that could act as one. The Four Flows: Where Atoms Meet Bits Dispersed manufacturing and network orchestration are made possible because of improvements in four flows required for the manufacturing process: information, financial, physical, and work flows, as shown in Figure In traditional supply chains, these four flows were integrated. The shipping information traveled with the physical order, and money changed hands with goods. Physical flows and work flows were essentially the same. Traditional supply chains were difficult to reconfigure, were easily disrupted, and required long lags between placing the order and receiving the finished goods. Even when global supply chains were created, they were fixed. The goal was to keep driving to make them more efficient after they were established, rather than creating the best new design for the chain at any given moment. Flexibility came at a high premium Family, 22_ _ch17.qxd 3/11/09 9:12 AM Page 303 CHAPTER 17 NETWORK ORCHESTRATION 303 Global Network of Trusted Suppliers Manage Risks Manage Four Flows Modular Structure The Interdependent Flows Reduce Friction & Increase Flexibility Physical Work Financial Information Delivering the right product to the right place at the right price at the right Time. End-to-end optimization Figure 17-1 Network orchestration The forces that are flattening the world (see the sidebar Friedman s Ten Flatteners ) have affected these four flows. These forces have accelerated and improved each of the flows. These interrelated forces are flattening the world and transforming management, making logistics more efficient and more global and creating opportunities to rethink the organization. Consider how each of these four flows has been transformed. Friedman s Ten Flatteners The ten flatteners identified by Thomas Friedman in The World Is Flat (paraphrased slightly): End of Cold War and rise of personal computer (IBM PC) Internet (Netscape IPO) Work flow software (Wild Brain, PayPal) Open sourcing (Linux, Apache) Outsourcing (Wipro, Infosys) Offshoring (Chinese manufacturing) Supply chaining (Wal-Mart) Insourcing (UPS, FedEx, and Modern Logistics) Informing (Google, Yahoo!, and MSN Web Search) Digital and wireless (The Steroids) 22_ _ch17.qxd 3/11/09 9:12 AM Page THE NETWORK CHALLENGE Information Flows In Being Digital, Nicholas Negroponte, founder of MIT s Media Lab, highlights the distinction between bits and atoms. A physical product such as a printed book or music CD is limited by atoms, whereas an electronic version is made of fluid bits. Transforming an information, entertainment, or financial product from atoms to bits makes geography and time almost irrelevant. The bits can flow anywhere in the world almost instantaneously. Think about music on a CD versus a download through itunes. The CD has to be packaged and stamped and shipped to a retailer. The customer buys the CD and takes it home. For the electronic download, the customer clicks a button, the payment is made via credit card, and the transfer begins. This transformation from atoms to bits in such products has been the low-hanging fruit of the information revolution. It is not surprising that the services that have been outsourced abroad, such as computer programming or customer service, are those that could be easily digitized. These advances improved and accelerated the information flows. Information technology has enabled the work and information to become more dispersed. The first separation occurred with the fax machine, whereby paperwork could make its own path separate from the physical products. But with modern information technology, the information flows are now separate from the order and can be accessed from anywhere in the world at any time. An order can clear customs while the shipment is en route because the information travels separately from the physical goods. Financial Flows Financial flows also have been digitized and globalized. Through digital technology, hard currency has become liquefied. Global capital can flow more freely, allowing the design and operation of cross-national supply chains and better management of risks. There also has been a shift in the center of economic activity to new countries and regions. As global capital markets have developed, capital flows have been accelerated and separated from physical flows. Physical Flows A shirt or a toy cannot be converted into bits. It is a physical product, and at the end of production, it needs to be shipped to its end market by land, sea, or air. Advances in logistics, including global shipping, use of containers, and technology to track shipping, 22_ _ch17.qxd 3/11/09 9:12 AM Page 305 CHAPTER 17 NETWORK ORCHESTRATION 305 have made moving between remote locations faster and cheaper. A buyer who wanted to change the fabric for a product used to have to get on a plane and fly out to the factory with a sample. Now, the sample can be shipped overnight. FedEx, UPS, DHL, and other carriers have rethought and improved every aspect of shipping and logistics. This is what UPS CEO Mike Eskew has called synchronized commerce, in which goods, information, and funds are seamlessly connected to benefit businesses worldwide (UPS 2003). As costs have declined, every year, more goods are moved by air. For example, 34% of goods from Hong Kong were moved by air in 2006, rising by 1 to 2 percentage points a year, and half of the cargo moves in passenger aircraft, making it less susceptible to spikes in fees from rising fuel costs. Work Flows Online retailers such as ebay, Amazon, Netflix, and Audible began addressing the challenge of building interfaces between the bits and atoms to deliver physical products ordered through electronic channels. They began separating financing and information from the product and to take advantage of improvements in shipping to reduce delivery times, accelerating information, capital, and physical flows. But these improvements only addressed the supply chain after manufacturing was completed. Producing goods such as cotton shorts presents a more complex challenge. Not only does this process require moving atoms from seller to buyer, but also these atoms have to be designed, sewn together, packaged, assembled, and moved around. The challenge here was to improve the work flows, to break up and manage processes that are dispersed across diverse geographic locations. Although only part of the modern supply chain could be turned into bits, the improvements in information, capital, and physical flows created opportunities to rethink work flows. Modularization of manufacturing and other value chains has made it easier to separate parts of the chain to be outsourced. New software to track and manage work processes has helped to keep control in a world of dispersed manufacturing. The first stage in this process was the outsourcing of specific functional areas such as customer service or accounting. The next step is to outsource all but core processes of the chain to the optimal locations in the world. With a modular structure, the network is the universe of suppliers from which a specific supply chain is precipitated. A specific supply chain is called forth from this universe in response to the demand of the customer. Whereas the old factory ended with the customer, this process begins with the customer. 22_ _ch17.qxd 3/11/09 9:12 AM Page THE NETWORK CHALLENGE The Need for Orchestration Modern management and control systems arose out of the vertically integrated factory. With more fluid value networks, the challenge is to control a supply chain or other value chain through partners that the company does not own. This is a daunting challenge as demonstrated by the many alliances, outsourcing, and offshoring engagements that have run into problems, often due to coordination and control issues. Studies find that half of all strategic alliances fail. Several recent studies have concluded that half the organizations that shifted processes offshore failed to generate the financial returns they had anticipated (Aron and Singh 2005). A study of outsourcing by Deloitte Consulting found that major stumbling blocks include governance, management attention, and change management (Deloitte Consulting 2005). Companies such as Nike, Wal-Mart, and McDonald s have found out the hard way that they are held responsible for what happens in the factories of their outsourced partners no matter how far removed. This has led to increased scrutiny of working conditions, environmental impact, and other issues throughout the entire network. More recently, we have seen tragic problems with product quality leading to poisonings in products from pet foods to children s toys. What is missing in many cases is orchestration. It is not enough to set up the network or contract with a partner. Without orchestration, many of the gains of networks and global collaboration can be lost because the resulting supply chains are suboptimized. Orchestration is different from managing a typical internal process. It requires a more fluid approach that empowers partners and employees, while maintaining control at the same time. Network orchestration is the design and management of networks that work together to achieve a common business process. In a networked and flat world, this has become an increasingly important competency. Although we developed the principles of network orchestration in a manufacturing enterprise, they have broad applications across diverse industries and activities, from research and product development to services. These diverse networks include a business built by Olam International working with small and mid-sized farmers in 40 countries to orchestrate a network for agricultural products and food ingredients. There are research networks such as the Connect & Develop initiative of Procter & Gamble that have linked it with more than 1.5 million independent researchers around the globe, or the external networks that have helped Canadian-based GoldCorp significantly improve the yield of its mining business by orchestrating an eclectic group of experts outside the firm. 22_ _ch17.qxd 3/11/09 9:12 AM Page 307 CHAPTER 17 NETWORK ORCHESTRATION 307 Companies have created marketing networks to orchestrate hundreds of thousands of buzz agents to get messages across and promote products. There are networks for innovation such as a system built around Nike and ipod to create an electronic personal trainer. Global sports leagues offer another example of the power of coordinated networks, and even the military is increasingly turning to networked models to meet the complex challenge of fighting modern wars and addressing global terrorist networks. All these examples have one thing in common: They all are based on networks that come together to create a product or service. And they all require orchestration to keep these networks operating at their peak and prevent them from devolving into chaos. The principles of network orchestration can be applied to these networked enterprises in addition to supply chains and manufacturing. Although Li & Fung is a large multinatio
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