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3
Supply Chain Potency

Potency, n., power, strength

3.1

The Need for Help

Businesses around the world spend billions every year on better products
and processes. Products and services along with the supply chains that
deliver them are on the move. They are constantly changing in new and
unexpected ways. Most of the investments made in what we broadly refer to
as product development or operations have at least some, and more
often a lot, of impact on the supply chain. These expenditures include product research and development, systems upgrades, capital investments in
brick, mortar, and equipment, and even enhancement of employee skills.
Managers are faced with a myriad of choices asking, What should I do
next?
We hope this book will help answer that question. This chapter introduces
those that follow. Its purpose is to argue for a framework for analyzing and
understanding the potential of supply chain projects for building potent
supply chains. After all, this book is less about running supply chains than it
is about improving them.
Whats the payoff? Managers are fond of measures. We all like to know
how were doing and where we stand: If you cant measure it, you cant
manage it. Some managers are fond of this characterization. However,
despite the rigor of most financial systems, many managers often have to
accept on faith that a project either proposed or recently completed is worth
the effort.
For example a manager or writer will describe some organization, including his or her own, as world class. This implies an advanced competitive
position in world markets, being the benchmark leader others in the industry
turn to for ideas. But its hard to measure world class with any great precision. We sort of know it when we see it.
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Quality measures are another popular yardstick. We see organizations

strive for six sigma processes. Six sigma is a quality gauge and measures
the number of defects in potential occurrences. It stresses execution of internal operations, building quality into each product. Six sigma performance,
with a very small frequency of defects, implies perfection in executing processes. Six sigma companies squeeze out unwanted cost brought on by low
quality. In recent years six sigma has taken on a broader meaning. Its now a
code word for excellence in any process. This includes managerial, administrative, and technical tasks.
The Malcolm Baldrige National Quality Award (MBNQA), presented by
the U.S. government, is another example of a quality yardstick. It has a comprehensive checklist that defines quality in terms of both internal operations and customer expectations. So its both externally and internally
focused. Companies use the checklist to guide internal evaluations. Some go
through the review for an outsiders perspective on their operations. Excellence here doesnt necessarily assure economic success, however; at least one
winner went bankrupt.
In measuring supply chain information systems, integration is a frequent
yardstick. A client once expressed the desire to become an integrated company. This is consistent with an information systems view of the supply
chain as we described it in Chapter 2. We encounter many supply chain
improvement projects intended to integrate the enterprise. According to
Hau Lee of Stanford, a company can be more or less integrated based on the
following: 1
Sharing of information and knowledge along the supply chain.
Coordination of decision making along links in the supply chain.
Tight linkage of organizational relationships between companies,
with aligned incentives among supply chain partners.
The more information sharing, coordination, and linkage there is, the more
integrated and presumably better the supply chain. Well return to this
topic in our discussion of proactive systems in Chapter 28.
Finally, there are multiple financial measures for improvement projects.
Indeed most proposed projects will encounter a capital budgeting process at
one time or another on the path to approval and implementation. This process frequently includes a financial justification. There, projects will be subjected to Internal Rates of Return, Net Present Value, or Earned Value types
of examination. Well discuss these in more depth in our chapters on cost
reduction in the supply chain.
Of course, the president of a company can point to his or her financial statements as an indicator of performance. After all, most businesses need profits
now or in the future as a by-product of serving customers. As long as
the financial statements are solid, the business must be solid right? Maybe
not. Financial statements are backward looking. The business may be head-

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ing for troubled waters, with few signs of problems apparent just by looking
at the numbers.

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3.2

Potent Supply Chains

We like the term potency to describe the effectiveness of initiatives to change

the supply chain. How potent are these initiatives? How do we measure
potency? What is the yardstick? We would define potency as the power or
strength of the initiative in improving the ability to compete. We have to
look beyond the measures mentioned above. Any of these measures
world class, quality, financial, or integration are means to an end. And
that end is a rosier future based on the ability to compete. Figure 3.1 depicts
the relationship.

FIGURE 3.1
Interpretations of potency.

Efforts to improve quality and integration or move the organization

toward recognition as world class probably contribute to potency. But often
it is the integration or the quality level itself thats the objective regardless
of impact on competitive position. You can have quality improvement without improvement in competitive position. While this has benefit as a rallying cry or company slogan, it may or may not be potent in the sense we use
here.
In the next few chapters and throughout the book, well develop a framework for supply chain improvement initiatives in terms of potency. To help us
begin, and to gain an understanding of contributions already available to us,
we visit recent and not-so-recent thinking on strategy and operations. They
offer various approaches to help us in developing our framework. They are
also useful in tracing how weve come to this point in our thinking about supply chains. We then offer our version a synthesis of these models. We
encourage the reader to pick the best approach for his or her own situation.

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The models we discuss here are shown in Table 3.1. Note in Table 3.1 that
each takes a different approach in interpreting the business environment.
This is to be expected at this stage in the development of supply chain thinking. There are often no absolutes in the managerial world. But there are some
helpful ways to think about decisions on where to invest to improve competitive position.
TABLE 3.1
Models for Measuring SCM Initiatives for Potency

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Model

Originator

Manufacturing
strategy stages
Driving force

Hayes &
Wheelwright2
Robert3

Supply chain
progression
Product life cycle
grid

Poirier4
Ayers, Gustin, and
Stephens5

Potency Measure
Support of the strategic plan.
Support of the single driving force (of 10
alternatives) in determining the
competitiveness of the organization.
Degree of supply chain cooperation and
technology infusion.
Product position with respect to its
competitors and/or life cycle stage.

References
1. Lee, Hau L., What constitutes supply chain integration? IEEM Network News,
Stanford University School of Engineering, p. 2, Summer 1998.
2. Hayes, Robert H. and Wheelwright, Steven C., Restoring Our Competitive Edge:
Competing Through Manufacturing, New York, John Wiley & Sons, 1984.
3. Robert, Michel, Strategy Pure and Simple II, New York, McGraw-Hill, 1998.
4. Poirier, Charles C., The path to supply chain leadership, Supply Chain Management Review, (2/3), pp. 16-26, Fall 1998.
5. Ayers, James B., Gustin, Craig and Stephens, Scott, Reengineering the supply
chain, Information Strategy: The Executives Journal, (14/1), pp. 13-18, Fall 1997.

Copyright 2001 CRC Press, LLC