Wednesday, December 17, 2008

“Triple-A Supply Chain”: How far have we come?

General opinion is that the holy grails of supply chain management are high speed and low cost. Though necessary, Hau L. Lee in his highly circulated 2004 article, “The Triple-A Supply Chain” in Harvard Business Review pointed out that they aren't sufficient to give companies a sustainable competitive advantage over rivals. He demonstrated this through a distribution statistics that though U.S. supply chains became significantly faster and cheaper between 1980 and 2000, product markdowns owing to excess inventory jumped from 10% to 30% of total units sold and the customer satisfaction with product availability plummeted.

So one wonders what’s going on here and how some companies like Wal-Mart,, Dell Computer, Apple and Cisco bucked these trends and continue to do that. Their supply chains aren't just fast and cost-effective. They're also: Agile, Adaptable and Aligned. This is the concept of “The Triple-A Supply Chain”. To achieve sustainable competitive advantage, your supply chain needs all three of these qualities. So what do these mean?

Agile: Agile supply chains respond quickly to sudden changes in supply or demand. They handle unexpected external disruptions smoothly and cost-efficiently. And they recover promptly from shocks such as natural disasters, epidemics, and computer viruses.

Adaptable: Adaptable supply chains evolve over time as economic progress, political shifts, demographic trends, and technological advances reshape markets.

Aligned: Aligned supply chains align the interests of all participating firms in the supply chain with their own. As each player maximizes its own interests, it optimizes the chain's performance as well.

After 4 years since this article was written, I feel there is still a lot of work to be done in each category for most of the companies out there. Apart from handful of the names mentioned above and few dozen others, I don’t think enough emphasis is placed on design of the supply chain. For example, not many companies pay attention to their evolving target markets and rationalize sourcing, assembly and distribution and tailor it to the nature, travel distances and location of their markets. Cost is still more than often the primary driver for the location of manufacturing. Total landed cost calculations do not include all the factors like logistics cost from distribution centers to the end customer, intangibles like customer satisfaction and time-to-market.

Vast majority don’t have any redundancy or dual sourcing built into their supply chain because it is expensive but then it limits the manufacturing and distribution capabilities. I wonder how many firms have a dependable disaster recovery plan if there is natural disaster at the internal or outsourced manufacturing site. I don’t believe there is any flexibility built in to kick-start another production site if one site goes down.

Many OEMs still treat their contract manufacturing vendors as second rate citizens instead of treating them as their collaborative partners. Demand forecast trickles down to the contract manufacturing partners as a one way communication from the OEMs without an adequate forum to openly discuss or question the demand being fed to them. The result is sometimes large amount of excess inventory build up. Due to lack of trust, commitment and fair sharing agreements on cost savings, there is no incentive for the vendors to come to the table with any proactive cost saving opportunities. As everyone in the chain tries to maximize their own interests it is hard to create alignment in supply chain.

Hau L. Lee's article gives an example of how Lucent lost its leadership position when it failed to adapt to the changing market conditions in 1990s and did not build manufacturing sites in Asia to serve the growing Asian market. Similarly only those companies that build agile, adaptable, and aligned supply chains will get ahead of the competition. Others will continue to lose market share to the companies who pay attention. Supply chain efficiency is necessary, but it isn’t enough to ensure that firms will do better than their rivals in the long run.


Hau L. Lee, “The Triple-A Supply Chain”, Harvard Business Review, October 2004, pps.102-112.


  1. I enjoyed your post. Particularly with small to medium size companies, 9 times out of 10, hard cost is certainly the number one factor in determining the location of manufacturing, and which contract manufacturer is awarded the contract. Many companies often lack the sophistication and initiative to compute metrics that reflect total cost. It's somewhat understandable, because in a fast-paced business environment, few have the time to quantify and successfully compute these metrics regularly. Hard cost delivers a single number and can easily be compared to quotes from other contract manufacturers. It's easy to assume that all other things are equal (quality, freight forwarding, fulfillment), and hard cost will be the main driver of total cost.

    I also agree with your point on how OEMs often treat their contract manufacturers as second rate citizens. Transparency in the supply chain can be one of the easiest and most fruitful practices in improving overall efficiency. Even a simple simulation can demonstrate the dangerous potency of the bullwhip effect and the costs of limited visibility in the supply chain. In a tumultuous supply environment, it pays to share information up and down the supply chain.

    Looking forward to your future posts...

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