Keeping the supply chain moving smoothly

Professor Ralf Seifert’s research started in 2003 with a request from LEGO; the company was posting considerable losses, and its Swiss factory had even been obliged to shut down. The Danish company, flush with the success of the small plastic building bricks it released in the 1940s, hadn’t seen the handwriting on the wall. “It was an interesting challenge that required LEGO to take the global situation into account, to rethink its product portfolio, its manufacturing sites and means of transport,” explains Seifert, who holds the Technology and Operations Management chair in EPFL’s College of Management of Technology. Is it possible to react quickly to market changes and to minimize costs, without either running out of inventory or being saddled with overstock?

Innovation boosts short-term prices
Innovative products are often ephemeral, which complicates inventory management. Product lifetimes are much shorter today than in the past; it took 20 years for the price of VHS to drop, four years for DVDs, and the Blu Ray has plummeted even faster still. LCD screens lose 50% of their value one year after they’re released. It’s thus critical to carefully choose a supply strategy and adapt it according to demand. In the Western world, when a product is first introduced, it’s preferable to manufacture it nearby, because its higher sales price will compensate for higher production costs. This choice facilitates reactivity in response to changes in demand. On the other hand, the production of “basic” products that are manufactured on a regular basis – such as university t-shirts, electronic components or traditional plastic toys – can be outsourced to other locations.

Well-aligned supply chains
“For this study, we interviewed many companies that did a good job managing their supply chains, and we observed that they diversified their activities,” explains Seifert. Logitech chose Ireland, then Taiwan and China. Hilti, a major construction tool company, uses both modes. Their innovative products are manufactured in Europe and the more standard ones are made in Asia and then stocked in Europe to ensure 48-hour replacement of defective material. Zara, a leading global clothing chain, releases 17,000 new items every year, most of which are manufactured in Europe. Its classic items are made in Asia. Seifert examined numerous cases in a variety of markets.

Pharmas also affected
Many drug patents will expire between now and 2015. Forty percent of the global market will thus be open to competition by generics, which are much cheaper. Pharmaceutical companies that have enjoyed this patent protection will also need to rethink their supply chains to deal with cost pressures.

Adaptation is everything
Sometimes a company should opt for a strategy of adaptation: centralized supply chains that can rapidly respond to changes in demand. Other times, it’s worth decentralizing supply to take advantage of lower costs. The researchers revealed some generalized strategies but did not offer a single solution. On the basis of their analyses and using mathematical models they developed, they showed that by aligning supply chains based on the products’ degree of novelty, it was possible to realize substantial savings and increase efficiency.
Seifert’s research has led to two publications, one in the European Journal of Operations, and another that is scheduled to appear in January 2012 in the International Journal of Production Economics. These topics are now part of course materials in the Master’s program in the College of the Management of Technology. Seifert and his team are currently continuing this research, integrating the environmental dimension.