Dr. Hau Lee on the New Supply Chain—and What to Watch Out for in TPP | Elementum

Dr. Hau Lee on the New Supply Chain—and What to Watch Out for in TPP

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Welcome to the third installment of Supply Chain Spotlight, Elementum’s interview series. We speak with the most influential people in today’s global supply chain. Each interview is a conversation about the most important topics and tasks facing supply chain professionals all over the world.

Hau L. Lee is the Thoma Professor of Operations, Information, and Technology at the Stanford Graduate School of Business. His areas of specialization include global value chain innovations, supply chain management, global logistics, inventory modeling, and environmental and social responsibility.  He is also the faculty director of the Stanford Institute for Innovations in Developing Economies, and is a co-director of the Stanford Value Chain Innovation Initiative.

Professor Lee has served on the editorial boards of many international journals and serves on the National Academy of Engineering.

Professor Hau Lee realized he could make a difference in the supply chain after taking a sabbatical. In 1989, he left Stanford to head to HP for a year, during the company’s heyday. There to help the company tackle its inventory issues, Lee discovered something that he would go on to spend the next few decades learning how to implement: supply chain is never isolated to supply chain. “Inventory problems could mean anything: distribution, logistics, manufacturing, design. You can’t ever look at just one end. Addressing only inventory is like treating a symptom rather than the disease,” he told me.

When he took that high-level view of what it means to address issues in supply chain, he was able to help HP solve some of their inventory issues. “I was able to help HP work… After that experience, I decided that this is a fantastic area, and people haven’t paid enough attention to it. That was the genesis of my whole career in supply chain.”

“This is a fantastic area, and people haven’t paid enough attention to it.”

Still, decades later, a talent shortage is gripping the supply chain industry. I asked Lee how companies can work to attract better supply chain talent. He said that there are two issues behind the awareness problem:

1. Supply chain is interdisciplinary. “Even though we know it’s more than one function that you need to coordinate and improve performance, the evaluations systems we have in place look at one area. Naturally, your boss will look at how good you are in procurement. Companies and performance measures haven’t embraced the idea that, maybe if you help a product designer even though you’re in logistics, you should get fair credit. We haven’t set employees up to embrace a holistic view of the supply chain. 

“Companies and performance measures haven’t embraced the idea that, maybe if you help a product designer even though you’re in logistics, you should get fair credit.”

2. “Supply Chain” is misleading. “There are people who say that the word ‘supply’ is heavily criticized. These days, “supply chain” includes concepts of how to manage customers, patents, developments, outsourcing, et cetera. I try to emphasize the term ‘value chain’ instead. ‘Supply’ steers people towards suppliers—but we try to look at the whole system. Everyone should be creating value. The value chain includes politics, too: the government can become your ally or your obstacle. We have to manage the relationship with governments and, in some cases, NGO’s and activists if you’re operating in developing country. The value chain embodies all this, so people will stop looking at supply chain managers as people who only deal with suppliers.” 

Who is making the holistic supply chain work?

Lee studies the successes of companies who are working to change the supply chain. One company he’s impressed with? Nike. “Nike manufacturers are based in China, Indonesia, and Vietnam. Traditionally, the way Nike treats suppliers is to make sure they’re compliant, high quality, and efficient. Some of these suppliers have become very good—they’ve gained knowledge and ideas from Nike working closely with them. Now, when Nike develops new products with special requirements—those are the kinds of products Nike might not be able to build in-house. Instead of looking to the supplier for only procurement, they now look at them as a source of potential ideas and innovation. These suppliers have quick turnarounds for prototypes, meaning it’s good for them and for Nike—for the whole invention process.”

“There has to be a deep level of trust.”

It’s about co-creating value—not just looking at your suppliers for procurement. But that also necessitates transparency: “It requires you to know where your suppliers are and to know their capabilities. More importantly, it requires you to use incentives. Nike’s taking a risk when it gives a supplier so much control—they could easily sell their prototypes to another company. There has to be a deep level of trust.”

There’s another example of how interdisciplinary supply chain is: Now, it’s a partner management issue. “How can you form deep alliances? The procurement manager’s job is so much more complicated, but embracing that complexity is the only way to win.”

Trends in Supply Chain

I asked Lee what he’s excited about—what companies are doing well to address these issues in supply chain. He’s optimistic about the future of the global supply chain, and sees three big trends emerging that will lead to more transparent, versatile global trade and manufacturing:

1. Companies are seeing rewards when they offer rewards. 

Globalization means that most companies are operating in developing economies. “The more we get into those economies, the more risk that we are exposed to. Some of the factories might not comply with codes of conduct. They might violate labor laws, which is now damaging to a brand like Apple or Nike. Some companies are deciding to monitor and instruct their suppliers better, or to use a third party to review them.” But how else are companies championing their supplier relationships?

“Giving workers and factory owners education in technology and instructing them on the science behind production—that gives them a solution.”

“They’re using a ‘carrot’ approach. Nike has done an experiment with Indonesian factories to show it’s much better to use rewards as incentives. These factories aren’t violating rules because they’re evil, but because it’s the only way for them to make a solid living. Giving workers and factory owners education in technology and instructing them on the science behind production—that gives them a solution. No one wants to be a criminal, and what’s exciting to me is to see the ability to use training to tackle a very tricky social and environmental problem.”

2. Co-Development allows companies and suppliers to win out. 

“We used to think that innovation only happened in the western world. Everywhere else? They can make the product for us. But over the years, these countries have come to possess the same know-how. Companies are coming to understand how to leverage the talents of the outside world. Cisco created Viking, their most advanced router, and they collaborated with their manufacturer in China to co-develop it. That’s what Microsoft did with the X-Box. Co-development can accelerate your product capabilities.

3. Advancements in technology can change the manufacturing landscape.

Rather than a confirmed trend, Professor Lee is excited to see just how technology will affect manufacturing. He thinks it could go a number of ways. “If we have more robots making things, then can we bring manufacturing back to the U.S.? Some say yes—then why are we still in China? The other side of the story says that our important suppliers will remain in China. Is our government giving enough incentives to encourage manufacturing? Other countries do—should we? I think this is a very exciting topic: How do the advancements in technology and trade agreements affect the new landscape of manufacturing?”

Looking forward to the Trans-Pacific Partnership

Speaking of trade agreements, I asked Professor Lee for his thoughts on the recently passed Trans-Pacific Partnership. He’s all for it, saying that certain countries will benefit tremendously from the deal. But there’s something important that companies should understand about the TPP—the language (unsurprisingly) can be tricky.

“Avoid looking at the broad strokes—understand the whole product structure.”

“Take clothing, for example. The fabric matters. If the fabric is sourced in China but processed in Vietnam, will it count as being made in Vietnam? I would advise supply chain managers to avoid looking at the broad strokes”—moving their manufacturing out of China to Vietnam, for example—“and understand the whole product structure. The DNA of the product. Every combination affects whether this product can be labeled as ‘Made in this Country’, but there are other trade agreements, too. It gets complicated. Does a certain engine part make a difference? How do you label a whole car?”

“It’s almost like looking at your family tree. You might say that you’re Irish—but chances are, you’re not entirely Irish. It’s the same with any product.” The future of the value chain lies in being able to see the big picture—but being equally able to zoom in on the intricacies.

Amy Clark

Amy Clark


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