No “I” in Teamwork in a Global Economy

Success in a global economy relies as much on your efforts as on how well you and your partners can synchronize. Think sports and how great teamwork can trump one standout player. Learn how companies apply this approach in Competing in a Flat World: Building Enterprises for a Borderless World by Victor K. Fung, William K. Fung and Yoram Wind (Wharton School Publishing).

Competing in a Flat World: Building Enterprises for a Borderless World
By Victor K. Fung, William K. Fung, and Yoram Wind; Wharton School Publishing, New Jersey, 2008. click for Bios

Compete Network Against Network

Companies used to see competition as firm against firm. But a networked player is like a team sport — the final score depends not on one player, but on the strength of the entire team. The best network will win. How do you design a network that provides a platform for rapid growth?

With the start of spring, the minds of all red-blooded males north of the Mason-Dixon Line in North America turn toward the barbecue. With the thawing of the snows, rolling out the barbecue is a ritual act of welcoming the summer. It is the modern equivalent of dancing around the maypole. When the snow thaws, it triggers the barbecue reflex in the brain.

For manufacturers and retailers who sell these grills, spring is not such a happy time. This purchase pattern means that, at the beginning of May, all the customers for grills converge on retail stores at roughly the same moment. They all want their grills and want them now. Before this point, consumers are buying snow shovels. Then, like throwing a switch, they are buying grills. The result is that a product with almost no demand for much of the year is suddenly flying off the shelves. In a period of a few months, all the barbecues that will be sold are sold. For the factories of China that make these grills, this means nine months of not producing a single grill, followed by three months of working around the clock. This means finding enough workers, luring them back from the countryside, and then laying them off when the work stops. It means overtime pay, problems obtaining supplies, and shipping nightmares. It means sourcing gas nozzles from Italy and rolled steel from different parts of the world in sufficient quantities early enough to meet demand.

For retailers, it means nail-biting moments waiting for the shipments to arrive or paying extra for air shipping to make sure they do. The last thing the retailer wants is for a barbecue-obsessed customer to walk in the door and walk out empty-handed. It could mean more than losing a sale. It could mean losing a customer to a competitor.

The solution to this dilemma is actually quite simple. The factories can smooth out production of grills over a longer period of time and warehouse the grills. This avoids overtime and ensures a steady supply for the retailers. Your garden-variety barbecue is not like a luxury automobile or fashion dress. It does not change radically in design from year to year, so it can be designed and produced in advance without going out of style. But the complication is that this smoothing of production is not a solution that the factories can arrive at on their own. If they invest in warehousing, they have to bear the added cost and could be stuck with the product if they misread demand. The factories also have to carry the expense of the production and warehousing until they sell the grills to the retailers. With a stockpile of products in the warehouse, they could be susceptible to pricing pressure from retailers, who would then have the upper hand. So suppliers, on their own, cannot come up with a good solution to this challenge.

Neither can retailers, who want to keep their costs down and do not want to invest too much in the manufacturers’ businesses. These investments could leave them vulnerable and put them at a disadvantage in negotiating with the suppliers. Left alone, both retailer and manufacturer will try to optimize their own businesses, with the result that the overall system is suboptimal. This is a problem that cannot be solved one piece at a time. It can be solved only by looking across the entire chain — including the retailer and manufacturer — and optimizing the entire network.

Working with a major North American retailer that sources $75 million worth of barbecues per year, Li & Fung essentially stretched out the production cycle. As the network orchestrator, it offered the factories 120-day credit terms on behalf of the retailers and arranged for warehousing the grills. Instead of starting production in October, the factory could start in the beginning of August, adding two months to the production cycle. This means less overtime for the factory. Most of the shipping can be done by sea, reducing expenses and avoiding rush charges. The retailer received the barbecue grills at a little lower cost, even with the storage charges. The factory had fewer disruptions and lower costs. Both sides benefitted because the overall supply chain was greatly improved.

The New Competition

Competition is no longer company against company, but rather supply chain against supply chain. Partners in the chain are all members of the same team trying to optimize value. If the other chain kills your chain, all of you are out of business. The more the members of the supply chain cooperate with one another, the better they can compete with rivals. This is a different view of partnership and a broader view of the firm itself.

This changes the way members of the supply chain interact with one another. In the old supply chains (or other “value chains” that deliver products or services), suppliers tried to extract the best prices from buyers. Buyers sought concessions from suppliers. Each player optimized one piece of the chain. This leads to classic “bullwhip” effects, where lags in orders and lack of coordination led to excess inventories or stockouts. The retailer without the right product on its shelves is at a disadvantage to rivals that have a better supply chain. Wild fluctuations in demand play havoc with factory production schedules.

In a European football (soccer) game, if individual players are always vying for control of the ball and scoring a goal, the entire team will lose against a more cooperative competitor. The individual skill of the players is important, but just as important is their ability to work together. A cooperative team of mediocre players will almost always outperform an uncooperative team of prima donnas. Studies of basketball, for example, find that the most successful teams are not those with one outstanding star player. Instead, the best teams are those that work smoothly together. This is the same with supply chains. A set of solid partners in a well-designed and well-coordinated network can outperform a star in one part of the chain with a weak team.

A study of rowers found a similar result. A crew team with the four strongest rowers was pitted against another team with less powerful competitors but better coordination. The coordinated team won the race. This is why these crew teams recognize the importance of carrying the extra weight of a coxswain to keep everyone in line. The coxswain, typically a very lightweight person, does not pull an oar or contribute to the forward motion of the craft, except for keeping all the other rowers in time. What does the coxswain do to justify bringing along this extra baggage when every pound counts? The coxswain does not row. The coxswain orchestrates.

Adversarial supply chains emerged because of a desire of each player in the chain to maximize its own efficiency and extract as much profit for itself as possible. An adversarial relationship can rarely produce the best results because the overall efficiency of the chain is usually sacrificed to optimize the returns for one powerful player. But much more than efficiency is involved in making a modern supply chain successful, and this is where the adversarial relationship can really be a detriment. Adversarial relationships dampen the creativity of suppliers, reduce flexibility, and suboptimize the entire chain in many ways. As flexibility becomes more important, the toll of this lack of coordination is growing.

Collaboration, on the other hand, can improve the overall supply chain. For example, consider rapid replenishment. All the Indian manufacturers of towels for a U.S. retailer are linked with the retailer. Using overseas collaborative replenishment, the retailer can cut inventories because it can track and count the inventories that are at the dock, on the water, and even in the factories in India. The manufacturers can keep some inventory of goods and yarns, and can, to some degree, speed up or slow down work in progress. Retailers never want to run out of towels, but now the inventory needed to deal with surges in demand can be across the entire supply chain rather than in the retailer’s own warehouse. The retailer typically sends an EDI transmission to the manufacturer every Sunday night (electronically transmitting sales data); the manufacturer responds by Monday; and the needed shipments are on the way by Wednesday. This is a 72-hour cycle of replenishment. It truly has become a collaborative enterprise, with the entire chain working together to maximize results.

Dr. Victor K. Fung is Group Chairman of Li & Fung. He is Vice Chairman of the International Chamber of Commerce. He holds a Ph.D. from Harvard.

Dr. William K. Fung is Group Managing Director of Li &Fung. He has chaired the Hong Kong General Chamber of Commerce and the Hong Kong Exporters’ Association. He holds an MBA from Harvard Business School.

Yoram (Jerry) Wind, the Lauder Professor and Professor of Marketing at The Wharton School, University of Pennsylvania, is an expert, consultant and lecturer on global marketing and business strategy. His books include The Power of Impossible Thinking. He holds a Ph.D. from Stanford University.

Excerpted from Competing in a Flat World: Building Enterprises for a Borderless World
Victor K. Fung, William K. Fung, Yoram Wind; Wharton School Publishing, New Jersey, 2008.