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Supply Chain Management A Learning Perspective

Lecture 2

Professor Bowon Kim KAIST Business School

© 2014 Bowon Kim

Management Capability

Capability is the firm’s ability to do something effectively.

Hayes and Pisano (1996) defined capabilities as the activities a firm can do better than its competitors.

Without capability, the firm cannot enjoy competitive advantage.

Reference

Bowon Kim & Chulsoon Park (2013): Firms’ integrating efforts to mitigate the tradeoff between controllability and flexibility, International Journal of Production Research, 51:4,

1258-1278.

Controllability versus Flexibility

Narasimhan et al. (2005) posited four performance capabilities: new product development, flexibility, efficiency, and market-based performance.

Kim (2005) developed a framework that further separates various firm capabilities into three categories:

controllability, flexibility, and integrating capability.

Controllability versus Flexibility

Controllability is the firm’s ability to control its processes.

Its primary objective is to achieve superb efficiency that minimizes cost and maximizes accuracy and productivity.

It often requires the ability to meet the specification exactly as demanded by the customer, thus enabling the firm to tightly control its processes.

Controllability versus Flexibility

Flexibility is the firm’s ability to cope with uncertainties, both internal and external.

It refers to the firm’s ability to change or react, incurring few penalties in time, effort, cost, or performance, as well as to respond effectively to changing circumstances.

Over time, it is clear that the interest in manufacturing flexibility has evolved from that of an intra-firm to an inter- firm relationship.

Tradeoff between Capabilities

Short-term relationship between capabilities

Is there any relationship between these capabilities?

  • Skinner (1969) first postulated a trade-off relationship between competitive priorities, i.e., operations performances.

  • A case at 3M, where the company was struggling with the conflicting relationship between efficiency and flexibility

  • Another empirical evidence – a clear inverse relationship between cost and flexibility.

Key questions

  • First, is there an inherent tradeoff relationship between controllability and flexibility?

  • Second, does the firms integrating effort enable it to overcome such a tradeoff relationship, making it possible to improve both controllability and flexibility simultaneously?

Tradeoff between Capabilities

Flexibility F 1 F 2 R 1 C 1 C 2 Controllability
Flexibility
F
1
F
2
R 1
C 1
C 2
Controllability

Integrating Capability

Controllability

   
Integrating Capability Controllability Tradeoff Relationship Flexibility

Tradeoff

Relationship

Integrating Capability Controllability Tradeoff Relationship Flexibility
   

Flexibility

Integrating Capability Controllability Tradeoff Relationship Flexibility
Integrating Capability Controllability Tradeoff Relationship Flexibility

Integrating Capability

Integrating capability is firm’s ability to integrate and coordinate diverse functions and parts of its value chain, embodied in overall operations effectiveness and new product innovation.

Firm’s ability to integrate various activities, both internal and external to the firm, in order to achieve optimal coordination between supply chain partners.

Relevant concepts: experimentation, cross-functional teamwork, group problem solving, customer as well as supplier integration into the product development process

Because the integrating capability is driven by a firm’s ability to integrate and coordinate diverse functions and parts of its supply chain, it is often embodied in overall operations effectiveness and new product innovation, involving a wide-ranging integration requiring cross-functional capabilities.

Integrating Capability • Integrating capability is firm’s ability to integrate and coordinate diverse functions and parts

Dynamic Changes of Capability

Long-term dynamics of capability

Flexibility

F

1980

F

1970

Firm A in 2010s Firm A in 2000s Firm A in 1990s Firm A in 1980s
Firm A in 2010s
Firm A in 2000s
Firm A in 1990s
Firm A in 1980s
Firm A in 1970s
Controllability
C 1970
C 1980
Dynamic Changes of Capability • Long-term dynamics of capability Flexibility 1980 1970 Firm A in 2010s

Strategic choice made by the company

Chain of Capability

 

Basic

 
Basic Process-level

Process-level

 

capability

capability
 

capability

capability
 
Basic Process-level capability capability • Overall knowledge and experience in • Individual function • Individual process:
 
Basic Process-level capability capability • Overall knowledge and experience in • Individual function • Individual process:
 

• Overall knowledge and experience in

 

• Individual function • Individual process:

 
  • - Process

 
  • - Assembly

 
  • - Manufacturing

 
  • - Process quality

 
  • - Safety

 
  • - Welding

 
  • - Engineering

 
  • - Cutting

  • - Work ethics

 
System-level

System-level

 

capability

capability
 
System-level capability • Responsiveness (quick delivery) • Lead-time • Overall quality • Design • NPD capability
 
 

• Responsiveness (quick delivery)

   

• Lead-time

 

• Overall quality

 

• Design

 
• Design

• NPD capability

 
Performance • Increased revenues • Increased profits • Customer satisfaction
Performance
• Increased revenues
• Increased profits
• Customer satisfaction

Customers can observe

the firm’s system-level capability only.

Chain of Capability

Chain of capability Performance System Process Basic System level improvement Group implement skills Individual technical skills
Chain of capability
Performance
System
Process
Basic
System level
improvement
Group implement skills
Individual technical skills
Trust/Mutual goals

System

Capability

 

Process

Capability

 

Basic

Capability

Customer Satisfaction! Continuous Growth! High Performance!

“Internalization” of the innovation process

•System-level integration capability •E.g., flexibility, responsiveness, … •Integrating process knowledge

•Technical knowledge, skills •Specific function-oriented •Process control •E.g., welding, marking, cutting, …

•General knowledge/experience in -Management -Engineering, safety -Work ethics; culture

Incremental versus Radical Improvement

Relative

Level

Incremental versus Radical Improvement Relative Level Time Radical Improvement Relative Level Incremental Improvement Time

Time

Radical Improvement

Relative

Level

Incremental versus Radical Improvement Relative Level Time Radical Improvement Relative Level Incremental Improvement Time

Incremental Improvement

Time