By David Demers and Priya Sathyanarayanan; David Demers is president of Avicon Group Inc. Priya Sathyanarayanan is a principal consultant at Avicon.

Can there be any more profound challenges than those confronting today's supply chains? Perhaps these challenges are here to stay and are more than just the manifestations of a tough economic cycle. Some leaders are acting on this assumption and are thoughtfully considering the implications of the forces creating these challenges. The implications of five key forces, in particular, demand close attention from supply chain professionals.

• The Trend toward Outsourcing. In the view of many experts, the loss of manufacturing jobs to overseas competitors will continue unabated. This development is affecting not only the traditional manufacturing and technology sectors but also the service industries. Forrester Research estimates that by 2015 as many as 3.3 million service-industry jobs in the United States and $136 billion in wages will have moved to countries like India, Russia, China, and the Philippines. Through the Internet, skilled labor is available at virtually a fraction of the cost of U.S.-based workers. This economic disparity means companies will continue outsourcing to offshore parties. The dynamics, cultural differences, and geographic distances associated with outsourcing add increasing complexity to global supply chains.
• Wall Street-Driven Cash Engineering. The cashless supply chain: Is it an exploitation of the less powerful players in the supply chain or a reality of doing business today? Once the financial markets saw the power of the Dell model and negative cash-to-cash cycle time, the course was set for others to follow. Wall Street's expectation of increasing working-capital velocity through supply chain models is spreading across industries. Financial service providers, such as GE Capital and others, also are paving the way with new funding models that reduce the cost of capital and accelerate the speed of cash conversion. The era of cash engineering in the supply chain is indeed here to stay.
• Competitive Forces Changing the Playing Field. Powerful competitive operating models are fueling both profitability and market-share gains. For example, Dell, Wal-Mart, and Zara (a leading-edge Spanish apparel retailer) have been able to reduce supply chain costs and working-capital requirements while achieving faster response time than the competition. By applying the economic and operational strength of their models, they create a strategic advantage that is continuously leveraged to expand market share.
• Unplanned Economic, Social, and Political Events. Forecasting, inventory planning, and resource deployment have never been easy. But in today's dynamic global marketplace, where business conditions appear to be in a constant state of flux, these activities have become even more daunting. Unforeseen events are driving the realignment of operating models, the deployment of resources, and the migration to tailored fulfillment strategies that can respond better to daily changes in supply and demand drivers.
• Shorter, Less Predictable Product Lifecycles. In a tough selling climate, the seamless transition between new and end-of-life products becomes critical. As heightened competition and the need for revenue growth drives shorter product lifecycles, the pressure on supply chain execution intensifies. This pressure, in turn, places further stress on the global coordination of complex cross-functional processes. Poor execution of the product lifecycle management process leads to excessive delays and loss of early-stage profit opportunities. It also typically results in warehouses full of older product inventory that decreases in value by the day.

Companies will have a difficult time overcoming these emerging challenges through traditional supply chain strategies. Traditional approaches generally have focused more on moving the product and cash, and less on the information systems and organization--which are at the heart of many of the key challenges. And while traditional models have been successful at optimizing individual functional areas, they have lacked the ability to optimize the entire supply chain.

What's needed is a dramatic new approach that directly responds to the challenges and, at the same time, opens the door to new growth and profit opportunities. A handful of industry leaders are beginning to adopt one such approach through a supply chain model called an integrated operating system. Unlike older models, this new model is capable of helping companies outperform weaker competitors by simultaneously reducing working-capital requirements, improving revenue and margin contributions, and improving order-to-delivery predictability and response time. The new model is particularly well suited for companies that are experiencing product commoditization pressures and that understand the need to shift from product innovation to supply chain innovation.

Each integrated operating system has its own unique footprint, which we call supply chain DNA. Unlike human DNA, supply chain DNA can be adaptively configured to deliver the desired business values. DNA are distinctive strategy and capability building blocks that drive supply chain innovation. In the integrated operating system model, the DNA are grouped into solution patterns spanning four essential business areas: process, information, cash, and organization (PICO).

Leading companies have developed integrated operating systems by selecting a unique blend of DNA and configuring these into DNA solution patterns organized in the four PICO areas to best suit their strategic needs. The resulting supply chain integrated operating system drives the simultaneous achievement of improved customer response, higher revenue and margin contributions, and faster cash-to-cash velocity. This innovative supply chain lifecycle is illustrated in Exhibit 1.

The Integrated Operating System Model

Two strategic shifts are spearheading the migration to an integrated operating system. The first shift involves the broad recognition that supply chain velocity is fundamental to performance, efficiency, and competitive differentiation. The advantage of high-speed supply chain strategies have been highlighted by technology companies like Apple, Cisco, Dell, and others that have mastered the concept to gain a competitive advantage over their rivals. These companies didn't have an influx of cash or the prowess of vast research-and-development budgets, so they chose to compete on business innovation instead of product innovation. In a recent issue of MIT Sloan Management Review, Paul J. Kampas discussed the significance and implications of strategic shifts like this one.1 Underlying the business-innovation strategy is a relentless pursuit of an improved business operating model. Today, the application of streamlined supply chain strategies is spanning electronics, retail, automotive, and other market sectors where product-innovation strategies are no longer enough to win market share.

The second strategic shift is the application of systems thinking to the transformation of supply chain models. In our view, the leaders are taking a more holistic view of the supply chain in designing their models. They are now engineering their models with four critical dimensions of PICO in mind: process, information, cash, and organization. These dimensions form the four support components of the integrated operating system, which require concurrent engineering to attain peak performance. Concurrent engineering entails simultaneous, rather than serial, implementation and execution of PICO initiatives with emphasis on achieving specific supply chain goals. When constantly monitored to ensure its conformance to these goals, an integrated operating system provides an excellent foundation for continuous improvements to the company's supply chain.

The PICO Perspective

In the past, supply chain transformation initiatives typically focused on one or two design perspectives, such as process reengineering, with a secondary focus on technology. Today, a fast-changing marketplace requires rapid, balanced solution design, and greater internal and external partner collaboration. Companies can meet this challenge through an approach that incorporates the concurrent engineering of the PICO dimensions.

To illustrate, a company wishing to reduce its order-to-delivery leadtime would likely benefit from a careful examination of its core business processes, information, cash, and organizational flows in order to identify potential bottlenecks. The company could then work to eliminate the bottlenecks while at the same time identifying ways to increase the velocity of the inventory flows. Addressing all four perspectives simultaneously increases the inherent improvement opportunities in asset velocity, cost, and response time as well as the efficiency and success of initiative implementations. Simultaneous engineering of the PICO perspectives ensures that the information flows support the business processes and are aligned with contractual arrangements and organizational structures. This typically results in reduced time-to-market and an improved capability to react quickly to customer demands.

Velocity is the common denominator among the process, information, cash, and organizational dimensions of the DNA solution patterns that form an integrated operating system. From an engineering perspective, this model simultaneously:

• Speeds up the physical flows and core enterprise processes within and across the trading-partner community.
• Accelerates integrated informationaccess, including near real-time availability and operational visibility within the enterprise and across the trading-partner community.
• Leverages speed and alternative cash engineering options to reduce cash-to-cash cycle time, release fixed-asset resources, and lower operating costs.
• Increases organizational capabilities to rapidly identify, collaboratively design, implement, and manage high-speed solutions.

A DNA solution pattern incorporating the PICO dimensions represents a unique supply chain pattern for a company, a pattern that can be tailored by geography and product line. An organization could have a variety of distinct patterns. Once assembled, these DNA patterns form the company's supply chain integrated operating system, which seeks to achieve specific supply chain goals. (The sidebar on page 55 shows how one company applied the DNA building-block approach to transform its supply chain.)

DNA Building Blocks

What distinguishes this new operating model is a set of clear strategies and differentiating capabilities that separate leaders from their competitors. The sample reference model shown in Exhibits 2 through 5 offers a closer look at the DNA building blocks that form the DNA solution patterns. Designed to show a company in the technology industry, the exhibits depict sample DNA building blocks organized in the four PICO quadrants. The new, composite view is supported by expert opinions from Stanford University's Graduate School of Business and MIT's Leaders for Manufacturing program as well as by our first-hand experience with the leaders in the technology industry. It is helpful to examine the key characteristics of the important DNA building blocks in each PICO quadrant for this sample reference model.

Process DNA

Supply chain leaders in the technology industry invest in innovative ways to respond to demand in real time without relying on static inventories. They ensure tight integration of process steps from early participation in new product design, rapid conversion of materials to finished goods, collaborative supply chain planning, and flow-through logistics that reduces the reliance on traditional, nonvalue-adding warehousing activities. (See Exhibit 2.)

Information DNA

Leaders invest in tools and resources to integrate internal and external trading partners. The technology architecture then leverages those capabilities to provide visibility and execution management across the extended enterprise. The new capabilities increasingly allow virtual supply chains to operate as though they were vertically integrated companies. (See Exhibit 3.)

Cash DNA

Leaders invest in alternative cash-engineering opportunities. Key activities here can include the following: using financial service providers like GE Capital to assist in financing working capital, carefully defining core and critical competencies and outsourcing strategies, enabling real-time flexibility to understand costs, and managing pricing as a lever to balance the variance of supply chain operations over time. Finally, the leaders seek to gain a better understanding of performance and execution management by utilizing effective scorecarding strategies. (See Exhibit 4.)

Organizational DNA

Leaders invest in new organizational capabilities to manage the integrated operating system. A core competency here is the ability to build collaboration at all levels, both inside and outside the organization. Management also can enable a culture that thrives on continuous business innovation. Alignment of rewards and operational incentives within and across organizations is a fundamental competency associated with this dimension. Lastly, leaders invest in the capabilities needed to transform the internal organization so that it can successfully manage across partner organizations inside and outside the company on a global basis. (See Exhibit 5.)

The composite set of DNA building blocks found in the reference model form a tool kit for the practitioner. It's important to recognize that the building blocks vary across industries. For example, build to order is a key DNA building block of successful supply chains for many technology original equipment manufacturers (OEMs), but it does not play a significant role in the retail or consumer packaged goods industries. Accordingly, a critical design step in selecting DNA building blocks is to understand fully the company's competitive vulnerabilities as well as the ability of its internal and external partners to implement change effectively. Once these building blocks have been selected, they are implemented based on their configuration sequence. This configuration sequence constitutes a unique DNA solution pattern.

DNA solution patterns are interdependent DNA building blocks that are deployed in a particular sequence. Correctly deployed, these patterns result in the integrated operating system and drive systemic performance improvement by making the whole supply chain more agile, less asset-intensive, and more responsive to customer demand. For example, within the process dimension, one key strategy is fast-response and lean manufacturing, which requires the coordination of just-in-time (JIT)/kanban capabilities, setup reduction, vendor-managed inventory (VMI), build-to-order capabilities, and having fewer saleable items. To be successful, the strategy also requires near real-time integration in the information dimension and appropriate risk-management contracts with suppliers in the cash dimension. Finally, no initiative can be successful without the appropriate organizational alignment and change management.

Perhaps the most important question at this point is what benefits can companies derive from the integrated operating system model. Our experience shows that this approach allows companies to optimize breakthrough performance across three key business values, discussed below.

The New Measure of Success

Traditionally, supply chain models have sought the best balance among three strategic values: order-to-delivery cycle time/predictability, cash-to-cash velocity, and revenue and margin contribution. These outcomes are opposing forces; therefore, merely optimizing one might result in negatively affecting the others. For example, a company transforming to a build-to-order supply chain model will directly benefit from reduced inventory levels, which will result in improved cash-to-cash velocity. However, companies need to ensure that there is a minimal, negative impact on order-to-delivery cycle time/predictability from this transformation initiative. Companies have often focused on one or two outcomes based on the highest business priority of the moment. In a difficult economy, the priority typically is cost and cash-to-cash cycle time. In good times, market dynamics offer more flexibility for leveraging service-level performance improvements.

While these trade-offs will always be in play, the bar is being raised to create a supply chain design that can effectively address these opposing outcomes and optimize all three at the same time. As depicted in Exhibit 6, the challenge is concurrent optimization of the three outcomes and the hypothesis is that companies must adopt DNA building blocks that result in high-speed processes to achieve cash velocity and customer loyalty.

To illustrate, "response time" necessitates shorter leadtimes, and "predictability" entails on-time delivery to ensure customer growth and loyalty. The challenge is how to reduce response time and improve predictability for customer orders without building excessive inventory or incurring added costs. The goal is no longer to build products to a forecast of future demand but rather to shift to a demand-driven model. Traditional supply chain models are based on forecasts that often lead to excess inventory and erratic response times. Demand-driven models, by contrast, are based on tight integration, collaboration within trading-partner communities, and flexible processes that can respond to customer demand within short leadtimes. These new integrated supply chain models result in reduced inventory investment, shortened leadtimes, and greater delivery predictability.

Furthermore, high-speed models enable business agility, allowing companies to focus their resources on enhancing margins and generating revenues, the second key outcome. Improved flexibility allows operations and financial managers to calculate and pinpoint specific products and services that can yield higher margins without the need for additional resources to support growth.

Cash-to-cash cycle time is the financial measure of working capital, which essentially represents the amount of time it takes to turn a dollar spent with a supplier into a dollar received from a customer. Operations and financial managers use this as a measure of efficiencies and inefficiencies. High-speed models facilitate improved cash-to-cash cycle times by reducing days of inventory, sales, and/or payables. In a tight economy when margins are thinning, cash velocity can become a company's secret to boosting bottom-line profits and increasing shareholder value. Even in times of shrinking margins, companies can achieve a good return on working capital by increasing the velocity of assets.

Competitive benchmarks set the stakes of the race--with improved response time and predictability, margin and revenue, and cash-to-cash cycle times as the prizes. Ultimately, by reducing the working capital tied up in a supply chain, companies can maximize cash flow. The excess cash can then be reinvested, thereby fueling future growth.

This leads to the final question: What are the essential guidelines that a company must follow in order to transform its supply chain?

Defining the Transformation Roadmap

Global economic challenges and commoditization pressures are forcing companies to transform their supply chains. Technology companies like Apple, Cisco, Dell, and others are setting the trend toward faster innovation cycle times and shorter time to market. Supply chain velocity and agility are the bedrock of competitive differentiation. As this transformation gradually cascades across industries, implementation of the supply chain lifecycle based on DNA building blocks can help companies manage these transformations effectively. The DNA building blocks represent strategies and distinguishing capabilities that have been implemented by the business-innovation leaders. The lifecycle model in Exhibit 1 provides a systematic approach to implementing these building blocks.

It is no simple task to develop a supply chain solution by selecting the most appropriate DNA building blocks, configuring them into company-specific patterns, and assembling a new integrated operating system that spans the entire supply chain of suppliers, contract manufacturers, OEMs, distributors, resellers, logistics services providers, and other trading partners. Such a solution must be designed with an eye toward optimizing simultaneous outcomes: cash-to-cash velocity, order-to-delivery predictability and response time, and operating margins. The solution can best be driven by a holistic approach that focuses on the following guiding principles:

• Organize across the four PICO areas--process, information, cash, and organization. Engineer the integrated operating system from all four perspectives concurrently for enhanced business value.
• Optimize competitive performance at the outcome level. Benchmark against the competition to determine relative ranking and to help establish target performance objectives.
• Collaborate proactively among strategic partners. Being proactive helps eliminate any barriers to success and ensures that objectives are aligned.
• Understand the issues with the current model that impact performance objectives from the four PICO perspectives.
• Prioritize the critical DNA building blocks based on their contribution to performance, the logical sequence of implementation, and ease of implementation. Understand the distinguishing capabilities implemented by the leaders. Prioritize and adapt these to suit the specific environment in order to enhance competitive prospects.
• Design the DNA solution patterns of the DNA building blocks to include quick-win opportunities balanced with systemic longer-term investments.
• Create a time-phased roadmap to provide continuous releases of business value in short (for example, quarterly) time frames. Delivering higher business value in shorter releases provides greater opportunity to connect with the boardroom and Wall Street.
• Ensure ongoing organizational alignment by creating a senior leadership forum/steering team supported by a program management office. Formalized and standardized practices, processes, and operations lead to consistent, repeatable results and a greater probability of successful projects.

Ultimately, how successfully an organization transitions to an integrated operating system with the right supply chain DNA rests with the people involved and their ability to continuously push the envelope and to overcome internal and external barriers to change. A successful transformation will significantly enhance business success, enabling companies to develop and maintain a winning competitive strategy--one that is based on a solid DNA structure.

Case Study: The DNA Building-Block Approach in Action

David Demers, Priya Sathyanarayanan
NMS Communications, a mid-sized network equipment manufacturer, employed the DNA building-block approach to reengineer the supply chain for its platform business, which accounts for 80 percent of the company's revenue. NMS realized that to maintain a competitive edge, it needed to create a high-speed, demand-driven supply chain. But developing such a capability in an environment where forecasts traditionally ruled was a challenge. NMS attacked the problem using a three-phased approach:

• Assess the supply chain baseline data and define a vision using the new DNA building blocks organized in the process, information, cash, and organization (PICO) quadrants.
• Design new business processes, information systems, working -capital optimization tools, and rapid cash cycle conversion methods. Align the organization to the desired outcomes.
• Execute time-phased implementation and adaptive deployment of the PICO changes.

This was not a one-time project, but rather a multiphase, disciplined process that began 18 months ago using the DNA-based lifecycle model. In order to establish the initial demand-driven foundation, NMS conducted a preliminary assessment of its supply chain and identified the key outcome metrics. This assessment helped the company define the vision of the desired high-speed model and identify the DNA building blocks necessary to support this vision. (The DNA building blocks deployed for converting NMS to a high-speed integrated operating system are shown in Exhibit 7.) The building blocks defined the company's unique demand-driven pattern, which had to be deployed quickly and sequentially.

Throughout this process,NMS realized that converting to a high-speed model required multiple changes. Product design, for example, had to be changed to support manufacturing. Designs had to be created with more standard parts and for fewer saleable items. In addition, because NMS had outsourced manufacturing capabilities, it needed to work with its contract manufacturer to reduce manufacturing setup time, implement vendor-managed inventory (VMI) capabilities with suppliers, and develop new contracts to manage risks based on upside and downside demand flexibility. The company recognized that the new model would be heavily dependent on information systems capabilities. For this reason, it deployed supply chain planning systems to enable the high-speed operation. Near real-time integration was established internally, connecting the disparate internal systems, and externally with the contract manufacturer. NMS partners were given access to the internal systems via an extranet.

Over subsequent phases, NMS rationalized its supplier base and established a more strategic relationship with its contract manufacturer, employing collaborative procurement programs and an open-book relationship. Cash-engineering projects were initiated to facilitate faster cash-conversion cycles for the company and for the partners by improving outstanding sales and payables. NMS also instituted customer/vendor scorecards and internal balanced scorecards to continuously measure and yield improvements. In the organization area, the company initiated programs to change the company's culture to be driven by innovation, pervasive leadership values, and a flexible workforce motivated by integrated rewards and incentives.

The competency and attitude of both the people within NMS Communications and its partner companies played a key role in the successful transformation effort. Key outcomes of that effort to date include:

• 52 percent reduction in inventory levels.
• 45 percent faster order fulfillment times.
• 300 percent faster manufacturing times.
• 96-97 percent of delivery commitments made.
• 12 percent reduction in supply chain costs.

Footnotes: Kampas, Paul J. "Shifting Cultural Gears in Technology-Driven Industries," MIT Sloan Management Review, Winter 2003, pp. 41-48.