Supply chains: make it or break it.

Today's supply chains are more dynamic than ever before - the result of advanced technology, narrowing supplier bases, product innovation, and changes in regulatory policies. Companies that know how to craft the most flexible - but tightly intertwined - chains gain tremendous competitive advantage.

At Xerox Corp., fully 85 percent of the company's products, on a cost basis, are outsourced. Since the early 1980s, the company has cut its supplier base by a factor of 10, and now manages a worldwide network that gathers and ships parts and components to its plants and finished products to distribution. Another consequence of supply chain management is that Xerox's supply chain (the links of which compose the entire manufacturing/distribution process) is tightly intertwined - not an uncommon occurrence for today's largest corporations. Supply chains are characterized by closer relationships between companies and fostered by narrowing the supplier bases. Each link in the chain is so tightly tied to the others that competition in the end market resembles a tug-of-war between chains, not individual companies.

Firms, however, must choose their supply chain teams carefully. A bad choice can be disastrous - and conversely, a good partner can be a tremendous asset. Xerox's global partners, such as Rank Xerox and Fuji Xerox, have been instrumental in introducing TQM and ISO9000 to the company. In the future, their partners in China and India will enable them to have a strong grip on low-cost manufacturing, product technologies, and designs suitable for the growing Far East markets.

Supply chains used to be relatively stable. Today, chains and networks are created, changed, re-engineered, and even completely bypassed rapidly. Certain forces drive these changes:

* Technological innovation. Two examples: Electronic publishing already has begun to erode traditional publishing chains that were heavily dependent on paper-based production and distribution. Electric cars (or hybrids) will have sweeping ramifications for complex car manufacturing networks, as well as for the supporting energy infrastructure.

* Product redesign and repositioning. Standardization of PC and small computer architecture has permitted the growth of companies that do not have significant manufacturing capabilities, but design, assemble, and market computers using standard modules produced by other firms. Some firms have developed core components that allow other final assemblers to produce a range of products: The Canon laser engine can drive a printer or a fax; a Briggs & Stratton engine powers both snowblowers and mowers.

* Reduction in the cost of international trade, due to a mix of factors including a decline in transportation costs, lower tariffs, improved communications, and diffusion of engineering knowledge. These factors have allowed the exploitation of low labor costs - which are not in themselves new - and led to massive geographical changes in supply chain structure and global manufacturing networks. Even firms with revenues under $50 million need to source or locate plants in low-cost locations to be competitive.

* Governmental and regulatory policy, including tariffs and trade arrangements. The European Economic Community has had a large impact on supply chains in Europe, due to the harmonization of standards and the removal of trade barriers. Retailing and transportation patterns have changed drastically.

* Chain reorganization by dominant firms in certain industry sectors. This re-engineering of supply chains can provide a competitive advantage for certain firms, and demand a response from others, resulting in permanent changes in supply chain structure. In electronics manufacturing, Intel has moved into the production of "motherboards" that employ its chips. This will ensure that board architecture makes best use of chip capabilities. This classic case of forward integration will force consolidation in that level of the chain.

The basic lesson is that increased intensity of competition in every sector, and a combination of forces are changing supply chains almost from month to month. Firms that do not recognize and even lead these changes risk falling behind permanently.

Certain patterns are emerging in supply chain strategy:

* Outsource non-crucial activities. Consider outsourcing any activity that other firms can do better and more cost-effectively than yours. In the electronic equipment industry, some companies outsource 95 percent of their manufacturing as measured by cost.

* Protect core activities. There must be something you do better than anyone else. It might not be sophisticated, but it's what makes firms profitable.

* Integrate processes. Material and information flows are integrated as seamlessly as possible, inside and outside firms. Programmatic techniques such as just-in-time, TQM, and concurrent engineering, support this integration. Traditional boundaries are blurred in the process.

* De-integrate ownership. Conventional vertical integration is not necessary for process integration. Partnering, relationship building, and bilateral contracting can substitute very well and create better motivation throughout the chain.

* Think globally. Global markets confer economies of scale and scope. Global sourcing is needed for efficiency, and global partnering for assembling the technology needed in new products. Global scanning and awareness will protect against being blindsided by new competitors and products.

* Be flexible. Low-cost locations become high-cost as trading success raises living standards. New markets appear and grow.

How should a company craft its supply chain strategy? First, a company must understand its position in the chain. This can be done by sketching a picture of the company and industry supply chain, tracing its major stages from raw materials and components to finished goods and the customer. Examine location, competence, role, and posture. A primary consideration is physical location in the supply chain. The major stages of manufacturing supply chains are raw material supply, part fabrication, component and subassembly manufacturing, end-item assembly, wholesaling, retailing, and post sales support.

The basic questions related to these stages are: What stage(s) does the company occupy now? What stage(s) should it occupy in the future? This vital issue is related to existing core competencies of the company. It is also related to those competencies the company can and must develop to survive and be profitable.

The third issue in positioning is the company's role or posture in the chain. Some typical roles:

Commodity supplier: The firm supplies a basic commodity and is likely to be in a cost-competitive situation. Basic strengths are scale economies, low costs, and guaranteed availability. Differentiating attributes include service to customers, quick response, and faultless quality.

Technology master: Coming is an example in ceramics and glass. The company, by and large, does not pursue downstream products and services. Thus, it is a supplier of optical fiber, TV tubes, and ceramic substrates to other companies. Kodak is unmatched in silver halide chemistry, and layering chemicals and emulsions on paper or plastic. This allowed it to dominate the entire film supply chain. Today, Kodak must move to develop mastery in digital imaging and is working hard at doing so. Firms such as Hughes Electronics and Texas Instruments rely on a range of technological capabilities and are thus not limited to a particular supply chain position.

OEM: These firms deliver end products to end consumers, and act as gatekeepers to the marketplace. Quality, design, value, and customer satisfaction are key attributes. American firms often have based their position on mass production and distribution skills. European firms have emphasized technology and fine design. The Japanese provide excellent quality at reasonable cost.

Supporting player: These firms are not very visible to the casual observer, but can be giants. Denso, Diamond Star, Lucas, and Varity are examples in the automotive industry. Relationships with buyers and reliable delivery are crucial.

Invisible supplier: At the extreme, suppliers from Taiwan, Singapore, and Malaysia are almost invisible, apart from a few exceptions (Acer and Kennex are two). Yet the volume of business done by these companies is huge.

Key component provider: There are often important subassemblies or components that can make or break a product. Cummins in large diesel engines and Intel in microprocessors are examples. They have superior design, and a range that supports multiple end-product segments while enjoying economies of scale and scope.

Some management fads come and go quickly - but supply chain thinking is not one of them. The driving factors of technological change, shifting cost advantages, and global markets will continue to operate for a while. Developing expertise in supply chain management is a good investment.

Uday S. Karmarkar is the Times Mirror Professor of Management Strategy and Director of the Center for Operations and Technology Management at the Anderson Graduate School of Management at UCLA. Milind Lele, senior lecturer at the University of Chicago's Graduate School of Business and managing director of SLC Consultants, was a major contributor to this article.