Supply Chain Management

NSF has been instrumental in helping to modernize manufacturing systems.

In 1927, Henry Ford's Rouge complex near Detroit began churning out a ceaseless stream of Model A cars. The Rouge facility was perhaps the ultimate expression of mass production and "vertical integration," in which a company tries to cushion itself from the vagaries of the market by owning or controlling virtually every aspect of its business, from the mines that provide the ore to the factories that make the glass. Raw materials—iron ore, coal, and rubber, all from Ford-owned mines and plantations—came in through one set of gates at the plant while finished cars rolled out the other.

Ford's vision informed how manufacturing was done for most of the twentieth century, but by the late 1970s the limitations of this approach had started to become obvious, at least to the Japanese. Why make steel if what you do best is make cars? Why be responsible for your own suppliers—and pay to maintain all that inventory—when it's cheaper to buy from someone else? Bloated, vertically integrated American companies faced a serious challenge from Japanese carmakers who organized their factories along a different, leaner model resulting in cheaper, better cars. Japanese factories—in which each car was built by a small team of workers rather than being pieced together along a rigidly formulated assembly line—were far more efficient when it came time to shift to a new model. An American car plant was like a machine dedicated to building a single type of vehicle. Workers were interchangeable parts of that machine, whose "intelligence" was vested in the machine's overall design rather than in the workforce. In contrast, Japanese plants depended on the intelligence of their workers, who were encouraged to make any improvements to the manufacturing process that they saw fit.

It took some time, but by the 1980s American manufacturers such as General Motors (GM) had absorbed the Japanese lessons of "lean" manufacturing and were looking to make some improvements of their own. For help, GM turned to Wharton Business School professor Morris Cohen who, with support from NSF, analyzed a critical part of its production system: The process by which GM distributed 600,000 repair parts to more than a thousand dealers.

Cohen's approach was to see this process as one of many "supply chains" that kept GM up and running. Supply chains form a network of resources, raw materials, components, and finished products that flow in and out of a factory. Using empirical data and mathematical models, Cohen and his colleagues proposed a complete reorganization of GM's repair parts supply chain.

"We suggested that a high degree of coordination be put in place to connect decisions across the supply chain," says Cohen. "Today, that's commonplace, but back then the idea was considered radical."

In fact, the idea was so radical that GM rejected it—not because they disagreed with Cohen's analysis but rather because the scale of the reorganization was too much for them to contemplate at the time. However, GM was soon to embark on building a new car company called the Saturn. GM's management decided to apply a number of Cohen's recommendations to the new venture, including the main proposition: centralized communications and coordinated planning among the Saturn dealerships and the company distribution center. Rather than operating in the traditional fashion, as separate entities, the dealerships would be hooked up via satellite to a central computer. By consolidating information and making it available to everyone, management could make optimal parts ordering decisions, neighboring dealerships could pool resources, and dealers could focus on maximizing customer service without worrying about what inventory they should be stocking. All of these improvements let management accommodate difficult-to-predict parts service demands without holding excessive inventory, while still ensuring that dealers got the parts they needed to repair cars in a timely manner.

Cohen's approach to supply chain management quickly proved a success: Saturns, which are relatively low-cost cars, are routinely ranked among the top ten cars with respect to service. "The other top ten are high-priced imports," Cohen says.