Companies that have followed these principles have realized a huge performance advantage—an advantage unmatched by any other capital asset. The numbers, measured across dimensions of cycle time, cost, quality, flexibility, and reliability, prove this point. Benchmarking studies done by PRTM's Performance Measurement Group show that top-performing providers of technology-based products that operate with a 40-percent profit margin have nearly 9 percent more working capital than average performers. For a $500 million business, that translates to approximately $45 million.

This striking disparity in operating capital is only part of the competitive advantage enjoyed by top performers. Our benchmarking data also show that the leading companies in the high-tech segments plan—and achieve—roughly twice their competitors' annual rate of supply chain performance improvement. Also, the leadtime required by these top performers to gain an unforecast 20-percent upside flexibility in finished-goods supply at approximately 15 calendar days is less than a quarter of the time required by average performers.

Where does this resounding source of operational advantage reside? The deceptively simple answer is that the top companies have aligned their operational practices successfully with the performance needs of their markets. And they know how to keep them aligned as needs change. But how do they accomplish that alignment? The answer, which is anything but simple, is that they view their supply chain processes and managerial skills not as a cost of doing business, but as revenue-generating assets. When recognized and managed as a "portfolio of competencies," a company's supply chain operations can position technology, products, and services for market success. In fact, well-managed supply chain operations generate higher returns on investment, with lower attendant risk, than many types of investments available in areas such as product development and information systems.

Competencies in this sense are defined as reliability in delivery of products, services, and information to the currently defined need of the marketplace in the most consistently efficient manner possible. Competencies do not have long-term performance targets. Nor are they definable in a single dimension such as skill sets, process definition, or information flow.

A standard procedure is emerging for building and managing a portfolio of supply chain competencies. It's a standard that has evolved from businesses that have grown up with a venture-capital funding mentality. Such businesses tend to have very sound portfolio-management instincts, since they have been forced to think about the end-to-end value of investment across all aspects of their operations with the degree of "due diligence" expected in financial management.

Managing a portfolio of supply chain competencies entails the same type of factual analysis, anticipation of future trends, and decision-making done by an investor with a stock or bond portfolio. This entails adding, enhancing, holding, or shedding pieces in a continual search for the mix that will predictably generate the highest returns for the markets served and the products offered. The blend within a portfolio of operational assets includes, for example, technical competencies, process management competencies across functions (or businesses), and process-execution competencies linked to control of capacities. In the best companies, decisions for modifying the portfolio mix are linked to specific analyses of quantified risk and reward as defined by overall business objectives.

By contrast, the traditional and predominant perspective in average-performing companies is that supply chain activity is little more than an unavoidable cost center. This view does not lead to an aggressive culture that adjusts its portfolio of operational competencies as market needs and opportunities dictate. Nor does it integrate the operations of acquired businesses effectively or drive the organization toward globally standard processes, or clarify supply chain managers' roles and incentives. The result of this view is that the supply chain operates as an ill-suited patchwork where processes are developed and assets acquired in reaction to crises or one-off opportunities. Over time the temporary solutions become permanent, organizationally bound processes. Mandates for cost reduction often are executed as isolated acts without regard for end-to-end performance or impact on total cost.

Without an end-to-end portfolio view, working capital becomes sticky or slow moving, flexibility gains get muted against flexibility losses, processes become fragmented by business unit or geography, and information systems become solutions rather than tools. All too often, functional optimization displaces the creation of significant and quantifiable shareholder and end-customer value.

As with a stock or bond portfolio, a business implements a portfolio of supply chain competencies based on the types of returns needed and the level of diversification and risk load defined through the business strategy. In doing so, the company no longer views operations merely as a cost of sales. In fact, it sees them as an opportunity to profitably grow income. How? By consistently meeting customer-requested dates, for instance, or by shortening the new-product introduction cycle time through development, sourcing, or acquisition of specific competencies.

Investment and divestment decisions must be made accordingly; they must be made factually and executed fully and rapidly. When a company has learned to manage its portfolio of operational competencies in this fluid and unbiased manner, it can satisfy the highest possible number of market needs with the right investment in assets.

To most of its customers, such a company appears to have exactly the kind of highly specialized capabilities they're looking for, suggesting great operational complexity. In actuality, the company derives its chameleon-like adaptability to market demands from the fewest possible number of standard supply chain processes. It adjusts its positions in various operational competencies, continually reconfiguring itself in accordance with the dictates and opportunities of the market.

Management of these few processes to satisfy a diverse set of customers is, perhaps, the most important component of being competent. By owning and managing only a small number of standard supply chain processes and then aligning information flows and performance incentives, the company is well positioned to keep the performance of those processes fine-tuned and to obtain the highest return from them.

Deciding What and When to Outsource

Using this approach to supply chain portfolio management, high-performing companies make ready use of outsourcing. They rely on and manage the supply chain competencies of service providers and suppliers with the same diligence applied to in-house processes. Businesses that implement this portfolio-management view are adept at developing technical and managerial skills, rapidly entering and exiting third-party alliances, and managing total costs and cash flow. The very best companies use this approach to address both the current and anticipated basis of competition in the same way that they proactively manage their product or technology portfolio to ensure highest margins.

These businesses configure supply chain processes to customize the end-to-end performance requirements of each targeted market. They maintain multiple mechanisms for conducting customer-facing supply chain operations, such as order intake, status, and invoicing—each mechanism suited to a particular customer class, market region, or channel. Internal-facing processes across the supply chain dimensions of "plan, source, make, and deliver," such as order processing, manufacturing, and shipping, are each driven to the minimum number needed.

In this way, each customer can choose the interface mechanism that makes it easiest to do business. If an Internet-based interface works best for a field sales representative wanting to configure a technically complex product solution, it should be available. If another user wants to know who to call to understand the technical pros and cons of purchasing a feature upgrade for a related product, the order administrator should be leveraging the same types of data from the same source. The internal staff managing fulfillment and related life-cycle management processes know that the supply chain can satisfy any type of customer with high reliability, in appropriate intervals, and with the highest possible operating margin for each segment of a product's life.

In another illustration, a business that has both a direct sales force and value-added resellers (VARs) may identify the need for an Internet-based order-placement, confirmation, and status-checking mechanism for a newly targeted market segment that demands low transaction costs, rapid order confirmation, or instant order fulfillment for software purchases. The development of this electronic business capacity can complement the competence of the direct sales force and VARs. Orders coming in through this new channel are designed to be processed through the same single-order acceptance process used for the other channels. Thus, the company adds a new competence and capacity for interfacing with the customer while avoiding unnecessary proliferation of supporting processes. In this way, it can simultaneously reduce order-transaction costs and attract a new source of revenue.

Here's another example: The manufacturing function, working with a product-development team, determines that it needs to migrate to a new testing technology to support the specifications of the product's key components and major subsystem. Manufacturing assesses whether the competence is core to the business and whether the ROI/ROA is favorable. It then can either invest rapidly in the competence or source the competence and support it with existing internal competencies for manufacturing, scheduling, product introduction, and so on.

When a supply chain asset is already owned as part of a portfolio but determined not to be a core competence, the costs of exit must be considered before the portfolio can be rebalanced. Perhaps fixed-asset depreciation schedules will not make this an attractive option. Or maybe the risk of losing related core competencies such as new-product prototype manufacturing might be too great. Top-performing companies anticipate the leadtimes involved in making operational changes; they are agile at making continual adjustments; and they view the value of the portfolio over the dimension of time instead of statically.

A company does not have to own a competency to capitalize on it. This also applies when sourcing a competence from an outside business that also supplies that competence to the competition. For example, top performers at leveraging contract manufacturing generate several percentage points better cost savings and on-time delivery performance than others using the same contract manufacturer. In fact, the most important aspect of implementing a portfolio of process competencies is the ability to manage information flow, decision making, and brand integrity across many different businesses that, combined, provide high-value solutions to customers.

Businesses that operate at this level view themselves as channels for bringing the most appropriate technologies to market through teams of process-competency providers, internal or external.

Using the Supply Chain Operations Reference (SCOR) model, a business can configure and manage a highly reliable portfolio of supply chain assets beyond those included in its balance sheet. (For more on the SCOR model, see the accompanying sidebar.) An example drawn from PRTM's experience illustrates how this can be accomplished. A business in the point-of-sale equipment market became aware of increased competence in a supplier's assembly and distribution services. This company decides to outsource these processes to the supplier, while holding onto prototype manufacturing and improving its ability to use consumption information available through its VAR network.

The result is a winning strategy of maintaining full in-house control over high—value-added "source" and "make" activities while outsourcing other activities that are not competitive differentiators. In the process, the company significantly reduces fixed and inventory assets and capacity constraints without loss of shipment performance or quality.

Another well-established business has realized it is highly competitive in sourcing, manufacturing, and delivery—even compared to specialized providers of these skills and services. Although the company will retain these functions internally for much of its present product base, it has decided to outsource them for product introductions requiring new manufacturing processes or distribution channels. Why won't it outsource its current product load? After a rigorous analysis, the company has determined that the exit costs are too great. It would incur the expenses of breaking a union contract, of ignoring a fully depreciated fixed-asset base, and of divesting internal skill sets that provide a high level of customer satisfaction.

Examples such as these show that when companies treat their operational competencies as changeable assets, they create a culture that is nimble, agile, and responsive to ever-changing market needs.

Though the net value of a portfolio of operational competencies is determined ultimately by customers, there are some important caveats for current or would-be portfolio managers. Clearly, a business organization is not simply a box of pieces, to be acquired or traded away loosely in the hope of ending up with a better box of pieces. There are limits to the malleability of every organization, and a company can easily "lose its formula" in misguided wheeling and dealing.

Companies that stray too far from their core competencies (usually through ill-advised diversification moves) tend to get into trouble. They often wind up retracing their steps, returning to what they do best. General Instrument, Hewlett-Packard, and AT&T are recent examples. Just as there are core competencies, there is core identity. The chameleon remains a chameleon through all its adaptive changes in coloration.

To manage a company as a portfolio of competencies is to manage identity, mission, and the very basis of value. Identity is an amalgam of an organization's ideas, perceptions, values, instincts, aptitudes, energies, resources, relationships, and history. That identity is inextricable from brand equity—what customers perceive to be the company's basis of excellence or value.

A company must never lose control of the operational competencies in which its brand equity resides. One company whose operational portfolio reflects an acute understanding of that principle is Volvo. The vehicle manufacturer understands that the brand equity of its passenger-car division is inextricably connected to crash-worthiness and occupant protection. Volvo thus has retained its competency in design and system-level safety standards, while outsourcing most of its major vehicle modules to companies that can meet its specifications.

Companies typically can fall into two types of traps when they add or shed operational assets without due regard for their identities and core competencies. One is "hollowing out" the organization through the shortsighted elimination or reduction of certain operational assets, including key staff. The other is adding competencies that don't support the organization's identity and basis of value.

For reasons that may not be immediately apparent, a company must be very careful in moving from held to sourced operational assets. First of all, an operational asset that appears on the surface to be a good candidate for outsourcing—or even outright elimination—may be the glue that is keeping some essential operational competency in place. Suppose, for example, that a company decides to outsource its manufacturing operations because they are not a "value-add." Soon thereafter, it starts losing its talented manufacturing engineers, who are the key to the high product performance and quality upon which the company has built its brand equity and thus its market value. As capable manufacturing engineers, they naturally want to work in a manufacturing environment.

There are other implications besides holding onto talent. Who will engineer the accustomed high standard of performance and quality into the company's products? For that matter, who will ride herd on the engineering standards and practices of the contract manufacturers?

In its zeal to slash operational overhead, this particular company ended up throwing out the baby with the bath water. Like others in the high-tech arena, it must ask itself at what point does a technology-based company stop being a technology-based company and become a mere nameplate? Right now, there are high-tech companies that I believe are "hollowing" themselves to death, at various rates of speed. The point is that a vital competency may be impossible to keep intact without retaining certain operational assets, regardless of those assets' prima facie contribution to the company's return on its operational investments.

The lesson? A company must never lose control or acute oversight over any operational competency that is critical to its brand equity. After making the outsourcing decision, the company may find that the costs and headaches of overseeing an outsourced activity are not worth it. No company should put itself in the position of having to serve as a school for its suppliers. Companies need to devote their internal resources to building their own operational competencies.

Acquisitions and mergers often present a different set of problems that center on integration. A company that had one accounting department, which operated like a charm, now finds itself with two. The two departments are assured that they are to be integrated. Six months later, the accounting function, which now has twice as many personnel and systems, has stopped functioning. The two departments refuse to share information or cooperate in any way, fearing that whoever blinks first will be out of a job. Eliminating the acquired company's accounting function, although an unpleasant task, could have prevented the situation. Recognizing and shedding redundant competencies is an essential aspect of operational "portfolio management."

The issue of suboptimized supply chain assets affects older companies that seek to create value by investing in combinations of vertical integration and local presence as well as younger, high-growth companies that are creating value through acquiring businesses. Use of the Supply Chain Operations Reference model or a similar process-performance assessment tool allows management teams to assess the need, for example, of multiple regional distribution hubs and the value of retaining closely clustered small warehouses or subassembly factories. Through such tools, companies can view the contribution of each supply chain asset within the overall context of its service to markets and shareholders.

There are really two forms of operational competency: competency in operations per se, and competency in market responsiveness. A company's supply chain is composed of the interconnected operational competencies by which it plans, sources, makes, and delivers goods and services. But a company's supply chain is not a stand-alone instrument. As one of my PRTM colleagues points out, "Your supply chain is part of someone else's supply chain." In fact, the basis of business competition is increasingly between supply chains rather than between individual companies—a fact that sharply redefines what "supply chain integration" means. Tailoring operational competencies to the needs and expectations of customers now entails integrating operational competencies in the context of interlocking webs of supply chain relationships and alliances.

In a technology-based industry, operational competencies are not merely the basis of value. They also are the medium of exchange through which companies forge powerful new alliances. IBM and Dell Computer, which for years have been fierce rivals in the personal computer market, have announced a deal under which IBM will sell Dell $16 billion worth of computer parts over seven years. The deal, reportedly the largest OEM agreement ever signed in the computer industry, is a perfect example of open-minded, outward-looking management of operational assets. As the Wall Street Journal observes, the deal "underscores IBM's new strategic focus on selling high-tech components on the open market, rather than just using them inside IBM computers."

On an operational level, the deal represents a shift in emphasis on IBM's part from finished-product assembly to component manufacture. It allows IBM to benefit from Dell's extremely successful direct-distribution selling strategy. As for Dell, the pact allows it to benefit directly from IBM's extensive competency in R&D operations. Access to that competency "plugs a hole," to use the WSJ's term, in Dell's operational portfolio.

Implicit in the deal is a trade of competencies. It's a perfect illustration of how companies don't need to own operational competencies to benefit from them. It's also an impressive example of interorganizational supply chain integration. The IBM-Dell alliance marks a shift from exploiting competitors' weaknesses to capitalizing on their strengths. IBM has far more to gain from participating as a supply chain partner in Dell's direct-distribution model than it does in trying to compete against that model.

Dell is a superb example of a company that has tailored its investments in competencies to the needs of its market. By bypassing the retail channel (and channel markup) and selling build-to-order PCs direct, the company has reached No. 125 on the Fortune 500, and No. 363 on the Global Fortune 500. A key concept in supply chain management is replacing inventory with information—and few companies have done that as effectively as Dell. The company reports that it now holds just six days' worth of inventory, equivalent to 61 annual inventory turns.

What are the vital operational competencies behind Dell's direct distribution, build-to-order model? One is obviously an advanced e-business capability. The company reports current online sales of more than $14 million daily. That's about $1.8 billion a year in sales over the Internet. Dell's operational investments in e-business also extend to its suppliers. Employees of Dell's top 30 suppliers can log on to a secure Dell Web site to view such important information as demand forecasts, lists of Dell's customers, and customer order quantities. Access to such sensitive information allows the suppliers to adjust their production schedules to Dell's demand forecasts. Dell similarly shares data on defect rates, engineering changes, and product enhancements with its suppliers.

The close collaboration with suppliers feeds directly into another operational competency behind Dell's profit machine, namely assembly and testing. Within eight hours of receiving an order for a PC, the company's Round Rock, Texas, plant can assemble the machine, install the software, test it, and pack it for shipping.

Dell is only one example of a company that has turned an operational competency in e-distribution into a profit machine. Another is Cisco Systems, which is doing about $11 million a day in business-to-business sales of networking equipment through its Cisco Connection Online service. That translates to about $4 billion a year, or roughly 60 percent of the company's total revenue.

Cisco Systems obviously brings up the subject of another "portfolio management" competency: the selection and operational integration of acquisitions. Since 1993, Cisco has acquired some 30 companies, at a cost of around $8.2 billion. Cisco made nine acquisitions in 1998 and says it plans to buy between five and 15 companies in 1999. In the first quarter of 1999, Cisco reportedly added more than 1,100 employees to its payroll of almost 16,000.

How does the company maintain operational cohesion? Analysts have credited Cisco's success to selecting the right companies with the right technologies and to keeping its acquisitions managerially—and thus operationally—intact. Cisco reportedly retains the chief executives of two out of every three companies it acquires, which helps explain the extremely low rate of post-acquisition turnover and minimal levels of operational disruption. The employee attrition rate at the acquired companies is reportedly around 6 percent. Cisco CEO John Chambers has estimated the industry average to be 30 to 50 percent and emphasizes that acquiring a company is pointless without retaining its talent.

"For what we pay for an acquisition, which is between $500,000 and $2 million per employee, if you don't hold the employees, you have got a big problem," Chambers told The Financial Times. "This is where some of the 'old world' players really don't understand what they are acquiring. It is not like a bank or an investment company or a telco acquiring market share or customers. You are acquiring future products and the people [who make them]."

By keeping intact the leaderships and competencies of its acquisitions, Cisco has been able to add competencies to its portfolio at an impressive rate—with minimal integration problems. Its acquisition model might almost be called a "virtual partnership." By assimilating entire portfolios of external competencies intact, Cisco has put together a remarkable string of successful acquisitions. The company reached a market value of $100 billion just eight and a half years after going public, beating the previous record of 11 years set by Microsoft.

Keeping a company's portfolio of operational competencies aligned with the dictates and opportunities of its market and industry takes a constant effort. The benefits may rarely be as dramatic as those reaped by Dell and Cisco. The long-term payoff from acquiring, upgrading, or shedding an operational competency may simply be the ability to stay in business. But as competition between intercompany networks of operational competencies continues to displace competition between individual companies, the due-diligence management of operational assets becomes an increasing imperative.

Yet it's no wonder that so few companies engage in these practices. Transforming a company's approach to managing supply chain assets as a portfolio of competencies is not easy. The first step is to secure senior management's understanding of the income statement and balance sheet potential buried in the supply chain. Other practical aspects of such an approach call for thoroughness; an unbiased, factual approach; the creation of a balanced business case that considers both quantitative and qualitative benefits; a focus on a clear objective; and a project scope that's small enough to be successful.

The time and effort expended in making the necessary transformation, however, will pay huge dividends in the form of enhanced performance. The industry leaders have demonstrated that beyond any doubt.