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Reengineer or Perish
Emerging factors, such as shorter product cycles and the rise of the super customer,
put increasing pressure on companies to reengineer business practices, says
management guru Dr. Michael Hammer. Those companies experiencing success have
reengineered the supply chain to speed cycle times, cut costs, improve asset use, and
add more value to the customer.

By G. Berton Latamore

THE IDEAS OF DR. MICHAEL HAMMER, one of the world’s fore- Hammer: The economic boom does not change my view.
most business thinkers and the originator of both reengi- In fact, in some sectors of our economy, companies’ reengi-
neering and process-centering, have transformed the neering of business practices in the last five years is the
modern business world. In 1992, Business Week named main reason for success. This is particularly true in key ar-
him one of the four preeminent management thinkers of the eas of manufacturing such as automotive.
1990s, and in 1996 Time magazine named him to its first Some companies may be doing well without making
list of America’s 25 most influential individuals. those changes, but that is not going to last. A new set of fac-
tors are creating new business problems that are putting a
A former professor of computer science at the Massachu-
lot of pressure on companies. For example, we are seeing
setts Institute of Technology, Hammer is the founder and
the rise of the super customer as many companies see the
director of several high-tech companies. He serves as an
number of customers go down and the size of their remain-
advisor to leaders of the world’s most progressive compa-
ing customers increase. The service and price demands of
nies and his public seminars are attended by thousands of
these more powerful customers are much more exigent.
people annually. He is the author of Reengineering the Cor-
Manufacturers also face shorter product life cycles. There is
poration: A Manifesto for Business Revolution (with James
the relentless drive of innovation among competitors. So
Champy) (HarperBusiness, 1993); The Reengineering Rev-
even if a company has squeaked by until now, that doesn’t
olution: A Handbook (HarperBusiness, 1995); and Beyond
mean it will be able to continue.
Reengineering: How the Process-Centered Organization is
So I think some of the business pressures we talked about
Changing Our Work and Our Lives (HarperBusiness, 1996).
five years ago are still there and others have changed, but
In this exclusive interview with APICS—The Perfor- the name of the game remains improving performance.
mance Advantage, Hammer discusses how reengineering
the supply chain is the key to manufacturing success in the
new millennium.
you have to assume the worst
APICS—The Performance Advantage: When you wrote Re-
engineering the Corporation, the U.S. economy was in re- and stockpile supplies
cession. The first chapter focuses on why U.S. businesses
were failing. Today, despite the economic problems of
much of the rest of the world, the U.S. economy seems to APICS: You advocate reengineering of the supply chain as
be continuing near-record growth. Does this change your an important step for U.S. manufacturers. But the term
view of U.S. businesses? supply chain means different things to different people.

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ANNUAL EDITIONS
What is your definition of the main components of the
supply chain for the purposes of reengineering?
Hammer: To some companies, a supply chain is nothing
but a euphemism for procurement and logistics, but I think
that misses the point. To me supply chain really means ev-
erything that happens to fill the demands of the ultimate
customer. That means all the work that is done by every-
body who is contributing to the product and service that
leads to the final customer. One of my favorite definitions
is from a company in the tissues business that defines the
supply chain as “from stump to rump.”
Over the last five years we have made a lot of progress
on the intracompany order fulfillment process. The prob-
lem is the system breaks down. What makes supply chain
a very different kind of process is that it does not exist
within the walls of a single company. By its nature, supply
chain is an intercompany endeavor. It does not end with
supplying the manufacturer’s customer. It extends to the cus-
tomer’s customer and goes back to the supplier’s suppliers.
It is a set of activities that are performed by a number of
companies. They need to perform those activities coher-
ently. Right now, different parts of the supply chain are
done by different companies at arm’s length from each
other. We need everyone to work in synchrony. The goal is
virtual integration. Companies should work together with
no more overhead or difficulty than if they were part of the
same enterprise. It should be no more difficult to get some-
thing from a supplier than from your own warehouse.
APICS: Why should manufacturers reengineer their supply
chains?
Hammer: One reason is to improve financial performance
by lowering costs. If you work synchronously with your
customers and suppliers, you can eliminate a lot of redun-
dant work to save money. But the more important reason is
that you reduce asset utilization—raw materials, work in
process, and finished goods in storage. And you can get
better use of your production assets. If you do not know
your supplier’s schedule, you have to assume the worst and
stockpile supplies in a warehouse. If your supplier does not
know your production schedule, he has to assume the
worst and stockpile supplies in his warehouse. If we reengi-
neer to work together, we can eliminate most of that inven-
tory and eliminate a great deal of waste and cost. That is
probably the main reason companies reengineer their sup-
ply chains.
The second reason for reengineering the supply chain is
to make it easier for customers to do business with you. In
a world of increasing commoditization, how easy you are
for your customers to do business with and how little over-
head you add to your customers’ costs can be critical dif-
ferentiators.
In the long term, the most important reason for supply
chain reengineering is to add more value to customers. If
you really rethink your supply chain, you can end up add-
ing more value to customers and even extending the nature
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of your product to deliver product bundled with service.
This means you are doing more for the customer, which en-
titles you to higher margins and gives you greater market
differentiation.
All of these goals are very important. Achieving them de-
mands looking at the supply chain process from end to end
and finding opportunities for eliminating redundancies and
improving asset utilization throughout the process.
inventory is a substitute
for information
APICS: What are some specific examples of how manufac-
turers achieved these goals through supply chain reengi-
neering?
Hammer: One example that is very current is IBM’s answer
to Dell Computer’s new manufacturing model that allowed
it to build PCs to order direct from the customer, with a
short time to delivery. This gave Dell a major advantage
over IBM in the PC marketplace. At the time, IBM had 12
weeks of PC inventory in the supply chain to its distributors.
Twelve weeks of inventory in a system where product life
is 12 to 18 months is a recipe for disaster.
IBM had to do something. But instead of just looking at
its internal processes, it examined the entire fulfillment pro-
cess from the time the customer places an order with the
distributor until it is filled. [The reengineering team] asked
themselves who should do each step of the process. One
thing they found was that often distributors had to disas-
semble the PCs they received to modify them to meet the
customer’s requirements. So IBM started delivering compo-
nents rather than assembled PCs to its distributors, saving
both IBM and the distributors time and money. The assembly
work IBM was doing is now being done by the distributor.
On the other hand, the team discovered IBM was better
at managing the distributor’s inventory of components than
the distributors were. Today, IBM manages its distributors’
inventories.
So IBM does some of the work the distributor used to do,
and the distributor does some work that IBM used to do.
IBM and its distributors went from 12 weeks to two weeks
of inventory in the system and eliminated a lot of errors, re-
dundancies, and duplications. It is now cost competitive
with Dell’s direct build-to-order model.
APICS: One major change that is often part of supply
chain reengineering is choosing a single supplier for key
raw materials or components. How does the manufacturer
ensure he doesn’t end up paying inflated prices for those
components once competition in the supply chain has
been eliminated?
Hammer: The consolidation of suppliers is, in fact, a com-
mon aspect of supply chain reengineering. In theory, there

is risk in being captive to that supplier, but that risk is more
theoretical than real. The supplier with a single-source con-
tract with a customer has a lot riding on that customer’s
success. Often, the supplier will succeed or fail depending
on the success of that customer. If the supplier abuses that
customer, the customer will terminate the relationship. So
we have not seen that as a problem. I sometimes say this re-
minds me of mutually assured destruction. The two organi-
zations are so dependent on each other that if either harms
the other they end up killing both.
APICS: Another major change is the much closer relation-
ship between manufacturer and suppliers in many reengi-
neered supply chains. Often this includes sharing sensitive
information, such as designs for new products. Is the shar-
ing information necessary for success of a reengineered
supply chain?
Hammer: Yes. Often, inventory is a substitute for informa-
tion. If you are a customer, and I don’t know what your de-
mands will be, I have to assume the worst and pile up
inventory. If you are the supplier and do not know my pro-
duction plans, you have to assume the worst and pile up in-
ventory. If you do not know my plans for a new product,
you often will end up holding inventory that no longer has
any value when the product changes. If we share with each
other, we can both win.
Product life cycles are getting much shorter. If I share my
new product plans with my suppliers, they can help design
those products so they can produce higher quality compo-
nents at lower cost. They can design and implement their
component manufacturing processes in parallel with mine.
As a result, when I am ready to start production of the new
product, they’re ready to provide the materials and compo-
nents I need, eliminating huge amounts of delay and, often,
redesign of products.
APICS: How do manufacturers ensure that sensitive busi-
ness information is adequately protected when shared
with other companies in the supply chain who may have
multiple commitments and divided loyalties?
Hammer: Obviously, you have to put procedures in place
to protect sensitive information, but it is in everybody’s best
interest to maintain that confidentiality. Any immediate
benefit a supplier might realize from divulging secret infor-
mation about a customer in a reengineered relationship
would be far outweighed by what it would suffer through
the termination of that relationship.
APICS: How have manufacturers benefited from the cre-
ation of this close relationship?
Hammer: We are really talking about the virtual enterprise
or what Chrysler calls the “extended enterprise.” Some in-
dustries, such as automotive, have adopted this concept al-
ready, and Chrysler has been a leader.
Chrysler and its suppliers try to work as one company.
Chrysler realizes it needs to focus on product design and
development, and on marketing. That means it must sim-
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Article 1. Reengineer or Perish
How Reengineering Changes Jobs
Supply chain reengineering enormously affects the jobs of
individuals within companies and their relationships with
their counterparts among the company’s suppliers and cus-
tomers, says Hammer. As with internal reengineering ef-
forts, supply chain reengineering shifts the focus of
individual employee efforts from following the rules and
pleasing the boss to improving corporate efficiency and
meeting or exceeding customer expectations.
“Jobs become much bigger and broader,” Hammer says.
Responsibility moves down the corporate organization to-
ward the people actually doing the work. As a result, people
have much larger responsibilities for major chunks of the
whole process rather than being confined to single tasks.
“Workers are expected to make their own decisions
about the best way to accomplish complex pieces of the
process as opposed to following orders and referring all is-
sues up the chain of command,” he points out.
To meet this responsibility, they need a greater under-
standing of customer requirements and customer opera-
tions. They need the authority to make the decisions that are
now their responsibility and see those decisions carried
through. “So we have moved from the narrow specialized
jobs to big, broad and responsible jobs.”
For instance, Hammer says, one manufacturing com-
pany he works with used to have a central group that cre-
ated the production schedules everyone followed. The
problem with this approach was its inflexibility, and the
company could not respond quickly to customer requests.
To gain competitive advantage, it wanted to move to a
build-to-order model with short production times between
customer order and product delivery. To do this, it reorga-
nized its manufacturing effort into production teams, each
linked closely to customers. Every day, each team decided
what it would build that day based on the customer orders
it needed to fill and the raw materials available.
“The important concept for this model is the team,”
Hammer says. “The workers on the manufacturing floor
work together as a team to decide not just how to produce
the product but what to produce and when. So much more
authority is pushed down to the front lines.
“Information about customer needs and the raw materi-
als available are what lets these teams take on this broader
authority,” he says. By harnessing IT to provide direct links
between the teams on its factory floor and its customers, it
cuts through the normal chain of information from customer
manufacturing engineers to customer supply managers to
the manufacturer’s sales force and through that to manufac-
turing schedulers and finally to the manufacturing floor.
Instead, the people who do the work hear directly and
instantly from the key people in the customer’s organization
and can respond quickly to satisfy customer needs. The re-
sult is a major reduction both in the time it takes to deliver
products and in the inevitable errors that happen as com-
plex information on customer requirements are passed from
hand to hand through the old information chain.
—B.L.
plify manufacturing. The auto industry uses the concept of
the “multi-tier supply chain.” Some suppliers are desig-
nated as tier one, which means they produce whole sub-
systems like automobile seats. They deal with tier-two
suppliers who provide springs, fabric, etc., for those seats.
ANNUAL EDITIONS
They, in turn, deal with tier-three suppliers who provide the
raw materials. The tier one suppliers have the responsibility
of bringing the supply chain together to deliver finished
seats to the right Chrysler factory, ready to install, rather
than springs, bolts, and fabric. The result is that the tier one
suppliers concentrate on what they do best—producing
specific car subsystems, freeing Chrysler to do what it most
needs to do—design and sell cars.
APICS: What part does information technology (IT) play in
supply chain reengineering?
Hammer: Information technology is the enabler for reengi-
neering. The key to allowing companies to integrate across
boundaries is sharing information, which is achieved by IT.
Electronic Data Interchange (EDI) has been the primary
mechanism for information sharing between partners in the
supply chain until now, but we are starting to move past
EDI. For example, as we speak, the automotive industry is
going live with the Automotive Network Exchange (ANX) to
allow sharing of a lot of information on the Internet along
the entire manufacturing process.
APICS: It’s often advised that manufacturers should
change their business practices first and then automate
the new methods. However, IT often creates the opportu-
nity to reengineer in ways that are impossible with paper-
based methods. Which should come first—the installation
of IT tools or reengineering?
Hammer: You don’t install the technology first, but you do
have to understand it first. You cannot design your new
business processes without a knowledge of what technol-
ogy can allow you to do. Learning that spurs your imagina-
tion to design the process, and then you use technology to
implement the design.
APICS: You have said that a successful reengineering pro-
cess needs a leader, a process owner, a reengineering
team, and a steering committee. Who are the best candi-
dates for leader and process owner for supply chain re-
engineering projects that, by their nature, involve two or
more companies?
Hammer: You really need a pair of people on each role be-
cause you are crossing enterprise boundaries. Typically,
you need an executive leader and a process owner at both
the customer and supplier. The leaders, in particular, need
to be reasonably senior people because you are expecting
massive behavioral change in the organization, which
never comes easily or lightly. You are asking people to
change their attitudes and share information with other
companies, which is very counter cultural.
From APICS—The Performance Advantage, January 1999, pp. 44-48. © 1998 by APICS, the American Production and Inventory Control Society. Re-
printed by permission.
Most important, they must be willing to share the bene-
fits of reengineering with the other organization. A com-
pany that wants to hog all the benefits of reengineering will
get slaughtered because no one will be willing to play with
it. Everyone has to benefit for everyone to be willing to
make the massive changes in operations that reengineering
demands.
These are radical changes in traditional modes of opera-
tion. Unless someone at the very top is driving the process,
these changes tend to be lost in the resistance of the orga-
nization to massive change, and the reengineering effort
will fail.
Similarly, the process owner needs to be highly visible
and respected person to demonstrate that reengineering is
being taken seriously. A token person does not make a state-
ment that the company is serious about cross-boundary
change.
APICS: Should the reengineering team include representa-
tives of other organizations in the supply chain?
Hammer: Yes, very much. Your suppliers and customers tell
you what to do. Chrysler, for instance, has a program called
Score in which their people work with suppliers to help the
suppliers figure out better ways to do business.
APICS: Do the people involved in reengineering have a
personal stake in its success—what happens to those who
succeed in reengineering their companies?
Hammer: Success in reengineering can be a big career
boost for the key people involved in it. At Texas Instruments
(TI), for example, the process owner for one of the first re-
engineering efforts was Tom Engibous. At the time, he was
vice president and general manager of a TI business unit.
He had the authority and clout to drive fundamental
change that lead to enormous improvement. Now, six years
later, he is CEO of the company.
APICS: In general, what advice do you have for manufac-
turers who are considering supply chain reengineering?
Hammer: First, if you haven’t already started, you’re be-
hind. Second, you must push the envelope. Merely repli-
cating in 1999 what your competition did in 1996 will not
get you far enough. You must go beyond, look for new
ways to speed cycle times, cut costs, improve asset use, and
add more value to the customer.
Bert Latamore is a freelance writer in Alexandria, Va.