To the uninitiated, the phrase supply chain management may have the quaint ring of the fading industrial economy, conjuring visions of assembly lines, warehouses, truckers and time sheets. And in fact such a vision would come pretty close to describing much of today's business, which -- new economy hype notwithstanding -- is not taking place primarily in the corridors of cyberspace. Bricks and mortar still matter.
Even so, the traditional vision represents only one dimension of a business environment that is growing increasingly multidimensional. That multidimensionality makes innovation in supply chain relationships not only possible but imperative. Getting a product made, sold and delivered today requires collaboration among members of a supply chain to manage sensitive strategic planning, the flow of information and the compatible design of the underlying IT. Supply chain members must also work together to cope with the political challenges posed by shifting job roles and responsibilities.
How can you turn one of the oldest business problems (King Solomon reportedly ordered Lebanese cedar for his temple in Jerusalem) into an advantage in the new, connected economy? Here are some tips from companies and experts in the thick of supply chain improvements.
1. Get Perspective
ANYONE WHO HOPES TO PUSH HIS OR HER COMPANY'S supply chain to its best must first take a broad and sophisticated look at the business as a whole, including its current strategy and where it wants to go. Over the last decade, the best CIOs have grown from managers of technology to drivers of strategic change. A comparable challenge awaits any executive who expects to achieve the speed, efficiency and customer satisfaction that supply chain management promises. At companies where a head of supply chain has not been appointed (which is to say, at most companies), leadership of supply chain strategy typically falls to a veteran of manufacturing, procurement or logistics.
Those managers are rarely equipped to see and manage the links between traditional supply chain areas and marketing, branding and product management. That's a problem because supply chain strategy is increasingly being integrated with overall corporate strategy, says Wally Buran, a supply chain specialist and partner in the Atlanta office of Deloitte Consulting.
Therefore, make sure a wide range of executives, or one executive without functional blinders, is in the driver's seat. Don't just think but hire outside the box. "There is a new breed coming through in supply chain management that is not tarred with that functional background, but few are at the VP or C level yet," says James Warner, global leader of the Supply Chain Management Practice at PricewaterhouseCoopers LLP in London.
One groundbreaking example of this new generation's taking the reins is a merchant banker who joined a European retail company to manage its mergers and acquisitions. "Things went slack, and so they asked him to look after the supply chain. He was bright and a senior executive," Warner recalls. Success came from his broad view, not previous experience.
Food company giant Nestl SA feels so strongly about the need for a supply chain perspective that it has devised a short training program for its managers from around the world at its International Training Centre in Vevey, Switzerland. Executive vice president and CFO Mario Corti expanded his awareness of supply chain strategies while CFO of Nestl USA in Los Angeles in the mid-1990s. He has now motivated the company to teach its managers to relate supply chain decisions to the future market valuation of the company.
The program uses a modelling tool from Powersim of Herndon, Virginia, that "captures some simple ideas about how goods are flowing from supplier to manufacturer to distributor to consumer," says Bernard Teiling, assistant vice president of business process integration at Nestl headquarters.
Over a day-and-a-half, managers simulate the next six years of supply chain management and the consequences for the company as a whole. Typical options include optimising factory performance, increasing the flexibility of production at one or several factories with highly seasonal demand, perhaps closing another, shifting distribution centres or helping a retailer manage inventory. The complexity builds progressively. The two-year-old training project is now expanding into some country units of Nestl, bringing together managers of product divisions and national markets.
"In the consumer packaged-goods industry," Teiling says, "you succeed only if the entire chain functions properly." Hence the need for managers from different departments to work together.
"In the same way that an instrument panel has many variables, a supply chain is a combination of responsibilities that come together, so we have at least three people share the scenario . . . one may be from manufacturing, another from distribution, another from sales and marketing; they need to come together to understand how they jointly create value."
2. Don't Underestimate Learning Costs
ALTHOUGH NOT A PROBLEM EXCLUSIVE to supply chain management, the cost of training people to use new software is still easily underestimated. "With the technology we have today, you can send information around the world in a second, but it can take days to get into someone's mind," sums up Tom Pike, CIO of Nashville, Tennessee-based Magnatek, a global manufacturer of electrical products such as motors, generators and lighting ballasts.
Two consulting firms advised Magnatek to count on training and change management as significant costs of improving its supply chain management. To which Pike would add the opportunity cost of not having those employees doing something else with their time and the travel costs for his geographically dispersed company of 13,000 employees.
3. Reconsider What's Efficient
SOURCING MANUFACTURING IN EMERGING market nations rather than the United States can seem like a cost-saver, but it may end up being more expensive in the end. Magnatek found that although its factories in Mexico were efficient because of low labour costs, most of the products were destined for the Great Lakes region of the United States, so it would be cheaper to transfer production back to the company's older and larger factory in Tennessee, and thus save on shipping costs.
Likewise, Magnatek realised that its sophisticated hub-and-spoke distribution system centred outside Nashville was not necessarily the most efficient way to cover long distances. It has now begun shipping some products directly from a factory to the customer, leapfrogging the distribution centre that had supposedly rationalised logistics.
But straight as the crow flies isn't always the answer either. If trucks sent to a customer are not full, the transportation cost per unit of product will be high and may well justify going back to the hub. Relearn your geometry: A straight line is the shortest distance between two points -- most of the time.
4. Serve Your Partners
WHEN IS A SUPPLIER NOT MERELY A SUPPLIER? When it knows how to manage its customers' inventory. In fact, suppliers that do not share their supply chain finesse with their customers could soon be left behind by those that do. A handful of companies are engaged in pilot projects in which they not only manage but own their customers' inventory.
Deloitte's Buran cites Earthgrains, a St. Louis-based baker, that has its drivers deliver and scan each product as it is placed on the shelves at Wegmans Food Markets in New York and Pennsylvania. Wegmans doesn't devote any time to keeping track of the arriving shipment; the receiving clerk need no more than wave to the delivery person. Most radically, the baker owns the bread until it crosses the checkout scanner, reducing the retailers' risk to zero.
Buran recalls another client, a manufacturer of packaging materials, that offered to solve the procurement problems of a customer who had more than a dozen other suppliers of complementary packaging materials. The manufacturer agreed to handle procurement of all packing materials and ready the client's product for shipment in exchange for 100 per cent of the client's packaging business. It worked so well, the packager is offering this service to other customers and has created a $US350 million business in the process.
5. Break Up the Turf Wars
ALTHOUGH THE EXECUTIVE MANAGING the supply chain has the company's best interests in mind, he or she ought to look carefully at the habits and motives of other departments that might resist innovations. And then make an argument for the overall supply chain priority to the conflicting departments.
For example, a common complaint of supply chain executives is that the sales organisation's drive to meet its end-of-period goals "creates inefficient and costly peak demands as well as unnecessary work resulting from returned orders", according to a recent study by KPMG LLP in which executives at 21 companies were surveyed about their supply chain practices. At the same time, manufacturing chiefs seeking to bring down their costs want long-term forecasts and long lead times. But the same survey found that accepting those preferences leads to otherwise avoidable excesses and shortages in product supply, raising costs and losing revenue. An executive with a vision of the overall best interests of the supply chain process must make the call on whose efficiencies are most important.
In a similar vein, Statoil AS, the Norwegian state oil company, found that it was allowing different business units to misbalance supply chain priorities because each sought to maximise its own profits. The unit that produces propane gas, a by-product of oil extraction, wanted to keep production at a steady rate for efficiency.
Shippers wanted bulky and highly predictable production to make it easier to schedule and fill tankers. Sales wanted heavy production in the winter, matching demand. They couldn't all win, of course. "When you optimise subsystems, you suboptimise the system," explains Michael Bean, vice president of Powersim, the software provider that Statoil used to run supply chain simulations. As a result of those simulations, the company shifted priorities and reconfigured business units in the chain for the good of the whole. Contrary to the commonly perceived logic of supply chains, Statoil found that increasing propane inventory would reduce shipping costs and enable it to sell the highest volume at peak moments of demand.
6. Let the IT Configure You
SAD TALES ABOUND OF GREAT, strategic IT implementations that went far beyond projected time and budget because they had to be customised to a company's business processes. But not everyone need fall victim to that. Olympus America, a manufacturer and distributor of cameras and medical devices in Melville, NY, tackled its supply chain implementation by re-engineering its operations to fit the business processes of J D Edwards' software. "There were some areas of resistance [within Olympus to imposing the software's discipline]. We had to articulate what [internal clients] wanted," says Olympus vice president and CIO Lee Wachter.
Salespeople, for example, were used to having commissions triggered by a sales order, and the software Olympus was implementing was configured to trigger commission when the goods were shipped. That meant a delay in payment for salespeople but a more logical way of operating a supply chain: "Now we're not issuing commission on orders that can be cancelled," Wachter explains.
The software configuration also led to the creation of a single customer master file through consolidation of customers across different operating divisions, replacing the practice of having separate divisions in the company keep information about the same customers. It also unified its product listings so that different business units would not be selling the same products under different numbers. Wachter championed changes in human behaviour as being more businesslike and less costly than changes to the IT.
7. Don't Overestimate IT
WITH MANY SOFTWARE VENDORS now touting Web-enabled products to streamline work with other businesses, it is tempting (though expensive) to overestimate the current state of connectivity. Only a few companies are far along in Web-enabling their supply chains. Truth is, most of industry is in the middle of a battle over data communication standards, and many of the large players would each like its house-developed system to become the standard for data transmission.
"The key issue today is the connected supply chain, the value Web," says Christopher Gopal, national director of supply chain and operations consulting for Ernst & Young LLP in Cleveland. Web-based monitoring systems and collaborative planning systems are the present for some companies and the future for most. But many obstacles remain to compatibility and sharing of information. "Different members of a supply chain have different metrics, data definitions, part numbering systems and different ERP systems. Getting collaboration is complex," Gopal says. The software vendors that solve those problems will be in great demand. "Those systems that are able to interface are the ones that are going to be able to drive competitiveness," he adds.
One company that began venturing into Web-enabled pilots in mid-1998 is Nabisco, the dry foods manufacturer in Parsippany, NJ. "We know we need some kind of collaboration software; we need to be able to plug into the customers' forecasting system," explains Gerard Cantwell, director of customer service. But that is easier said than done. "There are blind spots: A lot of the systems are not set up to handle the level of cooperation and detail [that Nabisco would like]," Cantwell says. Ultimately, Nabisco wants to be able to share viewability of its customers' and its own forecasts, using the real-time changes to improve, say, distribution. In one trial run using new software from Syncra and Manugistics, Cantwell says, Nabisco has cut inventory by 18 per cent at its customers' distribution centre.
8. Organise for Flexibility
AS SUPPLIERS AND CUSTOMERS REORGANISE for efficiency, companies can get caught being unable to compete if they can't match customers' ways of operating. Take for example a supplier of foods whose operating divisions -- frozen food, refrigerated food, dry goods -- each had its own order, delivery and billing systems. Then one day, a retailer says its other suppliers are offering fewer deliveries that include a wider range of products, combined ordering and a consolidated bill. To accommodate those demands, the supplier must change dramatically. "Those who can't integrate and simplify to develop customer interfaces are going to get clobbered," Deloitte's Buran predicts.
9. Create a Sharing Culture
IF YOUR SENIOR MANAGEMENT is full of people who probably failed sandbox, don't try supply chain management without giving them a refresher course in sharing. Take the case of a large computer distributor whose leaders did not want to share any data or engage in collaborative planning. "They were scared the vendors would learn too much about their customer and demand patterns, and [that they would] get disintermediated," recalls Steven Gold, a partner in KPMG's supply chain strategy practice in Chicago.
A newly arrived CEO had a vision of sharing more real-time information via an Internet-based tool with his trading partners, "but others in the organisation resisted this new technology in a big way due to its organisational and redesign requirements. So the CEO contracted directly with the vendors [of collaborative supply chain software].
It was pretty brutal for some time; he got zero cooperation from his direct reports, and we were in the middle." By the time the mess was cleaned up, several of the resistant senior executives had been excused, the CEO was let go by the board, and the vendor was left hanging. "It was the right solution, but internal resistance to sharing information put the whole project [in jeopardy]," Gold says.
10. Think Global, Start Local
A SUPPLY CHAIN IS A COMPLEX SYSTEM, and tinkering with it on a global scale could yield unpredictable results. Vic Leo, manager of organisational learning Ford Motor in Dearborn, Michigan, has found a way to reduce this risk by launching a series of pilot supply chain projects, while resisting executives' demands for speedy global rollouts. "Putting your ideas and principles into action is critical for learning," Leo says.
In order to do that, he runs projects according to the methodology of organisational learning, using small meetings to tease out what managers in various parts of Ford's supply chain really think about how the system in question works, and then putting those managers' assumptions and process flows into a simulation model.
For nearly 30 years, Leo says, managers have been tinkering at the edges of material release systems -- the mechanism to trigger orders and delivery throughout the chain. "At some point, the systems get totally beyond the grasp of any individual or team; the simulation world allows you to think big again," he says.
The simulation began using one Ford plant in Wixom, Michigan. Though the pilot was very successful in improving supply chain management, Leo has had senior Ford executives pounding the table in front of him, demanding to know why he can't work his learning organisation magic on a fast, global scale. But he resists. "Gambling [on a companywide rollout] in this day and age is going to be a disaster for companies."
Inventory being held across the retail supply chain at any one time amounts to $US1 trillion, according to a report by Benchmarking Partners, based on US Department of Commerce data. The Massachusetts-based consulting firm estimates 15 per cent to 20 per cent of those inventories ($US150 billion to $US200 billion worldwide; $US40 billion to $US50 billion in the US) could be eliminated through improved planning, forecasting and replenishment.
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