Achieving the Holy Grail of "perfect orders" involves more than just plugging data into software. Companies must also restructure their supply chain processes from end to end.
- What it takes to achieve high order-fulfilment rates
- How to restructure your supply chain to get there
- What to do when the costs outweigh the benefits
In late 2003 Qualcomm's CIO Norm Fjeldheim started seeing signs that the demand for mobile phone chips was rising much faster than expected. Consumers around the world were snatching up mobile phones at an unprecedented rate, and manufacturers of the popular handsets were scrambling for more chips. For Qualcomm, which sells chips to the mobile industry, the unexpected mobile phone frenzy hit its supply chain where it was most vulnerable. "Our customers were not getting everything they asked for," says Fjeldheim, noting that demand for the chips rose 37 percent in one year. "We could not increase our supply, and some deliveries just weren't possible."
Out of stock. Whether referring to semiconductor chips or potato chips, these are dreaded words for those in charge of far-flung and increasingly complex supply chains. In Qualcomm's case, the company not only missed an opportunity to significantly boost revenue but also was forced to re-evaluate the way it did business.
Since that period of panic (which lasted for most of 2004), Fjeldheim and his colleagues at Qualcomm have reorganized the supply chain so that they won't get caught by surprise again. Company officials are bringing supply chain, finance, IT, and sales and marketing together for regular demand-planning sessions. And the company is trying to increase the flexibility of its supply chain by working with multiple suppliers, rather than single suppliers, to build a set of chips. It has also started sharing more information (via Web connections and file downloads) with its 10 chip makers. Should there be another unforeseen spike in demand, Qualcomm will be better able to shift production back and forth between suppliers, if necessary. So far, Qualcomm, which ships 140 million chips per year to mobile phone manufacturers such as Samsung and Motorola, has improved its on-time product delivery rate - which had fallen below the 90 percent level during the chip shortage - to 96 percent, a high rate in an industry grappling with shorter lead times for its products than many other manufacturers.
AMR Research says the pay-off for companies with high rates of "perfect orders" - those that are complete, in the right place, undamaged and on time - can be substantial. AMR recently ranked the world's top supply chains (see "Top 10 Supply Chains", below). Companies that ranked high - such as Dell, Nokia and Procter & Gamble - carry less inventory, have shorter cash-to-cash cycle times and are more profitable. A 3 percent improvement in perfect order fulfilment translates to a 1 percent increase in profits, AMR says, while a 10 percent increase means an additional 50 cents in earnings per share. (Qualcomm, with revenue of $US4.9 billion in 2004, is too small to make it onto AMR's list, but the company qualifies as a top supply chain because of its ability to effectively collaborate with handset makers and mobile phone service providers, says Kevin O'Marah, a supply chain analyst at AMR.)
To get to this Holy Grail of order fulfilment, however, takes more than plugging data into software programs. In fact, companies that want to achieve and then maintain high perfect order rates may have to restructure their supply chain processes from end to end. They have to build systems that connect them in real time to both suppliers and customers, thus enabling the development of tighter relationships with both parties. They have to feed information from customers back to suppliers and get a clear forecast of customer demand. And internally, they have to improve long-term demand visibility through constant collaboration between supply chain leaders and the sales and marketing departments.
Striving for perfect orders can be costly. In order to get the most from investments in supply chain technology and processes, companies need to take a targeted and gradual approach. "If you don't first determine where the gaps are in your supply chain, you might be shooting blindly," says AMR's Debra Hofman. In fact, for some companies - for example, those that make commodity parts such as ball bearings or other items that can be stored cheaply - the cost of striving for perfect orders may not be worth it.
For most industries, however, including automotive, electronics and retail, the pay-off for high order-fulfilment rates can be substantial. And CIOs who want to be key players in their companies' strategic planning need to play an important role in overseeing the new supply chain strategy. Since they understand what information technology is capable of, they are in a good position to argue the business case for greater investments in the supply chain. "Supply chain is no longer a back-office activity," says Kevin O'Connell, director of manufacturing and procurement processes at IBM's integrated supply chain division. "It has become a potential competitive weapon in the boardroom, and IT is extremely important because technology ultimately enables the various processes."
O'Connell and others stress that companies must first revamp their business processes and then choose the technologies that support those new processes. "Getting our supply chain in order is 75 percent process and 25 percent tools and technologies," Fjeldheim says.
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