Last summer, Ford Motor Co. had to move quickly to restore consumers' badly shaken confidence when the news broke: Defective Bridgestone/Firestone tires on Ford Explorers were to blame for 119 traffic deaths and more than 500 injuries in the United States. Ford CEO Jacques Nasser pledged that the recall of the estimated 6.5 million defective tires would be the quickest in Ford's history. With the recall well under way, Ford officials announced in September that consumers and dealers would be able to choose whether they wanted Firestone, Goodyear or Michelin tires on new Explorer models.
Without a highly efficient computerised system for doing business with its tire suppliers, Ford would not have been able to offer consumers this option. Relying on phone and fax messages would take far too long to communicate customer preferences from the dealer to the Ford factory to the tire companies, all of which are links in the overall car production supply chain. Ford's tire-choice initiative is the highest profile example to date of a program enabled by a highly evolved supply chain, one in which customers declare their preferences to the manufacturer close to the time the product is being built on the factory floor.
The program requires flawless communication and seamless interfaces between Ford, its tire suppliers and their suppliers. So far, 97 percent of customers have chosen tire brands other than Bridgestone/Firestone when buying new Ford Explorers. Now that Ford is rolling out its 2002 Explorer model, the company is hoping that initiative has soothed consumer worries - and will bring the auto titan one step closer to meeting customers' individual needs.
Thankfully, a crisis such as Ford's won't push most executives to launch a supply chain initiative. But crisis or not, there are huge benefits to be gained from using technology to streamline and coordinate the activities of every company involved in making a product. Supply chain projects can help companies reduce cycle time, increase their flexibility and eliminate the need to stockpile inventory. They can also cut costs by eliminating obsolete business processes, reducing mistakes and decreasing the number of hands that touch goods on their way to the end customer. This overview of the current state of supply chain optimisation practices spotlights companies at different stages of the undertaking.
Many people view supply chain optimisation primarily as an exercise in inventory reduction. But the ultimate goal is to garner higher profit margins on finished goods. "People focus on inventory first. But when you move into collaborative product development, it makes a big difference in the product's profitability," says Kevin O'Marah, service director for supply chain strategies at AMR Research in Boston. The theory is that customers will pay top dollar for products that exactly match their needs and desires.
"[With critical input from trading partners and customers] you're designing the product for greater customer acceptability, easier serviceability and better sourcing. All of these factors contribute to better margins," O'Marah says. He notes that companies that can produce customised goods in mass quantities - Dell Computer and Levi Strauss were pioneers - can command the highest margins of all.
Today's supply chain optimisation stars often come from the retail industry. Since retailers add no value to the product itself (because they are not manufacturers, after all), intelligent and efficient product distribution can be a top competitive differentiator. Wal-Mart famously led the way a decade ago, leveraging its colossal buying power to make suppliers play a greater role in managing inventory. Increased efficiencies allowed Wal-Mart to slash costs to consumers. The formula has paid off handsomely: With net sales for the year ending Jan. 31, 2001, at US$191 billion, the discount retailer is now the second largest company in the Fortune 500 (right behind Exxon Mobil). High-tech manufacturers such as Sony Electronics have also been early adopters of supply chain technology, which has helped them fight constant price erosion.
Popular collaborative supply chain execution software packages, such as i2 Technologies' i2 TradeMatrix Plan, Manugistics Group's e-Chain and Parametric Technology's Windchill, enable companies to optimise business processes both within and outside the four walls of the enterprise to more efficiently deliver the new products customers want, when they want them. But supply chain technology is comparatively new, and many industries have not yet embraced it.
For companies that haven't yet made a foray into supply chain optimisation, the most logical starting point is inside the enterprise. Automating procurement of supplies, for instance, might seem pedestrian, but purchasing paper and pens at an online portal rather than using manual methods can be a quick win, O'Marah says.
Depending on your company's size - and relative clout in your industry - your supply chain effort may have to remain an internal matter. Like many in his boat, Peter Gerhardt of Town Shoes (a 49-store Canadian shoe retailer) does not have the market power to require his suppliers - all much bigger companies than Town Shoes - to revamp their business processes. For Gerhardt, supply chain optimisation means improving internal operations, or what happens to the shoes once they arrive from the vendors.
But the most significant supply chain gains will come from projects that extend well outside the enterprise. "You won't just interact with your suppliers electronically, but you'll do things jointly that allow you to come to a better solution for the customer," O'Marah says. Companies will proactively share product demand data, for example, so that suppliers can plan their own production processes around real-life customer demand.
If you're ready to start a supplier-focused project be sure to start small. "Do an experiment with a division that should be shut down anyway. Begin to understand the big picture, but go for the low-hanging fruit first," O'Marah says. For some that can mean porting electronic data interchange (EDI) transactions to the Internet to save costs, as Sears, Roebuck and Co. has done. For others, it could be as simple as using a product like Digital Paper's docQuest to compress large-format engineering documents for electronic transmission to partners. For a company with US$1 billion in revenues, it would be reasonable to spend about US$3 million on the first supply chain project (with US$1 million for software and US$2 million on labor), O'Marah says.
The good news is that supply chain optimisation isn't a big-bang undertaking like the enterprise resource planning (ERP) installations of recent years. "Just pick a good place to start and don't worry too much," O'Marah advises. Read on for ideas about where to begin.
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