When at the end of the First World War Henry Ford decided to build the Rouge plant in Dearborn, Mich., it sounded natural to co-locate all steps of the production process and have them owned and managed by the Ford Motor Company. Actually the ore and the coal came from Ford-owned mines and the wood and rubber from its plantations. Transportation was performed by Ford vessels and trains. Even the machines were built in-house. This was probably the ultimate in vertical integration; everything was under the control of a single company, and all decisions affecting the supply chain were in the hands of the same management team. It was easy to understand what happened; one just had to contact the right person in the organization.
There is a famous quote by Henry Ford regarding his company's Model T: "The customer can have any color he wants — so long as it's black." Since that time, customers have continually asked for more choice at lower prices, the market has become more global, competition more fierce, shareholders more demanding, technology innovation has increased drastically, and products are more complex to manufacture while their lifecycles are shorter. All these forces, combined with the tremendous improvements in communication technology, have resulted in a disintegration of companies' value chains.
An important side effect is that, where all decisions affecting the Rouge plant were taken in-house, company supply chains today can be affected by decisions taken within hundreds of supplier companies that do not all share a common objective because each of them are interested in their own profitability regardless of the others. Airbus, for example, works with more than 2,000 suppliers to build an aircraft. Many of those are involved from the start and invest in research and development (R&D) alongside Airbus without guarantees on the success of the program. To deliver a plane on time everything needs to line up perfectly. This is the headache with which Airbus supply chain management is confronted. Boeing is confronted with the same issue on its 787 program.
Understanding what happens in such an ecosystem no longer relies on inter-personal relationships between members of the same company but rather on interactions between different companies. As cost reduction programs have strained the relationships between suppliers and customers along those supply chains, gaining that understanding is often rather difficult to obtain. This is where the concept of "business visibility" plays an important role.
In this article, we will first describe what "business visibility" really means and how it can be implemented practically. We will then discuss how such an environment can be developed and what relationships are required with the partners in the ecosystem. Lastly we will review in more detail how targeting specific sets of information can provide major savings to companies running large ecosystems.
We could define business visibility as the "provision of the information and tools needed to run the ecosystem as an integrated business, allowing the fixing of problems in "real-time" and improving the performance of the end-to-end supply chain over time."
In the above definition we recognize three important functions:
- First, the collection of the information required to understand what happens along the ecosystem.
- Second, the identification of where issues are located so that they can be fixed in "real-time." We have to recognize that this term implies different time intervals for different companies. Depending on the processes and timelines of companies, "real-time" information about the supply chain may be required in minutes, hours or even days. A producer of high-volume electronic gadgets has another timeline than a manufacturer of railroad cars, for example.
- Third, the management of what is happening throughout the ecosystem and how things evolve over time to address potential trends and improve the overall operations of this supply chain.
Visibility supports the orchestration of the next-generation supply chain by gathering data in the design, the supply and the demand chains. By combining information from all three areas, it not only provides a comprehensive status of what the ecosystem is up to, but allows understanding of how it performs and where improvements can be made. From that perspective it is a critical component required to develop an integrated and agile ecosystem capable of taking advantage of opportunities in the marketplace while reacting quickly to unexpected events.
Now that we have identified the three components of visibility — data collection, event management, and analysis and reporting — let's take a look at each of them separately and discuss what is required to address the needs described.
To gain an understanding of what happens in a design, supply or demand chain it is critical to find and acquire the appropriate information. Information can be found within the enterprise, with the enterprise's partners or even in public sources. Being able to collect that information and present it in the appropriate way is critical for gaining the understanding for which we are looking.
A first source of information is the enterprise's back-end systems, in particular the enterprise resource planning (ERP) environment. Identifying the appropriate information items and making them available is an important task in developing business visibility. It requires gaining a clear understanding of what indicators the company is looking for, and what elements announce a problem or best describe a trend. The usage of standard reference models, such as the Supply Chain Operational Reference (SCOR) and its key performance indicators, can facilitate this task. In companies that run on a single ERP system identifying those elements is not too complex, but many larger companies have multiple, often independent ERP environments. They may even be from different vendors as the company grew through acquisitions or as IT decisions were left to the individual business units. In those cases it is of the utmost importance to create a standardized set of processes and vocabulary. Many companies actually start their route to business visibility by integrating their multiple ERP systems to coordinate the activities between business units, identifying waste and reducing costs in the process. In other words, in large enterprises business visibility may have to start in-house.
To complement the internal information, companies are collecting information from their supplier and distribution partners. This can be done in a variety of ways, from partners entering information using secure Web sites to automatic transfer of information between company systems, often referred to as business-to-business. Communication and message standards such as electronic data interchange (EDI), RosettaNet and ebXML, for example, facilitate the transfer of information between enterprises.
An important decision to make is whether the relationship between the partners limits itself to transfer of information, or whether the partners take advantage of the integration of their information systems to increase their collaboration. Does information or collaboration come first? This typically depends on the relationship between the companies and the degree of integration of their business processes. If a level of collaboration exists and it implies transactions are electronically exchanged between companies, the gathering of information for business visibility can easily be added. Once again, and we cannot repeat it enough, making sure both parties understand the information in a similar way by standardizing the processes and vocabulary is critical to ensure relevant information is received by the partners.
Over the last couple of years radio frequency identification (RFID) has become popular. The "Wal-Mart mandate" is surely an element driving that trend. Many companies have started experimenting with the technology and have experienced its capabilities and limitations. The latest technological improvements, referred to as "Gen 2" or generation two, will make the technology more reliable and easier to use across country boundaries, which is obviously critical for any multi-national or global supply chain.
In 2005, 58 million tags were used to track products through the supply chain. Unfortunately many companies limited the use of those tags to "slap and ship," where they put the tags onto their products as required by Wal-Mart and various other retailers but did not take advantage of the technology for their own use.
By attaching such tags earlier in the process, companies can track their products across their supply chains and, in doing so, gain better insight into what actually happens. Information provided by RFID or other locators like barcodes complements the ERP and partner information quite well. And once companies understand the added value of tracking products across their supply chains, the demand for better business visibility will drastically increase. The earlier companies embark on such journey the sooner they will gain profits, market share and better master their supply chain costs.
One last source of information may be important in business visibility, and this consists of public information such as can be found on the Internet. Early warning of competitor moves, geo-political events, natural disasters, or issues hitting suppliers or other partners, for example, allow companies to react faster and improve their responsiveness. Obviously, where the other data are typically structured and in numerical form, the data described here are unstructured and require different analysis tools.
Once the information has been collected, whether structured or unstructured, and "standardized" so that it can be exploited by analysis tools, it can be scanned for potential issues. A variety of events can be searched for, such as:
- Inventory stock-outs or pile-ups at a given node in the supply chain.
- Sudden changes in performance of one of the members of the ecosystem.
- Change in forecast.
- Reception of order.
The above events can be directly identified from a single piece of information provided by one single source. But where things really become interesting is when multiple information items provided by a variety of sources are correlated to spot more complex events. Examples of these are:
- Delays in order delivery
- Late shipment of a component or ingredient
- Delays in logistics
- Issues in product quality
- Change in market demand
Actually, one may even want to go further. When an order is fulfilled by the ecosystem all members work together to perform one business process called "order-to-delivery." The technology exists for companies to electronically monitor business process step by step. It is called workflow or business process management (BPM). By recognizing the appropriate information and using it to identify the completion of specific process steps, a company can follow the order-to-delivery process from end to end.
Gathering the data required to understand whether the partners do their job well and whether contractual agreements are met is a great improvement over many companies' current situation in which contracts are signed, filed and their execution is never evaluated.
Providing visibility into what happens in the supply chain and tracking an order as it progresses through the ecosystem also allows companies to identify orders that are in danger of being delayed. They can then decide what should be done to make up for the delay or, if that is not possible, inform the customer early of what is happening. In doing so customer satisfaction can be improved, giving them time to take the new situation into account.
Analysis and Reporting
We have looked at how to gather data and how to act on what is happening in the ecosystem in "real-time." We can also use the same data to analyze how the supply chain is behaving over time, such as where the delays are or what inventory buffers we really need in the supply chain.
Over the last several years, the concept of "Lean" has emerged. Lean is not a new concept; it consists in producing only what is needed, when it is needed with zero defects. In their book Lean Thinking, James Womack and Daniel Jones identify five organizing principles:
- 1. Specify value by product
2. Identify the value stream for each product
3. Make value flow without interruption
4. Let the customer pull value from the producer
5. Pursue perfection
The Lean concept was originally used at factory level and called lean manufacturing. Here again, the fact that all the information is available within the same organization makes it easier to apply. Lately we have seen a trend to start using the Lean concepts at a supply chain level. This is obviously called "lean supply chain." But here the information needs to be gathered from a variety of partners in the supply chain. Therefore, business visibility is a key enabler for the lean supply chain as it provides the information foundation required to perform the analysis identifying the areas of waste and loss of value. Companies that intend to develop lean supply chains should start by implementing a business visibility solution to gather the data they will require to spot waste in the system.
By defining key performance indicators, reviewing how they evolve over time and looking at why deviations take place companies can optimize their ecosystems and understand how their partners are performing. This provides companies with better decision-making tools and allows them to substantiate appropriate decisions.
Companies can even use predictive algorithms to spot trends early and take corrective action prior to the moment something is going wrong. For example, if the defect rate of a product increases regularly, a company can realize there is a quality problem, even if acceptable defect rates have not yet been passed.
What can we use such analysis for?
- Review the evolution of key performance indicators (KPIs) over time by reporting on KPI trends.
- Analysis of the supply chain cost by applying activity-based costing techniques to the flow of products through the ecosystem, hence finding pockets of costs and inefficiencies.
- Identification of inventory-driven costs by understanding the evolution of stock levels at different nodes in the supply chain.
- Manage warranty by spotting issues early and understanding where quality problems occur
- Risks can also be identified through the spotting of variations in the performance of partners
- Ensure partners are delivering on their service level agreements, and if not enforce appropriate contractual clauses
As the relentless cost cutting continues in enterprises, understanding ecosystem performance and spotting waste early provides companies with a competitive advantage, allowing them to improve their market position both from a financial and a share perspective. Such companies are capable of applying Lean concepts to their ecosystems.
About the Author: Christian Verstraete is the senior director, Solutions & Technology Integration, Worldwide Manufacturing & Distribution Industries, Technology Solutions Group, HP. For more information, please visit www.hp.com/go/manufacturing or http://h71028.www7.hp.com/enterprise/cache/4520-0-0-0-121.html for more information about HP Supply Chain solutions.