[From iSource Business, October 2001] Ask Christopher Flum, C.P.M., to describe what his company's supply chain will look like in the future and he'll tick off a list of adjectives that are worthy of a PowerPoint slide: Virtual. Smarter. Faster. More efficient. Smaller.
The supply chain in question is that of The Budd Co., a $2.5 billion tier-one automotive supplier that manufactures parts found on more than 100 current vehicle models sold in North America. Flum, a 15-year purchasing and supply chain veteran with such companies as General Motors and Allied Signal (now a part of Honeywell), is corporate manager of strategic sourcing and e-business team leader for procurement and supply chain at the Troy, Mich.-based Budd, which is a division of German industrial group ThyssenKrupp Automotive Co.
Flum's PowerPoint list is a sign of the times. Economic trends are compelling companies to pursue strategies for delivering ever-greater value out of their supply chains on a year-to-year basis. It's all about speed, cost, change and the tools we're going to use to get us there, Flum says.
Analysts, consultants and software providers have responded to these trends by putting forth various visions for the supply chain of the future, which is often dictated by their particular product or service offering. The blizzard of press releases over the past two years frequently has obscured those trends that are real and those that are merely hype. Nevertheless, some general characteristics of a common vision have begun to appear recently with all signs pointing to a supply chain built around compressed cycle times and increased information flows. Not everyone is ready to jump on the enabled supply chain bandwagon, however, and a few opposing voices are offering a competing vision for a federated supply chain that these dissidents say holds the key to keeping a supply chain competitive in the years ahead.
While it's too early to tell which vision will prove the more prescient, both camps are already suggesting the next steps companies need to consider taking, and they are pointing to likely success factors for enterprises moving toward their next-generation supply chains.
Catalysts for Change
Supply chains don't exist in a vacuum, and companies obviously don't re-engineer their supply chains on a whim. Hugh Baker, a sourcing practitioner at the London office of consultancy Booz Allen & Hamilton, points to several macro trends that are driving changes in the chain, beginning with deflation and ending with the emergence of e-business.
Expectations that the U.S. savings rate will increase in the near-term are combining with increased competition domestically and globally to put downward pressure on prices, Baker argues. To maintain margins, companies will be forced to focus on productivity gains within their own enterprises and also to shift deflationary pressure upstream in their supply chain. Eventually suppliers will run out of margin to give up, and buying organizations will have no choice but to work more closely with their supply base on innovation, product specifications and joint efforts to eliminate cost drivers and to change the mix of goods or services the suppliers provide to the enterprise.
Baker further asserts that increasing requirements for mass customization and increased service levels to consumers and customers up the value chain are leading companies to adopt increasingly sophisticated supply chain functions. At the same time, Robert Ferrari, an analyst with Boston-based technology consultancy AMR Research, points out that companies are outsourcing increasing numbers of processes, creating an extended enterprise for which the supply chain systems of the past are not necessarily adequate. Fortuitously, e-business solution providers have come forward with new tools that supply chain practitioners need so that their enterprises can work more closely with suppliers and customers.
The Connectivity Vision
Analysts, consultants and solutions providers continue to debate how companies ultimately will integrate those new tools into their operations and the shape of the supply chain of the future. However, some consensus is forming around one vision for the next-generation supply chain. The underlying theme: connectivity.
The supply chain has always been about companies working together, and these relationships have always involved some degree of collaboration to solve bottlenecks in the supply chain and overcome bumps in demand or supply. But as Chris Newton, a senior research analyst with AMR Research, notes, Traditionally these activities have been very silo based, and not a lot of real collaboration was going on. The problem was that the interaction between the individual players in the supply chain was primarily human-to-human. The speed with which information travelled limited the utility of that information.
Now, with the advent of the Internet, companies are starting to integrate their supply chains in a system-to-system manner, minimizing the need for human contact, human data entry or any sort of human involvement. Moreover, data can move in real-time and disparities in size are becoming less critical as software providers come up with solutions that allow small companies to connect with large customers through the Web. While the applications to connect companies with their trading partners are far from free, the Internet is a relatively inexpensive medium, unlike a value-added network (VAN) that charges a per-transaction fee for data transmission.
In addition, system-to-system connectivity can allow for communication between different functions within a single enterprise. Carl Drisko, president of online logistics optimizer Logistics.com, says that while the planning, forecasting and execution functions have had some degree of interaction all along, the combination of new standards, such as eXtensible Markup Language (XML), and new supply chain event management applications are allowing for closer cross-functional integration in real-time. I don't think any of that is particularly new, Drisko admits, but the technologies support it a whole lot better than what had been out there previously.
The Virtual Enterprise
The implications of this type of connectivity are numerous. Joe Pecoraro, chief operating officer at MaterialNet, a provider of sourcing and procurement applications for direct and indirect materials, says supply chains are evolving into supply webs. Instead of linear relationships up and down, with single points of failure, a web-like structure will grow as it becomes easier - and more advantageous - to deal with many suppliers, Pecoraro predicts.
The goal, says IBM's Carol Ptak, is a virtual enterprise, a group of intricately linked companies that behave as though they are one company. Ptak, who spent 20 years working in supply chain systems and six years in consulting prior to joining IBM, is program director for midmarket business and global services at Big Blue.
The virtual enterprise is a necessity, Ptak asserts, to move companies from an available-to-promise mode to what she calls dynamic, capable-to-promise. The assumption since the era of manufacturing resource planning (MRP), she argues, is that when a company completes a product it goes into stock and then that inventory gets promised to a customer. More advanced inventory systems have made companies better able to make that available-to-promise commitment. But when a customer wants something that isn't in the company's inventory, both sides lose. In this situation and under the dynamic, capable-to-promise function, the company - and possibly even its suppliers - would work with the customer to design the desired product, and the supply chain would align to produce that particular good. The theory is that because the company is dynamically linked in a web with a variety of suppliers rather than locked into a rigid chain, the company can identify the suppliers best suited (with the optimum mix of performance and available capacity) to participate in producing the end product. The idea is for the total cost to be much lower and the quality of the finished product for the end customer to be much higher.
Such a dynamic, capable-to-promise function presupposes working together with customers and suppliers to design an end product and being able to identify the suppliers best suited - in terms of performance and capacity - to participate in a given project. Let's tackle each of these points in turn.
Design for Supply Chain, Not Assembly
This magazine has covered the drive to introduce collaborative engineering tools that allow manufacturers to work with their customers and suppliers in an online environment to design new products (see Stop. Collaborate and Listen, iSource Business, September 2001). But according to Dave Seybold, managing principal in the supply chain planning practice at IBM Global Services, the potential of design collaboration goes well beyond the engineering function. There is a tremendous need, Seybold says, to consolidate procurement and other business processes with supply chain processes focused on product creation. You have to start earlier in the [design] cycle planning for procurement and planning for the supply chain. In other words, companies must move beyond design for assembly to achieve design for supply chain. Engineers, Seybold asserts, tend to focus on the best engineering solution, which might not be the optimal solution from a procurement and supply chain point of view. By involving the latter two functions at an early stage of the product life cycle, a company can take advantage of its relationships with suppliers, as well as information on the performance of the company's supply chain. With that data in hand, for instance, the company can then weigh options for each component of a bill of materials and decide the merits of sacrificing some aspect of form, fit or function in favor of a supplier that performs better in on-time delivery or that offers better terms for a particular component. The end result: satisfied customers get products that meet their specifications, the company optimizes its use of resources and its supply chain, and suppliers participate in a project that plays to their strengths.
The ability to identify which suppliers are best suited for a particular project will be key to the success of this type of dynamic supply chain, according to Jeff Baron, director of marketing at Open Ratings, a service that offers what it describes as predictive supplier performance ratings. You don't necessarily want to do business with the suppliers that are best in every category, Baron says. If on-time delivery isn't as important to you for a particular category, you don't need to do business with the supplier in that category that has the best on-time delivery. The costs would likely be higher than for a supplier with a lower on-time delivery rating but lower costs.
Distributed Order Fulfillment
Another precondition for the success of the dynamic supply chain is the much-ballyhooed visibility, another topic covered by this magazine (see Supply Chain 20/20, June 2001). AMR's Newton says that technologies available today can provide information on the current inventory status of a given supplier, allowing a company to book inventory held by a third party for a particular order. Similarly, the technology is available today to view and book production capacity at a supplier. One result of all this visibility is the up-and-coming concept of distributed order fulfillment. With the technology coming available, Newton says, it's a real possibility that you, as a company, can dynamically source products from your supply network, track the status of the order with each supplier, coordinate a merge-in-transit shipment to bring that order back together, and then get it to the final customer, all under a single invoice. Newton cites companies such as i2 Technologies, Vizional Technologies and Yantra as solution providers that have been working in this area.
All this connectivity is having one other consequence: time compression. This magazine has covered the drive to reduce cycle times through the adoption of automated tools that accelerate order processing (It's About Time, November 2000), but the talk these days is about collapsing forecast horizons to the extent that supply chain planning becomes supply chain execution. Analysts from U.S. Bancorp Piper Jaffray, led by Jon Ekoniak and Tim Klein, write in their weekly e-mail newsletter, The B2B Analyst, that the Internet's ability to increase the flow of real-time information can be seen in the creation of collaborative planning solutions that can take on a more executional feel because they are driving the realization of faster, more immediate and dynamic plans that can be reoptimized daily versus monthly.
Finally, while it seems almost hackneyed to say so, it's worth noting that connectivity is also allowing for a greater degree of automation in the supply chain than was possible before the rise of the Web. e-Tools have the potential to free supply chain practitioners from tactical or manual tasks so they can focs on more strategic functions, such as building closer relationships with suppliers. Says AMR's Ferrari: In B2B, you're doing business around the clock. Because of that, the notion is that you need to let the application try to manage the day-to-day activity, and the focus needs to be on when something goes bump in the night, when supply and demand don't match, when an order doesn't get fullfilled or when an exception gets drawn in the supply chain.
Supply Chain Community
The bottom line for this orthodox vision of the supply chain's future is, in a word, community. The supply chain, so this vision goes, will become a forum for continuous real-time interaction between companies and their suppliers and customers. Don Willis, CEO of IPNet, a company that provides e-business connectivity software, puts it like this: By the end of this decade we're going to look at the supply chain as an organism in itself, as an entity unto itself, where information will flow freely between these different components of the supply chain. The parts of the entity that are dedicated to a particular project will vary, depending on which combination of trading partners can provide the optimal solution for the end user. Relationships will become paramount, both within and outside the enterprise. Relationships are going to be more and more key than they've ever been before, says Flum, of The Budd Co., noting that all the e-tools in the world won't do any good without cohesive buy-in from a company's internal divisions and suppliers.
This shift from supply chain and purchasing as isolated functions within the enterprise to the supply chain as a community that extends beyond the four walls of any one company will also necessitate a change in how the chain is managed, according to Bill Michels, CEO of ADR North America, a supply chain consulting firm based in Ann Arbor, Mich. Supply chain management now spans numerous functions across the enterprise as companies become aware of the impact on shareholder value that the supply chain can bring. We're really moving to business managers, Michels says, and he points to a generational shift within purchasing and supply chain departments, for example, as bright young MBAs capable of operating on a business level, not a functional level, move into key positions.
Barriers to Change
Clearly none of this is going to happen overnight. Barriers abound, not the least of which being uncertain economic times. An economic slowdown can affect efforts to build a next-generation supply chain in at least two ways. First, supply chain practitioners that just now are contemplating such projects are likely to find little enthusiasm among upper management for grandiose, expensive information technology (IT) projects. MaterialNet's Pecoraro points out that the steep learning curves involved in moving to new technologies and new processes often equate to disruptions in business-as-usual, which can mean less revenue and lower profits. That's not what board members want to hear in the current economic climate because, as Pecoraro says, Wall Street won't accept quarter-over-quarter setbacks.
Nor are companies that have already embarked on supply chain re-engineering projects immune to the impact of a flagging economy. Kevin Williams, manager for account development at American Express Corporate Services, warns that as the economy lags, the funding that has been provided for e-supply chain initiatives could start to decrease. The risk is that a company that was partway through an implementation will drop it, stall it, postpone it or drag it out, he says. As a result, people's enthusiasm for the project might flag when they don't get the results that they expected. Cost can be an issue even when a company is fully funding its own supply chain initiatives. What about the company's suppliers? For example, Cindy Cronin, vice president of strategy at Ability, a provider of supply chain solutions to mid-market distributors, notes that midsize companies, with lower IT budgets, are likely to be reluctant to adopt a new technology until it is proven. Moreover, while small- and medium-sized enterprises are feeling pressure to move toward new supply chain technologies, Cronin explains, Their back-office systems may not be compatible to the outside world right now. As a result, these companies might not be able to provide information regarding current inventory levels or available production capacity on the real-time basis that supply chains are going to demand in the future.
The Risks of Sharing
The issue of who will foot the bill for moving a supply chain into the future can be further complicated by other issues. Drisko, from Logistics.com, cites an example from the transportation industry: Trucking companies generally know where their trucks are in transit, thanks to such technologies as wireless communications and global positioning devices, but the truckers have been reluctant to share that information with shippers. In part, this is a question of staffing: although the truckers have the relevant data, at this point someone would have to re-key the information into a system to make it available to the shippers, or they would have to invest in software to automatically post that information. That's a choice between ongoing staffing costs or a one-time IT investment. But what would be the return on that investment? The carriers know that merely showing the location of a particular shipment at any given moment does not accurately reflect the likelihood that the shipment will get to its destination on time. Carriers can expedite shipments to make sure they are on time, after all. But if a shipper or consignee were to pull up location information that appeared to show the shipment running behind, the carrier could wind up losing business. From the carrier's perspective, it does not make sense to invest in more advanced technologies to make the location information available to the outside world - all the shipper needs to know is that the package will get there on time. Shippers and consignees want more information to help them manage their supply chains, and, moreover, they want that information for free. Technology could help here, Drisko says, were it inexpensive enough that the carriers could afford it. But right now, the case has yet to be made to the carriers that offering this type of detailed, real-time information will net them a return.
The extent to which a company may want to share internal information affects the whole issue of visibility, too. Beyond just issues of security, an enterprise may consider its demand or inventory information to be proprietary. IBM's Seybold cites an example of gaming in the supply chain to illustrate how such information can be used: Last year, during a computer chip shortage in the high-tech industry, some companies were doing a good deal of forward buying as a way to keep competitors from having sufficient supply. When you are pursuing strategies of this nature, it calls into question the degree of visibility that you want to provide into your own supply chain, Seybold says.
Timeline for the Future
Barriers notwithstanding, a sense of the inevitability of change in the supply chain pervades conversations with analysts, practitioners and solution providers alike. Chris Flum sums up the mood when he says, 'e' [as in e-business] is going to go away in a couple years and it will just be business.' New processes and technologies that seem revolutionary today will become a mundane part of the landscape in the years ahead.
How many years ahead is open to question, however, and the pace of change will undoubtedly vary depending on the size of a given organization, its industry and internal culture, as well as such external factors as the economy. Lora Cecere, research director for enterprise and supply chain management with Stamford, Conn.-based technology consultancy Gartner, already sees a wide divergence among the companies with which she is talking. Cecere, who spent 16 years as a supply chain professional buying and implementing systems and four years working in software prior to joining Gartner in 2000, says the early 'A' [adopter] companies on the technological edge, are currently talking to her about supplier relationship management (SRM) applications that combine collaborative planning, forecasting and replenishment (CPFR) with supplier scorecards and technologies to enable buying, selling and negotiating within trading communities.
The later As are talking to her about visibility applications and business process modeling, which allow a company to look at real-time events in the supply chain and make better business decisions in response to those events. These companies are also looking at software to enable collaboration and at the various B2B standards that are emerging, such as RosettaNet and CPFR. Meanwhile, less advanced companies, Cecere's Bs, are working on more enterprise-related supply chain management topics, such as back- and front-office integration, and are trying to reap the benefits of customer relationship management (CRM) applications. Or they're talking to her about more sophisticated features of supply chain planning, such as capable-to-promise or profitable-to-promise. The later Bs and Cs are looking at supply chain planning and supply chain execution.
Beyond Utopia: The Federated Group
Of course, all these predictions could be completely wrong. That, in fact, is essentially the contention of a group of consultants at Booz Allen & Hamilton who say that the above-described orthodox view of the supply chain's future is utopian. Writing in an article entitled Beyond Utopia: The Realists Guide to Internet-Enabled Supply Chain Management, in the consultancy's house magazine, Strategy+Business, this group of iconoclasts asserts that all this talk of planning across the extended enterprise is akin to the dreams of totally planned economies harbored by Communist economic tsars. Instead, they offer an alternative vision they have dubbed federated planning.
Don't laugh. After all, Booz Allen came up with the very term supply chain management nearly 20 years ago. In their article, the authors Keith Oliver, Anne Chung and Nick Samanich, all of whom focus on supply chain management, among other disciplines - argue that supply chains will never be able to function as harmonious, unified entities due to the tensions and complexities inherent in the supply network. Companies may give lip service to the idea of shared goals and shared profit, but ultimately they will behave independently, in their own perceived best interests and in pursuit of their own goals. The anti-utopians suggest, for example, that companies will be unlikely to share information that they view as potentially giving them some competitive advantage.
The Booz Allen group further points to the incredible complexity of today's supply chains, which can involve thousands of companies generating billions of transactions every year. These different nodes in the supply chain form complex webs that are difficult to define and are constantly shifting. Companies within the same chain compete with one another for resources not to mention revenue and profit - and may also belong to multiple supply chains pursuing differing strategies. The consultants finally argue that by stressing real-time information, utopian supply chain management systems could divert a company's attention away from strategic goals and prompt managers to plan based on the latest data rather than on trends.
The Federated Approach
In place of the orthodox vision for the supply chain of the future, the Booz Allen group offers federated planning, a system in which each member of a supply chain continues to act independently in pursuit of its own goals and on behalf of its own shareholders, much like members of a political federation pursue their own policies on behalf of their citizens. In federated planning, companies in a supply chain would hold discussions and negotiations to align their business objectives as a precursor to collaboration. Through ongoing dialog, supply chain partners can understand critical constraints and cost drivers in the supply network and achieve agreement on performance levels, incentives, rules and boundaries, the consultants write. These boundaries define supply policies and targets and govern the flow of information across organizations. Because the dialog is ongoing, the supply chain can renegotiate the rules and boundaries to adapt to new market conditions.
Advocates of the federated model assert that it is less complex and more efficient than the utopian approach. In a federated supply chain, trading partners will evaluate the costs and tradeoffs of doing business with each of their suppliers and customers on a continuous basis, and they will seek out new partnerships beyond the constraints of existing relationships when necessary to meet their own strategic goals. Over time, the theory goes, supply chains will become increasingly efficient as companies swap trading partners in response to perceived potential gains in efficiency or to changes in market conditions.
Hugh Baker, also of Booz Allen & Hamilton, argues that it is the rise of e-business that is making the federated planning model possible. With e,' it is much easier to do federated planning than it was in the ERP [enterprise resource planning] era, Baker says. With e' coming along, you can build an architecture that reduces the barriers to swapping people out because all you're doing is defining the interfaces for communication. You enable the competition inherent in the threat to switch [to a different trading partner] to be played out while optimizing the supply chain.
Once a company practicing federated planning has optimized its supply chain - and its value chain - and enabled competition within those chains, the next step is to move on to what Baker calls product specifications and the whole innovation agenda. On the one hand, this involves getting the procurement department and suppliers involved in new product development to ensure design for manufacturability and assemblability. The federated approach also allows companies to think about how they can change existing products to take advantage of new technologies or new suppliers that offer innovative ways to solve a design problem in an existing product, since this model provides for the relatively easy switching of suppliers in and out of a supply chain.
Perhaps most interesting, Baker says the federated model has the potential to allow companies to design competition between their suppliers into a product by allowing substitute materials to be used as prices fluctuate between the substitutes. You can use the competitive pressure of the substitutes themselves, Baker says. A simple example: design a product so it can be packaged either in shrink-wrap trays or in cardboard boxes, and then alternate between the two as oil and pulp prices fluctuate.
Three Solid Strategies
Let's say you buy into one vision or another of what the next-generation supply chain will look like. What now? What steps can you contemplate to prepare your supply chain for the future? Here again analysts and consultants differ, although some consensus has formed around a few basic steps forward.
The first step, says Gartner's Cecere, is to have a vision, a strategy for where the company wants to take its supply chain. Sounds basic, but as Cecere explains, Supply chain management brings the strategy to life, and if you aren't clear on what that strategy is, you may bring the wrong strategy to life. In fact, Gartner predicts that 5 percent of supply chain planning projects will fail by 2003 due to a lack of a clear vision. IBM's Ptak adds that having a vision in place helps to ensure that any technologies a company adopts get applied to the particular pain points in the supply chain that the organization is experiencing.
Second, before looking outward to your supply chain, make sure your own house is in order. It's important to do a complete analysis of your business and how it needs to interact with your supply chain, says Simon Walls, vice president of consulting strategy for solution provider PeopleSoft. AMR's Newton advises breaking down internal barriers within the enterprise, including integrating internal systems and providing for a consistent view, across different functions, of what is occurring inside the company. Make sure your internal systems are operating as a whole rather than in individual silos, and make sure the systems underlying those operations are connected, Newton says.
Cleaning house implies cleaning your data. That doesn't mean you have to be operating at 100 percent efficiency, says Eric Black, director of consulting, e-procurement and visibility initiatives at DigiTerra, an enterprise application integrator. It means you have to make sure that whatever data or information you're opening up to your suppliers and customers is correct.
Planning for e-Business
Third, be ready for e-business. Cronin, from Ability, says this means more than merely having an Internet presence. It also means understanding how e-commerce fits your business. Newton adds that e-business means getting out of the mindset that all the information you have is proprietary to yourself. You have to realize that there are operational efficiencies to be had from sharing the information, he says.
Once you have a clear picture of how your company can benefit from going e,' you can begin to plan for transacting business over the Internet. Focus first on a limited number of processes that you want to automate, advises Eric Levin, vice president of marketing at online sourcing software provider Frictionless Commerce. While it's important to have everything tied together in the end, there are great gains to be had by breaking down major processes, understanding them and automating them, Levin says. Start with indirect procurement, strategic sourcing, supply chain collaboration and forecasting, or some other process, then identify software that will meet today's needs and also let you link to other processes further down the road. One advantage of this approach is that it helps you avoid falling into the trap of waiting for software that can solve all your problems in one fell swoop. A second benefit, says Joe Brucia, e-procurement practice leader at Technology Solutions Co. (TSC), an e-business consulting and systems integration firm, is that you can implement a smaller solution more quickly and therefore have a better chance of generating a quicker return on the investment.
The same strategy applies to your supply base. Pick a few key suppliers and start passing data to them, Newton says: It doesn't have to be full, lights-out, system-to-system communication. Just start passing data, exchanging sales forecasts or inventory positions or order-status information. Once a basic level of electronic connectivity is achieved, advises Jim Frome, executive vice president and chief strategy officer of SPS Commerce, the company needs to develop a roadmap for how to add increasingly complex transactions that foster more collaborative electronic relationships with all of its suppliers.
On the customer-facing side of your business, Michael Mohrman, global ERP/SCM executive at IBM Global Midmarket Business, recommends working with one or two customers that are indicative of the complexity of your business. This has to be done with a few companies that you know exceptionally well, Mohrman says, customers that will derive as much value out of the process as your own enterprise. In fact, Black, from DigiTerra, says it may make sense to start working with customers rather than suppliers because the former may more readily see the shared benefit. For example, suppliers might be unwilling to share how quickly they will be able to meet your demand, but a customer might be willing to share forecasts so you will be better able to meet that customer's demand.
So as Flum and the Budd Co. pick a supply chain model of the future - the Utopian model, the Federated model, or neither - their opportunity for success will be based on their commitment to the process and support from the right partners. Regardless, hooking yourself into a to-the-future time machine is exciting stuff. But take some Dramamine before you take off.
Planning for Success
No one can guarantee that your next-generation supply chain will deliver the results that you or your shareholders expect. But based on their experience with e-business to date, analysts, practitioners and solutions providers already are offering a few keys to success for building an enabled supply chain. Here's a checklist for the supply chain professional.
* Make sure your data is clean before you and your supply chain start relying on it.