Building a Collaborative Value Chain: Five Stages to Success

You can have a company that is a leader in collaboration, but take it one step at a time.

Despite the fact that "collaboration" has achieved buzzword status within the supply chain industry, it still remains an effective way to rein in the parts of a heavily outsourced or decentralized supply chain. Yet, for most manufacturers, true collaboration with external partners and the various internal business units will take several years, and this perceived long-term return on investment (ROI) has prevented many businesses from committing to the collaboration process.

Instead, companies must learn to measure ROI incrementally throughout the path to collaboration. Measurable ROI can be derived from various stages in the collaborative evolution, beginning with simple inventory management and ending with an Internet-based link to all partners (internal and external), demand forecasting and so on. To ensure that decision-makers within the organization realize the incremental ROI and stay on-board for the long haul, a master plan must be developed that identifies each specific stage and includes metrics that guide the move to the next stage.

Stage 1: Operational Excellence "The foundation for Supply Chain Excellence"

Organizations focused on Operational Excellence are at the beginning stages of automation. They have many manual or semi-manual processes and are at the trailing edge with the systems and technology they do utilize. Their efforts are focused on meeting daily production requirements within individual manufacturing facilities or divisions.

In Operational Excellence organizations, production schedulers focus primarily on adjusting the daily build plan based on available materials. Procurement personnel focus on executing lengthy P.O. processes and contacting suppliers to expedite material shipments. Supplier relationships are frequently antagonistic and depend heavily on contractual arrangements. Materials management personnel focus on receiving, shipping, expediting and locating inventory, as inventory systems are manual or spreadsheet-based.

Organizations pursuing Operational Excellence keep raw materials inventories high to buffer uncertain sources of supply. Finished goods inventories are kept high to expedite customer orders. Material costs and labor costs are high, as each division or business unit functions independently. The Operational Excellence organization concentrates on avoiding production line downtime and meeting daily production requirements in an environment lacking supplier trust and the systems required to provide visibility for effective process execution.

Operational Excellence organizations focus on controlling processes within the facilities of individual manufacturing sites or divisions. Improvement efforts are directed at implementing formal forecasting and scheduling processes and systems, and implementing materials resource planning (MRP) or enterprise resource planning (ERP) systems to provide functional support to planners, buyers and materials managers. These organizations must look to establish accurate baseline data from which further improvements can be built. This fundamental infrastructure must be in place in order to move toward collaborative network leadership.

Stage 2: Internal Collaboration "Getting the internal house in order"

Organizations in the Internal Collaboration stage are driving toward internal efficiency across the enterprise. They have improved operations at the plant or business-unit level and are now focused on adopting advanced processes, as well as enabling technologies across business units and geographies to make sure the internal divisions, processes, organizations, performance measures and technologies that are necessary to fulfill customer requirements work together. These companies are trying to improve their overall cost structure and profitability within the enterprise. They may be playing "catch up" to competitors who took earlier risks to improve their operations.

Internal Collaboration organizations have formal forecasting and scheduling processes supported by ERP systems. However, the processes differ, and multiple ERP systems exist between and across business units. Forecasts are not synchronized with supply chain partners, creating a "bullwhip effect" for inventories across the system. Buyers lack enterprise-wide visibility into bills of material and cannot leverage direct materials purchases with single suppliers, although they may be leveraging their spend on maintenance, repair and operations (MRO) items. As a consequence, material costs remain high.

Suppliers communicate with most business units in an Internal Collaboration organization via electronic data interchange (EDI), but receive and process orders from different business units as if for separate customers. Compared to Operational Excellence companies, inventory management within the business unit in this stage is more sophisticated, since it is supported by an ERP system. However, visibility into the supply chain and across business units is minimal. Therefore, effort is focused on ensuring material flow to keep production running, and raw materials inventories are kept high as a buffer. Order fulfillment is improving, although missed deliveries still occur, resulting in lost sales. As a result, finished goods inventories remain high.

Internal Collaboration organizations have accrued benefits from business-unit level improvements. They are now focused on developing and implementing common processes and systems across the enterprise, including internal APS solutions and data integrity efforts, to achieve internal integration and visibility. In addition, they must develop data standards and communication protocols with suppliers and aggregate their spend to reduce material costs and improve supplier relationships. Collaborative solutions can be leveraged to achieve these aims, but this is often the hardest step to achieve and requires the most change management. It is critical to have one's own house in order before inviting partners in to collaborate, because internal disconnects will be exacerbated in a collaborative environment.

Stage 3: External Collaboration "Web-enabling transactions for speed and simplicity"

External Collaboration organizations have integrated business processes and systems to create enterprise-wide commonality. They can no longer realize significant improvement in the organization's overall performance by improvements within the enterprise. They must now seek external improvements achievable only by working with their supply chain partners.

External Collaboration organizations introduce supplier-managed inventories and may outsource non-core activities like assembly and logistics. Forecasting and scheduling now involve key supply chain partners, and plans remain mostly fixed. This results in lower inventories in the supply chain and some reduction in the bullwhip effect. Procurement is characterized by plan-driven, automated purchase order (PO) communications through EDI (or a similar method) and advanced shipping notification (ASN) transmissions for shipment monitoring. Procurement personnel are focused on maintaining supplier relationships and working with suppliers to improve quality and reduce costs. Inventory visibility is available across the enterprise, as well as at key suppliers and certain logistics providers. Fulfillment has the tools and visibility to manage material availability while reducing finished goods inventories and meeting customer requirements.

External Collaboration organizations struggle to develop links with their supply chain partners and manage the impacts of demand fluctuations using inflexible, slow inter-company processes and unconnected systems. They operate with a limited ability to optimize capacity, inventories and resources across the supply chain. Having focused on their core competencies, they now struggle to manage a disaggregated network of suppliers, contract manufacturers and logistics providers, as well as to maintain quality levels and order fulfillment commitments to customers. Collaborative solutions benefit External Collaboration organizations by rapidly enabling the connectivity they need with their trading partners. This allows them to achieve speed and visibility and improve the trust required to benefit from collaboration.

Stage 4: Collaborative Information Sharing "Unlocking value through shared planning"

Companies that have reached the Collaborative Information Sharing stage are engaging their trading partners in the extended supply chain for the purpose of creating value for the combined virtual supply chain, as well as for their customers. These are the companies that were quick to recognize the value of managing the entire supply chain as a single system and the value of working with their trading partners to gain competitive advantage.

Companies at this stage strive to implement collaborative forecasting, scheduling, procurement and fulfillment processes with critical partners. They work with their trading partners to develop collaborative forecasting and scheduling processes that are flexible and allow for quick responses to changes in demand. The PO process is evolving to enable rapid acknowledgement and two-way communication to negotiate order fill amounts and ensure supply. Inventory visibility is extended beyond key suppliers into the extended supply chain. Process and technical standards are being introduced across all supply chain partners to facilitate the automated exchange of data and collaborative decision-making capabilities. As a result inventory levels drop, process costs fall and customer service increases.

The challenge facing companies in the Collaborative Information Sharing stage is to quickly re-aggregate their trading partners into a flexible, responsive operating network capable of delivering value to each participant and to customers. They seek a collaborative solution capable of delivering rapid time to benefit, scalability and security.

Stage 5: Collaborative Execution "Managing the customer-driven value chain"

Organizations that have reached the Collaborative Execution stage are at the leading edge of collaborative evolution. They recognize the potential of the new business model enabled by the Internet and collaboration. They have a track record of applying new processes and using technologies in new ways. They are moving beyond collaboration with supply chain partners and are starting to include customers and the sales and marketing processes into their collaborative value chain. These companies seek to link the entire customer-driven value chain in a new way to improve their competitive position, to drive customer loyalty and to improve profitability.

Collaborative Execution companies attempt to capture actual demand and propagate the single demand signal back through the collaborative network to drive production schedules, material requirements and order fulfillment routings. They are focused on delivering a product built or configured to the individual customer's needs, and the collaborative network must have the infrastructure, connectivity and processes to enable this objective. By capturing this demand signal, they drive down costs across the network, reduce inventories and significantly raise customer service levels.

The challenges faced by Collaborative Execution organizations are centered on connecting sales and marketing processes with supply chain processes to enable a fully customer-focused collaborative value chain.

A Step in the Right Direction

Companies considering collaboration must first assess their readiness for collaboration based on their current infrastructure, processes and organization, both internally and with their trading partners.

Regardless of their state of collaborative evolution, companies in each stage face similar challenges in achieving collaboration. They need a proven solution that can be tailored to fit their needs and operating realities with proven technology and processes. They need the ability to integrate the solution architecture with their existing back-end systems, other applications and with their trading partners' systems. Most importantly, they must be able to realize benefits as quickly as possible.

Matt Porta is a partner and global strategy lead for the Collaborative Value Chain Solutions of PwC Consulting.