[From iSource Business, June/July 2002] The Supply Chain Network @ Internet Speed describes the challenges and opportunities of effectively managing the supply chain in the Internet age in six different industries. This excerpt is from Chapter 3, Supply Chain Innovation, which discusses the challenges in the high-tech sector. It deals with how companies can use supply chain innovation to maximize working capital efficiencies.
Case in Point: The PC Industry
In order to find what is really driving change in the PC industry, one must look to the source of innovation. Many PC manufacturers provided direct innovation in the product itself for many years. However, because of the explosion of technological advances in PC components, this is no longer the case. The suppliers are now providing the direct innovation, with the PC manufacturers providing indirect innovation.
Another factor fueling the hypercompetitiveness of the industry is the deep discounting by suppliers when a new generation of processors, operating systems or memory is introduced. These new generations of components are instantly in high demand. They also render the older generations of components with a much lower level of demand, virtually overnight. Thus, this is an industry that requires instant response to the market on a day-to-day basis.
A demand is also created within each PC company for flexible, effective supply chain management that operates at Internet speed. There is no room for anything other than execution with speed. The stakes are too high; one market-share point is now worth $2 billion. Obsolescence can kill profit margins, yet loss of customers can kill a company.
From Linear Supply Chains to Network Supply Chains
In the personal computer industry, the result of forces driving change in the industry is that supply chains are no longer linear. Before the technology explosion of the last five to seven years, supply chains moved product and information from suppliers to manufacturers to wholesalers/retailers in defined steps. Today, information moves independently of the product flows and at Internet speeds. The old supply chains have evolved into networked supply chains that rapidly network optimal partners with the right components, technology and services for customers. These networked supply chains are extremely dynamic, allowing for companies to be included or excluded based upon technological advances, product life cycles and customer preferences.
The networked supply chain solution manages the complexity of this dynamic network by integrating sales and marketing activities with operational decision-making while synchronizing multiple supply chain partners. The supply side includes suppliers, direct fulfillment providers, logistics service providers or third-party logistics providers, and contract manufacturers. The supply side is linked to the value web through a supply communicator.
The demand side of the networked supply chain includes the standard channel sales (including customer direct) of the Internet; and new channels, like kiosks at university bookstores. The supply side is linked to the networked supply chain through the customer communicator.
There are two essential value drivers in the networked supply chain. The first value-driver, influencing customer demand based on inventory visibility, focuses on coordinating customer relationship management activities with demand and supply planning and matching activities. This includes segmenting customers based on buying criteria; controlling the flow of products through more traditional measures, such as price, promotion and placement of products based on availability; and collaboratively planning demand and supply throughout the supply chain.
The second value-driver, coordinating the networked supply chain to meet customer fulfillment, focuses on the coordination of real-time order management and supply chain excellence. This includes providing delivery based on material, manufacturing, assembly and transportation constraints; synchronizing execution; and replacing inventory with information.
Where Are We Today?
The small number of essential PC components has given rise to the outsourcing of assembly and shipping operations. However, given the limited supplier base for essential components, any shift in supply of essential components can create havoc in satisfying PC demand. At the heart of the interoperability between assemblers, suppliers, and third-party assemblers and logistics companies is the demand, supply and supply chain planning across the extended enterprise value chain. Yet these factors in a multi-company supply chain take on a significant complexity challenge. To do this with extremely short lead times demands speed and intelligence in system solutions.
Working Capital Efficiency: How to Get Started
There are three main areas of free cash flow and working-capital efficiency: inventory turns, days sales outstanding (accounts receivable), and days payable (accounts payable.) The executive must focus on business fundamentals to align these three areas to optimize free cash flow. Here is a five-step process to get started on the road to greater working capital efficiency.
Step 1: Identify, then institutionalize order-to-delivery expectations of customers. Customers like to pay for items at the time of, or after, delivery. Customers also like to pay for expected service levels around consistent products. The result of compressing the time between the placement of the customer order and the delivery of the ordered product is the acceleration of the receivable from order to cash. The two critical success factors here are speed and consistency.
Step 2: Establish customer-payment parameters. For PC companies that interact directly with customers, the establishment of customer-payment parameters is straightforward. There should be payment terms that stress cash or credit-card payments at the time the order is placed or at the time of delivery. Only account sales should be allowed, and they should be set up before orders are placed and should be reserved for volume buyers. What about offering customers credit for their purchases? Credit is dangerous with products that have life cycles that approximate payment terms. Restrict credit sales to credit cards and to large-volume customers with known credit histories. If the computer, the price and the service are overshadowed by the credit terms, then a corporate decision must be made about the profitability and risks associated with open credit terms. For nondirect distribution channels, tight credit terms are a necessity. Treat the computer hardware as a perishable commodity and get the money as close to the order date as possible. This will ensure better cash flow and better ordering habits by the retail or wholesale distributor.
One way to ensure customer satisfaction is to implement an online, real-time order management system with an interactive customer-order configurator. This allows the customer to be active in the product selection process as well as in their payment expectations.
Step 3: Profile, then link order information visibility with suppliers. The critical success factor in compressing customer orders for delivery/cash cycles is the immediate linkage of suppliers to actual customer orders. The lack of visibility causes suppliers, wholesaler distributors and even retailers to build up inventories to insulate themselves from the unknown fluctuations of customer demand. This distancing of the networked supply chain partners from the actual customer demand will encourage these partners to focus on internal efficiency activities instead of satisfying customer demand. These actions will add time between order and delivery, thus adding time between order and cash.
A critical activity here is to develop an electronic link between the real-time order management system, the bill of materials supporting the order configurator and the suppliers. This electronic link from actual customer order to supplier bill of materials translates actual customer demand into supplier speak. At the heart of this linkage are the customer and supplier communicators, or portals. The selection of the portal provider should be based on connectivity to other processes in the networked supply chain.
Step 4: Map, then transform networked supply chain activities with compressed time-frame parameters. Once the information linkage is established, supply planning and supply chain planning activities should be performed. This effort should be done from raw materials to final product delivery. The competitive order-to-delivery customer expectations identified in Step 1 should guide the supply planning and supply chain activities. Realistic time parameters should be placed on each supply chain step. The executive should work backward, from delivery of the final product to shipping to assembly to component supply delivery, while mapping and setting strict time frames for each stage of the supply chain. Performance measurements and compensation plans should be aligned to reflect overall supply chain order-to-customer delivery execution and the individual functional performance. The electronic link is to have the fulfillment process, complete with constraints, built into an order fulfillment system that is interactive with the real-time order management system. Customers can then understand real-world constraints when their product is configured, shipped and delivered with a high degree of certainty.
Step 5: Establish supplier payment parameters. By compressing the time between customer order and product delivery, an executive is compressing the time between suppliers shipping materials or components and the customer providing the networked supply chain with the cash for the final product. Therefore, it is critical for the executive to align supplier payables, whenever possible, with final product customer delivery. Suppliers should be given incentives to manufacture according to actual customer demand. They should also be rewarded when this transformation occurs. Once the payment process is designed with the appropriate rewards and penalties, the supply chain partners can function as one entity to access the customer cash as quickly as possible.
Online order tracking through customer delivery is a necessary activity. It must be integrated into an automated payment system that is triggered by final customer delivery.
Putting It All Together
Identifying, then institutionalizing the customer order to delivery expectations sets the basis for supply chain time compression. It also provides an entrance into establishing tight customer payment parameters. The supply chain partners must have access to actual customer demand if they are to have a sporting chance at fulfilling the customer's order-to-delivery time expectations. The networked supply chain must coordinate activities that both individually and collectively fit into the overall customer order-to-delivery time expectations. Included in this time coordination of activities are the alignment of performance measurements and compensation to reflect the performance of the networked supply chain as a whole and the individual's performance. An outcome of this process is delaying the value-add in the supply chain to as close to customer delivery as possible. This time compression also brings supplier payables closer to the customer's, providing the networked supply chain with cash for the final product. Only the appropriate systems (Web-based and traditional) can accelerate the speed and accuracy of the flow of information from customer demand through the supply chain, customer delivery and cash transactions. Time compression and customer satisfaction means cash acceleration.
The result of this process is compressed order-to-cash cycles and includes faster receivables, compressed payables and accelerated inventory turns. In other words, the result is accelerated working capital turns, greater free cash flow and enhanced market capitalization. All supply chain partners, and all of their shareholders, benefit from this achievement.
Fred A. Kuglin is a vice president in the Supply Chain Operations practice with Cap Gemini Ernst & Young. Kuglin has over 20 years of consulting experience, focusing on strategic planning, network optimization and supply chain management. Other industry experience includes senior posts with Frito-Lay Inc. and EDS/A.T. Kearney.
Barbara A. Rosenbaum is a director with the Global Supply Chain service line of Cap Gemini Ernst & Young. Rosnbaum also has over 20 years of supply chain consulting and industry experience. In addition, she served on the faculties of Johns Hopkins University and Loyola College, and has published numerous articles.