The Supply Chain of the 21st Century

There is great value in harnessing the power of supply chain ecosystems to drive growth and efficiency in a business. Applying ecosystem principles helps businesses create and master this "chain of chains" that envelops the multi-enterprise scope of the company's suppliers and customers to function as one synchronized unit.

There is great value in harnessing the power of supply chain ecosystems to drive growth and efficiency in a business. Applying ecosystem principles helps businesses create and master this "chain of chains" that envelops the multi-enterprise scope of the company's suppliers and customers to function as one synchronized unit.

The supply chain, as it currently exists for most companies, is a linear function of buy, sell, ship and pay. However, technological advances and communication innovations over the last 40 years have increased the complexity, opportunity and benefits associated with effective supply chains.

Even so, few companies have successfully realized the benefits. Most are still striving to integrate functions such as forecasting, purchasing, manufacturing, distribution, sales and marketing across their supply chains, and few have crossed the chasm to create a harmonious "chain of chains" or supply chain ecosystem, that envelops the multi-enterprise scope of the company's suppliers and customers to function as one synchronized unit.

Today's Supply Chain Ecosystem

Supply chains have evolved from merely a linear mechanism to a complex, multi-enterprise ecosystem. To understand the supply chain as an ecosystem, it is important to first understand the elements of any ecosystem. An ecosystem can be defined as "a community of different species interdependent on each other together within their environment, which is a relatively self-contained entity in terms of energy flow, adaptation and interactions" (From Note: definition simplified for the purpose of this article).

Within a supply chain ecosystem, a community is any combination of supply chain participants acting as a population. Interdependent species are supply chain ecosystem participants that, through their actions, impact the supply chain in whole or in part. Three categories of action or "energy flows" are present in a supply chain ecosystem: transactions, collaboration and initiatives.

Transactions are the life-blood or the circulatory system of the supply chain ecosystem that gives the ecosystem a reason to exist. Transactions are specific messages that are exchanged between two or more participants in the ecosystem, such as purchase orders, invoices, shipping notices, and payments. Transactions drive the end-state value of revenue generation (either directly, i.e. purchases, or indirectly, i.e. fulfillment) in the ecosystem, hence its role as the life-blood of the ecosystem.

Collaboration is the set of nerves or the nervous system within an ecosystem giving the ecosystem a way to create greater sensitivity and understanding to drive optimization. Collaboration includes sets of data, messages or process execution that drive clarity, increased understanding and knowledge of the conditions and uses of transactions within the ecosystem. At an extreme, collaboration is used to facilitate and manage the process such as made-to-order design, define available-to-promise distribution, or negotiate context-based pricing. At a more basic level, collaboration is used to increase the level of synchronization that exists between the participants of a given supply chain ecosystem to enable efficient transaction processing. The ultimate value of collaboration is increased efficiency in the timing and use of transactions within the ecosystem.

Initiatives are the mind and imagination of the supply chain ecosystem and consist of community or ecosystem-wide activities that drive some level of adaptation to the ecosystem. Common examples include outcomes of industry standards groups that drive changes in the way the ecosystem functions (X.12, RosettaNet, UCCNet), key industry "heavyweights" that require a fundamental change in the way others interact with them (i.e. Wal-Mart and the Department of Defense's radio frequency identification (RFID) initiatives for logistics and order fulfillment, or the evolution of generally accepted practices within an industry like the use of advanced ship notices rather than purchase order acknowledgement to trigger order fulfillment and acceptance).

The ultimate value of an initiative includes efficiency leaps, adoption of future capabilities that will keep the ecosystem from ultimately becoming extinct or tighter ecosystem communities. Initiative end-states are often expressed as improvements or changes in collaboration and transactions. Initiatives can create powerful positive leaps. They also can create an imbalance between members of the supply chain that is a competitive edge for some members and a Darwinian effect to others.

Ecosystem Adaptation

Adaptation occurs when a supply chain participant, population or community must align itself with the ecosystem environment for the purpose of survival (keeping existing relationships alive) or value increase (efficiency, speed, profitability, etc). Adaptation occurs within all categories of action in an ecosystem. There are two areas that impact adaptation: activity volume and disruption:

* Activity volume varies widely within an ecosystem based on the ability of the population to absorb the activity. Transactions and predefined styles of collaboration have tremendous tolerance for very large volumes. They are highly adaptive to volume scalability without significant stress on the ecosystem or cost to accomplish the volume. Complex collaboration is not predictable or well defined, and almost all initiatives have low tolerance for high volume. They quickly experience effectiveness breakdowns due to the lack of preparedness of the ecosystem to embrace and absorb the activity.

* Disruption sensitivities also widely vary. Transactions generally have little to no tolerance for disruption. This is particularly true of real-time or near-real time transactions and transactions that, by their execution, create time-dominant dependencies (order sourcing transactions to determine carrier, route and distribution flow). Collaboration on the whole has general tolerance for disruption but must be tuned to absorb disruption. This is often done with processes and event triggering mechanisms but in some instances it is done manually, through close coordination between human buyer and supplier. Initiatives, almost by definition, are high disruptors and rely on disruption as a driver of change and adoption. In the most altruistic sense, initiatives seek to change the status quo through innovation to create a new generation of efficiencies. Without this kind of disruption, there would be little improvement in an ecosystem.

The speed and effectiveness of adoption is based on several factors that impact the members and the ecosystem as a whole:

* Level of sophistication of the member. All members of an ecosystem are not equally sophisticated in vision, process, technology or resource talent. Members that excel in this area have much higher odds of success with effective change definition, execution and completion.

* Member impact. The amount of "push and pull" impact a member has within their ecosystem affects adoption rates of a member. The ability to drive one's view, require specific standards adherence, create standards or advocate for a position all make a smoother adoption for the member with leverage.

* Tolerance of change by the member. Change adverse organizations or members that are somewhat insular from the ecosystem will struggle to adopt change at a pace consistent with the velocity of their ecosystem.

* Ability to focus and invest. The ability of the member to take on the change, both philosophically and from an investment perspective aids in the adoption process, the odds of success of adoption and likelihood that the member's organization will embrace the change leading to adoption.

* Previous successes or failures within the ecosystem. Ecosystems that, as a whole, have a track record of successful change that positively impact all members are more tolerant of change, more open to mandate and more likely to innovate.

Ecosystem Management

Effective management is critical to the success of the members in a given ecosystem. In a multi-enterprise environment, transactions and collaboration seek to optimize the value of the ecosystem to each member. This is typically experienced in the cost-effective generation of revenue. Given the complexities of a given ecosystem and the reality that at any given time there will be at least one initiative exerting pressure on the concepts and processes of the ecosystem, management is very fluid and is based on the impacts of the major areas of action reviewed earlier: transactions, collaboration and initiatives. There are two basic kinds of ecosystem management:

Flow and Control
Flow and control are the management techniques that are applied to a supply chain ecosystem to manage the volume and effectiveness of transactions and collaboration. These include:

* Order management — The set of practices and processes that govern the transactions and collaboration related to "order to cash" processes. Practices vary widely and have varying degree of efficiency. In some ecosystems they include all facets of the business, from planning through payment. In others, they are simply processes used to manage purchases.

* Visibility — The set of practices and processes that provide insight and clarity into the progress of transactions and collaboration related to order management.

* Event management — The set of practices and processes that provide proactive and reactive management of pre-planned or exception-based actions that occur during the execution of order management activities.

* Community management — The set of practices and processes that drive the efficient identification, communication, relationship structure, and performance of community members within the ecosystem.

Extension and Innovation
Extension and innovation involve the management and execution approaches related to collaboration enhancements and initiatives within the ecosystem to support optimization. These include:

* Standards and open forums — The purpose of standards bodies and open forums are to foster collaboration and innovation that become standard practices and capabilities within the ecosystem. The choices of the standards, the decisions to participate or not participate, the investments made to provide the concepts that come from these groups all drive the acceptance and wide adoption of new practices and methods to drive efficiency and optimization through commonality. At the point of greatest maturity, the practice is ubiquitous within the ecosystem and is part of the social fabric of the environment. An example of this would be the electronic data interchange (EDI) standards that are used around the world.

* Industry mandates — The purpose of industry mandates is to "kick start" a specific practice or innovation. Industry leaders drive industry mandates and the purpose is typically to create leading-edge differentiation for themselves based on needs in the market. Mandates work because of the dependency of the members, real or imagined, on the member that is mandating the change. Twenty years ago, mandates were common and, in an environment of point-to-point relationships, had high levels of acceptance. Today, mandates are still as common but the tone has changed. Most industry mandates (data synchronization, RFID, use of UCCNet or RosetatNet) actively show and explain to the members of the ecosystem the expected results.

* Practice sharing — There is more collaboration among industries today than ever before fostering an environment, to a degree, of co-opetition. While no member of an ecosystem will divulge trade secrets or sensitive information (like price), there is recognition that electronic techniques and technology advancement have created a slimmer veil between the members of the ecosystem and therefore certain practices and improvements that are shared by all increase the overall efficiency of the ecosystem. Companies view their ability to absorb a practice to gain even a temporary advantage as a reasonable outcome and that if the members of an ecosystem share with each, they will improve through gaining many small, short-term advantages.

Ecosystem Equilibrium

Ecosystem management techniques span immediate to long-term timeframes. Because of the need and complexity of multi-enterprise ecosystem environment, there is little advantage to a given initiative or transaction best practice over time. Therefore, members tend to gravitate to a leading edge, "main pack," or laggard membership level in the ecosystem. The leading edge companies seek to constantly innovate and extend. The "main pack" of members works to adopt new innovations at a pace that keeps the leading edge happy but with the most cost-effective model possible. The laggards are late adopters or will not adopt the change at all and will seek ways to only comply at a minimum level.

There is no right or wrong to the position a member takes. Certainly there will be consequences over time to lack of adoption, but usually adoption occurs even if it is not efficient in the case of the laggards. The interesting reality of an ecosystem environment is that due to the mutual dependency between the members, the ultimate distance, or advantage, between the industry leaders that drive the mandates and the main pack is surprisingly small. Usually, the industry leader has innovated to the point of slightly over-building a capability (more capability than it actually needs to optimize). The "main pack" usually adapts to just slightly less full optimization and equilibrium is struck. The outliers are the laggards.

To date, the technology and process innovations have not created sufficient simplicity to provide higher adoptions to the "spirit" of the initiatives. Adoption rates of laggards are significantly up from where they were 20 years ago. For the foreseeable future, laggards will likely continue to embrace basic compliance.

Case in Point: The Role of Data Synchronization in Driving Ecosystem Innovation

Regardless of the type of supply chain, data synchronization at a global level is a critical underpinning for maintaining an effective multi-enterprise ecosystem environment. Data synchronization is a process, based on standards, by which companies and their supply chain partners integrate, cleanse and synchronize the business information they use to effectively execute within the ecosystem.

Data synchronization consists of three components: internal data synchronization, external data synchronization and operational synchronization.

Internal data synchronization ensures that item and partner data is consistent throughout the organization across departments and databases. This is done inside the enterprise.

External data synchronization ensures trading partners compare separate versions of data to detect and resolve exceptions and to come to an agreement on what the "true" data should be in order to update systems accordingly. This is done in the multi-enterprise environment.

Once internal and external synchronization take place,

operational data synchronization involves agreeing on the method and timing needed to keep the data in sync on a day-to-day basis with trading partners — even as it changes. This is the multi-enterprise execution result of effective synchronization preparation.

Data synchronization is a foundational element to moving the multi-enterprise supply chain ecosystem beyond the base levels of core transaction and collaboration. While the transaction is the ultimate "life-blood of the ecosystem," data determines the "blood type." An ecosystem that effectively harmonizes internal, external and operational synchronization can achieve the multi-enterprise collaboration required to experience leaps in efficiency and effectiveness in the ecosystem. Multi-enterprise collaboration enables companies to increase their trust in each other and to move toward mutual extension and innovation approaches to the supply chain, including co-mingled processes, composite applications and shared systems of record.

The Value of the Ecosystem View

The ecosystem view is not new, but it is not prevalent. After all, why should companies care that much about recognizing their environment multi-enterprise supply chain ecosystem? There are several good reasons, applying just the value of data synchronization in a multi-enterprise ecosystem environment. For example, according to A.T. Kearney's "Data Synchronization Proof of Concept: Case Studies from Leading Manufacturers and Retailers," a retailer can reasonably achieve:

* A 3 to 5 percent reduction in out-of-stock conditions by increasing its visibility and operational synchronization between itself and its suppliers.

* As much as 30,000 hours of annual labor savings in dealing with shelf-tag and scan errors.

* A 5 to 10 percent reduction in time spent in sales and accounting dealing with invoice disputes.

Ecosystem-level Solutions

There are a number of companies offering various products for data synchronization. The multi-enterprise environment of today will require the business achieve new levels of adaptation and flexibility. These include:

* Adaptation to multiple community styles, standards and synchronization methods — Good examples today would be the aggregation of synchronization at a single vendor point with adaptation to UCCNet and EPC Global for both data registry and RFID.

* Adaptive integration to the back-office — Look for a vendor that can provide multi-source to multi-destination integration from back-office systems, secure data infrastructure and a dynamic supply chain community. This becomes a non-negotiable to achieve long-term value in the current complex environment.

* Adapt and create predictability within large populations — Beyond adaptive integration is the visibility, management and measurement of the effectiveness of the ecosystem. Trading partner management, for instance, is a good first step.

* Adapt to virtual community diversity — The final element of adaptation is related specifically to the diversity, rather than size, of the community. The ecosystem as a multi-enterprise environment creates a very diverse community where a specific destination (partner) may, in fact, identify itself with a completely separate ecosystem. The ability to effectively interact with that partner around areas of commonality (typically order-to-cash sales and fulfillment) is critical to success. To do so, the vendor partner must have the ability to provide seamless adaptation to the rules and governance of multiple ecosystems simultaneously. This means robust protocols, translation, security strategies, standards compliance and multiple approaches to solution distribution, community development excellence and business process management with effective levels of persistence.

To understand the elements of the multi-enterprise supply chain ecosystem is to understand the complex web of many-to-many that the business world has become. There is great value in harnessing the power of these ecosystems to drive growth and efficiency in a business. Applying ecosystem principles will help the business master this "chain of chains" rather than be part of a "chain of fools."

About the Author: Jim Hendrickson is vice president of Corporate Development for Sterling Commerce, a subsidiary of SBC Communications and a global provider of business integration solutions. Hendrickson is responsible for strategy, business development, corporate intelligence, and standards and strategic technology. During his tenure at Sterling Commerce, he also has held positions running Product Management and one of Sterling Commerce's product lines.

Prior to joining Sterling Commerce, Hendrickson was a senior managing director, Strategic Initiatives for one of the top five financial institutions in the United States. Working with the investment management company of the bank, he worked closely with the business units to provide technology strategy and planning in support of corporate growth.

Hendrickson also has been a professional services consultant focusing on supply chain management, integrated inventory management and large enterprise application integration. In addition, he has worked in the defense and aerospace industry where he focused on large, integrated, worldwide systems integration and served as a medical service officer in the Army attaining the rank of captain.

Hendrickson is on the curriculum advisory board of Columbus State Community College, in Columbus, Ohio, and has served on the business advisory boards of Intraware Corporation of Orinda, Calif., Document Finishing, LLC of Indianapolis, and the Armada Group in Columbus, Ohio.

Hendrickson holds a bachelor's of business degree in information systems from Belmont University and a master's degree in management from National-Louis University.