Committing your company to supply chain execution is a good habit that will help keep customers, grow profits and make it more agile.
Lose weight. It's the perennial New Year's pledge, and I sincerely hope that manufacturing executives will put a similar vow at the top of their professional resolutions — for supply chain execution.
It's important to understand the distinction between the planning and execution aspects of supply chain management (SCM). Companies have long concentrated on planning, making supply chain management about as effective as a food diary or calorie counter: When focused on planning companies become aware of what's happening (consumption) and even what needs to happen (what and when you might want to eat), but that doesn't also mean they are taking action.
In contrast, supply chain execution comprises functions with suppliers and is driven by functions with customers. It includes business processes such as manufacturing operations, scheduling, warehouse management, customer service and so forth. Like running a circuit or tossing out all the cookies and potato chips, focusing on supply chain execution can have a positive effect on an organization by improving productivity and eliminating waste in and beyond the enterprise.
Demand-driven Supply Networks Run Rings around Supply Chain Management
AMR Research has proposed the Demand-driven Supply Network (DDSN), an infrastructure that "integrates demand data and processes across the supply networks of customers, suppliers, and employees to balance revenue against costs" ("Demand-driven Supply Networks: SCM Done Right," November 3, 2003).
AMR Research explains that conventional SCM addresses operations inside the enterprise without accounting for demand from customers or for suppliers' goods. In fact, most SCM tools operate on static, dated forecasts and lack any capacity for integrating actual demand as it changes. Consequently, conventional SCM does not scale well to handle changes in the supply chain, which in turn threatens profit margins.
Supply Chain Management: A Balanced Diet
I've walked factory floors for more than two decades and know how much time it really takes to build a car: just about 72 hours. Yet it takes weeks to deliver to the consumer because demand data takes about one week to travel from one tier to the next in the supply chain.
If a supplier can get to a lean, one-hour enterprise where it receives demand requests, schedules production and passes requirements to other vendors in a matter of minutes — not days — the returns will be tremendous. The car that took six weeks to deliver could potentially drive off the assembly line in days, and custom, customer-driven manufacturing would become a reality
Transforming your trading partner network into a DDNS is not the stuff of fantasy. Here's what companies can to do to achieve a balanced "diet" of supply and demand chain planning and execution for a more dynamic and cost-effective business network.
Recognize the Signs of SCE: Inventory Visibility
The public exchanges popularized in the late 1990s have given way to private exchanges — or electronic data interchange (EDI), the earliest form of order communication. Meanwhile, software vendors have introduced a number of products to streamline point-to-point communication. For example, in the automotive industry there are about two-dozen inventory visibility applications for suppliers to use to check their customers' inventory and proactively initiate orders for replenishment.
Though specialized, these kinds of applications are significant. Companies using them cut some of the steps involved in supply chain management. Instead of waiting for an order — while production continues to forecasts that may or may not be accurate — the supplier can see a customer's inventory. Are inventory levels too low? Or does the customer have excess material in supply?
These products are incremental steps in the shift from supply chain planning to supply chain execution. Inventory visibility software is just the beginning. Technology now replicates real-world processes such as Kanban, the card-based system used to signal and trigger events on the production floor. Other products compile inventory, production and logistics information to generate instructions for warehouse management. Customer self-service applications provide more ways to streamline the ordering process.
These specialized technologies make it possible for companies to do more than understand the status of their supplier relationships. They actually automate supply chain execution. The next three to five years could see a more level playing field, as companies understand the value of using these tools to balance the planning and execution aspects of supply chain management, which becomes a commodity instead of a competitive advantage.
Commit to Openness
But today, information flow within the supply chain remains a problem — it just moves too slowly.
It's important to recognize that the sophistication of technology used by suppliers varies widely. To illustrate, technology standards among automotive suppliers plummet after the first tier. In an industry where margins are razor-thin, smaller component manufacturers — suppliers to makers of seat, dashboard and other assemblies — often have little in the way of sophisticated software, much less the personnel or financial resources to add it.
To balance supply chain planning with execution, it stands to reason that members of the supply chain must be able to converse with one another. Unfortunately, in the automotive industry, the wealth of good visibility software applications also means suppliers must support all of the applications their customers use. On average, that's five or six products a supplier must learn simply to check inventory or fulfill an order.
Clearly, it will take more than good intentions and a renewed focus on supply chain execution solutions when there is disparity among manufacturers in terms of technological sophistication and resources.
What will it take to resolve this? Redefining openness. Trading partners must speak the same language — the purpose of programming standards such as extensible markup language (XML) and simple object access protocol (SOAP) — and subscribe to the same definitions so that they can interoperate.
Redefining "openness" is a task for industries as well as individual companies. Industry organizations have made great progress toward standardized procedures. Now, they need to address communication standards. For example, Southfield, Mich.-based AIAG, the not-for-profit automotive industry association, is spearheading an initiative for inventory visibility and interoperability, including conventions for programming semantics and syntax.
The initiative does more than ensure suppliers and customers can use the inventory visibility product they prefer. It gives them more than confidence that "quantity" always means one widget and not one case of widgets. The expected result is a supply chain that preserves suppliers' and customers' ability to share information selectively in each relationship.
Supply Chain Execution: From Six Weeks to Six Hours
What "weight" — inventory, time and costs — can manufacturers expect to trim out of their supply chain? To continue with the automotive industry example, supply chain execution and true openness will transform the mathematics of production. AIAG anticipates inventory visibility and interoperability alone will save the automotive industry $255 million annually on multiple software applications.
But more importantly, instead of producing to forecasts, accurate demand information might be transferred in a fraction of the time from one tier of the supply chain to the next. Lead-time from order to delivery would decrease, and inventory levels would decline. Sales and market share would increase. From my experience, gross margins could jump from five to as much as 11.5 percent.
Already there are early industry examples of the impact. Metaldyne, which designs and makes metal-based components, assemblies and modules, uses a Web-based application for inventory management. The company reports that its first installation already has reduced raw material inventory by 20 percent, in turn cutting inventory carrying costs. And Webasto, maker of ventilation, heating and cooling systems, is using technology to manage electronic data interchange with a simplified, standardized architecture that's cut EDI maintenance costs by a factor of 20.
Beefing Up the Customer Experience
As the economy recovers and manufacturers hope for increased demand, it's just as important to remember that supply chain execution impacts the customer's experience. When I went shopping online to replace my 10-year-old Lexus, I found just what I was looking for on the car maker's Web site: a LS430 with ecru interior and cutting-edge GPS technology.
But when I went to my dealer, I was told it would be impossible to get what I wanted.
So I went to Audi. I found a nice car and the features I wanted were available, but it would take a few weeks to get it, and the GPS technology was primitive. So I ended up buying a Lexus on the lot. I had to pay for features I didn't need or want, but I got the GPS technology and I didn't have to wait.
Without a commitment to supply chain execution, companies like Lexus and Audi lose customers: Lexus will lose those seeking fast execution — in other words, availability of styling and features in a car advertised now. Audi will lose customers seeking innovation — that cutting-edge technology worth having at any price — even though it can deliver a car more quickly.
Manufacturers must resolve to slim down their supply chain operations to become agile, one-hour enterprises. Until they do, they will continue to plump up inventory with products that may not have customers, and their profits stand to grow alarmingly thin.
About the Author: Pamela Lopker is founder, chairman and president of QAD Inc., a provider of enterprise software for manufacturers.