focus on: The Ins and Outs of SCM

The discipline of supply chain management (SCM) connotes complex IT systems that manage the hundreds of vendors and thousands of components used by manufacturing giants such as General Motors. But the maturing SCM marketplace is now delivering systems that can–and proponents say should–be used by organizations of all sizes to improve bottom-line performance and enhance competitiveness.

No matter what your company’s size, “whether you’re buying or selling, you’re part of a supply chain,” explains Rick Ruiz, director of marketing management for IBM’s Global Small and Medium Business Group. Midrange sites that understand this reality are beginning to consider whether SCM has a role in their businesses.

For many organizations, the answer is yes. SCM revenues, already at a record high $2.6 billion last year, are expected to grow 50 percent to $3.9 billion in 1999, according to AMR Research, an analyst organization studying the market.

Implementing a supply chain solution can be complicated by the confusing SCM market and depending on who does the explaining, SCM terms can be contradictory and vague.

As a result, midrange buyers interested in SCM must come to the market armed with sharp questions and a focused need. Those prepared to do the research can come away with substantial gains in inventory reduction, supply chain efficiencies and bottom-line profits, most in a timeframe that puts ERP implementations to shame.

“The value of SCM is in trying to help managers understand what might happen if they take certain actions,” explains Ken Ramoutar, vice president of marketing for ERP vendor Acacia. “This is one of those technology weapons that can serve as a great equalizer. It will bring exciting competitive capabilities to the midrange market.”

Defining terms

In its report “1999 Supply Chain Strategies Outlook,” AMR Research divides the SCM market into two segments: Supply Chain Planning (SCP) and Supply Chain Execution (SCE).

SCP focuses on preparing for a job, with decisions made weeks to years in advance. (See Figure 1.) SCP products handle supply chain network design, demand planning and forecasting, supply planning, manufacturing planning and scheduling, and distribution planning, says AMR.

In contrast, SCE handles the decisions required to execute a job, with decisions made only hours to weeks in advance. SCE includes warehouse management systems, transportation management systems, International Trade Logistics, inventory management, and order management, AMR explains.

For midrange buyers investigating the SCM market, choosing between the execution and planning products is a matter of identifying their supply chain needs. “The more precisely you can define your requirements and what you’re trying to accomplish, the more likely you are to find a solution,” states Chris Moss, vice president of business consulting for E3 Corporation, an SCE vendor.

When compared with larger corporations, midrange companies have the advantage of being less far-flung, says Vytas Kisielius, vice president of Frontec AMT, an enterprise application integration vendor. This may mean that they have fewer “touchpoints” for the supply chain, creating less complexity. In addition, mid-sized companies can learn from watching the mistakes of larger early adopters.

Yet smaller operations at midrange sites may mean that each problem is more critical to solve, explains Edward Sitarski, senior vice president of R&D for SCP vendor Numetrix. To a midrange company shipping only three or four trucks a week, each truck is far more important to its supply chain strategy than it would be to a larger company.

ERP in the mix

Complicating matters further is the question of how ERP fits into the SCM equation. SCM products take a prospective view of the future, with more emphasis on planning activities, explains Larry Lapide, vice president and service director for the supply chain strategy service at AMR Research. In contrast, ERP products focus on the transactional activities that have already taken place.

Another way of viewing the differences between SCM and ERP is that ERP typically focuses on activities that occur within the four walls of the company. SCP and SCE products extend their reach to customers and suppliers.

ERP vendors are increasingly claiming that their products offer SCM functionality, and many SCM vendors are partnering with ERP vendors. “ERP vendors will never admit that the ‘P’ didn’t stand for ‘planning,’” says Lapide. “But they’re now starting to put software in place” that handles planning activities.

Yet even with the addition of SCM capabilities, most ERP products do not provide the depth of pure SCE solutions, he adds. For example, most ERP systems lack warehouse management functionality as well as transportation management capabilities. Mid-sized companies that require richer functionality should investigate best-of-breed products.

Another issue is how SCM products should be layered on existing ERP systems. Many ERP vendors offer SCM functionality that they have recently purchased or developed in-house. Customers simply buy the functionality as an SCM module and integrate it as an upgrade to their ERP systems.

Where richer functionality is needed, buyers can look to dedicated SCM vendors such as market leaders i2 Technology and Manugistics. These vendors developed their products with an eye toward integration with other technologies, creating non-proprietary, open products that integrate easily with existing ERP systems.

“It’s not a major hurdle, although it is a major concern for buyers,” acknowledges Donald Flood, director of sales and marketing for inventory management vendor Supply Chain Solutions, Inc. “The AS/400 environment lends itself nicely to getting data moved around. Buyers shouldn’t worry about that part.”

Business issues first

Implementing SCM solutions requires IS managers to address business issues in conjunction with the technology. SCM cannot be implemented as a strict technology fix, explains Ruiz. “Before we try to sell anyone a solution, we must figure out where the problem is” and put the business processes in place to support that, he says.

The first issue is to ensure that the site has the proper supply chain data, including volumes of accurate data about suppliers and components. To support forecasting activities, the organization also requires a history–the longer and more accurate the better–of how goods have been sold.

Most successful SCM implementations also incorporate a review of business processes that shape the supply chain operations. Companies are encouraged to review the processes used to buy and replenish inventory, handle customer service issues and the use of supply chain IT systems. Fine-tuning these processes can help SCM technology achieve the most significant gains.

Some IS managers are surprised by the need for the human touch when implementing SCM technology. But the solution must combine technology with better human processes to improve a company’s supply chain efficiencies.

The cost of implementing an SCM solution depends on the application and the implementation, according to Flood.

For a distributor, the system can range from $100,000 to $200,000, with another $50,000 needed for consulting services. Manufacturers may pay $150,000 to $300,000 for systems and up to $75,000 for consulting. Retailers with multiple locations may pay as much as $450,000 for technology and $100,000 for services.

Getting started

In selecting the best SCM solution, midrange buyers must consider their industry, business focus and supply chain problems.

First, identify the type of supply chain the company runs, explains Bob Patterson, president and CEO of Thru-Put Technology. Companies can have supply chains that are purchasing-centric, manufacturing-centric or distribution-centric.

Thru-Put specializes in organizations with manufacturing-centric supply chains, focusing on reducing inventory and increasing production within the existing capacity. Other SCM vendors focus on different types of supply chains.

The next step is to identify the supply chain problem you want to solve. “Where is your pain?,” asks Moss of E3. “Is the problem you want to solve in inventory, service, transportation costs, manufacturing planning, or forecasting? Knowing that can rapidly narrow the search.”

ERP vendors with SCM functionality advise that buyers consider the depth of the functionality needed in a supply chain solution. Some ERP products can provide substantive supply chain functionality with out-of-the-box convenience, explains Craig Astfalck, product manager for supply chain management group at System Software Associates.

Niche players offer richer functionality and often partner with ERP providers for ease of use. For example, SSA partners with Manugistics and American Software uses its subsidiary Logility for SCP capabilities.

Another option is to use what you know. Midrange sites with Lotus Notes and Domino experience can leverage that expertise by using those products as middleware to facilitate SCM solutions.

One manufacturer of cardboard supermarket displays uses Notes and Domino to leverage transactional information within the JD Edwards ERP system and manage the sales data through SCP technology from SynQuest, explains Wayne Janzen, manufacturing/ERP industry manager for Lotus.

“Domino provides the ‘duct tape’ among those applications,” he says, allowing standards-based communication that enables collaborative working relationships. “Many people see us as providing simple mail and messaging. But this is collaboration that goes way beyond e-mail.”

Collaboration, especially learning to share once-protected resources, can be a difficult transition for closely held midrange corporations. But most midrange managers and CEOs come around to understanding the benefits of sharing when shown the bottom-line benefits.

Increasingly, midrange companies are coming to understand these realities. IBM’s Ruiz says that more than 1300 customers attended the company’s Supply Chain Conference in January, many of them midrange managers. “They realize now that they’re somewhere in the supply chain. Everyone is!,” he says.