Next-Generation Supply Chain Management

Successful supply chain management today means seeing the whole business picture. Who supplies your supplier? Who buys from your customers? What tools are out there to help the enterprise meet this Herculean task? Not many, for the moment, but the next generation is on its way with a focus on collaboration and knowledge management. Take a look at the players in this "new" market.

• 07/01/2001

Supply chain management is no longer just a matter of seeing your customer or supplier’s activities. It’s a matter of seeing your suppliers’ suppliers, your customers’ customers, knowing what’s going on in realtime, and being able to react immediately to any snafus that crop up.

Sound like a tall order? It is. Only a few companies have such capabilities. The supply chain management systems of the 1990s, typically implemented on a point-to-point or hub-and-spoke basis, helped companies bring goods more efficiently into the supply chain.

Today, the next generation of tools and systems emphasizes collaboration and knowledge management above and beyond speed and efficiency. Leading the way are major ERP vendors, such as SAP, PeopleSoft, Oracle and J.D. Edwards. B-to-b e-marketplace vendors, such as Ariba, i2 and Manugistics are also rolling out collaborative solutions.

GartnerGroup projects that investments in collaborative commerce technology will soon encompass five percent of overall IT spending. Over the next two years, companies that effectively open their internal processes to external collaboration will grow 20 percent faster than those who don’t, says Bruce Bond, vice president and research manager for GartnerGroup.

Increased collaboration will help companies realize greater ROI from supply chain and e-commerce initiatives. According to a study of 1,000 companies by the Center for Research in Electronic Commerce at the University of Texas at Austin, underwritten by Dell Computer Corp., there’s a strong correlation between a company’s financial performance and its readiness to engage in electronic business. Companies with strong e-commerce efforts saw increases in ROI ranging between 21 percent and 50 percent.

However, the study reveals that only a little more than 11 percent of the firms studied currently have any form of online transactional and informational sharing capabilities with their suppliers. In fact, most businesses have barely begun tapping into potential gains from collaboration in b-to-b e-commerce.

The greatest deterrent to full implementation of supply chain intelligence isn’t technology. Rather, it’s trust. "In the old economy, we didn’t have the ability to monitor interactions between partners," says Bond. "Instead, we relied on a great deal of trust." Companies relied on supply chain partners to achieve quality, act quickly on new orders and ship on time.

This trust is being hampered by a lack of interoperability and standards between trading partner systems. Within companies themselves, business units – rather than IT departments – have been driving new technology purchases, which require considerable integration with other systems across the enterprise.

The good news is that in most cases companies only need to build close collaboration with the top 20 percent of their suppliers, who typically account for 80 percent of their business.

Collaboration has been a popular buzzword. Leading supply chain management packages facilitate collaboration on one or more of the following levels:

• Internal collaboration between business units or departments

• Community or industry collaboration, in which members achieve economies of scale in purchasing and conduct online sourcing

• Product design and development collaboration, in which documents and engineering renderings are shared across networks

• Forecasting and demand collaboration, in which trading partners share inventory, pricing and sales data

• Management and monitoring collaboration, in which analytical information is shared between business partners

Successful collaboration efforts usually begin internally with the linking of departmental operations. For example, this could begin with a shared analytical and forecasting system for the executive management and planning departments. Eventually, other departments, such as budgeting and human resources, could be linked in as well.

At the core of such information-sharing efforts is usually a data warehouse or data mart, which serves as a consistent repository of data captured from various business processes.

Companies of all stripes are starting to share procurement information with trading partners over extranets. "Although e-commerce can provide dramatic improvements in cost containment," explains Bond, "most of these initiatives provide little in the way of opportunity expansion." Collaborative commerce, Bond continues, "provides a much deeper and richer form of b-to-b interaction, designed to allow trading partners to serve as virtual collaborators across a wide array of business processes."

As long as there has been manufacturing, companies have had to overproduce inventories to meet unpredictable demand, followed by forced markdowns of excess items. The technology business is particularly sensitive to booms and busts in demand.

Last year, the demand for high-technology products was so overheated that manufacturers and distributors were running out of vital components. "It didn’t have to come to this," says Tom Cook, analyst with AMR Research. "Inefficient supply chains and inventory management processes, not shortage of supplies, are what constrict the growth of the high-tech industry."

High-tech manufacturers can no longer survive without developing close ties with suppliers and distribution channels, insists Cook. Companies must link their forecasting and inventory management processes with their distribution channel so that production decisions can be made as early as possible. "The winners," says Cook, "will be those companies that work with suppliers and distributors to develop tightly linked, collaborative e-business processes."

A similar cross-industry initiative is called collaborative planning, forecasting and replenishment (CPFR). This helps synchronize product movement between consumer goods manufacturers and retailers.

According to a survey of 120 companies, conducted by Syncra Systems and Industry Directions Inc., more than two-thirds (68 percent) of large companies report having a CPFR effort underway.

The report also finds that many companies have already seen a strong ROI on the pilot projects alone. This includes an 80 percent increase in sales with CPFR partners and a nine million dollar increase in sales and inventory reductions of at least 10 percent.

Another new collaboration sector is called vendor-managed inventory (VMI), or a vendor-automated purchase process. One company that has leveraged these capabilities is Do It Best Corp. The company – which offers some 70,000 hardware products via the Web – currently handles 19 percent of its purchases through VMI. The program has reduced lead-time between manufacturing and shipping from 18 days to one day.

"The result is increased corporate efficiency and an increase of inventory turns from 30 percent to 100 percent, with no decrease in service levels," says Rob Palevich, director of electronic commerce and supply chain operations for Do It Best. "We don’t cut a purchase order," he notes. "The electronic ship notice has become our purchase order."

Within the next five years, Do It Best plans to automate all forms of purchasing across its supply chain. In doing so, the company will achieve significant cost savings and free up staff for customer sales support.