Next-Generation Supply Chain Management
Intelligent supply chains, with their emphasis on collaboration and knowledge management, can breathe new life into your e-business initiatives.
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.
Opening to New Business: Penske Logistics
One major logistics company took supply chain management to heart, leveraging its supply chain analytics capabilities to grow new business. Penske Logistics, a part of Penske Truck Leasing, manages companies' transportation needs on an outsourced basis. Its management spans a company's entire supply chain, both inbound from manufacturing and outbound to distribution.
Penske corporate account managers originally had to pull down numerous reports from OS/390 mainframes and load them into spreadsheets to provide supply chain logistics reports for customersa process that sometimes took up to four days.
As the company sought to grow its supply chain management business, it knew it had to speed up this process. The company also wanted to put data access directly into the hands of customers.
Supply Chain to the Rescue
The solution was a supply chain analytics system that ran against an operational data warehouse that mirrors the company's mainframe database. Data is sent to the system via satellite hookups from company delivery trucks.
"The data warehouse is basically a mirror image of the management system that resides on the mainframe," says Tom Nather, senior systems analyst and project leader for Penske Logistics." Everything comes into the OS/390 system. It's where all the runs are managed. All the satellite communications come in there."
Every night, data is relayed to an HP 9000 system that runs the company's analytical data warehouse, which is available over an extranet. The extranet provides access to analytical tools that help customers track shipping and logistics transactions.
As a result of the new system, a three-day reporting cycle was reduced to an almost instantaneous inquiry response rate. Shipping bottlenecks and other issues can be identified and fixed quickly.
Gartner Group 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 Trust Factor
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 unitsrather than IT departmentshave 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.
Collaborate or Perish
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 department
- 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.
Starting on the Inside
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.
Supply Chain in Action: Memec
One company that's deploying collaborative supply chain management software to handle surges and dips in demand is Memec, a value-add electronics distributor and logistics service. Memec distributes components to large data communications companies, such as Nortel and Cisco.
To buffer itself from the punishing ups and downs of the electronics industry, Memec opened its supply chain to more than 40 suppliers of advanced semiconductors. The company adopted supply-chain management software from Manugistics Group, which was deployed on an Oracle 8i database running on Compaq Alpha servers.
Before deploying its supply chain management system, Memec had to overcome several technical issues. Partners' forecasts came in a variety of formats, from handwritten to EDI and fax. Rather than rely on any single forecast, Memec developed a system to manage multiple forecast streams from its key customers.
Memec then used the system to compare customer forecasts with its own derived statistical forecast, getting a faster grip on the overall accuracy of the forecasts. With its demand-planning system, VEBA/Memec is now better able to determine when and what to buy from suppliers.
Bringing in New Business
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."
From Intranet to Extranet: Owens & Minor
Owens & Minor started off with an internal collaboration network and eventually branched out to its supply chains. The medical and surgical supply distributor built its data warehouse incrementally, one subject area at a time, beginning with sales and proceeding on to inventory, accounts receivable, purchase orders, purchase order receiving, customer account fees, budgeting and group contracts.
Owens & Minor's data warehouse was initially set up with an HP T520 database server with four CPUs and two gigabytes of RAM, tied to an EMC box for storage capabilities. This was later upgraded to an HP N series with six CPUs. Two Compaq 600 Web servers were used for Web deployment, and the client machines were Pentium-based PCs running Windows NT. On the software side, the company ran Oracle 8i database management software.
Going Beyond the Firewall
At first, the warehouse was only accessed by internal users via a client/server query and reporting tool from Business Objects. It wasn't long before Owens & Minor began extending these capabilities to its trading partners. The company started piloting an online analytics system to select partners in 1998 and later extended it to more than 60 hospitals and integrated health organizations.
Today, materials management employees in partner organizations can access any of 48 pre-defined queries from the data warehouse through a customized portal.
CPFR and VMI
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 companywhich offers some 70,000 hardware products via the Webcurrently 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.