The Supply-Chain Paradox

Somewhat paradoxically, while the players often use the same terminology, they arent necessarily talking about the same thing. Sometimes, theyre peddling enterprise-resource-planning (ERP) systems that feature APS-type enhancements or options. In other cases, theyre selling APS systems but encroaching on the ERP vendors territory. No matter what product niche a vendors basic software line falls into, if that vendor is chasing the manufacturing or enterprise management market, chances are it is currently trumpeting the features of its latest or soon-to-be-unveiled supply-chain-management solution. Meanwhile, leading-edge firms including Microsoft Corp. have looked further into the future and are painting visions of a new world where supply-chain-management platforms converge with Internet-based electronic commerce to create real-time "value chain" management systems. However, from the standpoint of the user--the manufacturing executive--there is a serious problem that the software companies tend to gloss over: No amount of expensive software can compensate for flawed human thinking or for corporate cultures that create antagonistic relationships within a supply chain. It is becoming increasingly clear to many that information technology is only part of the solution to the supply-chain puzzle. Without good internal and external relationships, based on such intangibles as trust and open sharing of information, todays increasingly complex supply-chain structures will continue to pose monstrously difficult management challenges. The simple fact is that things are getting increasingly complex. And therein lies the real paradox. Whats a supply chain? Its difficult to pinpoint just when supply chains became "value chains"--or exactly what the difference is. Adding to the confusion, somewhere along the way, a number of vendors began to use the term "demand chains" to describe applications that coordinate customer requirements with internal planning and scheduling. The broad array of current software solutions, combined with all the hype about wondrous future possibilities, has created a substantial level of confusion for decision-makers in the industrial marketplace. And manufacturing executives--especially those who are swamped by the challenges involved in running small and midsized firms--find it difficult to sort the hope from the hype. "There is no widespread common definition of what people are talking about," muses Kenneth J. Stork, a former Motorola Inc. executive who now does supply-chain-management consulting. Part of the problem is a lack of consensus on what, exactly, constitutes a supply chain. Mike Doyle, chairman and CEO of the recently formed National Initiative for Supply Chain Integration (NISCI), says his organization--created with the support of the U.S. Dept. of Commerce and the National Institute for Standards & Technology--defines a supply chain as having at least three links. "The links could go from the end customer to a dealer to the equipment manufacturer--or they could go from an OEM to a supplier to a second-tier supplier," Doyle points out. "It can be any three links, but in order to constitute a chain, it cant be less than three links." Yet, he adds, current software products typically span no more than two links. A software-industry magazine, he notes, recently conducted a survey of vendors of so-called supply-chain packages, "and they found that there was not one single offering that would qualify as a supply-chain solution based on our three-link definition. The vast majority of this stuff is still focused on coordinating what happens inside the four walls of a company--or between a company and one other company." Based in Chicago, NISCI was formed in September 1997 and has the active support of such leading manufacturers as Honda of America Mfg. Inc., Chrysler Corp., Harley-Davidson Inc., Procter & Gamble Co., and Trane Co. Its goal is to combine the best current thinking and best practices and develop improved "chain-wide" business processes that will make U.S.-based manufacturers more competitive in global markets. A special focus for NISCI will be representing the interests of small and midsized manufacturers--typically the middle links in business-to-business supply chains--who traditionally have had little or no voice in designing the information-technology platforms that facilitate supply-chain communication, coordination, and optimization. "A little supplier in the middle might have five or six different customers in different industries, each with its own protocols and each with its own hardware/software combinations," says Doyle, a former purchasing executive with Ford Motor Co. and Rockwell International Corp. "So that supplier might need five or six different systems--each costing $20,000 or more--to serve those different customers. All of a sudden, he realizes that it just isnt worth the trouble." One solution, Doyle suggests, might be to develop a standardized system with "cross-industrial" capability--so that a supplier that makes parts for an automaker as well as furniture manufacturers or other OEMs could install a single IT platform that would meet all of its needs. "Our members are action-oriented," he says. "Were going to share current best practices; then were going to develop pilot projects showing how we think this can be done, because there is nobody on earth doing this today." An initial challenge will be to create models depicting the various links in a supply chain. "Once you know who is in the chain--and for what reasons--then you can wire that chain together, so to speak, so that companies in the chain can communicate across the length and breadth of the chain in some real-time way. Then they can all share in things like concurrent design, concurrent engineering, concurrent problem-solving, and concurrent reaction to marketplace demand. "What were talking about is creating win-win-win situations. And youll notice that I said the word win three times," Doyle says. "In America, the little guys who are vitally important to making the whole thing work have not been at the table. As a result, they are very frustrated about their ability to plug into the new economy. And some of the big guys now realize that it is in their enlightened self-interest to bring the smaller guys along, because they cannot optimize their supply chains without their participation and help. Building Real Partnerships A few of the big guys, however, have been aware of that reality for some time now, including Honda of America and Chrysler, two companies often cited for their leading-edge practices in developing partnership relationships with supplier firms. Chrysler has won kudos from suppliers and shareholders alike for its highly regarded SCORE program--the acronym stands for Supplier Cost Reduction Effort--in which cost savings stemming from supplier suggestions are shared with suppliers. Since 1989 the Auburn Hills, Mich.-based automaker has received some 25,000 supplier proposals that have yielded $3.7 billion in cumulative cost savings. The success of this program clearly was one of the factors behind the recent decision to appoint 51-year-old Thomas Stallkamp as Chryslers new president--and heir apparent to Chairman and CEO Robert Eaton. Stallkamp, who had been executive vice president for procurement and supply as well as general manager of minivan operations, says the SCORE program has enabled Chrysler to pursue advances in quality, efficiency, and affordability without eroding its suppliers profit margins. The program seeks to reduce costs in design, sourcing, logistics, and administrative areas, as well as in manufacturing. "The momentum of the SCORE program, both internally and with our suppliers, continues to be phenomenal," Stallkamp says. "Every week our suppliers submit more than 100 ideas or proposals that offer practical ways for us to reduce costs. Were constantly working with our suppliers as teammates to discover new ways to be more efficient while mutually achieving cost reductions." Honda, likewise, shares cost savings with its suppliers--once theyve met the automakers "target cost" objectives. It has long emphasized supplier-development programs. Honda also uses various software packages--such as advanced planning and scheduling systems--to coordinate production activities. But information technology alone cant resolve all the issues involved in creating sound supplier-integration strategies, asserts David A. Curry, director of external activities in the purchasing division of Marysville, Ohio-based Honda of America. "Many people think this is the answer and that all they have to do is focus on information systems," Curry says. "Theyre looking for a magic bullet. They dont realize that this is just another tool in the toolbox. What they are missing is the fact that there is not one single element that will make them totally successful. It takes a combination of things. And there are no cookbook answers. Each company is different. You have to pull together the ingredients that suit your tastes--your culture, your size, your particular processes, and so on. You have to create your own recipe for success." The Trust Factor A commonly cited obstacle to building true customer-supplier partnerships--or developing relationships where information is shared openly--is a lack of trust. Perhaps because of the way theyve been treated in the past, supplier companies are often reluctant to tell customer firms too much about their business or cost structures. They often fear that technological secrets will "leak out" to their competitors. Joellyn Willis, a former purchasing executive who is now vice president-operations for Square D Co./Groupe Schneider-North America, Palatine, Ill., has been working on supplier partnership issues for some time. Building trust, she says, "has not been as big an issue as I expected. In a few instances, there was some reluctance when we wanted to go in and work with suppliers on their processes. With one supplier, we proposed bringing in our process people to work with their technology experts to try to improve both of our businesses. In order to build enough trust, we had to talk that through a lot and also do some other things together." The supplier was concerned initially about protecting its trade secrets, Willis says, so a confidentiality clause was written into the suppliers contract. "But weve gotten past that," she adds. "Once youve worked with a lot of suppliers, and they have success and can see additional business coming in and the relationship that develops, the trust factor just isnt an issue anymore." One of the biggest problems in cultivating partnerships that go beyond mere lip service, she feels, is that many companies "dont devote the necessary resources to help develop suppliers. And the result is a huge gap in their cost competitiveness. You cant optimize your cost performance without having good supplier performance. If you engage your supply base, it is amazing what they can come back and help you with." For example, Square D created a materials-productivity team, including both full-time and part-time participants, that works closely with suppliers on materials-cost issues--and has been achieving annual cost reductions equivalent to 2% of materials costs. "It is important to drive materials productivity," she says, "because of the cycles of inflation in the cost of purchased materials. We want to be able to offset that inflation." The materials-productivity team is a cross-functional unit driven by the Square D purchasing department, but it can also draw on the expertise of people in the engineering department, as well as the companys advanced-manufacturing unit. Another key aspect of trust-building, Willis emphasizes, is being a good customer. "Were not jerking suppliers around and then taking the business away after two years [when a lower bidder comes along]," she stresses. "We will do everything we can to maintain loyalty with them as long as they meet the quality, cost, and service levels we need." Seeking Shared Vision In The Power of Partnerships (1995, Blackwell Business), John Mariotti stresses that true partnerships require trust, open communication, fairness, consideration of the self-interest of both partners, and a balance in the reward/risk equation. "The choice of partners," he emphasizes, "is probably the most important consideration. . . . If the wrong partners are chosen, much effort and time will be wasted--and the outcome will be far from successful." Another important challenge is to develop "strong, sustainable relationships," says Jeff Trimmer, director of operations and strategy in Chryslers procurement-and-supply organization. And, he adds, "the only way to do that is to find an approach where everybody wins." The keys, Trimmer told an audience at the Assn. for Manufacturing Excellence annual conference in San Antonio, include: adopting standard processes, effective communications, and creating a "shared vision. . . . When everybody knows where we are going and buys in, it is very powerful." Chryslers 2,500-person procurement-and-supply organization, which oversees purchases of some $40 billion a year in parts and materials, seeks to "coordinate and focus the efforts of the automakers extended enterprise to meet the requirements of our end customers," Trimmer notes. "We need to look beyond the tier-1 suppliers--out to the extended supply chain." As he sees it, it is the extended supply chain that becomes a true value chain. It starts with the raw-material supplier and stretches all the way to the end customer. "It is a chain concept," the Chrysler executive asserts. "If any one of the links breaks or fails, the customer is not going to be satisfied. And one thing that has become apparent to us is that the leanest chain wins." Value chains, Trimmer observes, can be quite complex--even for relatively small automotive components. For example, Chryslers "fastener chain" includes 45 tier-1 suppliers and 400 tier-2 suppliers--including plating and heat-treating companies. And the chain that produces a $2.50 roller bearing lifter includes 35 separate links. Overall, Chryslers assembly plants receive parts, materials, and services from 972 tier-1 suppliers. Behind them--at the tier-2 and tier-3 levels--are some 100,000 component and subcomponent suppliers. Further down, in tier-4, are the raw-materials suppliers, who often tend to be very large companies like steelmakers. "The structure creates a problem," Trimmer says. "What it says is that youve got some relatively large OEMs at the top. At the other end, you have very large raw-materials suppliers. And, typically, the middle tiers are smaller vendors who are squeezed from both ends." Softwares Role Companies that excel at various facets of supply-chain management do gain a competitive advantage. A recent study by Pittiglio Rabin Todd & McGrath (PRTM), a Weston, Mass.-based consulting firm, found that 165 blue-chip technology-based companies slashed a total of $2 billion from their supply-chain costs in the course of one year. The study found that companies that are best at supply-chain management hold a 40% to 65% advantage in their cash-to-cash cycle time over average companies. And the top companies carry 50% to 80% less inventory than their competitors. For a company with annual sales of $500 million and a 60% cost of sales, says PRTM director Mike Aghajanian, the difference between being at the median in supply-chain management and being in the top 20% is $44 million of additional working capital. One of the important core competencies in business today, PRTM stresses, is the ability to "flex" production to meet changing customer demand without investing capital in inventory. And advanced software can be an important tool in achieving that capability. For example, when Digital Equipment Corp. (DEC) was looking for a way to reduce the time needed to propagate demand signals through its internal supply chain, it adopted i2 Technologies Inc.s Rhythm solution to synchronize its supply-chain planning and procurement activities. The Rhythm Factory Planner was installed at the computer firms "stage-one" sites, which produce modules for servers and desktop PCs that are subsequently assembled into the final computer configuration at "stage-two" sites after a customer order is received. DEC reportedly can now generate a customer-order quote in less than one day--even though it still takes a week to confirm materials from suppliers. During the last two years, DEC has trimmed its manufacturing inventory levels by some $410 million--thanks in part to use of the i2 software at its stage-one production sites. Another i2 user, Timken Co., chose Rhythm to smooth the flow of the 8,000 to 15,000 orders that work their way through Timkens four plants each year. "We wanted to reduce the starvation or flooding of operations," says Garry Fisher, general manager of steel order fulfillment. The company also wanted to be able to process smaller orders faster and more economically--to become a more agile competitor. The first step was to model Timkens process paths, including those resources that constrain output. The Rhythm software takes those constraints into account in synchronizing the steel-production process in real time, so the material flows smoothly through the plant rather than sitting in queues. "Rhythm gives us real-time visibility into what our true capacity constraints and availability are," Fisher notes. "Were beginning to see our production problems weeks before they occur, instead of running into big bottlenecks." Among the payoffs: Timkens manufacturing cycle time has been cut by 30% to 40%, and its inventories have been reduced by 25%. Another vendor--Los Angeles-based Paragon Management Systems--is touting the "collaborative planning" capabilities of its latest software, including rule-based available-to-promise (ATP) and capacity-to-promise (CTP) functionality that it claims will ensure "tighter coordination between an enterprises front and back offices." Paragons newest software suite--Version 4.0--also calculates optimal product mixes and optimizes distribution and sourcing alternatives, and it facilitates Internet linkages with customers and suppliers, thus supporting efforts to manage the extended supply chain. No Complete Solutions Some software-industry executives admit that most systems available today address only part of the supply-chain-management puzzle. "There are a lot of great software solutions out there," says Mike Harmelink, vice president-operations with STG Americas, Dallas, the U.S. arm of London-based Scheduling Technology Group. "But nobody offers a complete supply-chain solution--not even us." STG does, however, offer more than software, Harmelink stresses. "We have recruited the talent to tackle the soft-side issues like relationship-building. That is more of an organizational-development activity. How the software fits in is another issue altogether." The STG approach is to "take a step back and look at the entire order-fulfillment process and examine how a company reacts at each stage--from when it first talks to a customer until it delivers the product. You have to take a strategic viewpoint and consider how individuals react to certain business conditions." It is important for software providers to be flexible in developing solutions, Harmelink asserts. "You dont try to force a business problem to fit a software package. You have to adapt the software to the needs of the business," he contends. "Until you understand the dynamics of the business, you cant really offer a supply-chain solution. Once you understand the dynamics, it becomes easier to provide a solution that encompasses both software tools and human relationships." Modeling The Dynamics "People dont understand the dynamics of how product flows through the system," agrees Tom Brady, assistant director of the Center for the Management of Manufacturing Enterprises at Purdue University, West Lafayette, Ind. "They may understand the flow diagram, but not the actual dynamics." Brady recently worked with a large pharmaceutical company to create a multiplant model of its internal supply chain. "They believed that the root cause of their problem was not the lack of a software product or a supply-chain methodology, but the simple fact that they did not know how the production system [already] in place behaved," he notes. Within the pharmaceutical company, Brady found 97 different production "nodes"--or links in the internal supply chain--spanning six different plants around the world. In trying to optimize the system, two key questions had to be answered: What is the true capacity of the total production process? What are the key bottlenecks? "The complexity and variability of the processes often left the answers open to different interpretations," Brady observes. "The key to enhanced supply-chain or production-process performance lies in the ability of those who manage the process to understand the dynamics and variability of the system." At the completion of the modeling project, the pharmaceutical company had achieved substantial inventory reductions without compromising customer service. In some locations, inventory levels were trimmed by as much as 90%--with 20% to 30% being a common reduction at a given node. Leadtimes were reduced by 50%. "The company chose not to spend a lot of money to install an APS software system," Brady says. "They now have a policy that tells them where they need to be [on inventory levels] and what they have to monitor. And when a flag goes up indicating a breakdown or an abnormal condition, then they have to communicate. People who are involved in the supply chain now know whom they have to talk to. When a disruptive event occurs, they know what the impact will be on the entire chain."