Forward, March!

Dec. 21, 2004
Have you 'optimized' excess inventory and lowered costs in your supply chain? Great. But that's only the first step. Get ready to rally the troops for supply chain versus supply chain.

Simplify, collaborate, adapt. Those steps to supply-chain optimization seem so natural and easy in the context of Dell, Procter & Gamble and Wal-Mart. Yet why is supply-chain optimization still the exception rather than the rule? Why the optimization lag when common knowledge signals that competition today is supply chain versus supply chain? It's not that executives fear change; rather the issue is recognizing the magnitude of change -- constant change -- that success now requires, notes Boston-based Bob Ferrari, director of supply chain business development for software provider SAP AG. The difficulty lies in the two primary change agents that threaten traditional modes of competition and business conduct, explains consultant David A. Taylor, author of "Supply Chains: A Manager's Guide" (Addison-Westley/Prentice Hall, 2003). Both change agents redirect the focus of competitive effort and both relentlessly reconfigure the business model, emphasizes Taylor. One is directed toward the historic -- and successful -- preoccupation with optimizing the internal production processes of companies. In the past, winning meant just being able to make something better, faster and cheaper, he adds. The next step is to optimize beyond the four walls of the plant. His point: In the emerging business model, competition will be defined as companies working together to beat other companies working together. (The operating presumption is that the best manufacturers have already squeezed as much efficiency out of the factory floor as they're going to get.) The second factor is the effect of classic vertical integration down at the retail level -- the big bucks retailers led by Wal-Mart. "It used to be that manufacturers controlled the supply chain. Today there is a sharp transition of control from production to the point of sale," Taylor says With the consumer in the supply-chain driver's seat, companies such as P&G are transforming themselves. P&G's goal: Make supply-chain efficiency the core competence of the company. Its strategy is to pare inventory by 50%, reduce consumer-level out-of-stocks by half and achieve 20% savings in logistics costs. P&G estimates the strategy will also be able to reduce consumer stock replenishment time by half. Meanwhile, Wal-Mart's strategy has vertically integrated everything from controlling the manufacturers through their dictates all the way down to how customers actually shop in their stores. Other companies, to compete, must either vertically integrate themselves or at the very least devise how to uniquely optimize their supply chains. Clearly the search for supply-chain efficiency is reshaping business investments and strategies in consumer goods, but no sector is immune. Consider how supply-chain optimization needs redirected production equipment investments for the rededication of a Cleveland Ford Motor Co. engine plant. Its lesson: Assess all investment strategies in terms of how they impact supply-chain optimization. At the plant, standalone CNC machines now dominate a production equipment layout that in the past would have been home to transfer lines. The quest for supply-chain efficiency redirected that equipment investment. Transfer lines are "hard" automation while the CNC machine tools give the flexibility needed to quickly meet customer preferences with new product configurations, explains Ford's Roman Krygier, group vice president of Global Manufacturing and Quality. The facility has begun producing the new Duratec V-6 for the 2005 Ford Five Hundred and Mercury Montego sedan and the Ford Freestyle. The Weakest Link Ignoring this emerging supply-chain imperative carries substantial, measurable penalties to companies, notes a research team from Georgia Institute of Technology's DuPree College of Management, Atlanta, and the University of Western Ontario. Their research first revealed a link between the announcement of supply-chain failures and a 10% decrease in stock-market prices. That triggered further analysis. Did the price deterioration reflect a market overreaction or was it true fallout from supply-chain disruptions? The results: In the year leading to an announced supply-chain disruption, average operating income of companies dropped 107%, return on sales plummeted 114%, and return on assets dropped 92% What's more, the study revealed that companies with supply-chain problems averaged about 7% lower sales growth, 11% higher costs, and a 14% increase in inventories. The researchers were surprised to discover how long it took companies to recover from a supply-chain malfunction. Their research showed that operating income, sales, total costs and inventories remained flat during the two-period after a company announced its supply-chain problem. "The supply-chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years," says DuPree's Vinod Singhal, professor of operations management. "Like a heart attack that cuts off the flow of blood, a supply-chain glitch cuts off the flow of information or supplies. And similar to a heart attack, it has lasting effects on a company's health." (Singhal's University of Western Ontario partner is Kevin Hendricks, associate professor of operations management.) Other key findings: Industry sector doesn't matter. Supply-chain glitches often receive more attention in the high-tech area, but companies are negatively affected regardless of their industry. Small firms get hit harder. Average operating income dropped 150% for small firms compared with an 86% decline for large companies. Fault doesn't matter. Even when supplies and customers cause the supply-chain disruption, companies were still negatively affected. The Georgia Tech study provides more evidence why companies should pay attention to supply-chain optimization, but are enough managers listening? "When people talk about supply-chain management, they may agree that it's important, but they are not investing in solutions," says Singhal, noting that lack of investment has become more pronounced the last couple of years due to the economic downturn. Another problem: Companies aren't always investing in the right supply-chain solutions. There are two key aspects of supply-chain management -- efficiency and robustness -- and the trend has been to focus on efficiency. "Even though a supply chain may be efficient, if it's not robust, it could still malfunction," Singhal says. "One reason supply-chain problems occur is because there isn't enough slack in the system. As companies try to make their supply chain more efficient, they take away slack because it's expensive." To Singhal, timing of the fix is critical. "When companies can't respond to demand, customers take their money and loyalty elsewhere. A number of costs go up, such as expediting, shipping and customer penalties. Loss of reputation may even require a company to increase its marketing expenditures." He says quick resolution prevents escalation of the problem. It's also important because there are more global supply chains today, which increases the odds for more companies to suffer from a disruption. To reduce the frequency and probability of glitches, the researchers recommend the following:

  • Better forecasting and planning.
  • Collaborating with supply chain partners.
  • Identifying and tracking key indicators that can provide early warning of supply chain problems.
  • Developing strategies to respond to problems when they arise.
The researchers' conclusions derive from a study of 885 public companies that announced supply-chain problems during an eight-year period. The researchers examined operating performance one year before the announcement and two years after. Best Practices Warning To consultant taylor, establishing a perspective on best practices is challenging. "We're actually trying to understand a very difficult problem without being willing to model it and thereby truly comprehend it. It's as if Newton wanted to understand gravity without writing an equation." With supply chains, Taylor feels the best practice challenge is simplistic answers and directives such as "all we've got to do is increase inventory velocity." s "That's a totally bogus concept. There's no measure corresponding to that. To master the supply chain, what we need is to achieve understanding through modeling the complex nonlinear interactions among all of the contributing factors. To find real answers, we need to get our minds around the whole thing." Gaining a perspective and finding some answers is motivating ongoing supply-chain research at A.T. Kearney, says Detroit-based Susan Oaks, vice president in the firm's operations practice. Her initial report confirms that the supply chain is still the prime means for competition -- since a really optimized, synchronized implementations are relatively rare. The common trouble spots: managing supply-chain complexity, the relationships among the internal and external constituents and the change process. Managing complexity is tricky because supply-chain simplicity tends to disappear with the normal progression of marketing and growth. But don't give up, advises Oaks. She notes that while long product life cycles can fight complexity -- similar results can also come from strategic decisions made during the product design process. For example with modular design and the concept of postponement, parts of a product design can be kept standard while the product continues to evolve to meet customer needs. Postponement involves differentiating the product at the last possible moment -- the common example being slipping in the customer specified color panel of a dishwasher just before shipment. Oaks notes that other ways to manage complexity include contract manufacturing and third-party logistics service providers. At Ford Motor Co., managing supply chain complexity takes on a global perspective with a strategy of standardizing production facilities and equipment. "We are using the same type of equipment around the world so it improves our quality and our ramp-up time because we know first-hand how the equipment will operate," says Dave Szczupak, vice president, Ford Powertrain. "This gives us great ability to react to changes in market demand. We are also reducing purchasing costs for the tooling and equipment because we purchase it globally. Simultaneously, as we launch Cleveland, we are launching two other plants that operate and look nearly identical in the United Kingdom." The A.T. Kearney research project reveals that establishing and maintaining an appropriate level of collaboration -- internally and externally -- is key to supply-chain optimization. Companies surveyed indicate that a strategy for culture change can be beneficial in uniting a supply-chain's functional silos. Oaks says the research participants stress the need to establish information technology as the enabler of supply chain optimization. Serious management attention is needed. Tip: Constantly measure progress against objectives. Some analysts report that less than half of IT initiatives have beneficial outcomes. But don't consider that generalization as an indictment of software or software vendors, warns ARC Advisory Group's Sid Snitkin, vice president supply chain and asset management, Dedham, Mass. "When you hear of bad implementations, it's not uncommon to find the origins of the problem in inadequate strategies that led to inappropriate software purchase decisions." To counter such difficulties, Lilly Software Associates rewards agreed upon performance objectives with a full refund if they're not met in 180 days. With its new VISUAL Easy Lean software, Lilly says the payoff is evident in customer results. Lilly says customers report revenue increases averaging 10%, lead times cut by as much as 90% and inventory reductions of 50%. Conclusion: Focus on strategies and execution and remember that change is a constant. IT/Software Challenges Moving to a supply-chain centric business model brings new focus to supply-chain management (SCM) software, a category that includes supply-chain planning, collaboration and execution applications. Consistent with other enterprise software markets, the SCM market is beginning to recover, the ARC Advisory Group reports in its study "Supply Chain Management Worldwide Outlook." Worldwide, the SCM market is expected to grow at a compounded annual growth rate of 7.4% over the next five years. The market was at $5.1 billion in 2003 and expectations are that it will reach a forecasted $7.4 billion in 2008. What might be a surprise, however, is that three of the top 10 market leaders are completely outside the traditional software vendor list. They're big industrial companies that serve the process industries -- chemical, paper and oil and gas. The companies: Honeywell, ABB and Rockwell. And 3M Co. is now a supply chain execution solution provider with its purchase of HighJump Software. Overall, ARC positions SCM as a maturing market that is beginning to show some signs of slower growth and supplier consolidation. Best-of-breed SCM suppliers continue to face increasing competition from Enterprise Resource Planning (ERP) suppliers, says Steve Banker, ARC service director supply chain management. "However, this is not true in all supply chain execution application areas. Certain areas (an example is product management applications for process manufacturers) have been much less likely to lose market share to ERP vendors. ARC says ERP companies are winning deals based on their broad integration and holistic coverage of processes such as order-to-cash and procure-to-pay. They also continue to narrow their function and feature gap with the best-of-breed SCM suppliers. Users are beginning to have the challenge of deciding whether all good things come in one complete package.

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