Value-Chain Report

Dec. 21, 2004
The supply chain of the future looks more like a web.

Most businesspeople are aware of the importance of their supply chain -- that linear pipeline stretching forward to their customer's customers and back to their supplier's suppliers. Streamlining data and product flows throughout the supply chain has been one of the primary focus areas for leading companies during the past decade. And many of these firms have achieved significant performance improvements. Harley-Davidson Inc., for instance, reengineered its supply chain with dramatic results. Order-to-delivery times were reduced by 30% with a corresponding 15% reduction in overall supply-chain costs. In spite of all the optimizing, reengineering, and new software that companies have thrown at their supply chains during the past decade, there is a growing awareness that the current supply chain model is flawed and will not take most manufacturers and distributors where they need to be in order to prosper in the 21st century. What manufacturers need is a true value chain that fosters communication among all members of the chain, and that model increasingly looks more like a web than a chain. From supply chain to value chain The traditional linear supply-chain model is, by its nature, sequential in both physical and information flows. From a physical flow perspective, raw materials and components are purchased. Then products are produced and/or assembled. When enough finished products have accumulated, they are moved to warehouses and distribution centers. Ultimately these products are delivered to points of sale or end users/consumers. Along the way we create forecasts and receive customer orders (demand), issue purchase orders and production schedules (supply) and plan raw material, work-in-process, and finished goods inventories to balance customer service objectives against financial performance targets. From an information-flow perspective, most of the business processes in a linear supply chain (e.g., forecasting, warehousing, procurement, etc.) are typically fully connected only to immediate upstream and downstream activities. Currently, only the most progressive companies are fully linked throughout their entire supply chain. But that is changing. During the last half of the 1990s, new technologies (including Internet-based solutions) and fulfillment models changed the rules of the supply-chain game, resulting in improved market efficiencies, increasing rates of change, and a far greater number of customer choices. These effects are reflected in four major business dynamics, the "four Vs": velocity, visibility, variability, and volume. Velocity. Customers are demanding more in a shorter time frame. Manufacturers are being challenged to use technology and radically alter fulfillment mechanisms to accelerate product flow as needed to meet these demands. Toyota is aiming for a combined technology with streamlined supply-chain processes to achieve an industry leading order-to-shipment time of only five days for the Solara, with other models to follow. Visibility. Customers, distributors, manufacturers, and suppliers all need to know where products/inventory are within the entire supply chain. To achieve this kind of visibility, all trading partners in the supply chain must be connected. By implementing advanced supply-chain software solutions that reduced supplier lead times and the need for buffer inventories throughout its distribution network, Johnson & Johnson Medical, a division of Johnson & Johnson, was able to reduce inventories by 43%. Over the long term, Johnson & Johnson Medical anticipates reducing its manufacturing response time -- from purchasing raw materials to delivery at end consumer -- by 75%. Variability. Customers want to be able to change orders (destination and/or content) right up to or during shipment. Traditional planning and execution processes do not support the level of variability customers are now demanding. Herman Miller Inc., the second largest office systems manufacturer in the United States, is using leading edge supply-chain management technology and processes to significantly improve its responsiveness to customer requirements. Delivery performance has improved to 99%, late shipments have been reduced by 97%, and throughput has increased by 40%. Volume. Manufacturers and distributors seek profitable flow through the distribution channel. As the entire framework of business moves closer and closer to one-to-one customer relationships and mass customization, fulfillment mechanisms within the supply chain will need to be configured to deliver profitably at decreasing individual volumes. Dell Computer epitomizes this trend. With Dell Online, customers can configure product, enter and track their orders without human intervention. Dell's Premier Pages provides businesses with a customized version of Dell's Web site for their own firm, including automated purchasing, in which corporate users order from pre-approved configurations. From chains to webs These new business dynamics are creating the need for a new, nonlinear model. To support these imperatives, the new model will need to be collaborative. In its January 2000 Report on Supply Chain Management (SCM), AMR Research notes that "Supply chains will change as SCM processes leverage the Internet. Last year's e-business inflection point portends efficient, connected supply chains that include new trading exchange partners." As linear supply chains move into true values chains, expect to see them also become collaborative webs, with all trading partners connected in real time. Replacing inventory with information, future interconnected supply webs will have a "virtual inventory" created through end-to-end visibility. Instantaneous availability of information, driving powerful planning and execution decision support tools, and executed by flexible, responsive fulfillment processes, are likely to be the difference between success and failure. Kevin P. O'Brien is an Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.

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