The Infrastructure

Dec. 21, 2004
Making the value-chain pipeline flow.

So you want to improve your company's value chain as a means to reduce cycle time, cut costs, and improve order-to-delivery time for customers. Just how do you accomplish that? What kinds of systems are needed? First, keep in mind that a good value chain is a sequence of players who work together as a team, each adding some component of value -- faster assembly, more accurate information, better customer response -- to the overall process. For most manufacturers, the key elements in the plan for an efficient, responsive value chain are an internal information backbone and multiple external connections to suppliers, dealers, and customers. Many companies today already have at least a manufacturing-resource-planning system or a more expansive enterprise-resource-planning (ERP) system that is either in place or being installed. But the connections often are wanting. Information-systems executives at companies that already have established these connections will tell you point blank that the biggest challenge is getting the various pieces of the pipeline to connect -- that is, talk -- to one another. The problem is agreement on information standards and data protocols. For instance, in the world of electronic data interchange (EDI), there are scores of different data standards, largely as a result of differing proprietary systems offered by numerous vendors. Some software companies are trying to fix the problem. QAD Inc., an ERP software firm in Carpinteria, Calif., whose systems are used by many small and medium-sized manufacturers, in mid-July began offering a message-conversion system that lets companies connect to each other via EDI without worrying about incompatible EDI systems and the programming headaches that typically ensue. Called Ecommerce, the new conversion software "makes integration simpler, faster, and more effective with a tighter connection to our enterprise applications," says Lowell Johannsen, ERP project manager at Cascade Engineering, a Grand Rapids, Mich., developer of plastic parts for automotive, office furniture, consumer products, and waste containers. "It gives us not only better access to our partners, but also the flexibility to adjust quickly and inexpensively to changes in our business relationships with them. It used to take days or even weeks to accommodate new customers; now we can accomplish this in just a few hours." An automotive supplier, for instance, could use the message-conversion system to make an EDI connection with an OEM such as Ford Motor Co. Later, if the need arose to transact business electronically with General Motors Corp.'s Delphi Automotive, the supplier could simply download the EDI document specifications used by Delphi and begin accepting and sending EDI documents with the GM unit without any additional programming. "By taking responsibility for managing both the syntax and semantics, QAD has eliminated one of the major headaches all EDI users experience," states an Apr. 13 report on enterprise applications by AMR Research Inc. The issue of standards -- or lack thereof -- was the impetus for a new computer-industry venture called RosettaNet. More than 30 vendors of hardware, software, and network equipment have banded together to set standards that will let them do a variety of business transactions with one another over the Internet. The RosettaNet consortium promises to set the pace for the way companies deal with one another electronically in a world rife with different software programs, communications protocols, and data standards. The goal is to define how business processes are conducted between computer manufacturers, software companies, distributors, resellers, systems integrators, and volume end users -- in other words, the IT industry's supply chain. Perhaps more important, what this consortium is expected to bring to the computer industry can be done in other industries. "This has a great deal of applicability to other industries, not just our own," says Jerre Stead, CEO of Ingram Micro Inc., a leading computer industry reseller in Santa Ana, Calif. A host of software vendors offer systems to make these connections -- some more smoothly than others. For instance, in July the Atlanta-based supply-chain-software firm Logility Inc. began offering I-Community, a Web-based collaborative network of trading partners. The idea is to enable companies to connect with their suppliers and customers for collaborative planning, forecasting, and replenishment (CPFR). "Logility's I-Community supports collaborative business relationships and gives companies a way to improve communication with their trading partners and share information no matter what the company's size," says CEO Mike Edenfield. One company that plans to use Logility's system is Inland Paperboard & Packaging Inc. An international manufacturer of paperboard and packaging products, Inland operates 46 converting facilities in the U.S., Latin America, and Puerto Rico, and owns six paper mills. Inland will use Logility's I-Commerce system to handle planning, forecasting, and replenishment with its trading partners over the Internet. The manufacturer also will use Logility's Voyager XPS to manage relationships with customers. "Inland sees Voyager XPS as an extension of vendor managed inventory," says Ken Smith, manager of electronic commerce and EDI at Inland, based in Indianapolis. "We are doing vendor-managed inventory with our trading partners currently, but we want to move forward to a true Internet-based CPFR environment in which we can manage exceptions more effectively." Paragon Management Systems Inc., Los Angeles, has teamed with TRW Integrated Supply Chain Solutions to offer a total supply-chain-management solution to certain industries such as automotive, semiconductor manufacturing, and consumer packaged goods. Paragon offers software for advanced planning and scheduling, while TRW is a leading systems integrator with scores of clients in these industries. i2 Technologies Inc., the leader in supply-chain-management systems, in June released its Intelligent eBusiness initiative aimed at helping manufacturers connect with one another over the Internet to perform collaborative planning. "We have leveraged the expertise gained from implementations at, Compaq, Dell, Ford, GM, IBM, and Sun Microsystems to create a new set of solutions to meet the demands of the coming customer-centric era," says Sanjiv Sidhu, CEO at i2, based in Irving, Tex. Linking the supply chains of a single or multiple vendors, i2's Rhythm Internet Fulfillment Server is capable of coordinating fulfillment of the massive volumes of orders that can result from online commerce. Multiple vendors' products can be offered online at a single Web site; they also can be purchased and shipped as a single order. Not to be left out of the race, Manugistics Group Inc., another prominent supply-chain-software company, introduced its e-Chain family. One especially interesting offering is the Manugistics e-Compass framework, which helps manufacturers measure their progress in moving their supply chains toward e-Chains by identifying five key steps in the process. At the heart of the e-Chain offering are three products. E-Chain Communities allows companies to share information about their supply chains with their trading partners. E-Chain Fulfillment converts sell-side requirements into supply-side needs, meshing inventories, manufacturing and transportation capability, and material supply. Finally, Manugistics' Virtual Service Provider, aimed at third-party-logistics firms and distributors, enables them to share information with their customers and suppliers over the Web. Speaking of the Web, despite all the talk and hype and effort to connect companies trading together via the Web, there remains a lot of work yet to be done. RosettaNet won't have its first applications up and running for its participating computer-industry manufacturers and suppliers until next February. Even the Automotive Network Exchange, established more than two years ago, has only about three dozen active participants, versus a stated goal of more than 10,000. And the fact remains that thousands of companies continue to use EDI as their pipeline for trade with business partners. Part of the reason is inertia -- it's simply easier to stick with a system that's known and that works. What's more, EDI doesn't present the potential security problems that the Internet still suffers from. Many companies still worry that if the Pentagon can't keep its Web site secure -- as recent news reports revealed--how could they ever hope to? But those problems aren't deterring most companies that are determined to do business online -- adding value along the way -- with their suppliers and customers. Northern Trust Co. set up NetTransact, which compiles the bills from different firms, in effect serving as a virtual billing community. The Web site enables supermarkets to review the bills from a number of food suppliers in a single location. And sometimes just more careful management of the pieces that make up the value chain will yield greater value. With about 20 acquisitions under its belt, Owens Corning Toledo, Ohio-based last year combined a host of supply-chain activities, from logistics and materials management to planning and customer service. The result was elimination of a great deal of redundancy. Part of a larger corporate-wide restructuring, the shift yielded $25 million in savings from streamlined logistics and more effective purchasing. Another area where systems can add value to the process is in reverse logistics. Many manufacturers struggle with handling returned products, which in most cases must be discarded, rebuilt, or dismantled for parts. Usually these are costly, time-consuming manual processes. But some companies have found ways to speed them up and make them less cumbersome. Great Plains Software Inc., for example, offers a Returns Management application that monitors product returns and helps companies perform the other functions associated with reverse logistics. Coca-Cola Femsa SA de CV in Mexico City is using supply-chain-planning software from Numetrix Ltd., which recently was acquired by J.D. Edwards & Co., to help coordinate the flow of returned bottles with its production schedule. The company also is using the software package to meld promotions -- which bring greater demand for bottles--with an upswing in bottle returns. Solectron Corp. last spring introduced an innovative plan to add after-sales service and support for its customers, who are electronics manufacturers such as personal computer companies. The services include product repair and maintenance, logistics and parts management, returns, product upgrade and refurbishment, failure analysis, and warranties. Solectron's objective is to add value to the customer's supply chain. "Whether it is a product upgrade, an engineering change, or a warranty repair, Solectron's Support Services division is intent on making that product better and getting it back to the consumer fast," says Koichi Nishimura, chairman, president, and CEO of the Milpitas, Calif., contract manufacturer. In some cases, making the supply chain more valuable means reducing the cost for its participants. Some manufacturers are working to reduce their supply-chain costs by switching some of their information flows to suppliers and customers from EDI to the Internet. At Whirlpool Corp., Benton Harbor, Mich., the goal of a new e-commerce plan launched this year is to connect the appliance manufacturer with 600 suppliers, using the Internet to exchange information on orders, inventory, shipments, and parts. Called Easy EDI, the venture is expected to reduce much of the paper used by the company's smaller business partners, while cutting operational expenses Whirlpool incurs with its EDI network. Whirlpool's cost for the value-added network (VAN) over which its EDI transactions run is about $500,000 annually. For manufacturers looking to improve connections with smaller suppliers, Eventra Inc. (formerly APL Group Inc.) has launched a Business-To-Business E-Commerce system, including a product called VendorSite. This enables companies to connect electronically via the Internet with their suppliers. The system is targeted at manufacturers whose smaller suppliers can't afford to communicate using EDI over a VAN. One company that has made an entire business out of adding value at various steps on the logistics side of the supply chain is UPS Worldwide Logistics (WWL), a unit of Atlanta-based United Parcel Service of America Inc. (IW, Dec. 21, 1998, Page 58). Although most manufacturers may never become as deeply involved in the logistics business as UPS, the innovative ways that the package-delivery firm goes about adding value for its customers' supply networks may offer some lessons to companies in other industries. The backbone of the UPS logistics service is a pair of data centers, more than two dozen mainframe computers, and a worldwide network. The company's vast worldwide database containing all package information is accessed by more than 300,000 employees using more than 100,000 personal computers, as well as via special terminals and devices located on its fleet of vehicles. In a typical arrangement with a customer, UPS packages the various parts of Gateway Inc.'s personal computers before shipping them to a Gateway location for final assembly. For General Motors Corp., WWL manages warranty parts returns, picking up the parts from dealers and delivering them to a warehouse in Detroit where they are collected, collated, held for inspection by GM, and either returned to the original manufacturer or discarded. The WWL service also has a feature called Event Tracker, which offers two-way communication between the UPS unit and the customer regarding shipment status, problems, and how problems can be avoided or alleviated. The system uses a model of the customer's optimum supply-chain process as a benchmark and notifies WWL operations people by e-mail if a problem, such as a delayed shipment, is likely. Last year UPS began offering a supply-chain service for the wireless industries, including companies that manufacture cellular equipment, retailers, and wireless-network providers. Services include logistics such as transportation and warehousing, distribution, sales follow-up activities (technical repair, warranty management, and direct channel support), customer-service support, and inventory and order management. Another third-party logistics provider, Customized Transportation Inc. (CTI), based in Jacksonville, handles a variety of logistics activities for numerous manufacturers. Among them are Bayerische Motoren Werke AG (BMW), DaimlerChrysler AG, Compaq Computer Corp., Deere & Co., Ford Motor Co., and General Electric Co. For BMW, CTI adds value by sequencing some 750 stock-keeping units into 10 families of parts prior to final delivery to the assembly plant in Greer, S.C. Based on production signals from the BMW inventory-management system, CTI delivers the material to the production line within a two-hour window. CTI reengineered GE's transportation process, resulting in reduced transportation costs, inventory reduction, and the elimination of premium transportation services. The improvements in the process came as a result of an analysis by CTI of materials and information flows. On the horizon are still more Web-enabled supply-chain systems, meaning that companies can chart their business dealings with suppliers and customers over the Internet. One such offering, announced in mid-July by Ditan Direct, is called the Virtual Warehouse. This system allows companies that sell products over the Web -- which Ditan, located in Eatontown, N.J., calls "e-tailers"--to eschew costly brick-and-mortar warehouses as well as retail stores. "With no store shelves to stock, it makes no sense for an e-tailer to ship product from its far-flung vendors to its own, costly distribution center, then turn around and ship that same merchandise to the consumer," observes Ron Novotny, president of Ditan Direct. "The logical solution is to ship the merchandise once--directly from the point of origin to the consumer." With the Ditan Direct Virtual Warehouse, an e-tailer electronically transmits consumer orders simultaneously to its supplier and Ditan. At that point, Ditan can pick up the product and route it through one of its own distribution centers and on to the consumer. Or Ditan can ship it directly to the consumer. Ditan offers its own custom-shipping system, the Ditan Electronic Commerce System, that automates order processing, shipping, invoicing, and real-time order tracking, currently used by the entertainment-software industry. Not everyone likes the idea of using the Internet to cut out huge chunks of the supply chain. Home Depot Inc., for instance, sees possible Web-based sales by its suppliers as a threat to sales of products in its vast store network. In a letter the company sent to its suppliers in May, the giant retailer warned them that it would consider them competitors if they offered to sell their products over the Web--and could risk losing Home Depot's business. Home Depot currently does not sell goods over the Internet, but plans to do so either later this year or early in 2000. While some companies continue to operate their supply chains in a traditional mode, many are responding to change wrought by e-commerce. Barnes & Noble Inc., the big bookseller, has shifted from a more traditional buy-store-sell logistics model to one of sell-source-deliver as a result of the Internet. Similarly, at Toshiba Corp.'s electronic-imaging unit, an extranet allows the company's 325 dealers to place four out of five orders, check order status, and obtain other information. Yet another piece of the supply-chain puzzle is metrics. At least two software firms now are offering systems that help companies measure the performance of their supply chains. VIT, a software firm in Palo Alto, Calif., in June began marketing SeeChain, a set of supply-chain-performance applications. The metrics software works with various supply-chain systems such as i2, Manugistics, Oracle Corp., and SAP AG, and measures results in the form of key performance indicators. "Traditionally, executives and managers have been forced to work off data that is 30, 80, or even 120 days old," says Beth Enslow, senior analyst at GartnerGroup, a Stamford Conn., IT research firm. "They need an intuitive solution that allows them to quickly get to a problem and get on with fixing it. Rapid access to critical supply-chain-performance information allows them to be much more agile. They can leverage internal knowledge to make better decisions faster than their competitors." One company already using the new metrics is Nestl USA, where the software applications "allow us to synchronize our supply-chain strategies with Nestl's long-term business initiatives," says Richard Ramage, supply-chain vice president. "They allow us to view all of our supply-chain information in one place with one consistent set of measurements. We now can drill down more quickly into problem areas and take action to resolve them." SeeChain measures the accuracy of demand forecasts and production plans, as well as on-time delivery and customer-service levels. It also monitors availability of both raw materials and finished goods. Another yardstick for measuring the effectiveness of the supply chain is Industri-Matematik International Corp.'s Value Improvement Process (VIP) released in June by the Marlton, N.J., software firm. The system is designed to help companies identify and improve supply-chain challenges such as customer and vendor service quality levels, transaction-price management, and order-fulfillment cycle times and fill rates. "VIP has become the 'implementation bible' for our company initiative to enhance supply-chain performance," says Gary Tomczyk, order-management project manager at Brunswick Corp.'s Mercury Marine Group, a $1.5 billion manufacturer of marine-propulsion systems. "It helped us identify the high-payoff fulfillment advancements we could make and focused our project on strategic drivers to improve our global order fulfillment."

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