Tech can

Few firms remain even moderately vertically integrated, and few now control all but a fraction of their respective supply chains. This fact is too often lost in the “ERP versus best of breed” supply chain management (SCM) application debate, where integration is positioned as superior to all other evaluation criteria. Companies can no longer afford a myopic internal focus but must begin to take a networked view of their SCM world.

As META Group industry analyst Dwight Klappich put it, companies face a worrisome challenge as they design their next-generation SCM portfolio strategies. In this context “portfolio” refers to the business and technological aspects that apply to SCM. Historically, SCM investments were primarily focused inside the four walls of the enterprise and were justified in terms of addressing internal process problems. During the past decade, most of the “real” SCM investment has gone to four-wall applications like warehousing, order management, manufacturing, transportation, and planning. Common business drivers were reducing on-hand inventories, increasing factory throughput, improving shipping-date performance, etc. Now, the virtual nature of the modern supply chain demands new strategies that recognize the importance of externalizing supply chain processes and systems.

There have been several crazes during the past several years, such as collaboration, exchanges and the overarching e-business world, each of which promised to revolutionize SCM by externalizing some supply chain activities. Regrettably, there are few success stories. As with most new ideas, there are some achievements to suggest that the problems were with execution rather than concept, but even the few successful companies have struggled to take externalization beyond a handful of trading partners.

META Group believes the outsourcing trend demands that companies re-evaluate their SCM portfolios. Enterprises must redesign their portfolios around a virtual network model where they focus more attention on the external processes and information flows. Companies must develop business cases around end-to-end process improvement (e.g., order-to-cash cycle time, total pipeline inventory reduction, improved delivery on promise date), which, in a virtual network, will span multiple enterprises and systems. For example, improving order-to-cash and deliver-on-promise dates touches manufacturing, third-party logistics providers, carriers and customers.

Different organizations control pieces of the process at different points in the process. An order transaction might be taken in a company’s ERP system, handed off to a third-party logistics provider’s warehouse management system for fulfillment and handed off again to a carrier for delivery. Then payment authorization comes from the customer’s receiving and accounting systems. This example demonstrates that focusing just on what happens inside an enterprise’s walls (i.e., ERP) would address only a small fraction of the process. The greater value would come by looking across the extended supply chain.

Interdependencies between the numerous constituencies that participate in the supply chain influence the extended supply chain application architecture. As SCM networks become increasingly complex, there are, by definition, more participants in the SCM process — both within and outside the organization — and each play a role in the flow of product across the supply chain. How each participant interacts, the decision-making process and influence on the supply chain must be understood, and be used to define the needs in the application portfolio.

In addition to understanding the roles, responsibilities and influence of the various constituencies involved in the supply chain, enterprises must consider “end to end” process and information flows. Companies must recognize that the virtual nature of the modern supply chain will consist of a heterogeneous set of applications (i.e., each player having its core applications and technologies). The extended portfolio of systems will each own one facet of SCM processes (e.g., make, source, deliver), but the complete end-to-end process (e.g., order-to-cash, procure-to-pay) will more often than not span multiple applications and enterprises. The portfolio design must address strategies for connecting and managing the dots.

Forget SCM Trendy Diets

As previously stated, numerous trendy technologies failed to deliver on the vision of extended SCM. The fundamental problem with the early initiatives was that these solutions were positioned as silver bullets whereby technology alone would help the company lose 30 pounds in 30 days. There is no single, easy, or quick fix to extended SCM, and technology alone is certainly not the answer. In fact, some of the best examples of extended SCM use little or relatively rudimentary technologies (e.g., auto maker Toyota’s Toyota Production System, or TPS), while other initiatives (e.g., the Collaborative Planning, Forecasting and Replenishment concept, or CPFR) became mired in the cost and complexity of their technology centricity, eventually limiting adoption to only the most sophisticated trading partners.

Toyota’s TPS is a good example of marrying business processes and technology for SCM success. The automotive manufacturer employed relatively rudimentary technologies and aligned its vision of “balanced flow” with changes for it to work (i.e., operational and physical flows designed to enable smoother execution of work), Toyota achieved superior results compared to organizations that invested large sums in the next great version of MRP.

If hype were the only barometer, CPFR should be one of the most implemented supply chain technologies. However, our research indicates that fewer than 30 per cent of surveyed companies have or plan to implement CPFR, while more than 50 per cent remain committed to CPFR’s less collaborative cousin, Vendor-Managed Inventory (VMI).

VMI was developed to avoid some of the detailed process problems in CPFR. A key technology component that has made VMI possible is the ability of supply-chain applications to manage inventories at retailer locations. Demand and supply now come together at the retail receiving location — usually the distribution centre. VMI practices and technology provide a broader view of the inventory-holding locations and pipeline activity than current CPFR implementations, which give the manufacturer better information for planning inventory deployment across the pipeline. It also allows the manufacturer to be more customer specific in its planning.

We believe many Global 2000 companies feel the added benefits of CPFR are offset by the difficulty in breaking through historical barriers (i.e., lack of trust, co-operation, commitment, and bias between trading partners) between them and their trading partners, combined with the cost and effort to implement and maintain CPFR.

Although admittedly less reciprocal, many firms deem that, for now, VMI does the job. As a result, they are delaying CPFR projects. This notwithstanding, by 2005, CPFR adoption will grow in select environments where influential trading partners work to break down the traditional barriers of collaboration.

Before focusing on technologies, we believe that companies must understand and document their networked SCM processes. We find that many Global 2000 organizations have reasonable process models for their four-wall activities but stop at the enterprise boundaries. For example, if a company outsources warehousing to a third-party logistics provider, it might stop its process model at “pass orders to warehouse” or “receive shipment notification from warehouse.” This is not good enough for managing a networked supply chain.

Lacking visibility of partner-controlled activities creates a hole in a company’s knowledge of what is going on and how to improve process performance. Likewise, identifying and fixing problems becomes impossible if a company has no understanding of the process beyond its immediate control. Not to be overlooked is the added impact of legislation like Section 404 of the Sarbanes-Oxley Act (SOX) and similar regulations in Canada. These regulations require firms to provide visibility and transparency, control, communication, risk management, as well as fraud prevention for all processes that generate financial transactions. SCM represents a large cost in manufacturing, logistics and retail organizations. It is the source of, or at least affects, numerous financial transactions, so SCM must support SOX initiatives. Because documenting processes that generate financial transactions is central to SOX, and because SCM processes span multiple organizations, companies must extend the reach of their modeling activities to include all the constituencies that touch those transactions.

Given the vertical dis-integration of supply chains, companies must develop supply chain portfolio strategies that support process management across a virtual network of specialized participants.

— Farahmand is co-leader of META Group Inc., Strategic Consulting Services in Canada.