Supply chain management — it’s not grabbing the headlines the way e-business is, but it uses e-business technologies to deliver one of the best value-propositions around in the IT world today,
particularly for the manufacturing sector. The payback is typically high; the investment relatively low. In fact, research shows that companies with “best of class” supply chains typically achieve important advantages over medium performers, including:
– A seven per cent cost advantage — enough to double many manufacturer’s margins;
– A 40 per cent to 65 per cent cash to cash cycle time advantage — a significant benefit to companies struggling to improve working capital;
– A 50 per cent to 80 per cent reduction in inventory, compared to competitors.
The supply chain in the consumer packaged-goods sector was one of the first to take advantage of the opportunities. PETsMART, for example, has proven that e-collaboration with manufacturers yields outstanding business benefits. Since 1997, the company has reduced time to market 50 per cent for many new products sourced internationally, while increasing the SKU count by 40 per cent. And PETsMART did it without adding any new personnel. Instead, it eliminated the paper and moved its buying processes onto the Internet using a third-party service provider, SourcingLink.
Growing numbers of manufacturers are looking to gain similar synergies. They recognize they can improve their speed to market by collaborating more closely with their trading partners, including their customers. It’s particularly critical to support a just-in-time manufacturing strategy.
STRATEGIC SOURCING VIA THE WEB
Sandvik Mining and Construction, for example, is looking at its supply chain from a global perspective. The Burlington, Ontario-based company produces heavy equipment for the mining and construction industries. Through its parent company, Sandvik of Sweden, it is now participating in corporate-wide initiatives to rationalize the supply chain. Not an easy task for the firm, which has grown through a series of mergers and acquisitions to 8,000 employees worldwide with 11 manufacturing sites and 30 sales offices.
The company’s current supply chain efforts centre around the area of strategic sourcing, using Web technologies. As well, as part of a corporate-wide ERP implementation at 20 sites worldwide, it has reduced its intercompany order-processing cycle to 15 minutes. This cycle used to take up to five days in Sandvik’s remote locations, where routine communications were often difficult.
The company is now moving to centralize its procurement data, to ensure global visibility. It’s also rationalizing logistics to slash traffic costs by as much as 50 per cent. The goal is to source product as close to customer locations as possible. Sandvik can then respond locally, while leveraging its combined corporate purchasing power.
As Mike Fraser, IT Program Manager, explains, “For us, the issues are truly international. The biggest challenge we face is moving from a local mindset to a global view. Global visibility is the key to understanding the cost drivers and targeting the programs which will improve performance throughout the supply chain. That’s the key to capturing the ROI.”
He adds, “Organizations are usually too quick to automate processes in an effort to generate efficiencies, rather than looking at the big picture of what they are trying to accomplish. The organization that can define and develop greater collaboration, from the customer through to the supplier, wins. In fact, all parties involved win. The synergies are really compelling.”
A POWERFUL ROI
Why the focus now on the supply chain? To a large degree, it’s due to a growing awareness of the powerful return on investment that others have achieved. A 1998 Meta Group ROI study shows the following ROI for various supply chain IT initiatives:
Application type ROI
Supply chain management 99%
Supplier negotiation 62%
Inventory Manufacturing Planning 134%
Manufacturing Procurement 147%
Other reasons companies are launching supply chain initiatives include:
– It’s more feasible, given the dramatic growth in the breadth and depth of supply chain functionally in recent years. For example, where a supply chain planning system two years ago would have likely featured only a dozen functional areas, that same application may now offer up to 35. Yet, the ease of use is much improved compared to earlier systems.
– It’s more affordable. Many companies can leverage their investments in Enterprise Resource Planning. An ERP system can form the transactional backbone for supply chain management. It’s not a prerequisite, but it can reduce the complexity and cost of a supply chain implementation substantially. And increase the benefits.
It’s simpler, due to the explosive growth of the Internet. In the past, manufacturers have used EDI to communicate with their trading partners. This approach was often costly, with all the different protocols around. Imagine if each one of your major customers asks you to invest in a different EDI solution as the price of doing business. You’d quickly find it expensive to build and maintain the necessary infrastructure.
Do the same thing on the Web and you can provide lower-cost, universal access. Simple. Immediate. And powerful.
For example, at IBM’s Personal Systems group (PSG), supply chain initiatives have resulted in faster delivery of products, along with substantial inventory and cost reductions. PSG has achieved total savings of US$650 million, including $100 million saved through the use of a powerful simulation tool to analyse the supply chain.
On a corporate-wide scale, IBM has saved US$6.5 billion by transforming its procurement processes using e-business technologies. The company now completes 85 per cent of all purchase transactions without a buyer.
FOUR KEY AREAS OF OPPORTUNITY
For manufacturers, supply chain initiatives tend to focus on four main operational areas. Due to significant advances in the tools available, the payback today in each one is more impressive than ever.
1. Forecasting and demand planning
In the past, users often had to work with complex mathematical models for forecasting. It required a lot of training time and a deep understanding of modeling. Simpler user interfaces are now making it easier to use these systems. The result: up to an 80 per cent improvement in forecasting accuracy, according to one study by Advanced Manufacturing Research Inc., with reduced inventories and shorter lead times. The synergies expand when forecasting becomes a collaborative event across the extended enterprise, as the auto industry has shown so well. Here the major manufacturers often hold less than an hour’s worth of line side inventory. To ensure just-in-time delivery, they exchange order and forecast information on a real-time basis with their suppliers.
2. Strategic sourcing and procurement
If people feel a purchasing system is too complex and cumbersome, they simply won’t use it. At some organizations, maverick buying (where individuals buy direct, circumventing corporate procurement channels) is a major problem, accounting for up to 50 per cent or more of total purchasing. Strategic sourcing and procurement systems can reduce this number significantly. For example, an organization may post an electronic catalogue on the corporate intranet, complete with pictures and a user-friendly Web interface. People can submit orders electronically using a blanket purchase order that has been negotiated in advance by the buyer. Parker Hannifin Corporation’s Aerospace Group is implementing a secure Lotus Domino solution for suppliers to access vital part and order information. The system automates what was formerly a 68-step manual process, with 17 different people touching a purchase order — to a one-step process. It will provide a material overhead rate reduction of 10 per cent to 12 per cent (approximately $2.4 million in savings annually).
3. Production logistics
Manufacturing execution systems can interface directly with ERP systems and automated manufacturing equipment to help achieve higher levels of shop floor efficiency and quality. Equipment can be monitored in real-time to determine where there are bottlenecks or gaps to correct. And statistical measurements can be used to predict the optimum time to take a machine out of service for routine, preventative maintenance. When manufacturers service equipment in a controlled, planned manner, downtime is shorter and costs reduced. Advanced Manufacturing Research Inc. found companies improved capacity realization from 10 per cent to 20 per cent through supply chain improvement projects.
Many companies have significant resources tied up in transportation equipment. Just like the shop floor, they need to achieve high levels of utilization to ensure a good return on assets. Use of technology such as transportation management systems and global positioning systems (GPS) are now available to support efficient scheduling and execution. A good example took place recently on the 401 Highway west of Toronto. A 12-hour traffic jam threatened to halt just-in-time shipments coming to Cambridge-based Cami Automotive, a joint venture of General Motors and Suzuki. A major delay would have potentially forced a production line shutdown. Instead, Cami’s transportation logistics outsourcing partner, TransFreight, used their technology to quickly locate and reroute the trucks to avoid any impact on production.
For many manufacturers, these four solution areas may be the missing pieces of the puzzle needed to complete the transition to just-in-time manufacturing. Because just-in-time manufacturing doesn’t happen only on the shop floor. It’s about achieving efficiencies right from the word go — from the forecasting and planning stages up until the product reaches the end customer.
That’s the ultimate power of supply chain management: the power to apply today’s advanced technologies to save time, money and materials every step of the way.
Brian Smith is Principal of IBM Canada’s Supply Chain and Industrial Sector Management Consulting Practice. He has more than 20 years’ management and operational experience in the manufacturing and distribution industries, helping an international client roster achieve significant improvements in supply chain performance, and business and IT alignment.
Getting Started with Supply Chain Management
By Brian Smith
CIOs agree there are three essential steps to launching a successful supply chain initiative. They are:
1. Develop a supply chain vision.
As with any major business initiative, it’s vital to establish the strategic direction for your organization. Most organizations hold these kinds of discussions at an executive planning session. They may use an outside facilitator to navigate the roadblocks and ensure all points of view are heard and objectively considered so that a true consensus can be reached.
As you formulate your vision, watch for the following roadblocks:
– Technology alone is not the answer; it’s important to bring the technology together with specific operational objectives. Otherwise your risk will be high and ROI low.
– Focus your initiative, so you don’t become overwhelmed with a massive initiative beyond your resource capability. This is particularly important for small and medium-sized organizations. Fortunately, it’s relatively easy with supply chain technologies to proceed in stages. The benefits of one phase or project can fuel development of the next.
– Be sure to secure an operational sponsor, preferably a senior executive such as your President, CEO, or even Vice President of Operations. In addition, many organizations have now established senior executives in charge of supply chain or logistics. Teaming with them at the earliest stages is essential to success down the road.
Ingersoll-Dresser Pump, a global manufacturer of industrial and specialty pumps, takes it one step further. The leadership for its current supply chain initiative comes from the corporate purchasing team, not IT. The company is now working to consolidate its purchasing activities in order to improve its negotiating power while streamlining processes and reducing internal costs.
Says Brian Minaji, MIS manager at the company’s Brantford business unit, “We see a much better buy-in when the users drive the initiative. Our role is simply to provide the necessary technical expertise to support the business strategy. We used this approach successfully in our recent ERP implementation and we are now following the same model on the supply chain side.”
– Work to achieve a complete consensus at the executive level, with representatives from all the major business functions. Otherwise, you run the risk of an expensive false start. For example, a dissenting senior executive can give signals to his or her staff that could lead to problems in executing the initiative effectively. You want to work on this up front, before it becomes a show stopper.
– Where possible, include the extended enterprise in developing your vision. The biggest benefits from supply chain initiatives stem from coordination with trading partners.
– Learn from best practices in your industry, so that you can tap into the experience and insight of others in the market place.
Montreal-based Gildan Activewear, a leading manufacturer and marketer of high-quality activewear, has learned the value of planning firsthand. It is one of the lowest-cost producers of premium quality activewear in the industry. Now, the company is launching a series of initiatives that incorporate both ERP and supply chain technologies. For example, it is now rolling out a new distribution system that uses Web technologies to give its worldwide customers and sales force instant access to information on product availability and order status.
According to Fran