Trends—May 2012

Trends—May 2012

Seeding the Cloud, Harvesting Supply Chain Intelligence

The rise of "the cloud" and the proliferation of social media networks—both public and private—offer companies new avenues toward better analytical insight about their supply chains, says Siddharth Taparia, senior director, solution marketing for SAP. Inbound Logistics sat in on his recent presentation at the Supply Chain World North America conference in Miami.

As industries and companies begin to harness the power of social media to convey need-to-know, real-time information within the organization, similar opportunities exist outside the four walls—and beyond the firewall.

Even with social networking’s current popularity, untapped potential remains. Nearly 60 percent of supply chain decision-makers report that their supply chain partners and vendors either don’t participate in social media or they’re unaware of their participation, according to a recent survey conducted by Kemp Goldberg Partners and IDG Research Services.

Taparia sees the cloud as yet another opportunity to exchange information within the organization, and among supply chain partners, to drive greater collaboration and insight.

"A company can learn from all the transactions flowing through its network," Taparia notes. "As an example, the first indicator of Black Friday retailing success does not come from Walmart or Best Buy. Rather, it comes from Visa or MasterCard, because they can look at the number of credit card transactions that take place and make an informed decision as to whether shopping volume is up, down, or flat."

Within the supply chain, a similar flow of transactions takes place. Multiple suppliers may provide a similar type of product, but information can be fragmented. A social network allows companies to consolidate this data, identify transactions, and mine the information for greater intelligence.

Moreover, users can combine all this information with ERP and financial flows—extracting "systems of record" so that multiple parties have access to the data.

"This takes traditional machine-to-machine processes and enables people-to-people collaboration, which creates new context for looking at the supply chain," says Taparia.

Companies such as Siemens AG and Powell Electronics have been using SAP’s Supplier InfoNet solution, a cloud-based analytic application, to build the architecture for social networks where users can share information and knowledge about work they are doing internally or with business partners. This information may include designing products, working with distributors, or establishing supply chain strategies. If someone wants to enter a conversation, track activity or people on a project, or archive historical data, the information can be stored on a cloud platform. In this way, the cloud becomes a conduit to active collaboration, rather than a static cache for document sharing.

Untapped Power

But the real untapped power is when companies extend social connectivity to other supply chain partners, then continue to populate and saturate the network with new inputs and insights, explains Taparia. Then an organization has a holistic view to customer, supplier, and service provider behavior.

A cloud network allows you to see second-tier suppliers, build a map of the entire supply chain, address issues upstream, and measure possible impacts.

"A supplier might be having financial or operational issues not limited to one customer," he says. "The customer may not see it, but others—peers with whom it doesn’t necessarily share information—might see it. By bringing this information together in the cloud, the company can start aggregating more meaningful information."

What emerges is a cloud environment where transactional flows and threshold alerts for specified key performance indicators (on-time deliveries, for example) can be combined with market information, news wire items, and financial reports to create richer insight about supply chain performance. In effect, subjective data is cleansed by objective market intelligence.

"The cloud indicates events that might happen in the future—what other people in a business network are already seeing," Taparia continues. "Every connected party has a view to supplier or business partner issues that might emerge down the road."

Not only can a company gauge how a certain vendor is performing per lot-acceptance rates or lead times, it can compare against other vendors in the network to identify better options. A supplier delivering late for another company may be a harbinger of things to come.

"There may not be a lot of visibility to see far down in the supply chain and identify possible problems with second- or third-tier suppliers," Taparia notes. "A cloud network allows you to see these suppliers, build a map of the entire supply chain, address issues upstream, and measure possible impacts. If a fourth-tier supplier in Thailand goes out of business, for example, you can analyze the effect it will have on the company and its other vendors."

Roadblocks in the Cloud

While the benefit of having infinite inputs is preferable to one- or two-dimensional information flow, companies operating in the cloud face some potential roadblocks. For one, data quality is largely the responsibility of actors involved in the network. The cloud is neutral. If you put bad data in, you get bad data out.

More importantly, some companies don’t want to share proprietary business intelligence with potential competitors. For others, where supplier networks are heavily interconnected, or where businesses are willing to collaborate at the source and compete at the shelf, confidentiality is a lesser concern. Still, SAP has taken a conservative approach to showing and not showing what users can see in a network. "All the information users provide about a supplier is anonymous," Taparia says. "Nobody can trace it back to them.

"At the same time, the ability to look three or four degrees down in your supply chain is only available on a need-to-know basis," he adds. "If you request that a certain supplier join your cloud, it may be working with four or five other suppliers that you don’t know about. You can ask the supplier to get visibility to a few vendors that provide components to a specific product you’re sourcing—but you have to go through your supplier to get to theirs."

Whether or not lower-tier suppliers want to participate in a cloud-based network ultimately becomes a moot point. Other business partners can still submit information regarding their performance. So in a passive way, this connectivity builds greater accountability within the network.

Leveraging cloud networks as a supply chain differentiator is most likely a future state for most companies—but it’s a viable target. Solutions companies such as SAP and others are steering customers in that direction as they try and extract more actionable and objective information from what already exists in the supply chain.

Insuring Against Risk

Most companies readily acknowledge that supply chain visibility remains a critical problem when exceptions strike global networks. But many are not familiar with the tools available to help them mitigate risk and improve resiliency, including insurance options, according to Supply Chain Resiliency: How Prepared Is Your Organization?, a new whitepaper from New York-based insurance broker and risk adviser Marsh.

The 2011 earthquake, tsunami, and nuclear event in Japan, and floods in Thailand, resulted in significant business interruption losses. Companies in the electronics, semiconductor, and automotive industries were affected, and many have not yet completely recovered from these events.

To build more resilient supply chains, Marsh recommends an approach that encompasses an organization’s total exposure—including non-physical perils—aligned to the value it derives from key products or other revenue sources. This tack, which relies heavily on the use of analytics, can help an organization identify single points of failure in its supply chain, along with risk mitigation and financing options.

Risk managers are also encouraged to become more familiar with emerging supply chain insurance products that are considerably broader than traditional contingent business interruption (CBI) and contingent extra expense (CEE) products on which they have previously relied.

"The CBI and CEE products that risk managers have historically looked to do not cover the increasingly frequent disruptions that are not related to physical damage," says Ben Tucker, a senior vice president in Marsh’s Property Practice and an author of the report. "For example, the 2010 and 2011 Eyjafjallajokull volcano eruptions in Iceland caused little physical damage to insured property, but still led to significant disruptions and delays in transporting goods and services into and out of Europe."

In addition to indemnifying for business interruption and extra expenses resulting from physical damage to suppliers, supply chain insurance products also offer protection against non-physical interruptions to supply chains. These can include strikes, riots, ingress/egress, service disruption, and pandemics.

U.S. Transportation Credit Crunch

The credit quality of North American transportation companies has changed little since the beginning of 2012, according to Standard & Poor’s Ratings Services recent industry report card, North American Transportation Companies Navigate Through Higher Fuel Costs.

Operating conditions remain mildly positive as the U.S. economy maintains its pace of gradual expansion. Standard & Poor’s predicts a stable outlook for the industry, but says high oil prices pose a risk, particularly for the airline sector.

"We anticipate that revenues will continue to increase, but that higher fuel costs will partly—or in some cases, more than—offset growth," says Standard & Poor’s credit analyst Philip Baggaley. "For example, airlines are trimming expansion plans or cutting back on flights in response to higher fuel costs so they can maintain their ability to raise fares."

The balance of supply (capacity) and demand varies by sector. Truckload capacity has moved more in line with demand following the bankruptcies of many small trucking companies, and fewer new tractor and trailer purchases by larger players over the past several years. At the other extreme, global oil tanker companies continue to receive many deliveries of new vessels (ordered years ago), adding to oversupply and keeping shipping rates low.

Automakers Suffer Chemical Breakdown

Global automakers were reminded how fragile supply chains can be after crisis struck their supply network. They have sounded the alarm to find alternative sources for a chemical called CDT that is used to manufacture PA12 nylon resin for specialized plastic material found in fuel and brake lines.

The rush began after an Evonik Industries plant in Germany, which analysts estimate supplies more than half the world’s CDT supply, suffered a deadly explosion in mid-April 2012 that is expected to keep the facility offline as long as eight months.

One potential source is Wichita, Kansas-based Invista, a manufacturer that uses the chemical to make fire-retardant carpets in its Texas plant. Invista has a limited overage of CDT, according to a Detroit Free Press report.

Automakers are concerned that the shortage could shut down production at manufacturing plants worldwide, and recently convened an emergency meeting in Detroit to discuss the problem. General Motors says CDT scarcity is impacting parts supply. Ford Motor Company and Chrysler Group have yet to be affected, but are closely monitoring the situation.

The CDT shortage echoes a similar problem automakers faced in 2011, following the Japanese earthquake and tsunami. Ford had to stop taking new orders for cars in Tuxedo Black because of a pigment shortage. The rare dye was sourced from a single German-owned factory near Japan’s Fukushima Daiichi nuclear facility.

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