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Winning Supply Chain Strategies: Adversity Breeds Creativity

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While a slow economy drives many companies to wait out the siege, others do everything but. These winning companies look to the future, building supply chains based on creativity, velocity, collaboration, and speed. Here are their strategies for success.

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“With economic recovery nowhere in sight for the near-term outlook, many manufacturers face one of the most challenging business environments of their corporate existence,” says John Bermudez, a research analyst with AMR Research in Boston.

These challenges, which appear likely to continue into the first half of 2003, include:

  • Slower growth, lower profitability, and uncertain demand.
  • Intense pressure from global competition.
  • Attempts by industry leaders to use the recession to increase market share.
  • Frequent introduction of new products and services with shorter lifecycles.

” The pressures on businesses today are driving changes that have enormous implications for supply networks,” says German software giant SAP in a white paper entitled Adaptive Supply Chain Networks.

Shrinking capital availability is forcing companies to streamline manufacturing and supply operations. Globalization requires levels of supply network visibility and collaboration unlike those maintained in traditional supply chains. Customers are more demanding and less loyal, forcing companies to deliver unprecedented service levels that quickly become economically untenable for firms unable to manage supply chain efficiencies. And shrinking product design, build and launch cycles are forcing companies to innovate at velocities far greater than before.

Companies are reacting to these challenges by making efficiency improvement their number-one priority, according to a study by AMR Research.

” The corporate focus has shifted from extensive business process reengineering to revenue enhancement and cost containment,” write analysts Gerald McNerney and Wendy Davis. ” Both manufacturers and service companies are embracing a lean and cost-productive mantra that squeezes costs while speeding new product development and customer response.”

While the adverse economic environment drives many companies to hunker down and wait out the siege, other firms are doing everything but. They are looking to the future, and embracing a new paradigm of supply chain management built on creativity, velocity, collaboration and speed. They are beginning to build supply networks that are far more responsive than the traditional sub-optimal and sequential supply chains. They are starting to execute on the long-discussed concept of the extended enterprise, and are beginning to realize competitive wins as a result.

” Processes traditionally managed by single enterprises are spreading out across multiple enterprises,” SAP says. This means traditional supply chains will have to build the characteristics of what the software firm refers to as adaptive supply chain networks to be in a position to have the highest visibility, greatest velocity, and best ability to manage variability.

Just what is an adaptive supply chain network? SAP defines it as a loosely coupled group of organizations that ” work together to share transactional, operational, and financial data to enhance network competitiveness and optimize network profitability. This type of supply chain leverages the integrated and collaborative network to manage variability better than other networks. Its visibility and velocity enable it to manage variability with a minimal loss of operational and financial efficiency.”

To make this next-generation supply chain construct work, companies will need to map the three key elements—visibility, velocity and variability—to the three chief information enablers—quality of information, timeliness of information and depth of information.

1. Visibility and information quality. Visibility of high-quality information is becoming the fundamental building block for adaptive supply chain networks. Information technology advances now make extended visibility across organizations possible, SAP notes. Information visibility of orders, plans, supplies inventory, and shipments is key to successfully coordinating events across the network and to monitoring analytics that track the health of the networks and allow for proactive action.

” Theoretically it is possible for an order captured by a retailer to be simultaneously propagated to the suppliers across the network, and to have inventory checks made against it at all points,” SAP explains in its white paper. ” Distributors, logistics service providers and all relevant departments across different organizations can have full visibility of the order flow, both into the system and back to the customer. The customer, in turn, can track the shipment of the order and make changes based on redefined rules.”

While this scenario looks good on paper, at present it remains a pipe dream for most companies. Organizations still find it exceedingly difficult to extract relevant supply chain data from multiple systems across the network and distribute it to relevant network nodes.

The goal, therefore, is to develop a system that provides total visibility of the order, automates order management, and monitors product use by customers across the network, replenishing when necessary without having any manual intervention other than exceptions.

2. Velocity and information timeliness. Once organizations overcome the visibility barrier, the next step is to increase the velocity of response by accessing and distributing information rapidly across the supply network.

” Velocity of response is rapidly becoming the key differentiator in business performance,” SAP observes. ” The success of Dell Computer in the high-tech market, Wal-Mart in the retail market, and Toyota in the automobile market is closely linked to their access to timely information across their networks.”

3. Variability and information depth. As businesses become more dynamic, the traditional practices of creating forecasts over longer time horizons, batching orders, and pushing inventory downstream will become outmoded, yielding sub-standard results.

At the same time, organizations must do a better job managing variability throughout their global network. Companies will need to successfully manage events far outside the four walls of the organization. This will require supply network partners to share far more than simple surface transactional data.

” The most efficient networks will be those that successfully set aside concerns about confidential information and recognize that the end customer in the supply chain network—not the individual business-unit performance—will determine network profitability,” the SAP paper notes.

Stages of Evolution

The adaptive supply chain network represents an evolution in business process and practice. Companies must pass through two stages of evolution—the integrated and the collaborative phase—before they reach the adaptive stage.

The integrated stage. Intra-enterprise integration is not a new concept. It is, however, the basic driver for visibility within the organization. In recent years, enterprise applications have emerged to improve operational visibility and efficiency.

For example, a company may use an internal transportation management system to manage routing, rates, load tendering, and other execution functions. This system can be integrated to the company WMS, the enterprise system, and the supply chain event management application that tracks the shipment in transit. The extent of integration directly determines the degree of visibility that organizations have. Visibility, in turn, is the basic building block for an adaptive supply chain network.

As companies increasingly integrate their supply chains and logistics processes, their focus turns to synchronizing inbound and outbound logistics activities with supply chain partners,” notes Dan Gilmore, marketing and strategy results leader at software vendor RedPrairie Corp., Waukesha, Wisc. ” The Internet and collaborative technologies are enabling synchronization by facilitating supply chain-wide visibility and information sharing, proactive exception management and alert notification, and precise high velocity logistics operations,” he says.

The collaborative stage. Once a company has overcome the internal integration challenge, the next step toward adaptivity is efficient collaboration. Companies rarely out-compete their peers because of differentiated technology. The crucial competitive edge is the ability of the supply network to exchange near real-time information and thereby execute better and faster. Success is a derivative of the degree of collaboration. Most companies today have not evolved much beyond the integrated stage.

” Most companies share important information with trading partners, but outside of new product development processes, activities remain confined to functional areas and learnings are not shared across the enterprise,” say Janet Suleski, Allison Bacon and Larry Lapide in an AMR Research report, Supply Chain Collaboration Today: It’s a Tactic, Not a Strategy.

In a cross-industry survey of collaborative practices, the researchers found:

  • Companies collaborate the most with customers, but in very tactical ways.
  • Only a fraction of trading partners qualify as targets for developing joint planning and forecasting relationships.
  • Company collaborations are focused on short-term cost savings and operational efficiencies.
  • Collaboration’s future is different from what technology providers market today.

Dennis Howlett and Keith Rodgers of Webster Buchanan Research, writing in a research paper sponsored by software firm J.D. Edwards & Co. of Denver, offer a different perspective on the state of collaboration today.

They categorize collaboration into three groups, determined by the nature of the relationship: coercive, defensive, and partner.

The coercive model is by far the most common. ” In this model,” Howlett and Rodgers note, ” a channel master or category leader dominates value chain activity, dictating the way business is conducted and defining the structure of the community. The prime objective of the coercive model is to provide the master with the greatest economic rewards possible, although there is a declared intent that suppliers should also receive benefit.

“In practice, the master dictates and often controls the means of data transmission, the data that is shared, and the manner in which sharing takes place. This model is common in the retail sector, for instance, where major chains dictate the way product is received and marketed. “

Frequently, these kinds of business models are price-driven. ” The defensive model has evolved as a direct response to the perceived threat posed by channel masters,” Howlett and Rodgers continue.

” In this type of community, enterprises that serve specific industry segments but do not compete directly, come together in a coalition to remove friction from their processes and improve their competitive edge.”

In Europe, for example, a group of large automotive component manufacturers has formed a coalition designed to pool resources to improve their logistics operations and thus reduce costs.

Finally, the partnership model represents the basis for true collaboration in the long term. In this model, every participant in the value chain has a vested interest in promoting the common good because each has the opportunity to benefit.

The authors outline the key characteristic of a partnership model:

  • Collaboration initiatives center on the customer.
  • There is the potential for a number of wins inside the value chain.
  • Wins benefit all participants, albeit to differing degrees.
  • The driver for developing the model is often perceived as a supply chain issue, but the real imperative is to optimize customer value.

In the partnership model, no single factor, such as price, has an overriding impact. Rather, the aim is to understand the cause and effect of business activities, enhance business processes and strategic development, and optimize value for the whole community.

Fortunately, this kind of partnership is beginning to evolve in sectors that were previously characterized by master business models, including retail.

None of these more sophisticated supply chain models can succeed without a solid foundation of functional excellence. ” Many companies have embarked on aggressive supply chain initiatives, only to find they were unable to achieve their objective due to an inability to perform at the local DC level,” says Gilmore. ” Enterprise and supply chain-level applications must work in conjunction with local facility systems to enable seamless workflow and processing across the enterprise and where appropriate centralized.”

These foundation level logistics applications include warehouse management, labor management and transportation management systems.

Studies in Success

How do these concepts play out in the field of business today? A growing population of businesses are putting at least some of the concepts discussed above to work.

Herlitz, for example, is pursuing collaborative fulfillment efforts, while CVS is concentrating on improving its inbound freight flow management (see sidebars below).

It will be some time before truly adaptive supply chain networks populate the business landscape to any significant degree. Even collaborative supply chain relations seem a stretch for most companies today.

This does not stop leading enterprises from pursuing these elusive dreams, however. And those companies that get there first will walk away with the coveted prize of greater profitability and competitive advantage.

Herlitz: Collaborating for Profit

Herlitz PBS AG, one of Europe’s largest stationery manufacturers, produces and purchases almost 40,000 products to deliver to supermarkets, department stores, and other distribution channels. The company serves more than 10,000 stores.

Herlitz had a long history of managing in-store shelf space (vendor-managed inventory) on behalf of major outlets, requiring sales representatives to be located in some stores on a continuous basis. The company collected data on its in-store inventory positions, but did not have access to retailer’ point-of-sales data. As a result, Herlitz’ average retail stock outage rates hovered stubbornly at six to eight percent.

The manufacturer knew it could improve this situation by moving to a sales- rather than inventory-based fulfillment model, but this meant persuading retailers to share their point-of-sale (POS) data. Unfortunately, Herlitz’ retailer customers saw little reason to hand over this information.

” Retailers think POS data is their market intelligence and don’t see a reason to give it up,” explains Walfried Wagener, managing director of Mercoline, Herlitz’s outsourced IT provider. ” When they are prepared to show it, they want suppliers to pay for it.”

Wal-Mart’s entry into the German retail market prompted Herlitz customers to reconsider, however.

“There’s nothing like a new market entrant to persuade people to think again,” Wagener says.

Herlitz, for its part, took aggressive action to meet the Wal-Mart challenge head on. The company implemented a new replenishment system—part of an advanced planning and scheduling (APS) package it acquired from U.S. software vendor J.D. Edwards—that enhanced its existing vendor-managed inventory system.

Using the new software, Herlitz captures POS and inventory data overnight. This information is subsequently fed into systems that give salespeople, in-store managers, buyers, and demand planners insight into how a store is performing against forecast and what its future needs will be.

Armed with better information, Herlitz can now manage in-store inventories more accurately and effectively. The stationery manufacturer—and its customers—is realizing significant benefits from the new replenishment planning system.

Herlitz estimates, for example, that it is delivering 1.5 million euro in value each year to Metro, a major retailer with 50 outlets. The savings stem from a combination of reduced stock outages—which fell from six to eight percent to two to three percent—and accelerated stock turns.

At the back end, the APS system is fully integrated into Herlitz’s enterprise resource planning, production planning and logistics systems, allowing the manufacturer to close the transaction loop.

CVS Manages Inbound To Reach Inventory Goals

CVS, a U.S. drug chain with 4,100 stores, nine distribution centers, and more than $22 billion in revenue, knew it needed to do a better job managing inventory. If the company could take just one day of inventory out of its supply chain, it could save millions of dollars.

” Like many other retailers,” reports John Fontanella of AMR Research, ” the drug chain felt that better management of inbound freight would take the company a long way toward reaching its inventory goal. Unlike other retailers, it resisted the idea of changing freight terms from prepaid to collect to exert control over routing and scheduling.”

The retailer receives 100,000 inbound shipments a week from more than 22,000 origin points, 68 percent of which are routed less-than-truckload (LTL). The task of managing the inbound volume was daunting.

Rather than incur the expense of building and managing a transportation management system to consolidate and actively manage the inbound flow of products, CVS chose to install Descartes Systems Group Inc.’s 20/20 Visibility product connected to its Global Logistics Services Network.

Descartes’20/20 Visibility is an Internet-based collection of supply chain visibility products, services, and logistics information data repositories. The suite provides a framework that delivers comprehensive order, inventory, and event visibility across the supply chain.

With 20/20 Visibility, CVS can monitor purchase order confirmation and compliance, shipment confirmation, shipment status while in route, and finally receipt of the product when it is delivered to the distribution center.

Rather than manage each individual transaction, CVS uses the alerting capabilities found in 20/20 Visibility to manage by exception. Appropriate parties are notified when the supplier has not acknowledged the receipt of a PO, or can’t meet the quantity and/or delivery date requested.

It also displays shipments delivered to the retailer’s distribution center but not yet entered into inventory. By tapping into Descartes’ Global Logistics Services Network, CVS avoids having to build the infrastructure required to support complex inbound flow management.

To gain the inbound supply chain visibility it sought, CVS leveraged existing ERP, warehouse, and transportation management applications by combining them with Descartes’ connectivity via XML, EDI, webforms and email.

By December 2001, CVS had successfully connected six major suppliers and 26 carriers via the Descartes network, resulting in a complete picture of product movement. This year, CVS has worked to integrate its top 50 suppliers and applicable carriers, and subsequently expand the implementation to include 80 to 90 percent of all inbound volume.

By monitoring inventory movement and receiving automatic alerts, CVS can proactively manage supply chain events and prevent order failures. By allowing suppliers access to 20/20 Visibility, CVS offers the entire trading community a common view to the status of its inbound shipments and can measure the performance of manufacturers and carriers.

The company is well on its way to achieving its inventory reduction goal. Once the Descartes solution is implemented company-wide, CVS expects to reduce inventory by approximately 17 percent via improved logistics execution, proactive inbound shipment monitoring to prevent order failures, and supply chain partner collaboration to reduce order cycle times.