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e-INSIDER

— August 2, 2006

Global Manufacturing: MES and Beyond
Aberdeen Research/Michael Bittner
Of all Best in Class companies, 85% report that they already have a strategy in place to unify processes and systems across locations, with standardization through business process improvement ranked as a top strategic action. As this pressure spurs companies to standardize processes including KPIs across multiple locations, implement cohesive technology infrastructures, and create centralized knowledge repositories, these leading companies are realizing the important role that next generation MES, manufacturing intelligence, and business analytics will have for enabling continuous improvement.
The goal of this benchmark study was to drill down into plant operations to understand the role of MES in the over all strategies of local and global manufacturing enterprises. What we found was intriguing relative to the future potential of MES, in that 85% of best-in-class respondents told us they were looking toward a strategy to unify plant MES systems and operations across their Global facilities.

Manufacturing enterprises are looking to unify and standardize their MES. Best in class are looking to raise awareness and knowledge data transfer relative to their plant operations. Best in class IT departments are looking at the Enterprise level versus the plant level MES to drive decision making.
For the complete report, go to:
http://www.aberdeen.com/

Design Your Supply Chain Dynamically
From Gartner/Tom Payne
Globalization and competition have significantly increased the complexity of many organizations' supply chains. Companies are grappling with:

1. Increasing supplier lead times and lead-time variability driven by offshoring

2. Proliferating product portfolios driven by consumer choice and competition

3. Complex supplier and customer relationships driven by increasingly complex supply chain networks resulting from consolidation, mergers and acquisitions, and globalization

Companies are struggling to optimize the performance of their supply chains using operational supply chain planning (SCP) applications. However, despite the regular use of these applications, customer service and cost issues can still pervade their operations.

Research shows that matching the right supply chain design with the right products and customers is a key determinant of overall supply chain performance (see "Segment Your Supply Chain Response to Drive Enhanced Performance"). Organizations typically don't recognize the need for this matching process; rather, they tend to favor a "one size fits all" approach to supply chain design, enacted via their operational systems and processes. The tactical use of strategic network design tools and the emergence of inventory strategy optimization tools are responses to the need to analyze supply chain design decisions more closely. Linking these two disciplines will leverage more benefits for the supply chain organization by supporting a capable supply chain segmentation approach.

Examining and analyzing the dynamics of a global supply chain more effectively, and having the capability to frequently review subsequent supply chain designs (at least quarterly, if not monthly, and on an as-needed basis), will have a significant effect on overall competitive advantage. As part of a chaos-tolerant and segmentation-based supply chain strategy (see "Development of Chaos-Tolerant Processes Is Key to Supply Chain Optimization"), dynamic supply chain design (that is, a tactical examination of design decisions by combining network design and inventory strategy optimization) has the potential to deliver more-significant business value than the usual benefits (for example, localized inventory and cost reductions, and sporadic customer service improvements), derived from traditional supply chain management (SCM) programs (see "Customer Service Is Free: A Competitive SCM Model"). The supply chain improvements (in terms of overall customer service and total delivered cost) will be impressive enough that by 2012, 50 percent of Global 1000 product-centric enterprises will have strategic network design and inventory strategy optimization capabilities fully integrated and driving their key supply chain design decisions (0.7 probability).

Good supply chain organizations have been using strategic network design tools for years to help optimize their distribution networks, which are often linked to their capital expenditure cycles (at best, they're usually annual) in terms of warehouse construction/rental and manufacturing and sourcing capacity. Typical network design projects focus on distribution center numbers, size and location studies, manufacturing sourcing strategies and transportation optimization studies. On average, these strategic studies are executed infrequently during a typical three- to five-year cycle. This is a worthwhile effort, with many companies reporting significant cost-reduction opportunities resulting from a scientific examination of their distribution or manufacturing networks. However, this only represents about 20 percent of the potential benefits in terms of improved supply chain performance.

During the past few years, a new class of inventory management tools has evolved that Gartner calls inventory strategy optimization (ISO) applications (for example, LogicTools, SmartOps, Optiant, ToolsGroup and i2). These take the typical inventory-management capabilities of SCP suites - for example, SAP Advanced Planner and Optimizer (APO), Oracle Advanced Supply Chain Planning (ASCP) and i2 Supply Chain Planner - to an enhanced level. The limitation of typical SCP inventory setting logic is that it examines and recommends safety stock settings, in isolation, for a node in the network. However, supply chains are networks of interconnected nodes that often include customer and supplier facilities. With the inexorable increase in supply chain complexity (see "Understand Your Supply Chain's Complexity to Mitigate Risk and Improve Responsiveness") driven by increasing globalization, the drive to multienterprise processes, increasingly unstable (or even chaotic) logistical environments, and expansions into developing economies (see "Development of Chaos-Tolerant Processes Is Key to Supply Chain Optimization"), companies will have to establish strategies to make their supply chains more tolerant of the rising level of chaos to which they'll be increasingly exposed. To support the development of chaos-tolerant supply chain strategies, companies should investigate ISO tools to help them better understand how to deploy inventory across the supply chain and mitigate some of this risk.

Current ISO solutions address some of the issues of inventory sizing and positioning by simultaneously examining inventory levels across all supply chain network nodes. They account for chaos and uncertainty on the demand side and the supply side, and try to optimize against a chosen objective (usually cost or service). This is a significant improvement over the single-level inventory optimization of traditional SCP packages. It will drive enhanced inventory and customer service improvements for complex supply chain configurations that are operating under increasingly chaotic conditions. ISO packages are immature, but they'll evolve and result in more-functional depth. Some areas requiring further development are:

1. Support of supply chain segmentation strategies, including product clustering capabilities

2. Full activity-based costing across complete supply chain designs

3. Deep, stochastic simulations

4. Tight integration with transactional and other analytical systems

Best-practice organizations are starting to question their use of key assets (or, in some views, liabilities), such as inventory, to help them mitigate the risks of uncertainty and increasing levels of chaos in their global operating environments. During the past few years, a key supply chain strategy that leading enterprises (such as high-technology manufacturing and niche chemical manufacturers) have deployed with some success employs the concept of postponement in the form of time, place or form (or a combination thereof). In a postponement strategy, inventory is positioned at the strategic inventory decoupling point in a specific supply chain configuration. The positioning and sizing of this buffer stock assumes a strategic dimension in terms of balancing supply-side and demand-side variability.

The new breed of ISO tools is focused on helping organizations make strategic buffer stock decisions, and supports the application of effective postponement strategies by considering inventory location and sizing across all supply chain nodes simultaneously. This facilitates a level of inventory optimization that can't be achieved by considering each node in isolation, as in the case of traditional SCP applications. As soon as the appropriate buffer stocks have been identified and sized, the correct stocking parameters can be fed into the incumbent SCP application to drive the operational planning process.

Effective postponement and supply chain segmentation (see "Segment Your Supply Chain Response to Drive Enhanced Performance") rely on capable supply chain design linked to effective inventory strategy optimization. Today's ISO applications are limited because they consider inventory optimization for the current supply chain configuration. Network design and inventory optimization can't be considered separately to realize the full benefits of chaos-tolerant supply chain design. In addition, due to the nature of chaos, the deployment of supply chain design must become a more dynamic and tactical endeavor that's rooted in an increasingly frequent review and action cycle.

SCM vendors are starting to recognize the need for dynamic supply chain design:

1. LogicTools has established links between its network design application and its inventory strategy optimization tool.

2. Barloworld Optimus, a South African SCP vendor, is examining the potential of linking Cast - the network design tool it acquired from Radical (which Barloworld acquired in late 2005) - with a revamp of its Optimiza planning product.

3. Insight, an established network design vendor, has partnered with Optiant, an ISO vendor.

4. Oracle is planning to strengthen the integration between its Strategic Network Optimization product and its Inventory Optimization product. The first tentative steps of deploying tighter integration between these two functionalities are apparent in some vendors' product road maps.

5. i2, via its service-orientated architecture, has combined network design with inventory optimization as part of consulting engagements with customers.

In the coming years, alignment and integration between network design and inventory strategy optimization will significantly increase. Therefore, ISO functionality must be developed to facilitate full supply chain costing studies as part of the optimization process. Gartner expects the combined network design and inventory optimization tools to form a key part of an organization's supply chain risk management strategy (see "Supply Chain Risk Management Is an Emerging Requirement for S&OP").

Business units will progressively demand dynamic supply chain design capabilities, so the IT organization must be in a position to deliver them. In discussions with supply chain vendors, closely examine developments regarding supply chain design and inventory optimization to identify those that are working toward tighter integration and interoperability. These design and optimization applications are data-intensive, so ensure that your master data management initiatives can support them.

Examine the options for on-demand and on-premise solutions. Deploying network design and ISO tools will initially be more service-dependent than traditional SCP implementations. Network design/ISO vendors will have to develop consultancy capabilities to support fledgling deployments. Initially, organizations will probably deploy as an on-demand model, making use of suitable services - then prove the concept and bring the applications and skills on-premise.
http://www.gartner.com/

Asia/Pacific IT Spending Will Reach US$22 Billion in 2010
From Manufacturing Insights
According to a recent report Asia/Pacific (Excluding Japan) Manufacturing IT Spending 2006-2010 Forecast of Manufacturing Insights, an IDC company, the APEJ manufacturing industry has been recovering and gaining momentum after the initial turnaround observed in 2004. APEJ manufacturing IT spending was valued at US$15.0 billion in 2005 and is expected to reach US$22.0 billion in 2010 at a CAGR of 7.7%. The top three sub-industry segments within APEJ in terms of IT expenditure are high-tech, automotive, and chemical. From a geographic perspective, the Greater China sub-region had the largest manufacturing IT spending, followed by ANZ and Korea.

"2005 has been a year plagued with external environmental uncertainties globally and notably in the Asian region, with high-profile events such as the repeated terrorist bombings in Bali; the Asian tsunamis and numerous other natural disasters across the region; the bird flu; rising oil prices; and ongoing geo-political tensions. Despite the above factors, the Asia region as a whole has continued its recovery and stabilization from the economic crises that began in the late 1990s," says Tan Mang Teck, research director, Asia/Pacific Manufacturing Research, Manufacturing Insights. "The APEJ region will continue to be a fast-growing regional economic block, powered by the emerging economic engines of China and India."

Manufacturers have a lot of information available to them, but few put that information to work to improve the efficiency and timeliness of decision making. Leading organizations are building complete control loops over their processes to connect strategic (risk mitigation), tactical (speed and agility), and operational (consistency and control) decisions. There are good opportunities for IT vendors to develop an integrated business & IT vision and roadmap for manufacturing clients extending beyond the four walls.

Manufacturing Insights suggests IT vendors focus on value realization instead of new application investment. Doing this will allow IT vendors to provide thought leadership in areas which are close to the hearts of manufacturing clients, as well as to position and "gel together" products, services, and overall value proposition.

"IT vendors should bring an understanding of manufacturing and its segments to market. Deploy sub-industry segment experts to speak the language and provide in-depth understanding of manufacturers' business drivers, challenges, and processes. Besides focusing on helping manufacturers realize value in terms of costs and speed, look for opportunities to help them realize the much valued 3 'As' in their businesses - Agility, Adaptability, and Alignment. For example, building dynamic business processes enabled by dynamic IT," Mr. Tan concludes.
http://www.manufacturing-insights.com/

Performance Scorecards Ignore Supply Chain
From Ventana Research/Colin Snow
One of the major tenets of performance management is to link strategy with corporate goals and objectives in ways that make the best use of the company's resources by coordinating the efforts of every member of the organization. But a recent study by Ventana Research on the use of performance management technology finds that not every member of the organization is being included. In particular, the study shows that current deployments of scorecards are narrowly focused.

The largest numbers of users are in Finance (46 percent) and Sales (41 percent), while the smallest numbers are in supply chain operations (18 percent) and customer service operations (13 percent). The specific supply chain operations not being served by scorecards include product design, planning, sourcing and procurement, manufacturing, fulfillment, distribution and delivery, and returns. Ventana Research believes the frequency of deployments into the finance and sales functions confirms that companies value tracking revenue goals over tracking balanced measures of executing operational strategy; we believe this needs to change if organizations want to manage the performance of their operational assets.
http://www.ventanaresearch.com/

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