Global Trade Management — March, 2007

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In this issue:
Software as a Service Is Catching on in Global Trade Management
Companies Cite Lack of Visibility as Biggest Supply Problem
Mercy ROi Saves Money, Lives Through Supply-Chain Overhaul
IBM's Integrated Supply Chain Improves Performance, Cuts Costs
Poor Supply-Chain Management Can Offset Outsourcing Benefits
Air-Cargo Industry Needs to Tackle Its Documentation Problems
Who's Footing the Bill for Added Airport and Seaport Security?
Calendar: Upcoming Events of Interest

Should You Hand Over Key Software Apps to an Outside Provider? More and More Companies Are Doing Just That
A growing number of companies are embracing the notion of remote-hosted software applications related to global trade management, according to Jim Preuninger, chief executive officer of Management Dynamics Inc. The idea isn't especially new, he points out, having been pioneered in other areas of the supply chain., for example, was instrumental in making hosted software attractive for customer relationship management (CRM) applications. Now, companies are looking to the emerging area of Software as a Service (SaaS) for a variety of other functions. “They don't want to buy a big license to a piece of software, then implement it in a lengthy process behind their firewall,” Preuninger says. “The model is expensive and involves a lot of risk.” With SaaS, users pay as they go, drawing only on the functionality that they require at a given moment. And upgrades are easier to absorb as well. Most businesses today are running several applications under the SaaS arrangement, he adds. What's notable, however, is the number of large multinationals that are being drawn to the model. “For a long time,” Preuninger says, “people weren't sure that global enterprises would want to go that way. It turns out they do.” Reasons include the lower cost of implementation, faster adoption of new software and a higher quality of operations, he says. Companies might decide to keep certain applications in-house because they seek tighter integration of those tools with their enterprise resource planning backbones. But no application is by its nature unsuitable for SaaS delivery, Preuninger believes. On the contrary, he says, certain types are far more effective in the hosted mode. They include supply-chain visibility tools, which are part of larger networks connecting multiple trading partners. “To do that on your own, even for very large companies, can be a fairly expensive proposition,” says Preuninger. “It makes sense to use an on-demand model.” One reason companies are taking a closer look at SaaS, he adds, is their need to rein in costs as supply chains become increasingly global. The explosion in outsourced manufacturing has lengthened supply lines, Preuninger says. Companies are faced with the choice of boosting inventories to offset the risks, or become more efficient in their operations.

Visibility Ranks First Among Companies' Top Supply-Chain Concerns
A new survey by Aberdeen Group finds that the continued lack of supply-chain visibility, due to manually driven processes, is the top concern of responding companies. Seventy-nine percent of large companies cited that problem, in a survey of more than 150 manufacturers and retailers. But companies identified other major challenges as well. Second was the inability to coordinate global supply-chain processes across all of the parties involved. As companies increase their reliance on sourcing from emerging markets, it becomes increasingly difficult to deal with an army of freight forwarders and suppliers in a coherent fashion. The result: severe imbalances between supply and demand, leading to stockouts, excessive buffer stocks, longer cycle times and higher costs related to inventory and transportation. One of the chief culprits, says Aberdeen's Beth Enslow, is inadequate technology, especially in the global sector. Larger companies report that their international supply chains are only 50 percent as automated as their domestic operations. On top of that, many companies are facing staffing challenges. Just 36 percent of all respondents, and 13 percent of large companies, said their staffing for the management of global supply-chain and trade compliance was fully adequate to meet their needs.

Mercy ROi Overhauls Its Supply Chain, Saving Both Lives and Money
Mercy ROi, winner of the 2006 Supply Chain Innovation Award, shattered traditional distribution models with a new approach to the way it gets medical supplies to hospitals and patients' bedsides. The operating division of Sisters of Mercy Health System rethought every aspect of its supply chain. Chief among its efforts was the consolidation of Mercy's transportation and logistics programs, with an eye toward cutting out cost, and boosting visibility of inventory throughout the pipeline. The industry's traditional model is highly dependent on a handful of big distributors and outside group purchasing organizations (GPOs). Mercy took the dramatic step of becoming its own GPO, a move that required the company to set up a separate, for-profit subsidiary of the non-profit hospital system. Then it attacked Mercy's fragmented technology systems and purchasing programs. It implemented a single materials-management software application with a common item file, so that products were classified in a standardized fashion. A new, internally owned Consolidated Service Center (CSC) became the provider of warehousing and order fulfillment for all hospitals in the system. Mercy also launched a private fleet of tractors and trailers, to make regular runs from the CSC to hospitals. That helped to reduce stockouts. At the same time, Mercy implemented performance metrics which allowed it to keep track of contract compliance, among other things.

IBM Forges an Integrated Supply Chain for Its Worldwide Operations
IBM's Integrated Supply Chain (ISC) program is a core business unit which touches on every aspect of the company's operations. Created in 2003 as a means of coordinating global activities, the ISC now has some 19,000 employees in 56 countries, responsible for $45bn in spending. Elements of the organization include global manufacturing, parts procurement, order entry, customer fulfillment, inventory management and tracking of shipments all the way to delivery. IBM's various supply-chain teams work closely together, sharing a common framework to address day-to-day issues. New measurement systems capture critical data across functions; the idea is to create a “top-down” approach which allows all participants to draw on the same data. As a result, supply-chain managers can place shareholder and customer value first, rather than waste time optimizing their individual silos. Two years after ISC was created, IBM's inventories were at their lowest levels in 30 years. At the same time, cycle-time performance was up 6 percent, customer satisfaction up by more than 1 percent, and sales productivity had soared 25 percent. That translated into $580m in cash generated by the program, along with $6bn in total cost savings.

Poor Supply-Chain Management Can Offset Outsourcing Benefits
Companies are rushing to outsource their manufacturing and sourcing to low-cost countries, especially in Asia. Now they're faced with the challenge of managing supply chains of much greater complexity. Unfortunately, for many organizations the strategy seems to be “outsource first, then figure out how to make it work later.” In fact, many international supply chains are far less automated than their domestic counterparts. Communicating across borders still involves massive amounts of paper, not to mention phone, fax and e-mail. Companies functioning in this manner find it nearly impossible to exchange accurate, critical data in anything approaching real time. Yet international logistics and purchasing functions have yet to gain the stature accorded domestic operations in many organizations. The two areas continue to exist in separate worlds, with serious disconnects in the relaying of key data and plotting of long-term strategy. But industry leaders such as Cisco Systems are now moving to create “demand-driven” supply chains on a global scale. Agile companies are relying less on carefully crafted forecasts and more on the ability to adjust to ever-changing conditions related to border issues, safety, security and environmental factors.

Air-Cargo Industry Needs to Tackle Its Documentation Problems
Paperless documentation is a wonderful concept, but airlines and their freight-forwarding partners shouldn't sit around waiting for it to become a reality. Nor should they delay action because several hot technology developments - including radio-frequency identification (RFID), extensible markup language (XML) and document imaging - are far from mature. “Good old EDI [electronic data interchange] will take us a long way,” said Jim Friedel, president of Northwest Airlines Cargo. Speaking at the International Air Cargo Forum in Calgary, Canada, he urged carriers and forwarders to act now to automate the exchange of key documents. His call was timely enough. According to a Cargo 2000 audit conducted in September 2005, 76 percent of master airway bills (also known as the forwarders' waybill, or FWB) were incorrect. Moreover, a survey of three system providers found that 5 percent of FWBs, and 9 percent of house airway bills (FHLs), were rejected by airline systems. And those failures didn't even include messages that were rejected before reaching the airline, not sent at all, or accepted with missing or incorrect data, IATA said. Clearly, there's work to be done in the tradition-bound air cargo industry.

Who's Footing the Bill for Added Airport and Seaport Security?
There's a cost to the additional security measures that are meant to protect both air passengers and cargo, while complying with stricter government regulations. But who will pay it? And how much extra security is needed for cargo, anyway? Security is “a matter on which nobody can compromise,” says Oliver Evans, head of cargo operations for Swiss WorldCargo. At the same time, he says, the cost of such protection must be taken into account. Given the need for balancing those factors, Evans believes that existing security procedures are appropriate. Imposing additional barriers presents a serious downside for business, he says. Security rules can't be applied to just one part of the industry, such as passenger flights, but not to cargo freighters. Swiss WorldCargo advocates that security processes apply to all types of aircraft, “but it's incumbent upon any player in the industry, including the airlines, to try to improve their efficiency in order to minimize the impact of these costs,” Evans says. Ted Scherck, president and CEO of The Colography Group, believes that security risks continue to be greater on the passenger side than for cargo.

Calendar: Upcoming Events Related to Global Trade Management
Transportation & Logistics Council Annual Conference
Lake Buena Vista, FL
Apr. 16-18, 2007

92nd Annual International Supply Management Conference and Educational Exhibit
Las Vegas, NV
May 6-9, 2007

eVOLVE 2007, Management Dynamics' 4th Annual User Conference
Annapolis, MD
May 7-9, 2007

Global Trade Compliance Benchmarking Consortium
Penn State Smeal College of Business
Pittsburgh, PA
May 23-24, 2007

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