With the explosion in offshoring and outsourcing of manufacturing and logistics, supply chain executives and IT architects are faced with a seemingly trivial, but fundamentally important system decision: Where is the "truth" about the global supply chain? Which system contains accurate and timely data concerning orders, shipments, receipts and inventory positions of finished products and key components across the globe? Which internal employees and external suppliers have access to the system, and when? If different systems show different data, which one do you believe? How do you know what's really going on with your global supply network?
The answer to these questions can mean the difference between a well-coordinated global supply chain with full visibility across all partners, and a disjointed system of spreadsheets, e-mails, and late night phone calls, resulting in scrambling to meet shipment and production deadlines. Companies achieving a high level of supply network efficiencies have systems that ensure information flow always leads, or at least equals, material flow. As the degree of outsourcing increases, this metric becomes increasingly difficult to achieve. So companies are left asking, "How can we obtain the advantages of outsourcing without sacrificing those advantages in supply network inefficiencies?"
Two primary technology options exist for managing today's global supply chain-web-based collaboration hubs, and composite applications. Let's take a closer look at today's global supply chain environment, and examine the differences between these two alternative technologies facing managers looking to connect their global supply chains.
Companies are increasingly outsourcing manufacturing and distribution processes to contract manufacturers, third-party logistics providers and other service partners. In a recent AMR Research survey of 455 European and North American companies, 87 percent of companies with at least $1bn in revenue use contract manufacturing. For companies with revenues less than $1bn, 91 percent use contract manufacturing. Likewise, the use of 3PLs continues to grow rapidly.
With this growth comes increased complexity in the global supply chain, which has become a supply network of many different organizations. As global outsourcing has grown, so has the complexity of managing business processes across company and geographic boundaries. However, most companies are still using manual communication methods (e-mail, phone, or fax) to exchange inventory, order and shipment data with trading partners. These methods are inadequate to keep pace with dynamic conditions and cause inefficiencies that negate many of the gains outsourcing promises.
As demand for outsourced services has increased, information technology capabilities have not kept pace with the growth in complexity of the supply network. Supply chain executives are increasingly frustrated with their inability to manage complex processes across supply network partners in a way that links the physical movement of goods to the underlying financial transactions that IT systems support. Despite this need, most organizations do not have an adequate application infrastructure with the ability to manage supply networks of multiple partners running multiple systems. Current IT systems are fundamentally oriented towards managing cross-functional transactions within an organization. But inter-company business processes are not fully supported or modeled, so brand owners and their service providers are using out-of-date processes and manual methods for collaborating across company and geographic boundaries. The result is excessive inventory, high expediting fees, frequent shipping disruptions, and a substantial administrative burden for managing exceptions and reconciling discrepancies. These costs hit both the brand owner and its trading partners, but the brand owner ultimately foots the bill as it pays for suppliers' administrative costs in the form of higher prices.
In an attempt to automate communications across the supply network, a new generation of tools has emerged during the past few years: web-based collaboration hubs. These systems provide trading partners with an internet portal through which they can view new orders, accept or reject orders and indicate shipment against those orders. Some systems also contain a shared inventory model in support of VMI hubs and consignment inventory, while others allow collaboration around future demand forecasts.
These systems represent an improvement over some manual communication issues identified earlier. They potentially provide a single version of data and events that both the brand owner and its trading partners have access to. By doing so, they help companies avoid the back-and-forth disjointed communications of phone, fax and e-mail, and the associated mistakes that drive up supply chain costs and impact customer service.
Web-based collaboration hubs, however, have one critical flaw: The hubs add an additional database between partners, thus the movement of core business processes from the ERP to a disparate, remotely connected data model. By moving core business process from the ERP and introducing a remote database, revenue and inventory information and the processes for updating this information now reside outside the company's firewall and central information system. This introduces complexity into deployments through the introduction of a data model that is separated from the ERP. Although maintaining synchronization between two or more data sets is a relatively trivial task on a small scale with few order changes, the synchronization problem grows to enormous proportions with a global supply network comprised of thousands of suppliers accessing hundreds of thousands of PO lines each day. This results in conflicting information across network partners and a breakdown of trust in the system.
With recent technology advances in enterprise systems, no longer are companies required to deal with multiple disconnected systems and proprietary data models to get the functionality required to operate their supply chains. That model is being replaced by the collaborative ecosystem in which composite applications run on top of a common ERP platform, eliminating duplicate functionality and complex implementations.
This approach maximizes supply network efficiency by leveraging the capabilities and data model residing in the OEM / brand owner's ERP to manage trading partner activities involving order shipment and materials replenishment. Extending the ERP in a supply network for collaborative processes (drop shipment, VMI replenishment) is accomplished through business process capabilities delivered as modular composite applications. Composite applications provide specific functionality required to manage complex collaborative business processes, while leveraging the existing enterprise infrastructure. This shift to service-oriented architecture (SOA) and composite applications means that companies can add critical industry-specific supply chain functionality to their ERP systems more easily than ever before. Since the new composite applications have been pre-certified by ERP vendors, back-end integration is avoided, reducing the cost and complexity of software implementation. Companies in fast-moving industries, such as high-tech and consumer products, have begun realizing the effectiveness of this approach and have started to look for new functionality delivered as composite applications instead of the traditional "best of breed" approach requiring a proprietary data platform.
Besides providing a visibility platform tied to the ERP, composite applications provide an opportunity to control supply chain transactions at a trading partner's facilities. This effectively turns the ERP into a global supply chain "traffic cop" to enforce rules about shipping, receiving and invoicing. Suppliers access the system at critical points of material movement or ownership status change, such as packing, shipment confirmation or PO receipt. This allows for validation into the controlling system the instant material movement is required. As a result of this real-time check, shipping errors, price or quantity mismatches, and invoice discrepancies are prevented because the transaction does not go forward unless all items on the order are valid. Integrated barcode and RFID printing and scanning also contribute to error prevention and transactional efficiency. With suppliers, contract manufacturers and 3PLs using composite applications to print all transaction items, an additional layer of control is added prior to shipment, further reducing errors.
With the increased complexity of the global supply network, it is imperative for companies to find ways of automating high-volume, repetitive transactions among 3PLs and contract manufacturers. When searching for alternatives to automate these collaborative business processes, companies have a fundamental decision to make: Which system will hold the key data that drives the global supply chain?
Composite applications provide supply chain and IT professionals a new approach to managing collaborative processes that records all transactions in a "single-version-of-truth"-their enterprise resource planning system. The result is trading partner automation that provides reduced costs, faster transactions, better control and real-time visibility across the entire global supply network.
John Reece is president and CEO of ClearOrbit. The company's real-time supply chain execution and reverse logistics solutions are designed to improve the speed, visibility and control of extended manufacturing and distribution supply chains. Visit www.clearorbit.com.
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