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Memo to CEOs: All those millions spent on enterprise resource planning (ERP) systems were just the beginning. Real competitive advantage comes not from internal housecleaning but from close relationships with partners all along the supply chain.
In other words, be prepared to spend a lot more money and time to get it right.
Experts say most companies have yet to parlay their huge investments in ERP and other types of software into anything approaching a true collaboration with external partners. Many have barely made a start. Only 30 percent of companies responding to a recent Michigan State University survey said they had formal guidelines for developing, maintaining and monitoring supply-chain relationships.
"There are really no companies in the world today that have developed this totally seamless supply chain between vendors and their ultimate customers," says David Anderson, managing partner of Andersen Consulting in Boston.
There is, however, no lack of maps. Numerous consultants have laid out the steps from internal excellence - itself no mean feat - to what has variously been called a value web, net or constellation. What these terms share is a vision of complex, interlocking relationships, in contrast to the linear, sequential image that is conjured up by the term "supply chain." In this utopian scenario, information on the manufacture, movement and consumption of product flows freely among all supply-chain partners. Inventory levels are low to non-existent, because suppliers always know exactly which item is needed, where it is needed and when.
Charles Poirier is a partner in the national supply-chain practice of CSC Consulting. In his new book, "Advanced Supply Chain Management," he lays out four distinct levels of progress toward integration: (I) discrete improvements in sourcing and logistics, (II) general internal excellence, (III) network construction, and (IV) industry leadership.
The steps are distinguished in a variety of ways. For example, those driving change are likely to be a vice president of sourcing at Level I, a chief information officer or supply-chain leader for Level II, various business-unit leaders for Level III, and a cohesive, high-level management team at Level IV.
Benefits vary accordingly, from a degree of leveraged savings on the lowest level, to competitive advantage and profitability on the highest.
The Virtual Network
Other experts chart similar courses, all culminating in a supply chain that strips away unnecessary overhead. Anderson talks of three stages: supply-chain integration, collaboration and synchronization. Virginia Carmon, principal of integration services with IBM Global Services in Chicago, describes the ultimate goal as creation of a "virtual network" that relies on interdependence among partners. Its characteristics include end-to-end integration of business processes, the flexibility to reconfigure the supply chain in response to new market opportunities, and "plug-and-play" information systems geared to the internet as the primary means of conveying data.
Despite significant progress toward supply-chain integration over the past decade, Level IV remains little more than a pipe dream for most businesses today. Approximately 10 percent of those surveyed by Poirier's study team remain stuck on Level I, and 80 percent are on Level II. With another 10 percent having reached the relative heights of Level III, that leaves only a "trace amount" of innovators that have scaled the Everest of Level IV, Poirier says. And even they have yet to reach the summit.
The reasons are many, consultants say. In his book, Poirier blames "a lack of trust and sincere effort among necessary participants in the chain and a myopic view focused solely on internal gains." Companies have tended to discount the importance of sharing savings with external partners. Instead, they have pitted supplier against supplier for the best - or rather the cheapest - deal.
Even today, some major retailers conduct periodic "shootouts," in which their established suppliers are forced to withstand efforts at underbidding by a slew of rivals. "It became a zero-sum game,"
Poirier says, "and that is a prescription for failure."
Organizations, like people, tend not to act until they must. And the competitive advantage of an integrated supply chain still is not widely evident in most industries. "In some cases," says Carmon, "companies don't move until they see bleeding or hemorrhaging."
An Essential Tool
One strong motivator for change is development of the internet and worldwide web as conduits for information. They have transformed the mindsets of corporate executives virtually overnight. Poirier says the net has become an indispensable tool for those striving to reach the highest peak of integration.
"You cannot get to Level IV without an interactive extranet that connects key suppliers and customers, and settles the distribution issue," he says.
As companies rush to capitalize on the potential of electronic commerce, they can't help but overhaul their supply chains. Business-to-business internet applications have skyrocketed in value from zero in 1997 to nearly $100bn today, says Joseph A. Martha, vice president of Mercer Management Consulting Inc. in Chicago. Even as consumer-oriented pioneers such as Amazon.com and Peapod grab headlines with their vision of an electronic shopping mall, others are quietly building internet and extranet links for the transmission of internal ordering, inventory and shipment status data.
Their efforts have a long way to go. Anderson says companies are daunted by the complexities of linking up with outside partners. They are still catching their breath from the exertion of unifying internal functions - if they have gotten that far. "This is probably one of the most major transformations of business that we've ever seen," he says.
For many companies, ERP was the first move toward organizational change. But they didn't necessarily go for massive ERP packages from vendors such as SAP AG, Oracle Corp., J.D. Edwards and Baan Co. out of an enlightened desire to integrate their supply chains.
For the most part, says Carmon, they were motivated by internal legacy systems that weren't Year 2000-compliant. Only with the advent of the new year, and dissipation of Y2K hysteria, will the majority now turn their attention to outward-minded systems.
Anderson views ERP as an important step in the process, one that allows companies to provide outsiders with real-time access to internal data. With the help of Andersen Consulting, Texas Instruments recently implemented a global ERP system from SAP that is tied to supply-chain planning and scheduling software of i2 Technologies. The entire package allows TI to process more than 70 percent of its orders electronically.
Another Andersen client, cell-phone maker Ericsson Mobile Communications, used SAP and i2 software as the basis for a new program called Time to Customer. The combined system covers everything from planning and procurement to customer care. As a result, Ericsson has cut inventories in half and boosted supplier performance by 25 percent.
Martha disagrees about the strict necessity of ERP for companies bent on supply-chain integration. He says the internet has made it possible to sidestep that investment, at least initially, by opening up new avenues to providers of decision support and electronic procurement software.
ERP may be helpful in the long run, he says, "but it's not in all cases a prerequisite to dealing with outsiders." On the other hand, supply-chain optimization software is essential to building relationships with suppliers and customers,
People Over Kilobytes
Notwithstanding a wealth of technological solutions, the human factor is still the most important element in achieving the highest levels of supply-chain integration. Software is readily available to manage every imaginable link in the supply chain. "The hardest part is getting all of the people on board so that they'll cooperate across boundaries," says John L. Mariotti, president and chief executive officer of The Enterprise Group in Knoxville, Tenn.
Mariotti says executives must break through the trust barrier to share proprietary information that once was jealously guarded, either by the company at large or its individual departments. In some cases, access to data has justified the very existence of organizational "silos."
"You don't have to partner with everybody," Mariotti says. "Seventy to 80 percent of partnerships are marriages of convenience." But businesses must identify a core group of supply-chain partners who are privy to all relevant knowledge about goods and shipments. Often that will include a third party that has essentially taken over a client's logistics-management function, and can't be kept at arm's length if the relationship is to work.
No extended supply chain can function without clear-cut performance measures that are shared by all partners, says Stanford University Professor Hau Lee. Vendors, manufacturers and end-customers must agree on acceptable levels of performance in areas such as on-time delivery, order accuracy, product damage and order-cycle time.
The parties also must share responsibility for any deviations from the ideal. In the past, says Lee, a supplier might refuse compensation to a customer for the mistakes of its carriers. Today, such an attitude is considered unacceptable by industry leaders.
Lee cites the example of Singapore Airport, which began talking to independent taxi drivers about shortening the wait time for a cab at curbside. Although it had no control over taxi schedules, Singapore Airport was determined to improve "the whole passenger experience," for which it received both credit and blame.
Closer to the world of logistics, the U.S. Postal Service, in awarding a huge mail contract to sister companies Emery Worldwide and Menlo Logistics, required them to accept liability for delays regardless of who was responsible.
The Cisco Way
High-tech, with its preexisting reliance on computers and the internet, is fertile ground for supply-chain innovations. Dell Computer and Nokia, leading makers of personal computers and cell phones, respectively, have been especially aggressive in grabbing for Level IV status, Poirier says. Dell virtually invented the concept of build-to-order in the personal computer business, necessitating the tightest possible links with component suppliers.
But perhaps no high-tech company has progressed further in the direction of real integration than Cisco Systems Inc. Based in San Jose, Calif., Cisco is by far the world's leading supplier of internet switching, routing and other networking components. With fiscal 1999 sales of $12.15bn, it has a market capitalization exceeded in the U.S. only by General Electric and Microsoft.
Communication is the rationale for Cisco's existence - and the concept that drives its supply chain. Cisco's "internet ecosystem," as the company calls it, looks like the classic consultant's model of a value web. It links manufacturer, suppliers and customers in multiple ways, all organized around the functions of plan, make, move, sell and buy.
Holding it all together is the worldwide web. Currently 81 percent of Cisco's customer orders are placed in that manner, making Cisco the world's largest commerce site on the internet. Only a few years ago, 30 percent of the company's workforce was devoted to order entry. Today, with nearly all orders received electronically, that job title no longer exists.
A single point of contact over the web gives Cisco's customers information on product configuration, pricing, status, lead times, software distribution and technical reports. By allowing for direct shipment by suppliers, Cisco can guarantee delivery within three days of an order's placement. Now, having put into place integrated ordering over the past two years, Cisco is working on an even more focused approach that includes customer-specific channels for the flow of product.
Cisco's "Global Networked Business" model gives suppliers, customers, employees and supply-chain partners equal access to critical information and applications. On the supplier side, the system has eliminated the need for most purchase orders and invoices.
|Speaking the Same Language|
One development that can help companies achieve supply-chain integration outside the four walls of the enterprise is agreement on standardized business processes.
In the high-tech industry, more than 40 companies are working to achieve that goal through RosettaNet, a non-profit consortium devoted to creating standards for electronic commerce between supply-chain partners.
Members of the fledgling group have long complained of supply-chain inefficiencies resulting from a lack of information standards to govern business processes on a global scale. The standards fall into two basic categories: open content, to improve the flow of data, along with supply-chain reporting and rules; and open transaction, to improve real-time queries and searches.
The soaring popularity of the internet, combined with the business world's mounting frustration with ad hoc and proprietary processes, "has made the need for a solution greater now than ever before," says the group in a recent white paper on the information technology supply chain. Today, it says, supply-chain partners tend to function as a series of "smokestacks," hindering the flow of critical data and requiring excessive corporate overhead to manage it.
Participants in RosettaNet include Cisco Systems, Compaq Computer, Federal Express, Hewlett-Packard Co., IBM, Ingram Micro, Microsoft, Netscape, SAP AG and United Parcel Service. The group's web site is at www.rosettanet.org.
Cisco's long-term goal is to move beyond use of the network as a tool for data-sharing, toward "a foundation for applications linked to core business systems that serve all business constituents," says Chris Sinton, director of Cisco Connection, in a statement on the company's web site.The expected savings are substantial. Through networked applications, Cisco will save $250m a year. The total financial impact of its various electronic-business solutions - including customer care, internet commerce, supply-chain management and employee services - is pegged at greater than $550m a year.Cisco's supply chain is about to get a good deal leaner. The company recently agreed to turn over its shipping andwarehousing functions to FDX Corp., the Memphis, Tenn.-based parent of Federal Express. FDX will merge orders in transit so that components from different origin points can be shipped directly to the end-customer's site, where they will be assembled.The result should be an elimination of nearly all of Cisco's warehouses within five years. By keeping static inventory to a bare minimum, the innovative program will make the company more responsive to the fast-changing needs of its customers.A Supply-Chain VeteranThe concept of collaboration is nothing new to Procter & Gamble, routinely cited by consultants as possessing one of the world's most efficient supply chains. P&G began working closely with Wal-Mart Stores in 1988, notes Ralph W. Drayer, worldwide vice president of Efficient Consumer Response (ECR). The company has been a major participant in ECR, now more than seven years old and one of the most sweeping supply-chain initiatives of the last decade.Focusing on the grocery business, ECR attempts to match replenishment with consumption, eliminating excess inventory and improving the ability of supplier and retailer to adjust to changing consumer tastes.Other successful ECR programs at P&G include Continuous Replenishment (CRP), in which the supplier ships to stores on a just-in-time basis, and Streamlined Logistics, in which P&G allows products from different business sectors to be delivered to a retailer on the same truck, under a single invoice.According to Drayer, CRP alone, which today covers 40 percent of P&G's product, has generated total savings of 40 cents per shipping case - 20 cents for P&G and 20 cents for the retailers.At the same time, retailers have seen average inventory reductions of 12 days. P&G's total savings from supply-chain initiatives between 1990 and 1997 exceeded $2 per case, or $2.5bn.The internet is playing a crucial role in the multi-industry program known as Collaborative Planning, Forecasting and Replenishment (CPFR). Still in its early stages, CPFR allows for the transmission of store-level, point-of-sale data directly to a manufacturer or distributor. Forecasts can be quickly modified to reflect actual consumption patterns, especially during special promotions. Drayer expects CPFR eventually to yield benefits equal to or greater than those of CRP.He says the internet wasn't necessary for realizing early benefits from information sharing across the supply chain. Electronic data interchange (EDI) has brought about similar results, especially for companies of the size and technological sophistication of P&G. Still, says Drayer, "the net allows you to kick it into second gear."All of P&G's programs stress the need for collaboration in every direction. "We do a better job of serving the ultimate customer if we work together and share what we know," Drayer says.
For P&G, the next level of supply-chain excellence lies in the so-called virtual enterprise, "in which we are really operating as one enterprise across the supply chain," Drayer says. The business-to-business model of Dell Computer is closest to his vision of where the company needs to go.
Companies that decided early on to streamline their supply chains, even if they have yet to reach Poirier's stratospheric Level IV, already are seeing the benefits of their foresight. While the news media tend to focus on internet IPOs and the dot.com stock of the day, some of the world's biggest and most established companies - Wal-Mart, Dell, P&G, Coca-Cola - are winning favor from Wall Street for their hard-won supply-chain innovations.
"Increasingly, if you look at the top companies in the industry, generally they are the best supply-chain players," says Anderson. "The supply chain is a revenue generator, not just a cost of doing business."
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