Visit Our Sponsors
Collaboration across the supply chain: It ought to be a no-brainer. Who doesn't want better relations with suppliers upstream, and customers downstream? Beyond that basic desire, however, lies a tangle of contradictions. Many companies are lagging in terms of true collaboration - despite a compelling business case for achieving it.
In a down economy, companies will reach out to their supply-chain partners in order to boost the bottom line. That, at least, was the notion behind a recent survey of 150 senior executives of Fortune 1000 companies by Accenture. According to Chicago-based partner John Matchette, the consultancy had anecdotal evidence that tough economic times foster greater collaboration.
It was a simple theory: Tighter supply chains make business more competitive. Inventories fall while product availability rises. Excess cost gets flushed out of the pipeline. Customers are happier.
The results seemed to bear out the assumptions. Fifty-four percent of respondents to the Accenture survey declared it "very important" to develop collaborative relationships in demand and supply planning with their trading partners. Another 37 percent said it was "somewhat important," leaving only 6 percent opting for "not very important," and a mere 2 percent for "not at all important."
The executives who touted collaboration had clear reasons for doing so. Of the factors that would most persuade them to invest in integrated processes and technologies with trading partners, 48 percent cited operational effectiveness, 32 percent closer relationships with customers, 17 percent top-line growth, and 2 percent closer relations with suppliers. (An additional 1 percent was already investing in such processes.) Clearly, the need to squeeze dollars out of a listless economy was paramount.
Often talk of collaboration stalls at the outset, hung up on basic definitions. Business, one might argue, is by its very nature collaborative. A manufacturer must buy raw materials from one group, and sell finished product to another. But with the recent focus on supply-chain collaboration, managers have attempted to give the word more precise meaning.
For its survey, Accenture defined collaboration as occurring "at the highest level," says Matchette. "It is tightly coupled integration between three things - data, processes and intentions." The consultant wanted to know exactly how companies were working with their supply-chain partners in those areas, and what the results have been.
A Question of Timing
Underlying the survey was a question that wasn't directly asked: Why now? Enlightened managers have been preaching the gospel of collaboration for years. Why, with few exceptions, hasn't real progress toward that goal been seen until recently?
One answer is that companies today have had no choice but to seek out greater collaboration. Again, the slow economy is a major culprit. But other business trends are equally important. The high-tech and consumer electronics industries have seen drastic reductions in product lifecycles, Matchette says. Items are introduced with tremendous hype, only to become obsolete within a matter of months. That creates new challenges for manufacturers and retailers in the areas of demand planning, order-fill rate, and end-of-life inventories. Companies are also under pressure to bring new products to market faster.
Education is another reason behind the new awareness of collaboration. The Voluntary Inter-industry Commerce Standards Association (VICS) has worked hard to develop a picture of what the integration process should look like, Matchette says. The group has made substantial progress on Collaborative Planning, Forecasting and Replenishment (CPFR), a process model that allows manufacturers and retailers to get together on special promotions and stocking levels, tied to forecasts of demand. CPFR, which began in the consumer packaged goods sector, is beginning to spread into other areas such as electronics, media and entertainment, says Matchette.
Like any "new" idea, supply-chain collaboration has its roots in concepts reaching back years, even decades. In the 1960s, educators at the Massachusetts Institute of Technology developed a logistics simulation exercise known as the Beer Game (so called, it is said, because college students would be less interested in modeling a supply chain for, say, diapers). Four to five players would represent the various partners in the chain - manufacturer, distributor, wholesaler, retailer. Together they would strive to maintain a steady flow of product while keeping inventory costs to a minimum.
They quickly learned that a series of small errors in ordering, caused by the inability of players to communicate directly, could have a disastrous impact on ultimate supply. Today, this phenomenon is known as the bullwhip effect. By any name, it wreaks havoc with forecasts.
Even more frustrating was the fact that huge variances were occurring in actual products for which demand was relatively predictable - say, diapers. Suddenly, collaboration was no longer desirable; it was a necessity. Throw in the arrival of the internet, along with a host of software addressing every imaginable business process, and supply-chain executives finally had both the means and motive to seek it out.
Work to Be Done
Today, collaboration, or at least the awareness of it, seems pervasive. Outsourcing has become wildly popular, both in core logistics services and contract manufacturing. Such activities would be unthinkable without tight integration between companies, says Matchette. Yet the continuing imbalance between supply and demand, along with the questionable nature of so many forecasts, suggests these putative partners have a long way to go. Even collaboration pioneers like Cisco Systems Inc. have been forced to write off billions of dollars' worth of inventory when an economic downturn caught them by surprise.
Many of the companies surveyed by Accenture spoke of collaboration as something yet to be achieved. Asked what information from trading partners would be of greatest benefit if they had greater access to it, 43 percent cited true customer-demand data, including point-of-sale and sales forecast information. Another 20 percent said strategic plans about products and pricing; 18 percent said production plans, inventories and shipping information; 9 percent said promotion and marketing effectiveness, and 7 percent said new product design.
Those figures don't exactly square with a question about which areas of collaboration would be of the greatest value. Topping the list, at 26 percent, was collaborative product design - a curious result, given that only 7 percent had listed product design as a crucial area of information to be shared. (Matchette speculates that the disparity could stem from the way the questions were asked.) Next came joint sales planning, 23 percent; production planning, 21 percent; outsourcing, 14 percent; and third-party logistics, 10 percent.
The emphasis on product design makes sense, especially for manufacturers, Matchette says. "It's all about getting to market faster - and having the right fill rates and inventory levels." At the same time, the results betray a heavy bias toward downstream collaboration. Despite an obvious need for tighter coordination between producers and their suppliers, Matchette estimates that 80 percent of all collaborative efforts are on the customer side.
The reason is simple: Big retailers, with their slim profit margins, are driving the train. Except for a small number of enlightened manufacturers, such as Dell Computer, it's the major retail chains that are demanding that suppliers get in line with standardized systems and better information on product in the pipeline. Early efforts took the form of vendor-managed inventory programs, but Matchette says VMI today exists "on the fringes of the definition of collaboration." Often it involves an up-front agreement about service levels, without much subsequent exchange of information. "True collaboration," he says, "is more hands-on."
Hopes Remain High
Supply-chain managers appear to have high hopes for collaboration. Asked to cite the biggest benefit that they have achieved, or expect to achieve, through collaboration with trading partners, 28 percent said increased sales and top-line growth, another 28 percent said cost reductions or savings, and 21 percent said stronger strategic relationships. Other benefits included more effective decision-making, 11 percent; increased synergy and capabilities, 9 percent; and fact-based performance metrics, 2 percent.
Such data prompts Accenture to identify cost savings and growth from collaboration in two main areas: the maximizing of limited resources through a focus on core competencies, and better understanding of customer needs through more information-sharing. Says Matchette: "The more you work jointly with your downstream partners, sharing forecast data and user-demand data, the more you'll improve your forecasts, cut your inventory and reduce your production costs."
To the extent collaboration isn't happening, survey respondents were candid about the reasons why. Amazingly, given their previous insights into potential benefits, 26 percent of respondents cited "unclear value proposition" as the biggest hurdle. That was followed by technology and data obstacles, 22 percent; concerns over data security, 17 percent; corporate culture, 16 percent; difficulties in measuring collaborative processes and performance, 14 percent; and failure to identify the right partner, 4 percent.
Collaboration gets plenty of lip service from top managers. AMR Research Inc. recently identified "collaboration and community management" as one of the seven "mega trends" for European supply-chain management, based on a polling of senior U.K. logistics directors. (It was ranked seventh, but at least it made the list.)
AMR is realistic about the difficulties of making collaboration a reality. Its inclusion, says AMR analyst Simon Pollard, "confirms that the toughest and yet most rewarding battles reside in the tighter coupling of commerce partners' processes that were previously separate."
Key constraints to collaboration, according to Pollard, include lack of management buy-in, lack of a clearly understood return on investment, and conflicting and competing priorities within the organization. He sees a "worrying" lack of agreement among line managers and executives about the benefits of collaborating with trade partners. "The term collaboration," says Pollard, "has clearly been overused and abused into oblivion."
In a recent report, AMR vice president John J. Fontanella said interest in collaboration is on the rise, although the concept is far from becoming an everyday practice in most supply chains. The formal VICS model, with its nine steps to full collaboration, "has not been totally embraced," he said. Real collaboration is occurring between companies and select groups of customers, on a limited range of products, involving only a few steps of the model.
At a time when companies are demanding rapid ROI from supply-chain projects, some are put off by the relatively long payback for collaboration. Others don't even know what the payback is, says Fontanella. They're too busy meeting retailers' ever-increasing service demands to step back and figure out the true economics.
Further hampering progress is the fragmented nature and questionable quality of basic supply-chain data. Companies are only just starting to implement data-synchronization projects. "It is easy to see the sharing of product data and attributes as the next wave of collaboration," Fontanella says, "because it has all of the attributes that earmark success."
Success in Stages
Collaboration isn't something that happens overnight. Scott Elliff, president of Alexandria, Va.-based Capital Consulting & Management Inc. (CCMI), breaks it into three stages: information-sharing, on activities such as order and shipping status; coordinated execution, with partners reacting jointly to shifts in supply and demand; and optimized planning, whereby joint decisions are made on overall supply-chain performance, profitability and customer satisfaction.
According to Elliff, more than half of all companies today are mired in stage one. That kind of passive data sharing, he says, will do little to boost supply-chain performance. Another 30 percent to 40 percent have graduated to stage two, moving proactively to change tradition-bound processes. And just 1 percent to 5 percent have reached the heights of stage 3, "where the most substantial supply-chain benefits exist."
Matchette is nevertheless hopeful about the prospects for meaningful collaboration. "It's gaining traction all the time," he says. He sees particular promise in the area of product lifecycle management (PLM), at a time when so many industries seem to be mirroring the volatile fashion business.
The grocery sector, a bit more staid than high-tech, has paid collaboration the most attention, Matchette says. Its efforts could be viewed as a logical extension of the industry's efficient consumer response (ECR) movement, which has had mixed success in tying supply to demand. Close behind grocery are automotive and some large computer manufacturers. The telecommunications and pharmaceutical industries have made relatively little progress on collaboration, he says.
Even those who speak highly of collaboration are balking at spending heavily to make it happen. "When they actively look at what's involved in putting projects in place, they shy away," says Matchette. Many efforts must await economic recovery, and the consequent loosening of corporate budgets.
But numerous companies remain unfamiliar with the basic tenets of true collaboration, a term they only hazily understand. For the most part, supporting software has yet to catch on, and is often far from market-ready. Matchette likens the situation to that of client/server models and enterprise resource planning (ERP) software in their early days of development. "At first," he says, "people had to sell and explain. Then, later, it was an order-taking business."
Enjoy curated articles directly to your inbox.