Few industries have been hit harder by the current economic downturn than telecommunications. And when it comes to coping with future uncertainties, few companies have a greater need for a solution than Advanced Fibre Communications Inc.
Petaluma, Calif.-based AFC has had its ups and downs since being founded in 1992 by a trio of electrical engineers. More recently, the maker of network access equipment has been in the curious position of growing both revenue and market share, at a time when most high-tech companies are struggling. Yet AFC is all too aware of the possibility of getting stuck with huge amounts of inventory, should demand take another unexpected plunge. And, at a time of heightened concerns over security, it has to be nervous about the potential for sudden supply-chain disruptions.
AFC's products allow users to provide voice and broadband network access. Customers range from some of the largest telecommunications providers, such as Altel, Sprint and SBC Communications, to distributors and "mom-and-pop" carriers. With revenues of around $350m, AFC serves more than 800 phone companies overall.
Like many high-tech suppliers, it relies heavily on contract manufacturers to make the actual equipment. Yet that setup complicates AFC's ability to control product flow throughout the pipeline. Eight months ago, it went looking for a solution. Says vice president of operations Jeff Rosen: "Nobody had any information about what was going on in the extended supply chain until it was too late."
What it needed was a tool that, first, would allow for total visibility of inventory. And second, help the company adapt to the inevitable surprises - natural disasters, terrorist threats, fluctuations in supply and demand - that bedevil all businesses today.
The answer lay in a broad category of software that has come to be known as supply-chain event management (SCEM), and is now morphing into the broader designation of adaptive logistics management (ALM). Whatever the label, companies in this space promise an unprecedented degree of control over product in the chain, largely through tools providing visibility of inventory on the move and at rest. The systems are mostly exception-based, meaning that users are alerted only when something goes wrong, or exceeds pre-defined levels of tolerance. Armed with such information, companies can minimize the impact of supply-chain disruptions - hence the emphasis on "adaptive."
AFC's choice of vendor was Palo Alto, Calif.-based Valdero Corp. Its product includes an executive "dashboard," a screen that issues alerts whenever something goes wrong in the chain. Walt Rossi, vice president of marketing with Valdero, likens it to an air traffic control system, helping to synchronize supply-chain forecasts with what's occurring in the real world. The earlier a company learns of a problem, the less chance it will end up with inventory gluts or shortages, or resort to expensive options such as airfreight.
Rosen says AFC was less concerned about the underlying software - good as it might be - than the required change in internal business processes. AFC and Valdero worked for months to integrate the new system into buyers' and managers' day-to-day job responsibilities, through an exhaustive training regimen. "Otherwise they wouldn't use it," he says.
Early results have been dramatic. AFC's inventory turns are up by approximately 50 percent - from between three and four, to as high as six and a half. Moreover, the company believes it has lessened the chance of getting burned by the hot potato of unwanted inventory.
Looking for Visibility
For a long time, visibility was one of those things that executives talked about, but didn't necessarily spend money on. Their ability to track goods in transit depended largely on the proprietary systems of individual carriers. Warehouse management systems offered another piece of the puzzle, but standards were non-existent and nothing was linked. Freight tended to disappear into a series of black holes whenever it was passed off between handlers. And the information wasn't timely enough to permit quick responses in an emergency.
Recent events have given managers a new sense of urgency. The terrorist attacks of Sept. 11, 2001, temporarily paralyzed the nation's aviation and cross-border transportation systems. In the longer term, they gave rise to a rash of new security measures that will add cost and time to the movement of freight. Of more immediate concern to many importers and exporters was last summer's West Coast ports lockout, which stranded thousands of containers of Christmas merchandise, perishables and "just-in- time" production parts. Toss in the continued economic downturn, and you have a host of reasons why shippers are scrambling for better ways to keep tabs on inventory, and take fast, corrective action.
Supply-chain managers are still slow in realizing the long-term benefits of visibility. In a recent study by Cap Gemini Ernst & Young U.S. LLC (CGE&Y), Georgia Southern University and the University of Tennessee, 54 percent of the 365 respondents said cost reduction was their primary reason for seeking out visibility tools. And 52 percent said their organizations still view logistics as a cost center, not a means of boosting customer service and revenues.
Signs indicate they're beginning to wake up. Tony Ross, a senior manager with CGE&Y, says there is a heightened awareness among supply-chain professionals of the need for better event management and resolution. One piece of evidence: order cycles are speeding up. The 2002 study found that inventory turns had increased from 11 to 15 over the prior year, days sales of inventory had dropped from 47 days to 43, and the average expected time for materials to arrival had gone from 30 days to just 22. All of which leaves far less margin of error for mistakes or disruptions in the chain.
Noha Tohamy is an analyst in the logistics and supply-chain practice of Forrester Research, which claims credit for coining the term adaptive logistics management. She says traditional supply-chain planning and execution tools have done little to manage orders and inventory outside a company's walls. Even supply-chain event management doesn't fully describe the range of applications needed to achieve total visibility, she says.
An ALM approach, according to Forrester, embraces inventory visibility within the supply chain, along with multi-tiered sourcing and the ability to transform supply chains based on actual situations. The most sophisticated tools will incorporate software coding known as intelligent agents, which can recommend corrective action and, in some cases, take it without the need for human approval.
With such a broad definition of ALM, it's hardly surprising that no one software vendor can furnish all the necessary tools. Providers specialize in such areas as global shipping, aftermarket and collaborative fulfillment. Larger vendors such as SAP, i2 and PeopleSoft are attempting to extend their control, often through the creation of ALM portals. But the ALM world remains a series of scattered applications for now.
Scrubbing the Data
Celarix claims a modest but critical role in promoting ALM. The Cambridge, Mass.-based vendor limits itself to providing logistics connectivity and visibility. "We connect customers to all their logistics trading partners," says chief executive officer Evan Schumacher. Any successful system, he adds, starts with clean, accurate data.
Celarix extends its capabilities through partnerships with more comprehensive vendors, such as Manugistics, SAP and Yantra. But visibility alone carries big benefits, claims Schumacher. Knowing exactly what's in transit, companies can do a better job of inventory planning. On the inbound side, they can reduce buffer inventories and improve internal processes. Outbound, they can automate the proof-of-delivery process, lowering the cost of customer service.
Accuracy is critical, says Schumacher. Merely getting data from carriers results in a quality level of around 50 percent. A series of specific rules, setting tolerances for such factors as on-time delivery can pump that number up to 80 percent. To get above 90 percent, the vendor must employ logistics analysts who can "scrub" the remaining data to ensure that a shipment was sent on time, complete, and with accurate documentation.
Manhattan Associates chose to broaden its ALM application through acquisition, not partnership. The Atlanta-based vendor of warehouse management systems (WMS) recently picked up transportation-management (TMS) capability with the purchase of Logistics.com. Up to now, few vendors have successfully combined those two applications. Companies would buy separate TMS and WMS packages and plug them into their enterprise resource planning (ERP) backbone, says David Landau, Manhattan's director of product management. As a result, one system tended to drive how the other worked.
A more adaptive model, says Landau, lets the systems feed each other. A company can look at the day's orders in the warehouse, picking and packing against the transportation plan. As exceptions occur, it can accommodate late shipments and change carriers accordingly. The key lies in real-time integration between execution systems, instead of the batch processing that makes quick response impossible.
Of course, such integration isn't easy -especially on the vendor's side. Manhattan is still working to combine its warehousing systems with the TMS software of Logistics.com. It plans on marketing a single package this year.
Despite the looming threat of another terrorist attack, companies are buying ALM applications for more mundane reasons, says Mark Johnson, vice president of product marketing with Atlanta-based Viewlocity. He says the first order of business for most companies is making operations more efficient. "It's a byproduct, to be able to recover from large shifts in demand and supply."
Still, having such tools in place in the event of a disaster can be invaluable. Viewlocity approaches ALM both through supply-chain planning and event-management applications. In an emergency, companies need to know, not just the location of goods in transit, but suppliers' capacities and buyer's orders as well. Only then can they respond intelligently.
"It's important to act first, so you get the available resources that are out there before your competitors do," says Johnson. Viewlocity's vision, he says, is "zero time to critical information, and zero time to best response."
While visibility has its merits, the real value lies in resolving problems once they are identified, says Rob Sweeney, vice president of product management with Yantra Corp. in Tewksbury, Mass. Like several of its major competitors, Yantra has worked hard to build out a system of notifications and recommended actions. Its software can trigger alerts to selected departments, then present options suited to the receiver. In determining the best course of action, it can draw on pieces of business logic that reside in various places throughout the organization. "The answer is never going to be in one system," says Sweeney.
The next step is to automate the resolution process, eliminating the need for human intervention. For example, says Sweeney, the system might automatically reallocate orders in the event of a shortage. Or it might book freight on another carrier. But most companies still want to keep people in the loop, especially when one part of the supply chain will benefit in a crisis at the expense of another.
Some of the reluctance to let the system take over stems from unfamiliarity with the technology. But it also depends on the complexity of the problem, says Jaya Rao, vice president of business development with Sunnyvale, Calif.-based Vigilance Inc. A late shipment from the supplier could prompt the system to place an expedited purchase order for movement by airfreight. That's the kind of decision that humans might make on a routine basis. On the other hand, Rao says, few supply-chain managers would cede responsibility for allocating limited amounts of inventory.
What programmers can build into the system is a series of standard business practices that can serve either as a guide to action or trigger an automated response, depending on the user's preference. The Vigilance tool addresses a range of quality-control issues, including late shipments, late order confirmations or sudden shifts in demand. It sets off a series of escalating alerts, delivered to a growing number of managers as the problem persists.
The desire for human intervention is especially keen where money is involved. Once a disruption occurs, companies must know how it affects the financial side, says John Davies, co-founder and vice president of product marketing with Optum Software in White Plains, N.Y.
A good visibility system gives users "a single version of the truth," says Davies. Managers can better decide when to pay their own vendors. They can also resolve disputes with big retailers, who are prone to fine suppliers for perceived non-compliance with stringent delivery rules. Either way, the user of the system gets a better handle on its finances, and a keener sense of when to recognize revenue in the supply chain. IT managers, meanwhile, can make a stronger case for buying the system in the first place.
A Lesson Learned
Some companies know the value of an ALM application from experience. Procter & Gamble Co. used the SCEM package of BridgePoint, Inc. to cope with the West Coast port stoppage. The tool allowed it to identify which shipments and customers would be most seriously affected by the delay, then take appropriate action. P&G could also calculate the risk to shipments that were still en route to the U.S.
Cary, N.C.-based BridgePoint, a subsidiary of CSX Corp., still embraces the SCEM label. It features what marketing manager Ken Pikulik calls dynamic tools for assessing potential disruptions in the chain. For example, a rail shipment might be a day or more late to its planned destination. The system can determine whether there is enough buffer inventory to fill the gap, or whether the stalled shipment needs to be shifted onto a truck. In addition, it standardizes carrier messages so that they can be understood across modes.
The key to a successful system is flexibility, says Derek Gittoes, vice president of product solutions with G-Log. And not just flexibility of the physical network. Companies must employ business processes with a range of built-in contingencies, along with information systems that can support all aspects of the supply chain. Gittoes says many systems tend to be "hard-wired," unable to adapt when conditions change.
The first step in fashioning an adaptive supply chain is getting all the information in one place, says Gittoes. Companies must then manage goods and data on a global basis, both internally and with supply-chain partners. DuPont, one of the largest U.S.-based exporters by ocean, is employing G-Log's application as an internal portal, creating a common logistics data source for its multiple product lines. It receives a real-time snapshot of where its orders and related shipments are.
Visibility tools are of little value if they focus on just one piece of the supply chain, says Cosimo Spera, chief marketing officer of Santa Monica, Calif.-based Vizional Technologies Inc. His company seeks to tie manufacturing and logistics execution processes through a single alerting system. "Anything that's going to fail from the production side can be notified on the execution side, and vice versa," he says.
Such systems are still in their infancy. Also in the future, says Spera, is the use of radio-frequency identification (RFID) tags on shipments and containers. The technology has been touted as a means of bolstering security, but it can also be embedded within traditional SCEM applications. RFID tags hold a wealth of data, informing shippers of the precise location and condition of goods as they move from origin to destination.
"What's good for security," says Spera, "is good for the supply chain." The chief barrier to widespread acceptance of RFID is cost, he adds, although the price of "active" tags is beginning to fall.
ALM is far from fulfilling its promise. Companies like AFC continue to extend its reach, to suppliers and customers alike. Rosen hopes to include AFC's Tier 2 component suppliers, in addition to the Tier 1 manufacturers who are already hooked into the system. He's also thinking about merging the tool with an advanced planning and scheduling application. "We always need more visibility," he says.
Look for ALM systems to make greater use of automated resolution as well. AFC has already automated its available-to- promise (ATP) feature for customer orders. Users will gradually come to trust the software to handle a variety of situations that currently require human intervention. "If you build a success story," says Forrester's Tohamy, "they will become a lot more comfortable with it."
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