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It's hard enough keeping track of shipments when you're paying the freight and directly controlling your carriers. But CVS/pharmacy had the additional complication of accepting most of its inbound deliveries on a prepaid basis. Nevertheless, the company needed to get a handle on where its shipments were - and where things were most likely to go wrong.
Rapid growth in the retailer's network made it imperative that CVS achieve better supply-chain visibility. Since 1997, the company had nearly doubled in size, mostly through acquisitions. In just a few years, the number of distribution centers ballooned from three to 10. Faced with a variety of disparate information systems, CVS urgently needed a way to unify the reporting procedure in support of its 4,100 stores. "We really had no way of understanding where a particular purchase order was in its lifecycle," says Tom McHugh, director of supply-chain process and technology.
CVS finally acquired inbound visibility through Descartes Systems Group Inc.'s Global Visibility and Inventory Control software. The tool is a variant on the rapidly growing set of applications known as supply-chain event management (SCEM).
"So much time has been squeezed out of the supply chain, that a day late means production stops."
Increasingly, companies are looking for ways to track both product and data throughout the supply chain. That process has become more critical with the winnowing of inventories through lean manufacturing and just-in-time delivery strategies, coupled with the global nature of many modern-day supply chains. "So much time has been squeezed out of the supply chain, that a day late today means the production line stops," says Chris Heim, chief executive officer of HighJump Software Inc. in Eden Prairie, Minn.
With the help of Descartes, CVS was able to move toward standardized communications, largely through the internet. Instead of being inundated with updates on thousands of SKUs from some 22,000 origin points, managers can query the system about any given item. Suppliers are in the loop as well, so that all parties know when an item was picked up, where it is, and when it's due to arrive. The corresponding documents and transactions are generated each step of the way. By the end of this year, CVS intends to integrate 50 percent of its front-store inbound freight into the system. Eventually, the retailer hopes to have up to 90 percent of its inbound volume hooked up.
Blazing the Trail
When CVS set out to acquire SCEM software, there were no companies performing best practices in that area to serve as a guide. "Three years ago," says McHugh, "supply-chain visibility was just emerging as a topic." Wal-Mart Stores was the shining example of operational excellence for most retailers, but its systems were mostly built in-house, and the giant merchandiser manages its own freight. So a "best practice" in SCEM became whatever a user like CVS managed to achieve in unfamiliar territory.
The SCEM sector is still young. Early projects are targeting communications problems created by corporate expansion, the trend toward outsourcing and the growth of global supply chains, according to AMR Research Inc. Most packages aim to capture basic but critical information, both within the organization and from trading partners.
Web browsers are the medium of choice, AMR said in a report on SCEM earlier this year, with lesser use of electronic data interchange (EDI) and scanned shipping labels. Rarer still is the use of extensible markup language (XML) as a common language for exchanging data between systems. Reports flowing to SCEM users via the internet include supplier-managed inventory, supplier scorecards, order information and reconciliation, and shipment tracking and analysis.
The potential benefits of SCEM are significant. Lora Cecere, vice president of marketing with Descartes, says users can realize inventory reductions of between 15 and 18 percent on highly perishable items. They save even more by reducing markdowns or write-offs on obsolete merchandise.
But implementing the software can be tricky. As Cecere points out, system users have varying needs in accessing data. A buyer might require less frequent reports than a planner or logistics manager. The key is to fashion a set of rules that are firm enough to make the system work, but flexible enough to meet everyone's requirements.
Another challenge lies in the need for alerts with enough specificity to monitor key events, without users being overwhelmed by useless data. As Heim notes, seeing goods in the chain isn't enough; managers must be able to react to problems. But most SCEM systems today err on the side of too much information, he says. What's needed are "intelligent agents" built into the software, marking only the truly important glitches for correction.
HighJump's own SCEM software, introduced last December, replaces e-mail with XML messaging and a configurable web portal. Customers can choose between strategic and tactical approaches--the first involving information flowing to everyone in the chain, and the second limited to a select set of customers. As an example of a best practice in SCEM, Heim cites Amazon.com, which pioneered the use of e-mail notifications to buyers at each step of the fulfillment process. That type of system--with properly selective controls - is now popping up in the business-to-business world, in industries such as high-tech and automotive.
Process Over Technology
As with any application aimed at best practices, SCEM software alone won't solve a user's visibility problems. Steve Banker, director of supply-chain research with ARC Advisory Group in Dedham, Mass., encourages companies to view the issue as one of operational excellence, not technology. Real process management involves both event management and good supply-chain analytics, he says. The key lies in fashioning a set of metrics on the performance of the extended supply chain, including third-party logistics providers.
With the proper data in hand, companies can move toward continuous improvement in the chain. "Best practice is determining which measures are right," Banker says. "Software can't do that. It's driven by business strategy."
The "right" measures, he adds, are those that go into creation of "the perfect order"--a shipment delivered at the right price, complete and on time. The precise metrics vary according to industry and customer preference, but typical elements include order-picking accuracy, damage-free transportation, proper documentation and delivery within a given window of time.
According to Banker, SCEM contributes directly to what many top managers view as the best practice of all--the Six Sigma program of quality control. As deployed by industry leaders such as General Electric and Motorola, Six Sigma outlines a series of progressively narrower margins of error. The top level, still a dream for most companies, is just 3.4 defects per million "opportunities." Nevertheless, having the kind of metrics generated by an effective SCEM system can help companies move closer to that goal.
Accurate information is another critical piece of the SCEM puzzle. "You can't make good decisions if you don't have good data," says Nathan Pieri, vice president of marketing with Cambridge, Mass.-based Celarix Inc. The data underlying a workable SCEM system must be complete, accurate and timely. Celarix often staffs a logistics analyst at the customer's site, solely to ensure data integrity. Internal IT departments are frequently too busy dealing with strategic business issues to address that level of day-to-day operations, Pieri says.
Companies must be able to aggregate information from multiple sources and communication methods - XML, EDI, spreadsheets and e-mail. But opening up a pipeline for data is just the beginning. Pieri notes the large turnover in vendors experienced by most supply chains. Typically, he says, some 30 percent of connections with trading partners must be recertified every year.
Meeting Special Needs
SCEM applications can vary widely according to the customer. Overstock.com is a user of HighJump's Warehouse Advantage software suite. The system oversees daily operations of more than 4,000 SKUs at Overstock's 200,000-square-foot distribution center in Salt Lake City. But Overstock, which buys and sells excess goods over the internet, does almost no traditional replenishment, says chief operating officer Jim Hyde. It needed a way to inform buyers when stocks of a particular class of goods were getting low. It also wanted to synchronize inventory in the warehouse with its web site. The new system interfaces with wireless radio frequency units used by Overstock's warehouse personnel.
Still a rarity, radio-frequency identification tags will become an important part of SCEM systems within three to five years, says Cecere. The technology should allow users to turn inventory faster, and achieve real-time data capture.
Also in the future for SCEM customers is a more sophisticated system of alerting users to failures in the supply chain. McHugh says CVS will likely install its first true alerting capability after the first of the year, following the second round of user enhancements of the company's query tool.
Less imminent is any kind of system for automated resolution of supply-chain glitches. When it comes to taking corrective action, managers still trust human instinct and expertise over technology. In its recent study of SCEM applications, AMR didn't find a single case where resolution was automated.
As SCEM grows in sophistication, so grows its benefits. CVS believes the application eventually will lead to "significant reductions" in safety stock. "It's still a work in progress," says McHugh. "But we see our way clear to being able to do that."
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