There has been a tectonic shift in market and competitive demands, and the result is a new basis of competition. Just look at some of the factors fundamentally altering the supply chain management landscape: globalization and global sourcing (with an average of 30 supplier-customer relationships), leaner supply networks-velocity-based competition; shortened product lifecycles-increased demand variability; increased market fragmentation; more mass customization; and cost volatility, inflation and competitive pressures. Executives who continue to define the idea of supply chain management from inside the four walls of their enterprise-or worse yet-from within their particular locus of supply-side functional expertise, are set for an uneasy fate.
The results are in. The next generation of leaders in supply chain management are deriving substantial improvements in profitability and shareholder value by creating value networks-what AMR Research refers to more descriptively as demand-driven supply networks (DDSN). Those who embark on the DDSN journey find that-as with any business transformation-technology is necessary but not sufficient. While SCM technology is absolutely pivotal to bringing DDSN best practices to scale, its presence must be matched to the intangibles of strong executive leadership and careful process redesign.
Shifting Business and Technology Development Priorities
The massive shift toward globalization and market acceleration has changed the business priorities for users and software product development focus for vendors in the following ways:
• Movement from static demand planning to demand sensing and demand shaping-In the late 1990s, advanced planning and scheduling (APS) applications were defined by a more static demand planning signal. Typically using a monthly frequency, modeling was based on historic orders. Today we are seeing companies more actively managing their demand signals to better sense demand (think of monitoring consumption instead of orders), incorporating downstream data with a higher frequency of modeling (weekly or daily). In a recent AMR Research survey of 455 companies in Europe and North America, our research found that 38 percent of companies are still forecasting monthly. At the same time, we are experiencing rising inquiry volume as companies discuss plans to move to more active demand modeling.
• From enterprise planning to multi-tier decision support-We find that the average company today has 36 contract manufacturers, and 42 percent of firms report that more than 25 percent of manufacturing output is produced by third-party contract manufacturers. As a result, most global enterprises find that enterprise planning is no longer sufficient. In response, we are seeing the evolution of multi-tier modeling. Inventory optimization applications are furthest along in confronting the multi-tier supply chain planning (SCP) challenge.
• A movement from manufacturing as the primary constraint to the recognition of materials and logistics as additional major constraints-As companies move from internal manufacturing (controlled by internal teams) to outsourced manufacturing, they are incorporating a more holistic view of supply chain constraints and trade-offs. As a result, firms are shifting their SCM strategy from tight, constraint-based manufacturing planning to a cross-enterprise, synchronized view of the demand signal that encompasses both supply and demand visibility.
• Shortening of order execution cycles-Market pressure to reduce order-to-delivery lead times has fueled strong growth in supply chain execution (SCE) applications, with warehouse management systems (WMS) posting 8 percent growth and 4 percent growth from other execution applications, including transportation management systems (TMS), multichannel order management, and global trade management.
• Focus on network flow analysis-Initially, network design activities were focused on cost optimization of physical networks on an infrequent project basis. As companies have outsourced more aspects of their supply chains, executives are deploying supply chain network design tools to analyze optimal flows for market response, rationalize suppliers to minimize risk and maximize profit and market share opportunities, determine postponement strategies, and conduct cost-to-serve and product portfolio analysis.
• A recognition of the value of service in the supply chain-Vendors are finding that an increased attention to aftermarket services not only improves profitability and customer intimacy, but also provides the insight necessary to manage businesses better and offer new service based products.
SCM Applications Landscape
The turbulence in the SCM market has settled. In the late 1990s, the SCM market was fueled by vision and promises of future functionality. In 2005, we had a far more pragmatic market, with most companies building an SCM infrastructure based on a foundation of ERP investments. For many, this was either Oracle or SAP. Despite offering broad SCM suites with some integration advantages, ERP continues to have industry-specific and business-process-specific product functionality gaps. As a result, SAP is focusing on building a partner ecosystem based on NetWeaver as the de facto standard, while Oracle has continued to expand its SCM footprint through acquisitions and development.
Consolidation will continue to be a major force. There were several strategic and market share-altering acquisitions since 2005. As a result, companies should balance the risk of future market consolidation and purchase applications with a focus on achieving an ROI within two years.
The most rapid innovation is being delivered by independent software providers that are focusing on industry-specific functionality and targeting under-serviced business problems like Jonova, Kinaxis, LogicTools, Logility, Optiant, SmartOps, Synchrono, Terra Technology, ToolsGroup, TrueDemand, Vision Chain, and WAM Systems.
While 75 percent of firms have supply chain organizations, only 52 percent have experience with a supply chain organization for more than two years. As a result, domain expertise is a limiting factor for user adoption. Hosting and business process outsourcing (BPO) are slowly surfacing as viable market alternatives, as is the use of focused consultants.
Analytics is merging with optimization to drive decision support for critical processes like demand management, inventory optimization, and sales and operations planning (S&OP). Vendors following this trend now or in the near future include Adexa, Demantra, i2 Technologies, Kinaxis, Logility, Oracle, SAP, and Teradata.
Service management is becoming its own discrete market space. Companies such as IFS, Lawson, SAP, and Oracle (including Peoplesoft, JD Edwards, and Siebel), long in control of manufacturing and customer data, have grown into the service space to expand their reach into a client's business. An ecosystem of service management suite vendors has also emerged, including Astea, Click Commerce, Click Software, Indus, Metrix, Servicebench, ServicePower, Servigistics, and Vertical Solutions. These companies are evolving into this space, each with unique attributes focusing on customer management, field service execution, decision support, or parts management.
Supply Chain Management
Application Growth Segments-2005
The top growth area for 2005 was the inventory configuration and policy technology category, posting a robust license growth rate of 35 percent. As supply chains grow increasingly global, complex and interdependent, the need for multi-echelon inventory optimization and inventory policy to buffer against supply risk, maximize in-stock positions at the shelf, and ensure continuity of supply drove spending in this category.
In concert with the trend noted above, there was also renewed interest in supply chain network design in 2005, with license revenue growth of 21 percent. Leading companies are embedding these technologies into new product development and introduction (NPDI) and S&OP processes on a quarterly basis to evaluate product flows and profits and optimize flexibility and network response at the point of new market entry, factoring in demand variation and cost-to-serve.
As warehouses have become more labor-intensive with a larger percentage of mixed pallets, picked cases, customized orders, and late-stage postponement, warehouse systems have changed (see the AMR Research Report "Considerations for Selecting Today's Warehouse Management Systems."), causing an increase in requirements for order visibility, task automation and pick productivity, labor benchmarking through technologies like RFID, and voice recognition. Inquiry volume for TMS doubled in the first half of 2006 over 2005, indicative of the pressures logistics professionals are under because of rising fuel costs, capacity shortages, and the imbalance of trade flows.
While inquiries to the supply chain analysts at AMR Research on the topics of S&OP and vendor-managed inventory (VMI) increased in 2005, growth in these categories was not as high. This is because of the process-intensive nature of these projects. While VMI software license grew at an above-market average 7 percent, sales of S&OP applications were flat, reflective of the fact that S&OP software as a category is broadly defined, with supply chain planning organizations utilizing a broad scope of tools to support S&OP (see the AMR Research Report "The Handbook of Sales and Operations Planning Technologies"). However, with inquiry volume on the rise and more dedicated tools emerging, we expect S&OP software in 2006 to have bounced back at a 6 percent rate. Supply chain performance management applications and event management and visibility applications lagged behind the market growth.
Where the Technology Is Actually Being Used
In June 2006, AMR surveyed 455 U.S. and European manufacturing organizations to determine their current SCM usage patterns-and their spending intentions for the years 2006 and 2007. The data reveal that both process and discrete manufacturers have made significant investments in a wide variety of SCM applications, with high degrees of adoption across several application sectors (see Figure 1 for SCM application usage among discrete manufacturers. Figure 2 applies to SCM application usage among process manufacturers.)
Underlying Supply Chain
Management Technology Trends
• Service-oriented architecture (SOA) is here to stay in supply chain management. SCM applications were early adopters of SOAs because of the high rate of customization in implementations and the need to leverage data from numerous existing applications and legacy data sources. We expect this trend to continue as most vendors have either already converted or are in the process of converting their applications to the new flexible architecture.
• SCM applications increasingly are shifting from a focus on transactional integration to buy- and sell-side, service-level-based relationship workflows.
• In high-tech, there was also wider adoption of RosettaNet PIPs for multi-tier synchronization. As E2open and Exostar continue to be successful in the deployment of supply and demand visibility based on the RosettaNet standards, more and more companies-in high-tech and beyond-are investing in bidirectional visibility, and looking to evolve to multi-company collaboration and planning. As a result, this will continue to put pressure on the electronic data interchange (EDI) vendors, including Descartes, GXS, and Sterling Commerce, to continue to expand their value-added services and application offerings as pure connectivity becomes commoditized.
• There is use of new technologies to harmonize and rationalize downstream data to make demand sensing and demand shaping a reality. Vendors like Oracle, Teradata, TrueDemand and Vision Chain are racing to achieve market share in the hotly contested race to own and manage downstream data.
Our forward-looking survey data indicates that SCM budgets will continue to rebound from slower growth in 2004 and 2005, accelerating to a growth rate of 6 percent to 7 percent over the next two years. While overall SCM spending will increase, the drivers and preferences vary between process and discrete manufacturers by geography and company size. This year's data show that, on a global basis, 26 percent of the 455 firms we surveyed expect to increase their SCM spending, 14 percent plan to decrease, and 60 percent expect to keep their SCM budgets flat. As the data show, the global environment for SCM spending is healthy (see Figure 3).
Importance of Business Process
However, the data also show that usage of SCM software does not necessarily translate to SCM proficiency and business process excellence.
In part, this is a function of the maturity of supply chain organizations. While supply chain organizations and supply chain executives are increasingly common in large enterprises, the supply chain planning experience, expertise, and "tribal knowledge" related to more complex planning and decision support processes are less mature. For example, more than 60 percent of organizations have had some form of S&OP process for more than 4 years. But client interviews indicate that the effectiveness of S&OP processes is frequently sub-par. Process proficiency gaps reflect that people skills and process/change management elements are as much or more of a factor in the attainment of business value as the enabling applications and technologies.
What the Leaders Do Better: Build Demand-Driven Supply Networks
AMR Research devotes a substantial portion of its research efforts towards tracking best practices in supply chain management. Until about three years ago, excellence in SCM for many consumer goods organizations was synonymous with ERP-led enterprise efficiency. This narrow approach to SCM has for many organizations translated to meaningful bottom line value. But increasingly we find that traditional approaches to SCM are falling short of today's emerging basis of competition.
Thanks to the globalization of production, retailer consolidation, and ever-increasing consumer expectations, the bar is raising quickly on what makes for supply chain leadership. A new class of supply chain visionaries-companies like Dell Computer, Nokia, and Procter & Gamble-are starting to forge a fresh path, transforming their supply chains from localized centers of operational competency into demand-driven supply networks (DDSN). Whereas traditional SCM has always led with its namesake-supply-DDSN leaders are taking a more cross-functional and cross-enterprise approach to creating differentiated customer value.
Amongst the DDSN leaders that we track, we find three distinctive capabilities:
• Demand sensing-an ability to read demand signals from points closest to final consumption, and translate those signals into unified, actionable operating insight.
• Demand shaping-the capacity to assess upside demand opportunity rapidly, and proactively initiate supporting sales and marketing tactics.
• Profitable demand response-the ability to tune supply-side activity for optimum profit, based on a dynamic assessment of cost/value trade-offs.
As with any significant change management effort, those who embark on a demand-driven transformation must plan for a supporting cultural and communication shift, both inside and outside the four walls of the enterprise. To initiate DDSN transformations, leaders start by aligning organizations around defining "moments of truth," key operating metrics that determine the success or failure of a business in the eyes of its customers. They then coordinate the necessary network resources to deliver on outside-in market metrics. Initiatives such as real-time sales and operations planning (S&OP) and vendor managed inventory become critical enablers of collaboration between brand owner and its supply-demand partners, and the basis for agile DDSNs.
We find that there are four basic stages of DDSN maturity
• Reacting-Classic site-to-site traditional supply chain. Integration barely happens
• Anticipating-A connected enterprise. Internal integration, clumsy external links
• Collaborating-A connected network with some external integration, still no strategic control
• Orchestrating-plug-and-play external integration, with the ability to create new businesses as opportunity arises
Why it Matters
Based on our 2006 study of 455 companies, we find that the companies that are the most mature in DDSN processes have:
• 20 percent better performance in new product launch
• 15 percent improvement in new customer orders
• 6 percent improvement in total supply chain cost
The single greatest predictor of great customer service is an accurate demand forecast. In fact, we find that a 10 percent reduction in forecast error translates to a 20 percent improvement in perfect order performance-defined as complete, on-time, and accurate as defined by a company's customers. When one considers that a single percentage point improvement in fill rate for a large global organization converts to millions of incremental dollars straight to the bottom line, the notion of a double-digit percentage improvement in perfect order performance represents perhaps the most substantial profit opportunity available to supply chain managers today.
A central element of the migration from reactive to orchestrating behavior is a company's sales and operations planning process. For most organizations, S&OP is in fact the only forum to coordinate large-scale trade-offs across the diverse stakeholders in a value chain.
The idea that S&OP is simply a matching of supply and demand is an antiquated concept. Topics as diverse as new product launch, capacity commitments, and promotional commitments are fair game among the most progressive practitioners of S&OP. Given the breadth of cross-functional representation at S&OP events, increasingly we hear leading organizations use the term "integrated business planning" to reflect the universality and strategic importance of the process.
Technology-while a critical enabler of S&OP efficiency-is only a small fraction of what makes for S&OP success. Where technology becomes essential to S&OP success is in the integration of disparate sources of data to allow executives to have visibility to past performance-and to simulate future potential trade-offs characterized by significant supply network interdependencies. Given the commitment of resources required to align diverse global stakeholders, however, S&OP excellence is much more about change management and process design than it is about software.
But those who make the long-range commitment to S&OP as a company's continuous business improvement engine reap substantial rewards. As shown in the figure below, increasing numbers of global organizations are making the necessary multi-year investments in technology and process change. Of note is that companies with mature S&OP processes are three times more likely to have successful product launches (see Figure 4).
Other key drivers of new product launch success are even more directly supported by critical technology enablers:
• Real-time forecasting-Companies' use of real-time forecasting tools to feed rapid insight back through the supply chain has shown to correspond with a doubling of product launch effectiveness. Particularly for short-lifecycle products, the ability to use initial sell-through activity as a predictor of future demand is a critical capability.
• Network design simulation-Response times grow dramatically with distance, increasing the minimum time in which a change in demand could be reflected in the availability of product. Leaders use sophisticated network simulators to model alternate flows for optimum response to demand. Companies that actively model their supply networks for agility in the face of rapid product introduction cycles report a 50 percent improvement in product launch performance.
• Electronic customer scorecarding-Just 23 percent of companies formally measure and internalize their own supply chain performance against their customers' expectations. Yet DDSN leaders have found that use of scorecards correlates with 16 percent improvement in product launch performance. Business intelligence tools and an emphasis on underlying data integrity are often at the heart of effective scorecarding processes.
Another key dimension of DDSN leadership is the ability to orchestrate value across multiple parties in a value network. Our most recent survey of DDSN leadership practices among the 90 percent of companies that conduct some amount of manufacturing outsourcing indicates that over 50 percent of those organizations still use the fax and e-mail as their predominant mechanisms to communicate with their suppliers. Yet we find that a substantial portion of perfect order leadership is directly correlated to heightened extra-enterprise collaboration. For DDSN orchestration to occur at scale, the collaboration gap must close quickly.
A Future of Tighter Collaboration
AMR Research finds an evolution of functionality, process and organization as companies try to build more collaborative supply networks. DDSN leaders are most likely to distinguish themselves not so much in terms of their ability to optimize any single business process, but in their ability to coordinate their extended networks more effectively than their peers.
Inevitably then, technical functionality and associated behavior is evolving out onto the information network between enterprises, as shown in Figure 5.
• At the bottom level is traditional B2B communication of purchase orders, acknowledgments, advanced shipping notices (ASNs), changes, invoices, payments, and the like. This won't change as this level documents the legal transactions between the parties is tied directly to the ERP systems of each partner.
• The need for visibility is adding more information to the mix. Inventory levels, capacity, visibility of events, location of shipments, and the like go beyond transactions. The information gives the brand owner and other participants an eagle-eye view of how their supply network is performing, and is needed to implement advanced supply chain techniques, such as VMI. This information also provides the basis of shared performance measurement of the supply chain.
• Ultimately, collaboration is the secret of a successful supply chain management. How can multiple enterprises come together to better respond to rapid changes in demand profitably? Neither arm's-length contract manufacturing nor command-and-control approaches will work. More likely, supply chain event management (SCEM) capabilities of these platforms will alert the parties to an issue, kicking off a discussion or workflow to resolve it. Making the course corrections while inventory is on the move requires managing a compromise among the parties. And since nothing goes as planned, the incremental agreements better be documented for when it comes time to settle up at the end of the month.
• The top level of the model is just emerging. AMR Research sees the evolution of supply chain analytics, planning and automated response as features of the platform. In effect, the supply chain applications will migrate from being private applications inside the four walls of the enterprise to shared applications on the hub platform.
Obviously, the owner of the value in the network will have significant control of the platform and who gets to see what information. It will also have a significant share of the vote on any decisions. In most cases, it will be the brand owner that sets up the hub for a specific product program, though some contract manufacturers have similar aspirations. Software-as-a-service will be beneficial in dealing with short product lifecycles, allowing the shared workspace for a product program to be set up quickly and reconfigured as needed. The net effect on the market is going to be a move to managed services, with perhaps even some planning and execution services being taken on by the hub provider.
In the 20th Century, the basic premise of supply chain management was that local, deterministic optimization of supply chain costs was sufficient to achieve supply chain excellence. Today's leaders of demand-driven supply networks are creating value networks that take a more global view of risk and opportunity, integrating multi-enterprise business processes across the three major spheres of activity: product innovation, demand management and supply management.
Evolving from traditional, localized approaches to supply chain management to true value-network orchestration takes multiple years of cross-disciplinary effort. We have yet to see an organization leapfrog its way to DDSN excellence, bypassing the inevitable cultural and structural hurdles that lie between myopic views of supply chain management and value network orchestration. Even the very strongest among the DDSN leaders recognize that they have many years still to go before they can be assured of quickly, reliably and profitably connecting market insight to profit outcome. But those that make the investment now will most certainly be the ones left standing at the next inevitable market inflection point.
Mark Hillman, a research director at AMR Research, works on detailed research projects in contract management, supply chain risk management, and procurement and sourcing.
Stephen Hochman, an AMR research director, focuses on trends in supply globalization and tactics for agile supply network response.
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