The Death of Time and Distance

In today’s chaotic global economy one thing that is certain is that supply chains matter. Presently 75 percent of a typical product’s cost is tied up in the supply chain. The New York Times columnist Thomas Friedman has demonstrated in his book, The World Is Flat, how technology has flattened the world. The possibility of people and organizations collaborating and competing in real time across the world has made the necessary connectivity in the supply chain an economic reality with the transmission protocols of the Internet and the technology of digitization.

Friedman points out that:

…the more these supply chains grow and proliferate, the more they force the adoption of common standards between companies, the more they eliminate points of friction at borders, the more the efficiencies of one company get adopted by the others, and the more they encourage global collaboration.[1]

Since Frederick Taylor enunciated the principles of scientific management some 100 years ago, we stand at another major milestone today where the practice of supply chain management (SCM) enables leaders to enhance shareholder value. David Simchi-Levi defines supply chain management as “a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, in order to minimize system-wide cost while satisfying service level requirements.” The purpose of this article is to emphasize the holistic nature of supply chain management, outline the current directions of SCM and how SCM can be applied to your organization to gain competitive advantage.[2]

Evolution of Supply Chain Management

The decade of the 60s witnessed Jay W. Forrester at MIT pioneer the field of System Dynamics and demonstrate that a systems view of an enterprise, along with its suppliers and retailers, was a prerequisite for overall optimization.[3] The 1970s ushered in Materials Requirements Planning (MRP) in industrial America with significant results. Taiicho Ohno at Toyota Production Systems implemented a radical approach of Kanbans, a system in which inventory was delivered to the factory by suppliers only when needed for assembly.[4] What emerged was Just in Time Manufacturing.

In the 1980s, Wal-Mart made Point of Sale information available to its suppliers, deployed Electronic Data Interchange (EDI) and rigorously enforced more frequent replenishment of its inventory with direct shipments to stores. Furthermore, store-specific labeling and pricing took kinks out of the supply chain. It is widely accepted that management of inventory has been the singular contributor to Wal-Mart’s growth, profitability, and dominance.

During the 1990s, industries launched initiatives to improve their supply chains. To stay competitive, trendy apparel makers’ items with short product lives called their program Quick Response. The grocery industry with its perishable products came up with Efficient Consumer Response, and the food service industry with a plethora of Stock Keeping Units (SKUs) branded its system the Efficient Food Service Response. Vendor managed inventory systems were implemented to determine the optimal functioning of the physical pipeline connecting the segments of the business. Finally, Internet and Business to Business (B2B) Commerce, along with deregulation of the transportation industry and the outsourcing of manufacturing and services, reconfigured the global supply chain.

Supply Chain Management: The Competitive Edge

In the new millennium, it is supply chains, not companies, that compete for market dominance. AMR Research has analyzed the top 25 supply chain performers, led by Dell, Nokia, Procter & Gamble, IBM, Wal-Mart, and Toyota Motor, and has concluded “…the basis of competition for winning companies in today’s economy is supply chain superiority. These companies understand that value chain performance translates to productivity and market-share leadership. They also understand that supply chain leadership means more than just low costs and efficiency; it requires a superior ability to shape and respond to shifts in demand with innovative products and services.”[5]

AMR Research 2004

The Intrinsic Challenges

In the global market place, the management of the supply chain in delivering numerous products from multiple suppliers, manufacturers, and distributors to retailers in a consumer-centric world is a Herculean task. Calvin B. Lee, vice president and chief scientist at Evant, Inc., has very succinctly assessed the challenges of creating efficiency in the supply chain in the following words:

We need sound, scientifically based replenishment techniques, which incorporate statistical and operations research techniques, to analyze the richness of contemporary databases and to deduce patterns, trends, variances and the dynamics of the customer demands. Such scientific techniques enable us to balance the various costs—inventory, transportation, handling, warehousing and other direct and indirect labor—while simultaneously providing optimal services for customers. This balancing act requires timely and accurate data.[6]

In addition, one must correct for the “bullwhip effect” [named for the variations in reaction down the length of a whip after it is cracked] when information about consumer demand becomes increasingly distorted as it moves upstream in the supply chain. More specifically, demand uncertainty grows at each step in the chain. This distortion leads to excessive inventory throughout the system, insufficient or excessive capacities, product unavailability, and higher costs.[7]

A Startling Discovery: Three A’s of SCM

“Many businesses work to make their chains faster or more cost effective, assuming that those steps are the keys to competitive advantage. To the contrary: supply chains that focus on speed and costs tend to deteriorate over time,” declares Hau L. Lee, based on a 15-year research of 60 companies.[8] He elaborates, “Only companies that build supply chains that are agile, adaptable, and aligned get ahead of their rivals. All three components are essential; without any one of them, supply chains break down. Great companies create supply chains that respond to abrupt changes in markets. Agility is critical because in most industries, both demand and supply fluctuate rapidly and widely.”[9]

Lee continues, “Supply chains typically cope by playing speed against costs, but agile ones respond both quickly and cost efficiently. Great companies also adapt their supply networks when markets or strategies change. The best supply chains allow managers to identify structural shifts early by recording the latest data, filtering out noise, and tracking key patterns. Finally, great companies align the interests of the partners in their supply chains with their own. When companies hear about the triple-A supply chain, they assume that building one will require increased technology and investment. But most firms already have the infrastructure in place to create one.”[10]

Strategies and Tactics

The objective of supply chain management is to optimize system-wide costs while delivering the desired level of customer service. Some specific strategies and tactics for enhancing the effectiveness of a supply chain are highlighted in the following list:

Strategies

• Optimization of Distribution Network to Serve the Market: Number and location of suppliers, manufacturing facilities, distribution centers, and warehouses
• Distribution Management Control: Centralized versus decentralized, direct shipment, warehousing, cross docking, pull or push strategies, and third party logistics (TPL)
• Inventory Management: Quantity and location of inventory including raw materials, work-in-process, and finished goods
• Information Technology System and Network: Support and link suppliers, distributors, and retailers
• Technology Deployment: Enable transfer of content, automation of data capture and management, and visibility of inventory, such as RFID
• Strategic Alliances: Partnerships with suppliers and distributors for information sharing and achieving operational improvements
• Product Development Coordination: Participation in the product development process

Tactics

• Configuration of supplier and distribution networks through mathematical modeling
• Benchmarking operations against competitors and implementation of best practices
• Demand forecasting, planning, and scheduling for manufacturing and distribution
• Inventory management at all levels of the supply chain
• Transportation management—selection of economical modes of transportation and optimization of shipping loads
• Customer relations management
• Systematization, automation, networking and integration for forecasting, warehousing, inventory, and transportation management
• Performance measurement through establishment of metrics
• Business-to-Business (B2B) management
• Business Intelligence Systems
• Technology for Automatic Identification

Measurement of SCM Performance and Benchmarking

The best known reference model for managing supply chain performance is the Supply Chain Operations Reference model (SCOR), created by the Supply Chain Council, an independent non-profit organization. This model contains standard descriptions of management processes it calls plan, source, make, deliver, and return. It also characterizes the management practices and standard metrics that benchmark “best-in-class” performance.[11]

Many companies use SCOR to identify and prioritize improvement opportunities because it recognizes the linkages among supply chain process elements, metrics, and best practices and so helps companies measure the flow of information and physical goods. Demand forecast accuracy, perfect order fulfillment, supply chain cost, and cash-to-cash cycle time are the four most critical metrics a company can use to get a quick, balanced snapshot of its supply chain performance, to make trade-offs between cost and service, and to indicate how well you manage your cash flow.

Technologies Enforcing the Supply Chain

Two major areas of technology deployment that are central to building efficient, agile, adaptive, and aligned supply chains are 1) Information Systems (IS) and 2) Radio Frequency Identification (RFID).

Information Systems

Supply chain planning software uses mathematical algorithms to help improve the flow and efficiency of the supply chain and reduce inventory. The most important area is forecasting demand, which drives the inventory to be built to satisfy customer demand. Supply chain execution software is intended to automate the different steps of the supply chain. Accomplishing this can be as simple as electronically routing orders from manufacturing plants to suppliers for the materials needed to make products.

These software solutions interface with the Enterprise Resource Planning (ERP) system of the firm, which integrates all the information into a single application. Connecting the supply chain of a business with that of its suppliers and customers into a single vast network optimizes costs and opportunities for everyone involved. ERP has been a major driver for the B2B explosion; the idea that everyone with whom you do business can be connected.

Radio Frequency Identification (RFID)

The Wal-Mart mandate to their top 100 suppliers to apply RFID tags to the pallets of shipments has been in effect since January 2005. Just as the Universal Product Code transformed retail operations around the globe over the past 40 years by increasing productivity and efficiency within the supply chain, the Electronic Product Code (EPC) of RFID promises to upgrade the supply chain. An RFID system consists of a “tag” containing data storage, an antenna to communicate with the tag, and a controller to manage the communication between the antenna and the host computer.

RFID technology will redefine the global market supply chain by embedding intelligence, identity, and Internet connectivity into everyday objects. The Electronic Product Code unites all elements of the entire supply chain and provides interactivity, from raw material and distribution to purchase and recycling—and back to raw material. RFID is envisioned as an infrastructure breakthrough. Products wearing smart tags will interact with each other, and the manufacturer will be able to view an optimally efficient cycle of direct, real-time supply and demand.

The EPC will enable the supply chain (which accounts for 75 percent of a product’s cost) to be intelligent and automated, saving companies billions of dollars while enabling them to meet consumer needs directly and quickly. It is claimed that this information will help businesses save billions of dollars in lost, stolen, or wasted products.

The trend towards RFID as a vehicle for reducing costs and improving productivity is not without its roadblocks and critics. For example, less than 50 percent of Wal-Mart’s goal of having 12 of its major distribution centers RFID “wired” by the beginning of 2006 has been achieved. Many of the retail giant suppliers claim that the investment in RFID technology can not be recovered over any foreseeable horizon.[12] One reason is that present RFID tags can cost upwards of 50 times the traditional bar code and these costs do not include the additional hardware to track and analyze the information. Nevertheless, it becomes difficult to understand how RFID technology, in the long run, will not continue to play an ever increasing role in SCM since decision making based on real time information is becoming an economic reality.

Developing an Effective SCM Strategy

Global supply chain initiatives often require tradeoffs. Two of the most frequent ones are: 1) collaboration versus independence and 2) customer satisfaction versus cost reduction. Identifying the most appropriate supply chain strategy is a continuous and dynamic proposition. Characterizing the benefits and costs associated with a new SCM initiative is essential, including the opportunity cost of what has been given up. Developing an effective supply chain strategy is predicated on three key drivers: 1) perceived value, 2) organizational utilization, and 3) cost effective solutions. The development of an SCM strategy should be tied to specific organizational performance goals and operational objectives. Presented in the following list are the major steps involved in developing an effective SCM strategy:

• Assess the current supply chain in terms of the metrics described earlier.
• Establish benchmarks for the critical business processes of the organization.
• Establish SCM objectives. (Specifically, what do you want the system to do?)
• Evaluate the current in-house support capability, including the present system’s architecture.
• Perform a gap analysis on existing data systems, including response time.
• Identify alternative technical solutions.
• Formulate an implementation timeline.
• Find a champion in the organization at the highest level of the organization.
• Conduct organizational “Town Hall” meetings to solicit ideas and to enhance the cultural climate for change.
• Create a collaborative environment and reach out to the suppliers and customers for inputs.
• Establish a cross-functional project team of operations, IT, finance, sales, and marketing.
• Develop the game plan.
• Implement, monitor, and adapt.

The global economy is transforming the way you do business. It favors organizations that can reach across boundaries effectively. It rewards those that can collaborate smoothly with their partners and customers. As a result, business excellence is no longer about individual players—it’s about effortless coordination and orchestration across your value chain. To thrive in this environment, you must optimize the performance of your entire business community—from your smallest supplier to your largest customer.[13]

—Sterling Commerce

[1] Thomas L. Friedman, The World is Flat (New York: Farrar, Strauss, and Giroux, 2005).

[2] David Simchi-Levi, Philip Kaminsky, and Edith Simchi-Levi, Designing and Managing the Supply Chain (McGraw-Hill/Irwin, 2002).

[3] Jay W. Forrester, Industrial Dynamics (Cambridge, MA: MIT Press, 1963).

[4] Retrieved 12-15-06 from http://encarta.msn.com/dictionary1861623648/kanban.html.

[5] Tony Friscia, Kevin O’Marah, and Joe Souza, “The AMR Research Supply Chain Top 25 and the New Trillion-Dollar Opportunity,” AMR Research, November 2004.

[6] “Demand Chain Optimization: Pitfalls and Key Principles,” Calvin B. Lee, vice president and chief scientist, Evant Inc.

[7] Hau L. Lee, V. Padmanabhan, and Seugjin Whang, “The Bullwhip Effect in Supply Chains,” Sloan Management Review, Spring 1997.

[8] Hau L. Lee, “The Triple-A Supply Chain,” Harvard Business Review, October 01, 2004.

[9] Ibid.

[10] Ibid.

[11] Debra Hofman, “The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain Health,” AMR Research, February 18, 2004.

[12] Gary McWilliams, “Wal-Mart’s Radio-Tracked Inventory Hits Static,” The Wall Street Journal, B1, February 15, 2007.

[13] Sterling Commerce, White Paper, http://www.overcomebarriers.com/thanks.aspx?uid=12894,39072.381650077157. (no longer accessible).