Sort of OT, But Not Really...
Found a great, though very long CIO Magazine article about
supply chain best practices and some of the weak links in ERP,
specifically SAP. Lots of very interesting and revealing quotes... even some from SAP management. The article is old, from February of this year... but will give everybody who reads it insight into the some of the competitive opportunities that ITWO, though not mentioned, will be exploiting with its e-BPO initiative. (Note: several ITWO implementation and consulting partners ARE referenced in the
article.) FWIW... c m
Enlightened companies are using new technologies--and rethinking old business maxims--to squeeze more time and money out of the supply chain
By Malcolm Wheatley
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The health of the bottom line often depends on how well a company's supply chain is managed. Read this article to learn
Four best practices supply chain leaders swear by
Why it's risky to rely on an ERP system for enterprise planning
How today's best practices are already transitioning to tomorrow's
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The truck had been expected. Long before it reached the factory gates, its mobile data terminal employing satellite-based global positioning technology had alerted the plant's computer systems of its imminent arrival and downloaded instructions that directed the driver to the proper unloading bay. As the truck passed through the gates, computers automatically recorded its contents and updated the plant's inventory records.
Thanks to slick scheduling, the components would arrive on the assembly line just minutes before they would be required--and thanks to some clever procurement optimization techniques, the company paid less for the components than it had paid five years ago. As the truck rumbled away, the fact that the logo painted on its side was that of a competitor attracted little attention; competitors' trucks were always turning up with parts. How else could an efficient business operate?
Fiction? Yes. Fantasy? No. In supply chain management, current best practices comprise an intriguing blend of new technology and a radical rethink of basic business concepts. Although many companies are still marooned in the era typified by materials requirements planning (MRP) software, best practices today are a far cry from what passed for supply chain excellence a few years back.
"It's no longer good enough to plan in monthly cycles," says Charles Prow, a partner in the Arlington Heights, Ill., office of Coopers & Lybrand Consulting. "These days, businesses must plan on a weekly or even daily basis--and synchronize demand along the entire supply chain so that partners are working in tandem to optimize the entire chain, not just one part of it." The problem is how. The real world is a complex place, and trying to forecast demand often results in bloated inventories of the wrong goods. Frequently the factories that are too busy producing forecasted orders rather than real ones find it hardest to respond to angry customers' demands for the orders they needed filled yesterday.
Make-to-Order Manufacturing
Manufacturing to specific customer requirements is increasingly the solution--a solution facilitated by today's enterprise resource planning (ERP) systems. Such systems help businesses quickly identify and marshal the resources and raw materials that are required to turn incoming orders into outgoing shipments. "We're a make-to-order manufacturing environment--and SAP has given us the infrastructure to focus our energies on managing our supply chain," says Gwen Babcock, vice president of information systems at Pacific Coast Feather Co. in Seattle. A $140 million manufacturer of down comforters, bed pillows and mattress pads for leading retailers such as Bloomingdale's and Kmart Corp., the company has located its nine manufacturing plants across the United States and Canada in order to be as close as possible to its customers.
"We determine every Monday what we're going to manufacture and ship that very week," explains Babcock, adding that 95 percent of the company's orders arrive through electronic data interchange (EDI). "The objective is to minimize our customers' inventories while ensuring that they don't run out of stock," adds President Roy Clothier. Since installing SAP in the push to make-to-order, he notes, "we've been able to continue growing at 20 percent a year with minimal increases to our inventories."
With relatively straightforward bills of material--even the most complex product has no more than 20 different raw materials in it on average--and a supplier base of under a hundred major vendors, Pacific Coast Feather's supply chain planning process is relatively undemanding. But increasingly, Babcock's peers in more complex business environments are turning toward a new breed of advanced planning and scheduling (APS) tools that integrate with traditional ERP systems to synchronize materials through the supply chain.
ERP's Achilles' Heel
"ERP logic contains at least five flawed basic assumptions--and maybe as many as 20," charges Joe Trino, president and CEO of SynQuest Inc., a Norcross, Ga.-based vendor of one such APS system. "ERP systems describe a theoretical supply chain rather than a real one," he says. Chief among ERP's failings are assumptions that machines and people possess infinite capacity, that lead times are static and don't change, that costs don't need to be explicitly taken into account, and that product and process flows can be rigidly defined along routings that won't change.
It's a charge that ERP vendors have come to accept is not without foundation. "Generally speaking, our view is that [such perceptions] are correct," acknowledges Andrew Zoldan, director of supply chain at SAP America Inc. in Wayne, Pa. The term ERP is unfortunate, he adds, "in that it leads people to expect that the system will be doing more enterprise planning than it really does. In fact, ERP systems are more about management and execution, and the amount of software code [devoted] to planning in these systems is less than 5 percent." To address these concerns, SAP and other ERP vendors are partnering with most major third-party APS vendors and have begun integrating optimization tools within their systems. PeopleSoft Inc. in Pleasanton, Calif., bought ASP vendor Red Pepper and is incorporating its optimization engine in its line of PeopleSoft manufacturing and distribution software. And SAP announced last summer that it will develop its own optimization solution.
"When you deliver architectural glass, you can't deliver partial shipments," observes Glenn Carleton, manager of advanced technologies at Viracon, an Owatonna, Minn., business that commands over 60 percent of the U.S. high-performance architectural glass market. "There's a crew waiting to fit it into the side of a building--and by the way, they don't want it a week early, either." Fulfilling orders completely and on time and doing so in a way that makes optimal use of the company's production resources is a tough challenge for any business, notes Carleton, explaining why the company chose to integrate SynQuest's APS tool with The Baan Co.'s ERP system.
"We're no longer relying on gut instinct to figure out what the data is really telling us," says Linda Shannon, order fulfillment manager at Sun Microsystems Inc.'s U.S. Operations Logistics Organization in Milpitas, Calif. In 1993, the fast-growing computer company chose to outsource its warehousing and distribution to a third-party contractor to be more cost effective but was anxious to retain control of key allocation and shipping decisions. Sun ended up coupling PeopleSoft's Red Pepper APS software with its PeopleSoft ERP system. "We wanted to have Sun employees making the business decisions, not a third-party's employees," she explains, referring to the process by which the company's revenue objectives, distribution center capacity and customer delivery commitments are balanced. "With a standard database, the reports are only as good as the person running the query. The [APS] software adds intelligence--and it does it very quickly. We weren't prepared to be as delighted with it as we are."
A similar story emerges from Deby Veneziale, vice president of logistics solutions at Skyway Freight Systems Inc. in Watsonville, Calif., a third-party logistics contractor that orchestrates the sourcing, manufacturing and distribution of its customers' products from raw materials to finished goods delivered to end customers. "Skyway aims to provide customers with 'glass pipeline' visibility," she says. "This shipment is on the way, this one is on order, this one is in the warehouse and so on." Her company uses Stockholm, Sweden vendor Industri-Matematik International Corp.'s optimization tool, which allows Skyway to coordinate not only activities and information across many partners in a supply chain but also partners across different supply chains. "Within a single, planned truckload, we can have materials from multiple suppliers, maximizing the utilization of each vehicle," she explains.
Sleeping with the Enemy
Not all supply chain best practices require fancy software. Many companies are achieving similar efficiencies through old-fashioned cooperation. Or rather, co-opetition, the management buzzword used to describe cooperative arrangements with businesses that would normally be regarded as competitors. Sounds crazy? The logic is impeccable: The folks with logistics problems and requirements that are closest to your own are usually your competitors.
"In some industries, co-opetition works very well," says Steven Y. Gold, a Chicago-based partner in the supply chain strategy practice of KPMG Peat Marwick LLP. "It makes a lot of strategic sense: You're shipping on the same trucks and sharing the same overhead burden." For example, despite the bitter brand battles fought for the consumer's sweet tooth, competing candy manufacturers might share the same third-party warehouses and trucks all over the United States, he adds, pointing out that such arrangements are usually effected by a third-party contractor who acts as a "marriage broker" to put competitors together.
Usually, but not always. "It was the pharmaceutical manufacturers that came to us," says Gloria Wynnyk, vice president for professional affairs at the Edmonton, Alberta-based pharmaceutical wholesaler Northwest Drug Co. Ltd. (Northwest Drug has since been acquired by Saint-Laurent, Quebec-based Medis Health & Pharmaceutical Services Inc.) Drug manufacturers asked Northwest to take on consolidation and logistics activities as a wholesaler in all but name and ownership of the inventory--performing essentially a consignment function. The reasoning was simple. In contrast to U.S. hospitals, where as much as 90 percent of a hospital's pharmaceuticals come through the wholesale channel, Canadian hospitals source only 20 percent of their pharmaceuticals through wholesalers and order the balance directly from manufacturers.
By purchasing directly from drug companies, hospitals were forced to deal with multiple invoices and delivery shipments. They were also unable to buy partial cases of drugs, leading to undesired inventory. Wanting to make their ordering more efficient without simply giving the business to the wholesale channel, a consortium of manufacturers led by Astra Pharma Inc., Bristol-Myers Squibb and Glaxo Wellcome Inc. created the Canadian Pharmaceutical Distribution Network--and asked Northwest Drug to serve as a logistics provider.
Everybody wins, it seems. Manufacturers ship their drugs to one point, not 400 or so, and retain ownership of their inventories and control over their pricing policies. Customers buy from one source, issue one purchase order, get one invoice and make one payment. And Northwest Drug gets paid for managing and distributing goods it doesn't own. "It hasn't cannibalized our sales, we don't have to hold any inventory, and we get paid based on the picking, packing and shipping that we actually perform," says Wynnyk.
And sometimes competitors share facilities without involving a third party. MoDo Paper AB's plant in Husum--a small town in northern Sweden some 2,000 kilometers (1,240 miles) from the company's major markets--places the Swedish paper manufacturer at a disadvantage in Europe's cutthroat office printer and copier paper market. The Husum mill, one of nine that the company has in Sweden, France and the United Kingdom, produces the bulk of its flagship Datacopy brand. Ships bring in most of the paper mill's raw materials and take away almost four-fifths of its output. But rather than maintain two separate fleets to reach its suppliers and customers, MoDo makes use of its competitor's fleet of vessels in the North Sea in return for giving the competitor access to MoDo's fleet in the Baltic. "Our mills are where they are; we can't change that. What we can do is attempt to be the best distributor in Europe," says European Logistics Director Lars Nilsson. That ambition was realized in November 1997, when the company won an award from Logistics Europe magazine. "We're not afraid of cooperating with competitors," says Nilsson. "It's only by looking at each other's cost components that we can really understand how to reduce the overall cost--and gain the required economies of scale."
Strategic Procurement
Since the 1980s, businesses have been attempting to reduce their vendor base in order to increase the leverage that they have on each supplier. Such reduction programs are fine in theory but often hampered in practice by multiple ERP systems within a business and different component numbering schemes that hide the fact that the same part is being bought by different divisions under different names and at different prices. "There's often a lot of low-hanging fruit to be found," acknowledges Tom Cross, a New York City-based partner who leads Price Waterhouse LLP's Global Product Industry practice. But tracking down that fruit is no simple matter. "There's not always an easy way for a large company to find out how much of a particular item it is buying," says Cross.
Enter a concept known as strategic procurement, which aims to identify multiple orders of the same parts, regardless of ERP system or part number. First, purchased components are analyzed and categorized according to their form, fit and function. Every bolt that the company purchases, for instance, would be sorted by type of metal, length, diameter, thread and so forth, enabling the company to recognize duplicates and provide (often for the first time) a clear picture of the business's total bolt purchases. Using that information, the company selects the most appropriate vendor from whom to source the combined order. Price obviously plays a part in the decision, but so do other considerations such as service, delivery frequency, minimum order quantities and payment terms--hence the strategic aspect of the name.
The typical bottom-line benefits of strategic procurement include a 5 to 15 percent reduction in the cost of purchased components through consolidation of purchases across divisions, the elimination of duplicate holdings of slow-moving components and lower administrative costs, according to Romesh Wadhwani, chairman and CEO of Aspect Development Inc., a Mountain View, Calif., vendor of a strategic procurement software tool. A $1 billion business with a $400 million procurement budget can expect savings of up to $50 million by using Aspect's three levels of Component and Supplier Management Software, Wadhwani says.
Although he stresses that his company's projected savings through its ongoing implementation of strategic procurement are confidential, Aspect user Russ Armitage, group procurement director at £3.5 billion (roughly $5.8 billion) global defense business GEC-Marconi Ltd., says he'd be extremely disappointed to achieve savings at the lower end of Wadhwani's estimates of typical benefits. And with 30 sites in the United Kingdom and 10 in the United States--one of which had no fewer than 160 different numbering systems worldwide--and an overall external procurement budget of £1.4 billion (about $2.3 billion), the potential for savings is enormous. "We'd been trying to do it by hand," says Armitage. "We had the philosophy but lacked the tools."
Rockwell Automation, a global electronics company that specializes in industrial automation solutions, is another enthusiastic adopter of strategic procurement that had commenced work in-house but subsequently switched to Aspect's software. A partial implementation has already produced savings of $11 million over a three-year period, according to Project Manager Brant Anderson. A full implementation is currently underway and is expected to save $20 million annually as well as reduce the number of buyers that the company needs to administer its shrunken supplier base.
And what of future best practices? Expect to hear more of strategic procurement, particularly when coupled with IT tools such as data mining. Expect, too, to see more use of radio- and satellite-based technologies to help businesses keep track of products and consignments as they move through the supply chain. Watch for the use of techniques such as vendor-managed inventories to break out of the beachhead they currently hold in the automotive and retail sectors and become best practices more broadly. Extranets, too, will augment the process of communication with suppliers. They're around today, to be sure, but most observers agree with KPMG's Steven Gold. "Extranets? They're coming--but it's tomorrow's best practice, not today's."
Malcolm Wheatley is a writer in the United Kingdom. He can be reached at malcolm_wheatley@compuserve.com.
How To?
Putting best practices into practice is easier said than done. Supply chain experts have differing opinions on how to pursue supply chain excellence.
Knowing how to improve the effectiveness of the supply chain is only half the problem. Getting people to agree with the analysis--and to do something about it--can be a barrier to progress. One solution is the supply chain operations reference (SCOR) model promulgated by the Supply Chain Council, a group of manufacturing businesses, consultants, software vendors and other supply chain service providers that now includes over 300 of the world's largest manufacturers. "SCOR is a process-reference model that provides a common language for supply chain partners to communicate to each other in," says Jeffrey F. Berg, a director with Weston, Mass.-based consulting firm Pittiglio Rabin Todd & McGrath. "With SCOR's 'plan/source/make/deliver' terminology, we found we could map our supply chain much faster than we'd expected to," says Vinay Askegar, manager of business process reengineering initiatives and a leader of the supply chain reengineering initiative at Rockwell Semiconductors Systems in Newport Beach, Calif.
Others aren't so sure, however. Tom Cross, a New York City-based partner who leads Price Waterhouse LLP's Global Product Industry practice, says that the spread of broadly similar ERP systems, each with built-in business processes, will in time "force a lot more consistency and commonality than paper-based models." Still others, such as Steven Y. Gold, a Chicago-based partner in the supply chain strategy practice of KPMG Peat Marwick LLP, assert the importance of organizational reform to establishing best practices. He advocates appointing a functional head to manage the supply chain as a coherent whole--a strategy that Price Waterhouse's Cross retorts "will work only if the manufacturing function is [included] as well." Many companies, while happy to combine purchasing and distribution into a supply chain role, have thus far tended to regard adding manufacturing responsibilities to the supply chain as too big a job--despite the obvious benefits of balancing the conflicting priorities of manufacturing and the often-more-customer-responsive supply chain function.
At the Cork, Ireland, plant of Pepsi-Cola International, manufacturing and logistics executives work closely together, sharing responsibility for the supply chain, says Walter G. Todd, supply chain director and site general manager. Investment and management initiatives are focused on jointly harnessing the strengths of each function, he explains. The 5,000-gallon standard minimum manufacturing batch size of Pepsi-Cola concentrate has recently been reduced, worsening the plant's productivity performance in order to cut inventory levels and improve the freshness of the product. With seven distinct production processes, 14 filling lines and five salt-packing operations, the manufacturing task is more complicated than might be imagined. Caramel--a key ingredient--now comes in by pipeline from a supplier located 100 yards away next door.
Nor is the outgoing supply chain task straightforward. The number of stock-keeping units (SKUs) has risen from 520 to 1,200 in the last three years, Todd points out. "Production is becoming increasingly country-specific," he says. The Cork plant serves 234 customers in 104 countries spread over five continents--and is the sole international supplier of 7UP concentrate outside the United States. From Lima to London, it seems there's a little bit of the blarney in every can of 7UP.
-M. Wheatley
Wherever You Go, There You Are
New technologies are taking the guesswork out of tracking parts and products
Businesses used to have a blind spot: the interval between shipment and arrival of goods. Now technology is helping companies keep track of the flow of materials through the supply chain. Cliff Neuse, president and CEO of three AdCom Express Inc. franchises in St. Louis, Dallas and Detroit, has replaced pagers and two-way radio systems with mobile data terminals linked to RAM Mobile Data USA's Mobitex radio network. The network covers 93 percent of the urban business population of the United States--and a supplementary option employing satellite modems, recently piloted by retail giant Sears, Roebuck and Co., now extends this coverage to 100 percent of its mobile workforce throughout the United States, adds Lee Butts, RAM Mobile Data's vice president of industry marketing.
Coupled with satellite-based global positioning system (GPS) receivers, Neuse's dispatchers know where the company's drivers are at any moment and can direct the appropriate driver to pick up packages. "With pagers, we never knew if they'd gotten the message or not," says Neuse, adding that the mobile data system's instant proof-of-delivery capability has enabled the company to win contracts requiring such proof for which it previously had not been eligible.
And at J. Sainsbury PLC in London, the United Kingdom's second-largest grocery chain, John Rowe, the company's director of logistics, is overseeing a large pilot implementation of San Diego-based SCS Corp.'s passive radio frequency identification technology. A quarter of Sainsbury's £1.5 billion ($2.4 billion) supply chain management budget "is spent confirming that stock is where it ought to be and that it is moving as it should," says Rowe.
Unlike bar codes, the batteryless tags attached to each crate of goods don't need line-of-sight visibility and can be read automatically by receiver/transmitter units embedded in the gates of each warehouse. Employees aren't needed to scan in data, notes Rowe, and the company's inventory systems can be updated instantly as trucks drive through the gates. Another benefit is improved visibility of products nearing their sell-by dates, after which they can't legally be sold in Europe, he adds.
-M. Wheatley
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