Management Accounting

Working on the Chain

With profits down and perils up, companies are focusing on supply-chain management.
Edward TeachSeptember 1, 2002

Slumping capital markets. Fears of a double-dip recession. September 11. These are reasons enough for companies to start taking more slack out of their supply chains. But new technologies, the continuing evolution of Internet-based commerce, and a much-hyped concept — the “real-time enterprise” — are also spurring managers to make their supply chains as cost-effective, transparent, and responsive as possible. The rewards of doing so can be great: leaner inventories and lower working capital, higher profits and productivity, better customer service, and competitive advantage. Companies like Wal-Mart, FedEx, Dell, IBM, and Procter & Gamble have shown how superior supply chain management (SCM) contributes not just to a healthier bottom line, but also to industry dominance. Their example has even rubbed off on the military: the United States Marine Corps has launched a major campaign to streamline its supply chain operations, based on civilian models.

Meanwhile, the penalties for supply chain malfunctions can also be great, as demonstrated by the inventory glut of 2000-2001, which cost high-tech and telecom businesses billions of dollars in excess supply. Or by the stumbles in recent years of companies like Nike and Hershey Foods, whose flawed rollouts of SCM systems cost them dearly. Or by Kmart, whose belated attention to its supply chain problems was singled out by analysts as a major cause of its slide into bankruptcy last January.

SCM systems have been at the core of many reengineering projects, making them one of the hottest software categories during the past few years. But in 2002, corporate spending on technology has slowed. Recent surveys of CIOs by Morgan Stanley, Meta Group, and Gartner/Goldman Sachs all show that companies have tightened their IT budgets. Boston-based AMR Research reports that the overall SCM market grew 12 percent in 2001, to $5.6 billion; AMR expects 13 percent growth in 2002.

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A slowdown in spending doesn’t mean companies have stopped implementing or improving SCM systems. Some are installing “shelfware” — software they bought as part of a bundled offering but hadn’t got around to installing yet. Others are trying to clean up specific problem areas of the supply chain with niche applications. Meanwhile, many applications remain to be integrated with each other and with enterprise resource planning (ERP) systems. As always, ROI is king.

“We’re seeing a push for quicker time to benefit from an investment; we’re seeing a push for investments that build on top of past investments,” says Andrew Macey, director of supply chain for Sapient Corp., a Cambridge, Massachusetts-based consultancy. “Companies that put in large, enterprisewide supply chain software tools, like an i2 or a Manugistics or an SAP, obviously don’t want to throw away that investment. But in many cases they haven’t got what they hoped for, and they are trying to ameliorate that with smaller, incremental investments focused around a particular point issue.”

Supply chain applications come in many varieties from hundreds of vendors, all promising to deliver greater control over some part of the supply chain as defined by the nonprofit Supply-Chain Council’s Supply-Chain Operations Reference (SCOR) model: plan, source, make, deliver, and return. Broadly speaking, applications may be said to fall into one of two types: planning and execution. The latter includes increasingly sophisticated systems for warehouse management, logistics, and event management. Last year, overall sales of supply chain execution software surpassed sales for planning apps, says AMR Research, indicating that companies are increasingly focused on business tactics and cost control.

But software isn’t the whole story. Although SCM systems can work wonders, experienced managers know that projects will fail if process and people issues are ignored. Supply chain consultants insist that companies rethink old assumptions, replace inefficient processes, and prepare for change management before they embark on an expensive software implementation.

First, Collaborate

One ambitious effort by retailers and manufacturers to implement supply chain best practices is called collaborative planning, forecasting, and replenishment (CPFR). A set of process and technology models that build on vendor-managed inventory programs, CPFR promises to optimize information sharing between buyers and suppliers. But although numerous pilot projects are under way, CPFR’s time will be slow to arrive, as it requires extensive process and technology reengineering.

Best-practice collaborative forecasting can be done in the here and now, says Kevin O’Marah, vice president for supply chain strategies at AMR. He argues that collaborative forecasting isn’t technology-dependent, but relies instead on process rigor, relationships, and trust. The goal is to get everybody on the same page, from a company’s internal departments to its outside trading partners. (The goal is not to achieve a perfect forecast or even 90 percent accuracy; suppliers understand that demand uncertainty is inevitable, says O’Marah.)

Successful collaborative forecasting rests on a rigorous sales and operations planning process, says O’Marah. That amounts to convening formal, regular meetings between sales managers, who know what customers will pay for, and operations managers, who can match that demand with sourcing, production, and logistics requirements. Does this sound too simple? “A lot of best practices end up being really simple, like collaborative forecasting,” he responds. Too obvious? “It doesn’t go on as much as you think.”

And if collaborative forecasting doesn’t happen that much within the four walls of a company, it’s not all that frequent between companies either, say consultants. John Leffler, global head of collaborative value chain solutions at PwC Consulting, recalls a recent meeting between managers of two companies in the entertainment industry: a large, multimedia concern and one of its major suppliers. “The supplier was outlining in detail the major supply chain issues they had that hurt their profitability” — issues the larger company didn’t have visibility into, says Leffler. As a result of the powwow, the managers agreed that instead of giving the supplier the usual range of forecasts, the company would start from a baseline amount and provide timely updates as it received better demand signals from its customers.

The specific technology used to collaborate with suppliers doesn’t matter, says O’Marah, as long as it’s simple and fast; EDI or E-mail may serve as well as collaborative supply chain applications. The quality of information does matter, though. That might mean, for example, an end to forecast padding, a practice especially rampant in high tech, where companies have routinely overstated their need for electronics parts. Instead, a new level of trust is required. Ideally, suppliers could pass on savings from collaboration without fear of being squeezed or replaced.

Judging by a recent AMR survey, suppliers and their OEM (original equipment manufacturer) customers have a ways to go to achieve that level of trust. When asked what cost discount would cause them to change suppliers, the average OEM response was 7 percent; suppliers thought 10 percent. The suppliers, says O’Marah, have less breathing room than they think.

From Supply Chain to Keychain

When it comes to getting detailed forecasts out to scores of suppliers, technology can make a difference. In high tech, where supply chains have been disaggregated through outsourcing and contract manufacturing, some companies are experimenting with Internet hubs, or private networks, to establish faster collaboration with trading partners.

One of the more successful experiments is Hewlett-Packard Co.’s procurement and supply chain exchange, dubbed KeyChain. For the sprawling computer multinational, newly merged with Compaq, with thousands of suppliers and more than 100 operating sites, the trading exchange is the answer to a conundrum: how to bring common processes and companywide visibility to widely distributed supply chain operations.

KeyChain has four components: order-forecast collaboration, inventory collaboration, auctions, and sourcing, according to Craig Flower, vice president and group information officer for worldwide operations. The exchange supports some CPFR, for inkjet supplies, and plans to do more. During its 18 months of operation, more than 100 trading partners, including contract manufacturers, have plugged in. That’s a small part of HP’s supply chain, yet Flower claims the exchange has already saved the company $100 million. How did HP calculate that sum? “Very carefully,” says Flower with a laugh, adding that the savings come primarily from materials costs and inventory-driven costs. (Increased productivity isn’t factored into the ROI.)

That kind of savings is enough to make any CFO smile, though supplier CFOs may be forgiven for frowning in suspicion. Indeed, HP is so enamored of its trading-exchange approach that it’s offering it, in tandem with PwC Consulting, as a supply-chain solution. (It remains to be seen how IBM’s purchase of PwC will affect that partnership.)

Getting Visible

Even the best-laid plans may go awry, and that’s why visibility is so important to supply chain managers: if you can see something isn’t going as planned, in close to real time, you can minimize the damage. Sapient’s Macey says companies can’t attain supply chain transparency unless they resolve their systems-integration issues first. “Companies will have warehouse, order, and transportation management systems, and in many cases they don’t share data easily,” he says. “So the first problem these companies have is integration. That word can turn a lot of people off, but you have to get these systems to talk to each other.”

And to ERP systems. “Every one of the Fortune 500 has some component of an ERP solution today, but very few are fully integrated,” points out Leffler of PwC Consulting. “They may have a financials solution from one vendor for several business units, if not the company, but then they may have disparate order management and fulfillment systems, disparate [SCM] systems. For us it’s probably our biggest market, helping customers integrate their processes and the technologies that support those processes.”

It’s one thing to make internal supply chain processes transparent; bringing visibility to external parts of the supply chain is another, and that’s what supply-chain event management (SCEM) software is increasingly called on to do. Many vendors now offer Internet-based systems that monitor the status of orders to suppliers, distributors, and manufacturers and automatically report exceptions. Networking company Lucent Technologies, for example, uses Optum’s TradeStream in its Supply Chain Networks unit to make sure the hundreds of parts that make up a given customer order arrive at the same time — first at a Lucent warehouse, then at the job site for Lucent’s installers.

Lucent is “a very virtual company,” notes Jim Schoessling, senior manager for global logistics. It outsources most manufacturing, warehousing, and logistics, and so most of the material for, say, a data switch will come from external suppliers. The TradeStream application makes sure Lucent’s service people will receive all the needed parts at the right time to install the switch. It’s a hub-and-spokes model, knitting together disparate supplier systems over the Web into a single, seamless platform, says Schoessling. If something is held up in provisioning, such as a supplier shipment, the system automatically alerts users of the delay. The virtues of this approach include much smaller inventories and carrying costs (Lucent has reduced its warehouses from 200 to 33 in the past 18 months), greater productivity (installers don’t have to wait for straggling parts), and higher customer satisfaction, says Schoessling.

Where in the World Is…

SCEM systems can deliver up-to-the-minute information in the context of problem resolution or crisis management. “For example, there’s a late order — a delivery from overseas is being held up in customs,” says Macey. “Or, an Asian supplier has something at sea, and typically it just disappears for four to five weeks, because the boat is crossing the Pacific. Or, a company may be trying to merge deliveries from several suppliers in transit, so that it arrives at its plant in one delivery. All these sorts of scenarios could be facilitated by more-real-time information.”

Kimberly Knickle, research director at AMR, says most early adopters of SCEM are using it to share information about supply chain events with outsourcing partners, as Lucent is doing. Some tools have the ability in theory to resolve exceptions automatically, but few companies have tapped that ability, says Knickle.

Texas Instruments Inc. is installing an SCEM application from SAP that will help it move to an order-anywhere, ship-anywhere model. The $8.2 billion semiconductor-and-electronics giant has a product distribution center in four regions: the Americas, Europe, Asia, and Japan. Currently, customers order products from a regional center, but eventually, after the SCEM application goes live in October, a customer in Europe will be able to order a product from the United States and track its delivery to Japan, according to Ray Pechacek, TI’s logistics manager.

The application will provide door-to-door shipping visibility for both internal users and customers. Just as FedEx customers can track the progress of overnight mail via the Internet, so too will TI’s customers be able to track the status of their orders. Pechacek, who discussed the new application at an SAP user conference in June, said this will eliminate the costs, time, and inconvenience of a manually based customer service system.

When a shipment of die from TI’s Dallas wafer fab heads for assembly in the Philippines, the SCEM application will monitor its progress on the specified path — from the loading dock to Dallas-Fort Worth airport to Los Angeles International, through customs and on to Manila, and finally to delivery at the assembler. It will automatically notify TI if, for example, a shipment doesn’t leave an airport within a given window of time. It may also specify the reason for the variance (weather, equipment failure, customs). By tracking exceptions over time, the software will help planners identify bottlenecks in the supply chain.

The ability to confirm delivery electronically will itself pay for the cost of the system, predicted Pechacek, by eliminating the float associated with manual proof of delivery. For a multinational corporation, the cost of delayed payments can mount quickly.

Keep On Trucking

At the cutting edge of SCEM are agent technologies — smart software programs that handle predefined tasks, learn from experience, and make decisions when an event happens. Greg Cudahy, global director for the B2B/Supply Chain service line at Cap Gemini Ernst & Young, says agent technologies can make supply chains more reliable, a major concern in the wake of September 11.

Cap Gemini wants companies to think of supply chains as adaptive networks, where if a node fails, agent technologies can rapidly reroute the network around it. What if an ocean carrier loses a container ship, or if an entire port shuts down because of an earthquake or a terrorist threat? Instead of working the phones for costly ad hoc alternatives, a company could use an agent-based system to reroute cargo in seconds. Such decentralized decision support and execution systems, developed by companies like Living Systems and Bios Group, are winning favor with some of Cap Gemini’s large European customers, says Cudahy.

Extraordinary events aside, agents can make supply chains more responsive to routine demand volatility. One Cap Gemini client, a major European carrier with more than 10,000 trucks on the road daily, is using an agent-based SCEM system on a pilot basis to help dispatchers optimize routes and consolidate partial truckloads. If a new order comes in late, the system can weigh the cascading effects on the network and make schedule and route adjustments on the fly. “The system will calculate which truck it would go to, would it be profitable to pick it up, will it fit in the truck, and finally, will it violate any service commitments,” says Cudahy.

The system’s payback? So far, a 4 percent increase in capacity utilization at the test depots, says Cudahy. That may sound modest, but it translates into 15 percent greater revenues and a 100 percent increase in margins. Once spread across the entire truck network, the investment in agent technologies could look very smart, indeed.

Edward Teach is articles editor of CFO.

In the Air, on Land and Sea

Whenever there’s serious trouble abroad involving U.S. interests, count on the United States Marine Corps to show up in a hurry. Such around-the-clock, global readiness depends on an effective supply chain, and in a world where the source and nature of trouble are increasingly unpredictable, the supply chain has to be flexible, fast, and supremely responsive. But until recently, those qualities were in short supply, as seen during the Marines’ last major logistics effort before Afghanistan, the Persian Gulf War of 1990­91.

“It took us some time to get prepared until we were comfortable kicking off a ground assault,” recalls Lt. Gen. Gary S. McKissock, the Marines’ deputy commandant for installation and logistics since 1999. “Everybody was relatively happy with our performance, and a lot of folks gave special kudos to the logistics community. But it was obvious we could have done a lot better.”

During the Gulf War, the Marines still relied on the time-honored strategy of moving an overwhelming amount of materiel close to the battlefield — “Whoever gets the most stuff on the beach wins,” as McKissock puts it. To support this “Iron Mountain” of supplies, the Marines maintained a 60-day level of inventories. But while that approach still sufficed for set-piece battles such as Desert Storm, it consumed unacceptable levels of time and money in an era of brush wars and budget cutbacks.

Accordingly, the Corps set out to upgrade its supply chain operations. At first it thought information technology was the solution, but IT was in fact a big part of the problem. Over the years, the Marines had assembled more than 200 separate logistics systems, with virtually no integration. (In presentations, McKissock calls the computer tangle the “Rat’s Nest.”) Forget moving Iron Mountains; it took seven to eight days just to deliver a readily available part to a repair technician.

Finally, the Corps realized that fixing its supply chain “wasn’t an IT issue, but a process issue,” says McKissock. “The light went on for us.” Illumination came in particular at The Pennsylvania State University’s Center for Logistics (now Supply Chain) Research. For 12 weeks in the fall of 1998, guided by Penn State professors and consultants from Sapient Corp., McKissock and his logistics team studied how civilian outfits like Wal-Mart, UPS, and W.W. Grainger ran their supply chains. They came away with a battle plan for reengineering Marine logistics.

Semper Supply

That plan emphasizes information and speed, not mass. The Marines want to be able to send supplies to troops anywhere in the world within 24 hours, while reducing their insurance policy of supplies from 60 days to 30 days or less, depending on the item. (Just-in-time fulfillment is not a goal, since having a sufficient amount of weaponry or equipment or medical supplies always on hand is literally a matter of life and death.) To those ends, they have adopted processes and metrics that value speed.

“We don’t talk about fill rate as much as we do order-ship time and repair-cycle time, which have a real direct impact on the materiel readiness of a weapons system,” says McKissock. “We have completely redesigned our materiel readiness approach — how much equipment is available to the war fighter and how quickly it can be returned to a ready state once it is damaged or there is a malfunction.”

Already, McKissock’s Marines have streamlined processes so that the repair technician can receive his part in less than 24 hours. They have shrunk safety stocks of medical supplies to 15 days while cutting intermediate stocks, such as engines and transmissions, by $100 million. In the 40 months since the project began, McKissock’s team has freed up 1,800 Marines from logistics duties, reduced order-cycle time for products and services by 35 to 50 percent, reduced the annual tonnage shipped by up to 70 percent, and achieved inventory cost savings in the range of $125 million to $180 million a year.

And slowly, they are untangling the IT mess. To identify redundancies, techies compared the Marines’ systems with the Supply-Chain Council’s SCOR model; a number of unnecessary systems have been unplugged. A detailed technology architecture remains to be worked out, but the aim is an efficient, integrated complement of supply chain systems.

The Defense Department is clearly impressed with what McKissock’s troops have accomplished so far; it has designated Marine logistics as its supply chain “re-invention lab.” Meanwhile, the new architecture of business rules and processes is currently being tested at the Marine base at Camp Lejeune. The processes will then be rolled out in the 2d Marine Division, and reform should go worldwide by 2003.

One thing won’t change: like any good supply chain operation, Marine Corps logistics puts the customer’s needs first. “We’re not looking to save money or people,” says General McKissock. “We want to meet the war fighter’s requirements, and be more effective on the battlefield.” —E.T.

In Any Event

Samples of events and exceptions captured by SCEM systems.
Source: AMR Research, 2002

Inventory Status/Changes

Events: Exceptions
Receipt of goods: Status outside minimum/maximum boundaries
Condition of delivery: Quality discrepancies
Advance Shipping Notice (ASN): Discrepancy from ASN
Demand forecasts and changes: Errors in forecast
Production of goods completed: Inconsistent inventory counts

Order Status

Events: Exceptions
Purchase order: PO received or not/early/missing
Sales order: Cancellation
Elimiation of product from line: Change in routine ordering policies
Placement of order: Order amount above threshold
Placement of order: Order inconsistent with production-schedule requirements

Top 10 SCM Vendors

Ranked by 2001 SCM license revenue.
Source: AMR Research, 2002

Company Name
Revenue 2001($millions)
Growth Rate 2000­2001
1. i2 Technologies
2. SAP
3. Manugistics
4. IBS
5. Retek
6. Manhattan Associates
7. Vastera
8. Aspen Technology
9. J.D. Edwards
10. Descartes

Execution Up, Planning Down

SCM license revenue by major application, 2001.
*Includes international trade and logistics.
APS = advanced planning and scheduling.
Source: AMR Research, 2002

Revenue 2001 ($millions)
Growth Rate
Supply Chain Execution
Order management
Inventory management
Transportation management*
Warehouse management
Event management/Visibility
Supply Chain Planning
APS distribution planning
APS manufacturing planning
APS production scheduling
APS supply planning
APS demand planning and forecasting
APS supply chain network design