A supply chain may still be a supply chain. What’s changed through is how you can – and need to – manage it.
Managing the supply chain has always been a critical yet challenging activity for almost all companies. This paradox was illustrated in a survey of over 200 companies conducted by Deloitte & Touche in 1998/99. Eighty percent of respondents admitted that using an SCM-specific application was critical to improving the accuracy, timeliness and flow of information in their organizations. Yet, just two percent said they considered their current supply chains to be world class.
One of the key reasons why so many respondents feel their supply chains are lacking is the continued rapid evolution of supply-chain techniques, processes and applications. This evolution—perhaps more of a “revolution” since that is what makes it so difficult to keep supply-chain management current, let alone cutting edge—will continue in earnest as companies begin using the Internet to further optimize their supply chains.
Within three years, the global value of business-to-business e-commerce is projected to exceed $2.9 trillion (all figures are in U.S. dollars unless otherwise stated). A large percentage of that will be channelled through Web enabled supply-chain applications. Over 40 percent of respondents in the Deloitte & Touche survey said they planned to strengthen their supply chains by implementing Internet-based relationships with their suppliers within 12 to 18 months.
Traditionally, supply-chain optimization focused on improving supply-chain processes within the organization by better integrating the activities of various functions. The Internet enables processes between organizations to be improved by more closely bringing together the four key supply-chain elements suppliers, manufacturers, customers and consumers in the following equation: connectivity = collaboration = visibility = speed. What does that mean in real terms? Here’s a case in point: On any morning after 4 a.m., any of Wal-Mart’s 7,000 suppliers can get into a Wal-Mart database and learn how many of their products each store has sold over a two-year period ending the previous night!
THE EVOLUTION OF SUPPLY-CHAIN MANAGEMENT
Supply-chain management is not a new challenge. However, the opportunities created by the Internet are new. The figure below illustrates the four major steps in supply-chain evolution.
The first, dating from the 1960s, has its origins in basic computerized applications, particularly Electronic Data Interchange (EDI). These applications automated routine transactions—such as purchase orders, shipping manifests, invoices, receipt notices and more—helping to make the supply chain faster, better and usually cheaper.
Step two was often a byproduct of the ERP (enterprise resource planning) systems that organizations implemented to achieve Y2K compatibility. Many companies added specific supply chain applications to improve dynamic planning, considering both capacity and material constraints, to achieve what is referred to as Advanced Planning Systems (APS).
This article focuses on steps three and four—those in the near and only slightly more distant future. The supply-chain techniques in these steps offer dramatically new opportunities even though they are not entirely novel. Many are adaptations of elements that have existed before.
The applications that characterize the third step of supply-chain evolution include:
- Web-enabled EDI
- Web-enabled Systems (ERP)
- E-procurement (MRO and Catalogue)\
- Auctions, exchanges and other infomediaries
Step four is based on more advanced techniques:
- Collaborative product design and e-manufacturing, and
- Collaborative planning, forecasting and replenishment (CPFR).
This article will discuss each technique, and include some background, proprietary data or survey information which readers may use to benchmark their own organizations’ activities. It will also discuss some real examples taken from extensive research of current supply-chain practices.
EDI was an early, but effective, supply-chain management technique. It is credited with a number of important benefits: manufacturing on demand, just-in-time delivery (JIT), vendor-managed inventory (VMI), electronic funds transfer or settlement (EFT), efficient consumer response (ECR) and, in retailing, quick response (QR). True, it is often difficult to put a precise monetary value on these benefits; however, the cost savings are easily quantifiable: paper and postage savings, shortened receivable cycles and fewer personnel for data entry, to name just a few.
However, traditional EDI has not been without its problems. It is normally suited to routine transactions only, lacks a decision-making capability, is inflexible, is not “real time” and, in many cases, is costly. For these reasons, EDI has been primarily for the big players whose value-added networks (VANs)—essentially, private communications networks between trading partners were a similar, though much more modest version of today’s Internet. (With its greater scale and number of users, the Internet is a cheaper alternative to VANs and, as a result, has already started to absorb them.)
However, despite being a similar—though much more powerful and sophisticated—application, the Internet won’t kill EDI. It will merely change it.
EDI will survive because of its functionality—companies still need high-speed, integrated, automated messaging systems. However the technology that enables that functionality will change (EDI software firms are already introducing “Internet EDI”) and become more streamlined. For example, traditional EDI requires separate software applications for each step of collecting, defining and organizing data; translating that information into an EDI standard; and then communicating it. With the Internet, all of those tasks can be done with just one piece of software—a browser.
Consider what this means at the simplest level of efficiency in a supply chain, such as the everyday task of shipping products to customers. A company transacts with its customers through purchase orders or point-of-sale. That, in turn, is linked to an invoice that flags a receivable, and the company schedules a carrier to deliver the product. For customers, however, the carrier represents the company’s service level, meaning that the company is only as strong as the middleman’s link to its customers. Similar relationships exist between the company and its carriers and buyers for its legal and financial transactions.
Here is an example of how one company uses Web-enabled EDI to optimize its supply-chain links to its customers.
Owens Corning, the company that invented glass fibre, is perhaps best known for its Pink fibreglass insulation. The company uses Web-enabled EDI for routine transactions. It allows its customers to determine the size of their orders based on cube/weight cost, or whether they want to build a truckload exclusively for their own order rather than split a load by using a less-than-truckload (LTL) shipment.
Here is how it is done. Owens Corning’s Purchase Express II™ is a fully secured, Internet-based order processing tool. It allows on-line pricing, truckload sizing, order entry, acknowledgment, invoicing and status checking. The EDI technology is invisible to customers who use the Internet to enter Owens Corning’s password protected extranet to place their orders. The software automatically converts the product quantities entered by customers into truck loading logic. The cube logic then calculates the percentage of a truck that each order represents and provides the customer with a visual display of a truck cube with its appropriate costs.
WEB-ENABLED SYSTEMS (ERP)
Most of the 200 respondents in Deloitte & Touche’s supply-chain survey reported that they use the Internet as a marketing and communications tool. One-third use the Web to communicate or share information with their strategic supply-chain partners, particularly about purchase-order entry/tracking and inventory replenishment. Within two years, almost 60 percent of respondents said they expected to be using the Web for that purpose.
Businesses expect that Web-enabled systems will provide real benefits (primarily, cost reductions and improved performance) in the areas of improved customer service, reduced inventory, lower supply-chain costs, improved delivery date accuracy, enhanced management control and decreased order-fulfillment cycle time.
Imation and Menlo Logistics have partnered in a real-life example of Web-enabled ERP (which also includes features of Web-enabled EDI). Imation, a 3M subsidiary, manufactures data storage and imaging products while Menlo Logistics is a full-service contract-logistics company. Their partnership involves the Internet, an ERP system (in this case Oracle) and EDI to schedule orders for carrier companies.
The figure blow illustrates how the process works. The upper left portion of the diagram depicts customers entering and placing their orders through ERP. The lower left portion shows how carriers access the system through EDI (which is still the convention in the transportation industry). That links them to individual customer orders through Imation’s Oracle System (ERP). Menlo’s EDI system connects to freight systems that allow the carriers to view their order status, size, weight and other details.
While the process diagram may be complicated, the Web page that customers and carriers use is much cleaner. It provides distinct, easy-to-find and logically organized links to give users with information on the things that matter to them: transit times, rates and routing information, shipment tracking, shipping location information, contingency shipping information and more.
The Oracle link provides a Web-enabled track and trace tool that allows users to search by customer order. Once the order is located, they can view the status of their orders by date and real time at each stage in the process—when the order was created by Imation, received by Menlo, sent to the warehouse, shipped, in transit and delivered. Users can also view the details of each individual shipment, even when a single order involves multiple shipments.
For carriers and customers, the system is ideal. Companies with high volume and/or multiple shipments for a single order receive even greater benefits because it frees their order entry and shipping departments from dealing with multiple carriers over the phone and scheduling pickups and other arrangements with each of them individually. Customers who want to know important information, such as their freight charges, can access that information as the load progresses, when it is complete or even before it is processed prior to shipping.
Another example, in this case using Web-enabled GPS (Global Positioning System), links satellite technology to the Internet. Cemex, a cement and concrete company operating in Mexico, the U.S. and South America, has arranged this marriage of outer space and cyberspace. Cemex was a fast-growing company (its sales jumped 40 percent from 1997 to 1998) with a serious problem. Its customers are construction companies that cannot afford to have work crews standing idle while waiting for concrete to arrive on the job site. Because Cemex had problems delivering its product on time, half of the orders it received were being cancelled, changed or rescheduled.
Cemex’s Web-enabled GPS provides the company and its customers with a central tracking system—or, if you prefer, the dynamic synchronization of operations. The system links customers to Cemex’s GPS-equipped fleet. The result? Since orders can be tracked wherever they are, deliveries now arrive within 20 minutes of their scheduled time. The company has increased its fleet productivity by 35 percent, and saved on its costs for fuel, maintenance and payroll. Most importantly, it has eliminated order cancellations.
E-PROCUREMENT (MRO & CATALOGUE)
Today, few activities are gaining as much attention as e-procurement. The reason is simple: It offers companies an extremely rapid payback (sometimes within two months) and allows them to address problems such as inefficient buying, redundant processes, non-strategic sourcing, too much paper and unreliable shipping.
Maintenance, repairs and operations (MRO) represents about 36 percent of the indirect goods and services a company purchases—typically at a cost of $79 per transaction. It includes purchases of office equipment and supplies; computer and IT equipment; piping, electrical and HVAC suppliers; legal and professional services; utilities and communications; catering and food services; material handling supplies; advertising and marketing suppliers; travel and entertainment. It includes everything down to and including the purchase of nuts, bolts, nails and screws.
The reason why MRO e-procurement is so successful and, therefore, so popular is that it performs four critical functions:
- It allows employees to do their own purchasing they’re doing it already, hence the high levels of “maverick” buying that exist in most companies. However, MRO e-procurement controls that through systems that automate the routing and approval process to arrange purchases through “approved” suppliers.
- It enables customers to place orders, configure-to-order a product, track progress through the supply chain and undertake all the other tasks consistent with order fulfillment. That allows the company to reduce its need for customer support staff while improving its timeliness and the availability of its service.
- It increases the company’s leverage with key suppliers. By combining individual employee orders with each supplier, the company can negotiate better volume discounts and better monitor the supplier’s performance.
- Finally, and certainly not least, MRO e-procurement reduces costs by cutting requisition cycle time, administrative bureaucracy, individual transaction costs and the costs of paper-based transactions.
On-line catalogues and self-service work best for non-routine transactions or in fragmented markets. These Web-based sites bring together many scattered buyers and sellers in one location and offer useful tools such as order status checking; shipping status checking; virtual design centres; instant live help; a tool for quoting costs; and a savings calculator. An example of such an on-line catalogue is SciQuest.com (“The Internet Source for Scientific Products”) which brings together the comparatively fragmented universe of scientific supply vendors and customers.
Many companies also maintain their own on-line catalogues. Cisco a computer networking company, receives 75 percent of its orders over the Internet, 80 percent of which are booked, credit checked, scheduled and manufactured automatically—without human intervention. 3Com (known for its PalmPilot computing organizers) credits its on-line catalogue for a 95-percent reduction in cost-per-purchase calls as well as millions of dollars in inventory savings.
Of course, computer and technology companies would be expected to utilize and benefit from Web-based supply-chain techniques. However, other types of companies have also achieved equally impressive benefits. UPS, the world’s largest parcel carrier, has a self-service Web site that enables customers to place, track and trace their own orders. The timely, seven-day-a-week, round-the-clock operation has reduced UPS’s need for live agents, call-centre contacts and long, interactive voice-response queues. It has also helped the company increase its customer satisfaction levels.
Livingston International Inc., a Canadian logistics management and customs brokerage firm, has focused on a clearly defined market opportunity, capturing an end-to-end order fulfillment business through its subsidiary, ProCure.com Inc. Livingston manages the logistics for the Canadian Pharmaceutical Distribution Network (CPDN). Its ProCure.com Web site brings together 14 hospitals (the customers) and 28 CPDN manufacturers (the suppliers).
ProCure.com is a unique on-line catalogue which hospitals can use to purchase pharmaceutical supplies. The site enables a hospital to place a single order for multiple products from multiple manufacturers, even if each has a distinct pricing and service requirement. They can also order narcotic products that require a “chain of custody” (ProCure.com is the only government- and RCMP-approved vendor of narcotics over the Internet). All of these purchases can be made via a Web-based browser, a point-of-scale device such as a bar-code reader, or a PalmPilot.
The figure below illustrates how the process works. Each hospital’s order is certified and validated before being sent to the appropriate supplier. The hospital is sent a shipping notice and, when it receives its order, sends an order confirmation back to ProCure.com. Similarly, shipping notices and order confirmations are also exchanged between ProCure.com and the pharmaceutical suppliers.
Health Canada has approved the system’s security components that guarantee privacy and ensure that transactions between senders and receivers remain confidential. The system includes authentication by verifying the customer’s identity before orders are processed. Each transaction received is matched to the transaction that is sent, and proof is provided that transactions actually took place. ProCure.com is exploring ways to further strengthen its security components, including a digital signature scheme for pharmacists or practitioners to provide a “signed receipt” for the drugs they have ordered.
AUCTIONS, EXCHANGES AND OTHER INFOMEDIARIES
Infomediaries are virtual third parties that bring buyers and sellers together. There are many of them and they facilitate business-to-business, business-to-consumer and consumer-to-consumer transactions.
Exchanges provide suppliers with an opportunity to expand their customer bases, manage excess supply and reduce their transaction and marketing costs. Buyers, on the other hand, get to expand their bases of suppliers, find better prices and lower their purchasing costs. The process is particularly effective in matching fragmented suppliers and buyers in markets for near-commodity items. It works in real time, with a bid-ask matching process, and provides market-wide price determination and clearing.
E-Steel, The Global Marketplace for Steel, is one example of an exchange. Users enter the system and work their way through a series of Web screens, some of which are described below.
- Create inquiries to buy—buyers select the product type they wish to purchase and specify particular details about that product
- Commercial terms buyers specify sales terms such as price and delivery times
- Seller—buyers select the “audience” or potential vendors who will be asked to bid on the transaction
- Confirm inquiry—when the buyer’s price and sales terms are matched to those of a supplier, the buyer receives an order confirmation
- Tracker—buyers can enter the system to track their order as it moves from the manufacturer to them.
In 1993, the National Transportation Exchange (NTE) began providing a real-time, neutral, interactive electronic commerce system that enabled members to improve their transportation activities. Through the Web, the NTE provides real-time services for shippers tendering loads and for transportation carriers tendering space available for freight. Currently, the NTE has 350 users (shippers, consignees, contract and dedicated logistic forwarders and brokers) with a total network of 100,000 vehicles and 60,000 originating and destination locations.
Here is how the NTE works. Shippers who face the problem of having orders that make up only partial truckloads input details of their shipping orders to the NTE. At the same time, carriers with capacity to fill, input information about their rote plans and available space. The NTE then matches shippers to carriers, based on space, order size and shipping terms (such as price). It sends a list of loads to each carrier, while sending shippers the necessary information about the carriers who will serve them. The NTE pays the carrier for the load, while invoicing the shipper.
Despite never touching the product, the NTE transacts 380,000 loads per year. Shippers participating in the NTE report increases in fulfillment speed, reductions in shipping costs and savings of five to 40 percent. Carriers claim 30 to 50-percent increases in asset utilization, wider customer bases and savings of between 15 to 30 percent.
On-line auctions are similar to exchanges in that they provide an interactive mechanism to match buyers and sellers. They also provide a means of testing prices and are expected to soon become one of the biggest areas of electronic commerce. Forrester Research, for example, predicts that by 2002, over half the on-line transactions will be conducted through auctions.
Auctions work best with unique, specialized or perishable products and services. One example is iMark.com, which says that it is in the business of simplifying surplus equipment trading worldwide. Through Web sites such as these, companies are able to deal with excess capital equipment, used products and non-salable returns.
A number of companies have been successful with on-line auctions. Ingram Micro, a worldwide distributor of computer technology, products and services, turned to an on-line auction to relieve its problem of rapid product cycles and fluctuating inventory levels. Caterpillar, the heavy construction equipment manufacturer, reports that it has achieved 10-percent savings through on-line auctions. United Technologies, a company serving the aerospace and building industries, projects auctions will enable it to achieve 35-percent savings.
COLLABORATIVE PRODUCT DESIGN AND E-MANUFACTURING
Supply-chain techniques in the fourth step are distinguished by the fact that they are collaborative. Two or more companies in the supply chain work together to reduce costs and increase efficiencies across the entire supply chain.
Within the manufacturing sector, attention has shifted from rationalization to increasing throughput, gaining greater agility through lean manufacturing, configure-to-order, concurrent engineering and collaborative product design, and outsourcing non-core functions. Manufacturers are using the Internet to help them achieve some of these goals.
For example, General Motors has provided its dealers with a variety of tools that allow them to become Web-enabled. Here is a description of three of them. GM Access, a configure-to-order tool that performs historical modelling of trends, helps dealers determine the number of vehicle models and features they will order based on past popularity. Suppose, however, that a customer wants to take immediate delivery of a vehicle that isn’t on a dealer’s lot. The dealer can use GM Buy Power, a Web-based network that provides a “live” view of all GM products available at a given time, by vehicle type and by dealership, to locate vehicles that match the customer’s specifications across GM and its dealerships. And if none exists, the dealer can use GM Prospect, a point-of-sale, spec-to-order tool that allows the sales associate to input the customer’s order directly into GM’s production facilities.
Amkor Technology, a semiconductor assembly and testing company, develops products in several plants. Each one simultaneously produces subassemblies that may be combined in a single order that is integrated after each plant has completed its assembly. Amkor worked with Camstar, an organization that focuses on plant floor operations, to develop a totally integrated factory solution that would optimize activity from order entry to product shipping.
Through the Internet and Camstar MES (Manufacturing Execution System), Amkor plants can report their yield for a particular day, before it is completed, through a Web-rollup by Bill of Material (BOM). This has enabled Amkor to increase the capacity of its plants, while decreasing cycletimes and downtimes. These efficiencies have enabled Amkor to run leaner, with fewer staff, while improving both quality and control over its products.
COLLABORATIVE PLANNING, FORECASTING AND REPLENISHMENT (CPFR)
Exchanges may be thought of as “focused” linkages between organizations to achieve specific objectives. A fuller realization of this technique lies in full virtual integration on a real-time basis, something most often referred to as CPFR.
In essence, CPFR involves fusing each company’s internal systems to those of its suppliers, partners and customers. To do this, however, all players must use a common “language” for their technological communications and have integrated Internet, EDI and other internal information systems (guidelines to facilitate and manage this process are available at www.cpfr.org).
The figure below illustrates why CPFR is attracting such interest. This simple matrix of the supply chain illustrates that the greatest opportunities lie in extending planning and delivery between companies across the entire supply chain. The order, sourcing and manufacturing activities that support this initiative are primarily routine transactions that can all be Web-based.
The figure also illustrates why ERP systems have done little to extend supply-chain connectivity. ERP applications are traditionally focused on processes within organizations, not between them. That is changing, however, as ERP vendors are introducing Web-enabled products to help support companies making their collaborative linkages.
Heineken USA Inc., the North American distributor for Heineken breweries, is one of the most exciting examples of collaborative supply-chain activity.
Heineken faced a North American supply-chain problem. It took the company three months to produce beer in Holland, ship it in containers to North America and then manually process orders for distributors in each state. Since beer has only a six-month shelf life, Heineken’s product was spending half of that time in the supply chain!
Heineken USA’s primary customers are 450 distributors. However, Heineken is a relatively small supplier for them (typically representing between two and 10 percent of a distributor’s business), something that limited its options for improving its supply chain. It would be too costly, for example, to install PCs or leased lines between it and its suppliers, and the distributors would balk at installing systems to run EDI setups for such a small component of their business.
Heineken’s solution was to use the Internet. It set up a Web-based system that its distributors could access for information about suggested forecasts, marketing and promotions, and order tracking and tracing. Distributors can also input information that allows Heineken to extract data regarding sales and inventory reporting, confirmation of forecasts or orders placed by distributors.
The resulting collaborative supply chain is widely recognized as state-of-the-art (it has won the Gartner Group ieC Award, VICS ’99 Best-in-Class Logistics, and the 1999 Food Processing Achievement Award). It works because it is a single, integrated plan extending across Heineken’s operations and distributors. It uses a common plan to drive all initial forecasting, which distributors can then receive and adjust. These collaborative forecasts then form the basis for orders, with seamless communications across sales, orders and inventory.
Because the process is Web-based, the infrastructure costs for Heineken have been comparatively low. However, the benefits have been significant. The company’s forecasting and planning ability has improved. Inventory turns have been reduced by approximately 10 days, a result of the automated, self-regulating inventories and order management enabled by CPFR. Order lead times have been reduced from three months to three to four weeks and the company believes they can be reduced further still.
There are also a number of softer, yet no less important, benefits. For example, Heineken’s customer service ratings have doubled since the system was introduced. Two-thirds of its distributors rated Heineken’s service as either excellent or good in 1999; four years earlier, just one-third of them felt that way. The effectiveness of the system has freed up time for Heineken’s sales team, giving them more opportunity to focus on selling rather than chasing tardy orders.
SUPPLY-CHAIN TRENDS TO WATCH FOR
The e-based solutions discussed in this article are real, highly effective new approaches to supply-chain management. However, the objectives that underlie them are the same ones that have always been a the heart of supply-chain issues. The nuts and bolts (Pos, invoices, ASNs and BOMs) are still the same; they are just being handled faster, better and definitely cheaper through the Internet.
What will supply chains be like in the future?
E-procurement, with its potential for large savings and fast paybacks, will continue to draw immediate attention from many companies> Routing transaction features will follow as one of the next areas of focus; watch for things to move into the mid-market.
As companies perfect a way of handling returns for e-commerce transactions, consumer confidence in e-business will increase dramatically. Meanwhile, virtual fulfillment companies will become more tangible. Amazon.com, for example, is currently spending $300 million to build three million square feet of warehouse to store its products.
There will be more virtual third-party logistics providers (3PLs) and new fourth-party logistics providers (4PLs)—essentially, the 4PLs will manage the 3PLs.
What should companies do when considering where to invest in their own supply chains?
First, remember that tangible methods of optimizing your supply chain will reduce your costs, while maximizing your service levels. Supply chains can be optimized through e-business by automating routine, non-routing transactions and by enabling greater collaboration with your customers and suppliers. Second, your EDI investment isn’t dead; the techniques described above illustrate how you can build upon it. Finally, how far you go in energizing your supply chain depends solely upon how much you want to try to do.