What to Expect
Starting an e-business takes ideas, capital, and technical savvy. Operating one, however, takes supply chain management (SCM) skills. A successful SCM strategy is based on accurate order processing, just-in-time inventory management, and timely order fulfillment. SCM's increasing im- portance illustrates how a tool that was a theoretical process 10 years ago is now a hot competitive weapon.
Let's face the facts. In today's "high customer expectations, gotta have it, real-time world," it's no longer fulfillment as usual. Companies are racing to find the right combination of click-and-brick supply chains, which is why you need to understand that SCM isn't a technology issue but rather a business strategy for creating new, interesting opportunities. Before implementing an SCM com- ponent as part of your e-commerce strategy, make sure that you've invested adequately in tech- nology and in strong fulfillment. Also make sure that your company's order processing and its pick, pack, and ship operations are tightly integrated. What matters in the long run is execution.
In this chapter, we'll define SCM and ask the following questions: What will the supply chain look like in the years ahead? Do you know how to diagnose your company's supply chain problems—
and cure the root problem? Is your company ready to design and implement new supply webs?
Don't panic. The answers are here in the form of a supply chain roadmap.
And to make your job even easier, we also present eight steps to setting up your company's e-supply chain architecture.
Leading companies have the most innovative supply chains and are pulling ahead of their compe- tition at breakneck speed. The following companies illustrate the impact supply chain management is having on modern business.
Bergen Brunswig is a major pharmaceutical and medical/surgical supply distributor. According to CEO Donald Roden, SCM has become his company's business. "We do $13 billion a year and handle billions of packages," says Roden. "We're no longer in the distribution business, but actually in the business of managing the supply channel. This means not just moving products, but managing information, and the ultimate cost-effectiveness of that supply channel."[1]
Dell Computer is built on a vision of customer-responsive order fulfillment. This vision requires a flexible supply chain that gets it made and gets it there. "We already have a quick-ship plan for large customers, where we can deliver a machine within 48 hours of an order," Michael Dell explains.[2]
The frictionless flow of information through the supply chain is a central part of Dell's vision.
Procter & Gamble (P&G) plays its supply chain like a maestro plays the violin. P&G estimates that it saved retail customers millions of dollars through gains in supply chain efficiency. According to P&G, the essence of its approach "lies in manufacturers and suppliers working closely together…
jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain."[3]
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Boeing Aircraft was forced to announce write-offs of $2.6 billion in October 1997. The reason? "Raw- material shortages, internal and supplier parts shortages, and productivity inefficiencies."[4] In other words, poor SCM created havoc with production at Boeing, resulting in extremely unhappy cus- tomers.
Nabisco, the food king, disappointed Wall Street with slow innovation and sales growth. The com- pany's main problem was that its supply chains were not integrated. The supply chains for Nabisco Biscuit, the baked-goods segment, were handled by one software system, whereas the Foods Group division (LifeSavers and Grey Poupon) ran on another, resulting in unhappy retailers left waiting for Nabisco products to fill their barren shelves.[5]
During the Christmas season of 1999, Toys "R" Us couldn't commit to fulfilling customer purchases made before Dec. 24, even if the customer had placed an order before the retailer's Dec. 10 dead- line. The company grossly underestimated the number of online orders it would receive. Those customers whose purchases weren't delivered on time were offered the option of canceling their orders or receiving $100 credit to shop at Toys "R" Us stores. The order delays resulted in unhappy customers, a class-action lawsuit, and a settlement.[6]
Today, companies must speed up their responsiveness to satisfy market demands. The most pressing issue facing modern business is no longer about reducing manufacturing costs and making the highest-quality product. The issue is about delivering value to the customer—what they want, when and where they want it, and at the lowest possible cost. Companies need rapid, cost-effective, flawlessly executed demand fulfillment in order to support this new value proposition (see Figure 9.1).
Figure 9.1. Cause of the Supply Chain Management Boom
With e-commerce, the process focus is shifting inexorably outside the organization's four walls.
Process reengineering, quality improvement, and other trends have all addressed the inner work- ings of the corporation. The next opportunity lies in the fusing of each company's internal systems to those of its sup pliers, partners, and customers. This fusion forces companies to better integrate the interenterprise processes to improve manufacturing efficiency and distribution effectiveness.
The managerial challenge? Integration must be achieved while simultaneously achieving flexibility and responsiveness to changing market conditions and customer demands.
There is no doubt that supply chain issues are getting the attention of senior management and even boardrooms. How should an executive respond? By first initiating supply chain education and then planning, execution, and measurement—in that order. Supply chain education is needed to address the SCM market's lack of definition and structure. No clearly defined SCM business requirements or application standards exist; even its buzzwords are poorly defined and confusing.
The Basics of Supply Chain Management
Defining SCM
What will my supply chain look like next month? Next year? Ten years from now? Over the past two decades, SCM's evolution has been swift and sure. Before deregulation, every company had a traffic department responsible for deciphering the tariff and regulatory mysteries associated with moving freight. The emergence of the physical distribution management approach in the 1980s was an acknowledgment that transportation managers could not work in a vacuum, independent of their colleagues in purchasing, materials management, and warehousing. Logistics management evolved from physical distribution management to link sales order processes to manufacturing and distribution processes. In the 1990s, SCM represented a further expansion of logistics management.
In the simplest sense, the supply chain is a "process umbrella" under which products are created and delivered to customers. From a structural standpoint, a supply chain refers to the complex network of relationships that organizations maintain with trading partners to source, manufacture, and deliver products.
As you can see from Figure 9.2, a company's supply chain encompasses the facilities where raw materials, intermediate products, and finished goods are acquired, transformed, stored, and sold.
These facilities are connected by transportation links, along which materials and products flow.
Ideally, the supply chain consists of multiple companies that function as efficiently and effectively as a single company, with full information visibility and accountability.
Figure 9.2. A Process View of the Supply Chain
At its most basic, SCM is the coordination of material, information, and financial flows between and among all the participating enterprises in a business transaction.
• Material flows involve physical product flowing from suppliers to customers through the chain, as well as reverse material flows, such as product returns, servicing, recycling, and disposal.
• Information flows involve demand forecasts, order transmissions, and delivery status reports.
• Financial flows involve credit card information, credit terms, payment schedules, and consign- ment and title ownership arrangements.
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Interenterprise integration is a major focus of SCM. Since the late 1980s, businesses have focused on reengineering their internal processes to improve efficiency. Having succeeded, many organi- zations are now looking for other ways to gain competitive advantage, such as speeding up the time to market, reducing distribution costs, and getting the right products to the right place at the right time, cost, and price.
Surging demand, more frequent and shorter order-to-ship times, and in creasing customer-compli- ance requirements are now the cornerstone of SCM. Today's enterprises are rethinking and reex- amining their relationships with their suppliers, manufacturers, distributors, retailers, and customers.
The market leaders realize that the more efficient their relationships with their partners, the greater the edge they will have over their competitors. As these partner relationships increase in efficiency, they become more dependent on the information flow. As with any relationship, the more commu- nication there is, the greater the mutual dependence of the parties involved. This interdependency is creating sweeping changes in the competitive landscape. With the shift in focus from internal to external process improvement, competition of manufacturer versus manufacturer has become com- petition of supply chain versus supply chain. This change is forcing enterprises to solidify relation- ships with their own partners in order to remain competitive.
The SCM integration between Amazon.com and FedEx for distributing the book Harry Potter and the Goblet of Fire, one of the most popular books in publishing history, illustrates the challenges behind e-commerce distribution. Before the book was released, 350,020 copies were preordered at Amazon.com, making the title the retailer's largest advance order ever. The challenge became not only getting all those books to eager readers but also doing so in a single day. FedEx Home Delivery, in a deal with Amazon.com, delivered 250,000 copies of the Potter book the next day. To ensure a smooth distribution process, FedEx worked with Amazon for weeks prior to the ship date to integrate the firms' computer systems, to prepare labels, and to get the shipping data ready for
"the largest single day distribution event in the history of business to consumer e-Commerce."[7]
Clearly, a supply chain perspective transforms a group of ad hoc and often fragmented processes into cohesive systems capable of delivering value to the customer. Such integration requires supply chain process optimization, which means minimizing the total cost of the order-to-delivery process by trading off the costs of inventory, transportation, and handling. Traditional business process op- timization solutions succeed at minimizing a single cost, but they cannot handle the complex inter- dependencies that real-life business situations often create. Also, the business applications of the chain's players—manufacturers, distributors, transporters, and retailers—are designed to control the costs of the processes under the company's direct control, not the combined costs of end-to- end supply chain operations.
Until recently, no one player has had the information visibility needed to synchronize the entire channel. New versions of large-scale optimization applications make such process visibility possi- ble. Consequently, supply chains everywhere hold more than double the product inventory needed to provide acceptable customer service. In addition, products are typically handled five or six times, and transportation carriers struggle to maintain the profitability of their equipment and to maximize driver utilization.
A variety of technological and process innovations have permitted simultaneous improvements to a number of steps in the supply chain process. Supply chain planning and optimization are enjoying a revival. The new generation of supply chain optimization tools, including I2 Rhythm and SAP's Advanced Planning and Optimization, provide an integrated approach through which demand pre- diction, inventory stocking, and transportation decisions are made cooperatively together. This new generation of software applications manages supply chain tasks more than they do costs and also optimize service, quality, and time factors that can strongly influence customer satisfaction.
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An e-Supply Chain in Action
Cool Mint Listerine? All it takes to make and deliver it is syrup, a bottle, and a truck, right? Not quite.
The supply chain dynamics, illustrated by the relationship between Warner-Lambert (WL) and CVS show how completely technology can be woven into the entire consumer product supply chain.[8]
When you point and click on a bottle of Cool Mint Listerine at cvs.com or pick one off the shelf at the local CVS pharmacy, your act represents the culmination of a complex set of events and pro- cesses to ensure that the bottle is available for you. The mouthwash's journey begins in Australia, where a farmer sells his eucalyptus crop to a processing company. The company extracts the oil from the eucalyptus, then sells it to a plant oil distributor in New Jersey, which then transports the oil to WL's manufacturing facility in Pennsylvania.
Meanwhile, in a Saudi Arabian desert, natural gas is being drilled, producing the synthetic alcohol that gives Listerine its 43-proof punch. Union Carbide ships the synthetic alcohol to Texas, where it's refined into ethanol. The ethanol is shipped to the same WL plant in Pennsylvania as the euca- lyptus oil. In the Midwest, farmers grow corn that is converted to Sorbitol, a sweetener that adds bulk to liquids. The Sorbitol is also shipped to WL's Pennsylvania plant. All these ingredients are then mixed, and the finished product, Listerine, flows through pipes to be packaged for distribution.
The packages are shipped to CVS's warehouse and then distributed to its retail stores.
Imagine trying to manage and coordinate all these suppliers to ensure that every time a customer wants a bottle of Listerine, it's on the shelf or available to be distributed. The product order and its process, shipping, and final delivery constitute the basics of supply chain activity. It's a complicated process, one that consumers don't often think about but that successful companies understand is critical to their continued success. Many software systems are used throughout the supply chain cycle. CVS's merchandise transaction system calculates the exact quantities of Listerine needed at the company's pharmacy, generates a purchase order, and sends it via electronic data interchange (EDI) to WL. CVS's warehouse management system also receives the purchase order information so that it knows to expect the order.
At WL, the supply chain planning system analyzes manufacturing, distribution, and sales data against expected demand to determine how much product to make and consequently, how much of each raw ingredient the product requires. WL's capacity planning system schedules production and generates electronic purchase orders, which are sent to the company's suppliers. WL's SAP R/3 ERP package prices the order and also determines how much of the product to manufacture.
The same day, the ERP system transfers the order to WL's transportation planner to also determine how best to consolidate order delivery and which shipping companies to use to minimize cost.
Meanwhile, the delivery information plan is downloaded by the warehouse application for the ware- house staff to use for picking and packing purposes.
After the delivery arrives and the truck is unloaded, the CVS warehouse system generates an elec- tronic receiving notice, notifying the CVS accounts payable department of the receipt from WL. The warehouse system also uploads the receiving notice to the company's data warehouse for pur- chasing, sales, and forecasting purposes and to the warehouse management system, which routes the pallets to the appropriate storage location. The pallets will remain in this location up to 3 weeks, until they're shipped to fill orders placed by CVS stores. The demand cycle starts again, with another purchase of a bottle of Listerine.
The ultimate objective of the CVS-WL supply chain is to "scan one, make one." A company's market share and revenue growth are increasingly dependent on getting the right product to the right place at the right time. The goal is to provide exemplary end-to-end service that will satisfy even the most finicky customer. Why? Because customer satisfaction creates more demand, requiring the pro- duction rate increase for in-demand goods. The phrase in demand is critical, as some businesses build products no one buys.
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Some companies, such as WL, react quickly to customer demand by producing the goods customers want when they want them. Although a variety of businesses are already responsive, the supply chain can be streamlined further.
Supply Chain Investment Trends
Today, several forces are driving companies to expand Internet-enabled supply chain collaboration with trading partners:
• The trend toward worldwide dispersion of manufacturing and distribution facilities. —The de- mand for customized products for local markets has increased.
• Channel unpredictability. —New technologies are enabling firms to better manage local and regional demand, requiring sophisticated coordination of multiple distribution channels.
• Responsiveness over efficiency. —The need for faster and more customized deliveries has disrupted traditional inventory management policies and transportation choices.
• Companies' willingness to accept lower margins to maintain and increase market share. —Many companies are redesigning supply chains to drive out unproductive work and, consequently, eliminate delay, error, excessive cost, and inflexibility.
The advent of e-commerce has forced manufacturers and distributors to become more responsive to retailers and consumers. These same competitive pressures are forcing manufacturers to reduce costs, decrease order cycle times, and improve their operating efficiencies. As a result, manufac- turers are under pressure to better manage the supply chain and to improve manufacturing efficiency and logistics operations while remaining responsive to changing market conditions and customer demands (see Figure 9.3). The increasingly complex global relationships among suppliers, manu- facturers, distributors, retailers, and consumers compound these pressures.
Figure 9.3. SCM Investment Areas
The implementation of new technology helps to offset these pressures. SCM applications, built on new technology platforms, have enhanced the ability of organizations to integrate their processes through collaborative information sharing and planning. These innovations include the proliferation of Web sites, the introduction of point-of-sale devices to acquire data, the growth of data manipu- lation tools for large-scale data optimization, and the growth of data-dissemination capabilities.
Information is replacing inventory. Supply chain capabilities are rapidly growing to manage external inventory that companies can't see and don't own. Companies that are adept at managing infor- mation are less likely to carry costly inventory. Companies that don't understand how this trend lets them avoid inventory carrying costs will fail. The competition will move from a model of company versus company to one of supply chain versus supply chain. Learning to exploit the current chain- fusion trend will permit companies to achieve considerable advantage over their less adept com- petitors.
Internet-Enabled SCM
Strategies and structures vary from company to company, but the goal remains the same. SCM will be a focal point of business strategy during the next decade. With so many product options—from forecasting and purchasing to warehousing and shipping—and with countless variations in SCM terminology used relating to various supply chain functions, corporate managers often struggle to improve their SCM infrastructures. In order to relieve the confusion, it is important to understand that SCM's basics are the same whether companies make PCs or conduct financial transactions.
Interenterprise Integration
Interenterprise integration is the ultimate goal of SCM. As Figure 9.4 illustrates, SCM is evolving from the current enterprise-centric models, such as Nabisco in the food industry, to more collabo- rative, partnership-oriented models, such as Procter & Gamble's and Wal-Mart's continuous-re- plenishment model in the consumer packaged-goods industry. Leading-edge companies, such as Intel and Dell in the high-tech industry, have gone even further to create a streamlined supply chain model with mass-customization and customer-direct capabilities.
Figure 9.4. Three Supply Chain Strategies: (a) Enterprise Focus, (b) Partner Focus, (c) Direct Focus
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