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The Value of Viewing Everything as a Supply Chain

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This chapter is from the book
James Cortada explains why Supply Chain Management is a good thing, and tells you about the six features of economic activity have compelled firms to pay more attention to SCM than ever before.
This article is excerpted from James Cortada's book, 21st Century Business: Managing and Working in the New Digital Economy.

To begin with, we need a working definition of SCM because its definition varies depending on which constituency discusses it. Supply chains have also become increasingly larger, encompassing more aspects of an organization's work as it became more possible to do so. Before exploring SCM, managers and workers in the Information Age have to face a basic problem with the subject, namely, coming to an agreement about what it is because of the fact that SCM is currently changing so rapidly in scope and form. For my purposes in this chapter, I define SCM as the activity that links and optimizes the processes, tasks, technologies, and terms of operation necessary to design, acquire components, and bring a product to market, to sell and deliver it, and to service it. The flow from one end to the other of such a supply chain can also involve just a service, such as dry cleaning or mailroom management. The origin of SCM came from managers breaking down the walls of highly optimized functional silos, such as sourcing, warehousing, transportation, and manufacturing, to manage the linked processes for an optimized result across the chain. The concept implicitly included the idea of sharing information about the logistics of raw material to finished products among all handlers. For example, Ford Motor Company can tell its suppliers of tires what cars it will build next week, allowing suppliers to look at the production database in a Ford computer system to know what kinds of tires to deliver each day next week. The concept expanded to include backward forecasting, that is to say, retailers or customers telling vendors and suppliers what they thought they needed.

If this sounds very much like the electronic data interchange (EDI) of the 1970s and 1980s, it is because EDI taught participants in SCM about the value of information shared across multiple enterprises using telecommunications and computers, particularly in manufacturing industries. EDI and the sharing of information and knowledge facilitated the expanded use of SCM. Its consequences for how organizations are formulated and tasks performed are far more extensive and, thus, more critical to the successful management of a company than ever before. It is why the overwhelming majority of senior executives today must be familiar with the whole subject of SCM. The historic trend of the past three decades has been from some exchange of data (such as EDI) to sharing of all information related to the design, manufacture, movement, selling, and servicing of goods and services. Collaboration increases as one moves toward SCM approaches. Today we can see collaboration among several companies in the design of new products; we see this all the time with automobiles and their many components, often involving hundreds of firms scattered across the globe. American clothing manufacturers working with suppliers in Asia and Israel, for instance, represent yet another highly visible case. So this is not a topic that just popped up in the past several years.

The theory of why SCM is a good thing holds that when properly implemented, collaboration between trading partners can reduce operating costs and capture additional market share beyond what they could otherwise do on their own, that is to say, within the walls of their enterprises. By tying together the processes of many departments and firms into one megaprocess, additional opportunities for efficiencies and speed can be realized. In practice, the theory works for several reasons. First, most firms, both large and small, have varying degrees of understanding about how to apply EDI. So they know what technical traps to avoid, they have learned to share information, and have realized some efficiencies. This is a very basic component of modern management practice.

Second, most realize the value of speed to market with either new products and services or faster delivery. Increasingly, managers have had personal experience with both. While implementation is not always a positive experience because of the complexities involved in coordinating the development of processes, implementation of technologies, and creation of meaningful metrics of performance, nonetheless, the end results are often positive, even essential.

Third, a generation of managers and their staffs now have experience with process management practices, a crucial ingredient in the development of coordinated activities across multiple departments and enterprises. Put another way, a company cannot have supply chains across multiple organizations operating as sporadic activities. They have to be processes because of the high degree of coordination required to make them work. This means managing activities with the rigors that come from process management and organizing one's organization (people and assets) around such processes. Structured activities become the name of the game for all the same reasons that common language, legal practices, and predictable government policies were always crucial to the successful operation of "for profit" enterprises and capitalist economies. Certainty, predictability, and repeatability are hidden features essential to the effective functioning of processes.

Six features of economic activity have compelled firms to pay more attention to SCM than ever before. First, consumers acquired more power in the 1990s, demanding specific goods and services as a result of their increased purchasing capabilities and access to knowledge about these. As with some of the other features of the economy, use of the Internet stimulated these changes. As a result of this shift in power, we moved toward a pull approach to selling goods, making it attractive for customers to come to vendors. Second, already mentioned in this book, but appropriate to consider again at this point, is the historic shift from mass marketing to mass customization. This shift required more electronic transactions than ever (e.g., purchasing, coordinated manufacturing, and delivery), leading to fewer physical activities per sale (e.g., building and shipping products to stores, then again to customers). Third, markets became geographically larger as firms crossed international boundaries to sell to new sets of customers. Many business professionals refer to this as globalization, but in practice it is more a matter of building the capability to reach new customers with messages and offerings across a larger land mass, either within a domestic market or across national borders.

These first three features concern how the playing field in business has changed in recent years. The second set of three features concerns how the first three were addressed within the context of SCM. Our fourth feature concerns the enormous amount of activity on the part of managers to make their traditional supply chains far more agile and flexible so that they can deliver newer and more varied offerings more quickly. More specifically, for product companies, shorter product life is now driving the need to get to bigger markets quickly before a product dies. Fifth, trading partners within the supply chain have been forced to collaborate in the development and execution of their business plans. That trend emerged as perhaps the most radically different management practice to emerge in the second half of the twentieth century. Sixth, with so many firms now publicly traded, the pressure of stockholders around the world for continuous improvement in efficiencies and overall economic performance has been unrelenting. In some cases this pressure has increased recently, particularly since the end of the Cold War.

These six trends were listed in the past tense as if they had already taken place because many of the world's largest corporations have experienced these, as have many of their suppliers and customers. Things that have already started to be done, of course, lend themselves to study for best practices, while those late to this game have the potential of leapfrogging earlier mistakes, cutting straight to best practices or to outsourcing to those who know what they are doing. As market activities become more closely connected, thanks to growing standards of living around the world, mass media, and to the Internet, these six trends can be expected to become more the case than in the past. It is very clear that this is an economic process still underway.

A variety of recent studies identified the benefits of modern supply chain management practices. The studies provide strong evidence that the new SCM processes, which are characterized by the extensive use of information technology, are delivering tangible business benefits. Two examples illustrate the point:

  • A study by Pittiglio Rabin Todd & McGrath demonstrated that firms with effective supply chain management processes yield an average of 7 percent cost advantage, and a 40 to 65 percent advantage in cash-to-cash cycle times over less effective firms. And, of course, such firms hold on to 50 to 80 percent less inventory, in itself another major source of economic benefit.

  • A study by IBM and the Financial Times demonstrated that manufacturing firms could cut as much as 60 percent of their procurement staffs or improve availability of stock stocks by several percent without additional inventory costs by several percent.

What experts will tell you is that SCM processes go in faster than Enterprise Resource Planning (ERP) approaches, often in less than one year, frequently building on existing EDI-like infrastructures already familiar to trading partners. One can, for example, construct SCM processes with little or no dependence on such massive projects as ERP implementations. One can roll out new franchises to gain economies of scale. One can use SCM to create industry standards, as was necessary, for example, in the banking industry in the 1950s when it became one of the first to create industry-wide EDI practices for the exchange of money.

Studies and work done by IBM's own consultants, working with clients implementing both SCM processes and the technological infrastructures that underpin these demonstrated the possible kinds of economic benefits firms were beginning to harvest. For example:

In the area of cost savings:

  • Reduced inventory levels ranging from 10 to 50 percent (consistent with historic orders of magnitude seen with the original round of EDI implementations in the 1970s).

  • Reduced markdowns and scrap of 40 to 50 percent (a bit higher than when companies reengineered their manufacturing processes in the 1970s and 1980s with Deming's quality management practices).

  • Increased utilization of resources in the range of 10 to 20 percent due to inefficiencies (very consistent with what we see with reengineered processes, or those which are incrementally improved over several years).

In the area of customer service:

Improved reliability of delivery of goods from levels in the low 90s to 99.9 percent (not radical changes but continued improvements due to access of information on individual shipments at all points in the journey of a product).

  • Reduced outages of inventory down to 5 to 0 percent without increased costs of carried inventory (benefit made possible by shorter lead times from demand generation to fulfillment).

  • Reduced cycle times of 10 to 20 percent (typical of moderate to well redesigned processes).

In the area of business growth:

  • Increased market share (due to better execution and broader reach).

  • Increased customer retention with 3 to 7 percent increases in sales (target marketing combined with mass customization and speed of delivery represent a new configuration of capabilities evident in the 1990s).

  • Increased flexibility to change based on new circumstances (caused by management teams willing to change their practices and to exploit already-installed technical infrastructures).

  • Increased capability to reaching markets faster (e.g., by providing online services).

So far we have seen that as supply chains extended further back into the product and service development arena and into customers with flexibility, accuracy, and speed, benefits occurred through cost savings, improved customer service, and business development.

Are there any rules of the road emerging on how to get this done? Veterans of the process speak about understanding the positive impact that changes in one's supply chain management processes have on their competitiveness. It is not just simply an issue of lowering costs and improving customer service. Those experienced with SCM have found that there is a counterintuitive "virtuous cycle" that occurs when inventory is taken out of a supply chain. In order to function, process and quality have to improve, collaborations with trading partners and customers rule improvements, and speed becomes critical. When properly done, the results are lower costs, higher customer service, fewer writeoffs, and fewer assets required for a given level of sales.

Second, it is increasingly becoming evident that execution and decision making must be tightly coupled with all involved trading partners to ensure that the whole works as desired. In recent years Dell Computer has become a classic example of this at work. However, increasingly, other firms have learned to link execution and decision making. To a large extent, the decision of some.com firms to expand to additional offerings emerged out of such a linkage. The capability, for example, of Wal-Mart or Amazon.com to play on the Net are clear examples.

Third, senior executives point out that SCM does, just like ERP, fundamentally change how many tasks are performed. The effects on policies, practices, and internal politics is nothing less than profound. The cases of Amazon.com, eBay, and Priceline.com come to mind as modern examples of this phenomenon at work. In short, what we are learning about ERP implementations applies to SCM, even though the latter go in much quicker than the former because managers tend to implement them in piecemeal fashion. A piecemeal approach is not possible with most ERP software tools, where so many elements are integrated by design within their software packages by the vendors who sell them.

By definition, supply chains increase in value as they expand, becoming increasingly comprehensive and reaching more customers. That is why I argue that everything management does should be viewed as potentially in a supply chain. A question for us to ask always is how a specific function of the firm can be woven into the fabric of the supply chain. In other words, would a particular activity be more effective or efficient as a formal part of a supply chain management process? Loaded into such a question are two suppositions: that the real work of the firm should be devoted to selling and servicing customers, and that such activities need to be disciplined, and often routinized.

If you accept my proposition about the significance of supply chains, then what questions might one want to ask as he or she modernizes their SCM? Five increasingly are on the minds of executives who remodel their SCMs.

  1. Do you have a supply chain management strategy? To a large extent this is a question of becoming aware of what supply chain-like activities an organization is already involved in, possibly also what these should be. By the end of the 1990s, organizations of any size were either managing their own SCMs or were participating in someone else's. The issue, therefore, is to understand the state of one's own use of a supply chain and link it to the overall business strategy of the firm. Managers want to understand as well what value their supply chain delivers. With an appreciation of existing circumstances, it becomes easier to answer a second question.

  2. What would be the specific advantages to a firm if the existing supply chain management process were expanded or made more comprehensive? Before reinventing the world, it is appropriate to see if the existing one can be leveraged to yield further results without total reconstruction. The effort to invigorate an existing supply chain can range from more use of the disciplines of SCM with suppliers and product developers all the way to expanded marketing to other geographies through partners linked via telecommunications, such as with EDI or the Internet. A caution at this point is the need to understand how differing SCM improvement activities may interact with each other to reinforce or cannibalize each other.

  3. Are there first entrant advantages to be gained through the expanded use of SCM, or does one have to have an SCM just to remain relatively competitive and profitable? The answer to this question varies by industry and company. The answers are not obvious or assumable because circumstances can change, often rapidly, as I suggested in the first two chapters of this book. When Ford and GM both announced on the same day that they were going to convert their procurement processes rapidly to Internet-based trading hubs, they changed the future shape of thousands of suppliers' supply processes in one bold stroke. So managers have to constantly ask the question and not be surprised if the answer keeps changing. The question is an excellent one to ask of an existing bricks-and-mortar firm, although increasingly it is the sort of question that drives a creative entrepreneur to a venture capitalist because of first entrant opportunities. People serving as brokers—intermediaries—in the world of e-commerce, for example, fit into this latter category. They can operate only if they have a supply chain built around what they do. Dell does not manufacture personal computers, but commissions others to do so, even making IBM part of its SCM process because of the components built by Big Blue. Intermediaries sell insurance online, making mainline insurance companies providers of insurance to customers brought to them via the Internet, often leading to rapid consolidations of market share in the hands of a few entrepreneurs.

  4. What technical capabilities and infrastructure does one need to pull it off? The underlying message is that technical wherewithal is often more crucial today than the rationale for SCM. Putting all the technical pieces together is daunting, even for a large multinational corporation with its army of computer and telecommunications experts. Managers often outsource some technical functions because building one's own proves too expensive or too slow to accomplish. Increasingly, they also find they must either concentrate their energies on industry-specific capabilities or go buy those as well so that they can expand into markets otherwise closed to them. Partners and candidates for mergers and acquisitions are often chosen in part because of their technical capabilities and the information technology infrastructures they already have in place.

  5. To what extent do we have the knowledge and capability of operating an extended enterprise? It is not enough to read the writings of Harvard Business Review authors on the subject; you have to know how to do it. Opportunities for extending this brave new world have been enormous and varied:

    • Managing across traditional boundaries in response to new market opportunities

    • Getting rid of old supply chains or competitors in response to the opportunity of providing new goods and services

    • Optimizing and managing networks and processes (insourcing for others), and a newly emerging area called reverse logistics (e.g., taking in repair work for other product providers).

The normal way of describing a supply chain is constrained, even inaccurate. Usually, one views it left to right, perhaps because in the Western World we read our texts left to right. So, you inevitably will have a picture of raw materials or product development on the left side on a piece of paper and the customer on the far right. SCM is then depicted as moving from raw material through a chain of activities to end in the hands of the customer. Information flows then are seen moving either from right to left (what the customer wants) or left to right (what we are delivering to market). However, what information has done is to make the management of a supply chain bi-directional and simultaneous. That is to say, information moves back and forth, left to right, right to left, and also within each major step left to right, right to left at various speeds, and does this in various types of supply chains which themselves are evolving, as illustrated in Figure 5.1. Understanding the flow of information, when it is used, and how, helps management win control over the supply chain and answer the five questions in ways that will determine a course of action.

Figure 5.1 Evolving Supply Chains

Most managers know that operating a supply chain well means focusing on efficiently executing steps they have long understood: product development, logistics, market

ing, purchasing, and so forth. The new element in today's SCM is its holistic quality made possible by the increased use of information technology. Because of what telephones and computers make possible, competing on operational excellence—the heart of SCM—means being very good at organizing around supply and demand chain processes. It means being very good at rewarding suppliers for their efficiencies and replacing them for noncompliance with the SCM as the megaprocess, the way of doing business with vendors. It calls for synchronizing SCM based on a far more intimate understanding of customer demand than one ever needed before. Keeping score does not change from what it has always been. Remember to focus on the basics: inventory turns, service levels, profit margins, market share, inventory levels, and total landed costs.

Thus, at the tactical level within that part of SCM, it is not information technology or strategy that are the central issues, rather, the traditional activities. They include forecasting and demand planning, sourcing and procurement, order fulfillment and service, distribution, warehouse operations, transportation, production logistics, and accounting. While these change as a company integrates them tightly into an SCM, they remain, nonetheless, the stuff of which business is made. That is the good news. The difficult news is that they have to be integrated more tightly and often more quickly to deliver the kinds of benefits individual components did decades ago. Again, as with so many other aspects of business activities today, it comes down to a footrace. Who gets there first, wins. In this case, winning is creating a new value proposition that works in the market.

Before we move to a discussion of emerging value chains, a subject directly connected to SCM, there remains one question concerning technology and supply chains: the role of the Internet or, as we are becoming more accustomed to saying, e-business. Does the Internet change things for a supply chain? The answer today is far clearer than it was even in the mid-1990s. The answer is a resounding yes. The Internet has created differences that are both important and subtle.

From the start of the 1970s and continuing through the early 1990s, firms usually had a dedicated technical infrastructure with private networks. Today, a company is more likely to have a network that is the Internet with shared global networks. Prior to the 1980s, most firms did not share a great deal of electronically-based information outside the walls of the enterprise. When a firm did share, it was most often with suppliers and always at some great expense, usually a third party or Value Added Network (VAN); networks were not cheap to build or maintain. Today, information is shared with whomever it makes sense to share it with, on a global basis, yet with controls over whom the firm authorizes to participate in access to its electronic files. Teaming used to be intracompany, with outsiders difficult to manage. The same was true for teams made up of employees from the same firm scattered around the country or world. Today, intracompany teams are very common, along with others made up of employees from widely dispersed geographic locations within the enterprise, following the flow of information, and coming in and out of departments more frequently than in the past. Control over who had access to a corporate network used to be physical or through passwords on internal systems. Today, an individual is given permission to access, shares information via authorization, and uses complex security systems to constrain who has access to sensitive data. Process management used to be a question of all process participants sitting around a table to discuss whatever issue was on the agenda. Today, you see such things as virtual product modeling, simultaneous engineering on a global basis, groupware for collaboration, and now effective video conferencing, Internet hookups for voice, combined video and text, and the use of such IT tools as Lotus Notes. They work, they are cheap, and people increasingly like them.

I suggested earlier that the world was changing; this is a good place to remember where and how. The Internet has a direct influence on any SCM in five areas: globalization, digitalization, compression of time and space, convergence of everything from products to industries, and empowerment of employees and customers. We do not need to cover this ground again. However, we do need to keep in mind that the Internet reduces distance, time, and physical barriers on the one hand and, on the other, increases speed, access, and responsiveness. These characteristics of the Internet are just as evident in SCM as in any other aspect of business practice where communications and information technologies are in evidence.

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