Creating the Optimal Supply ChainAs global competition and advancing technology render borders irrelevant and linkcompanie...
from vendors around the world and delivering them to global consumers as fast and inexpensively aspossible.Flexibility in ...
changed how they manage this critical part of the business.” According to Matthesen, that’s largelybecause most company ex...
hard data to work with. It’s also hard to ask your customers, since they are likely to respond that theywant higher servic...
different, notes Lubkeman. That means the efficient frontier for each is very different,too. The goal of any company, then...
who have paid a different price and to whom youhave made different promises? “It is inefficient tochop up the supply chain...
correctly, not using the right technology; there are avariety of reasons to explain why some companiesare not on it and ot...
provide optimization solutions for retail customers.HighLowLow HighCostservice level“I have directly seen how the smart ap...
“I don’t think they understand it,” he says. “I thinkthey want to improve their supply chain, but I don’tthink they know t...
to quickly respond to demand, rather than relyingon forecasts.“CEOs need to engage with their managementteams to understan...
profit differentiation and improved marketing fortheir success have now embraced integrated supplychain management as a pi...
of the Fishman-Davidson Center for Serviceand Operations Management, cited a study of theU.S. food industry which estimate...
of supply chain elements and a high level of collaborationare among the primary criteria for creatingsuccessful supply cha...
finer and finer segmentation of customer needs, inorder to meet the demands of a growing generalconsumer trend that says, ...
or tracking everything from purchase orders tophysical logistics of inventory and tracking the flowof funds among business...
retail space for items that would sell, for example— you have “a lot of waste built in when you makean error in your suppl...
pieces, you end up not accomplishing a lot.”Taking the Holistic ViewThe experts agreed that any supply chain has itspartic...
typically, “Poor communication between businessunits and disjointed legacy systems prevent coordinationand alignment of so...
as much an art as it is a science. Most organizationsare not managing the supply chain holistically, andhow you coordinate...
can provide information to Procter & Gamble abouttheir store because their incentives are aligned here— P&G doesn’t want i...
can give back at lot of money at the end of theseason in order to reduce inventory and cut losses.”As a supply chain consu...
basic needs and can be sold in a wide range ofretail outlets like grocery stores, are characterizedby: predictable demand ...
software business designed to improve supply chainforecasts and help companies make better decisionsabout their inventory ...
equilibrium when everyone is acting in a collaborativefashion.”Which begs the question: Despite increasingattention paid t...
high degree of communication, the one person youcan’t coordinate with is the consumer…. With supplychain management, you h...
flexible and integrate disruption risk managementinto every facet of supply chain operations.“So many companies are trying...
Wharton generally agree that managing supplychain disruptions revolves around two goals: first,to thoroughly understand th...
terrorist blows up your building.”Flexibility in the Face of Disaster: Managing the Risk of Supply Chain DisruptionDisrupt...
about these events prior to their occurrence,” hecontinues. “Only after the event when it is often toolate do they want to...
Supply chain experts suggest that the key to firstmitigating and then managing disruption risks isunderstanding a company’...
and CPFR (Collaborative Planning, Forecastingand Replenishment) methods allow for improvedinformation integration and supp...
for each key process to identify vulnerabilities,triggers for these vulnerabilities, likelihood ofoccurrence, and mitigati...
vulnerabilities as well as its overall risk architectureconfronts disaster? Consider the following example.In March 2000, ...
The company did not become aware of the supplyproblems for weeks, by which time its abilityto meet customer demand had bee...
that companies should follow to achieve all threeTriple-A goals — a veritable blueprint for disruptionrisk management thro...
production processes; create different supplychains for different product lines, to optimizecapabilities for each.”• Align...
products and product lines in order to understandwhich ones are more time sensitive and critical thanothers. “If I’m going...
redundancy, companies have to ask, “How muchprotection can you take? It’s like insurance — onlysome things are worth insur...
often split their shipping business in order to buildtransportation relationships with more than onecompany. “People do th...
review your supply chain plans and risk assessmentpriorities.“But the real story is that you don’t have to runfaster than ...
risk,” said Matthesen. “But if you can be quickto identify that there is a problem emerging andyou’ve thought about it a l...
information management.But, Kleindorfer acknowledges, there is something“going on simultaneously with this huge set ofacti...
financial returns and customer satisfaction.According to AMR Research, corporate investmentsin enterprise systems totaled ...
the application of technology hasemerged as a leading “pain point” inthe field of supply chain management.Creating the Opt...
typically high cost of these systems, in many casesthe question is not which system to purchase,but whether or not a compa...
which represent physical product flows fromsuppliers to customers as well as reverse flowsfor product returns, servicing a...
2004. And what do these systems promise to deliver?A lot, judging by the following three examples:• SAP, a leading supply ...
software company designed to improve supplyand demand forecasts and help companies makebetter decisions about their invent...
remotely storing and retrieving data using devicescalled RFID tags. The new technology is beingtouted as the ultimate posi...
this information and have it in real time,” Wharton’sCohen said. Just having better information is worthsomething, he adds...
forecasting technology to work,” Matthesencontinued. “My experience is that companies puta lot of money into IT systems an...
it is important to “constantly refocus, but notreconfigure. The more you get to real-time plans,the more you have to updat...
“You don’t know exactly what the software isdoing, what settings work better than others,” saidMatthesen, “so changing the...
Where should I have a warehouse? It’s less a tooland more of a model that you need to understand.”And before investing in ...
would use to centralize its data management:“This software offers an accounting system,financial system, operational syste...
get a lot of pieces to work cross-functionally. Let’ssay I spend a lot of money on IT in the shippingdepartment; that’s no...
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  1. 1. Creating the Optimal Supply ChainAs global competition and advancing technology render borders irrelevant and linkcompanies more closely, supply chains — the network of suppliers, plants, distributors,retailers and others that participate in the sale, delivery and production of goods andservices — are growing increasingly complex. No longer simply the domain of thewarehouse manager or logistics director, supply chain management is viewed by mostcompanies as a mission-critical element. In this special report, experts from Whartonand Boston Consulting Group (BCG) discuss strategies for maximizing the value ofsupply chains, avoiding inefficiencies, managing the omnipresent risk of disruption, andevaluating the pros and cons of supply chain enterprise systems.‘You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value 1Low-cost country sourcing, outsourcing, customization, globalization and more are adding tremendouscomplexity tosupply chains across the globe. But even as companies are rapidly adopting supply chain managementstrategies in aneffort to keep up, experts from Wharton and BCG report that many still lag when it comes to measuringhow well theyare doing, and balancing the trade-offs involved in keeping service levels high and costs low.Avoiding the Cost of Inefficiency: Coordination and Collaboration inSupply Chain Management 5The process of getting the right product to the right place at the right time at the right price — thetraditional touchstonesof supply chain success — remains a challenging and often elusive goal. According to experts from BCGandWharton, two key supply chain elements that are often taken for granted — coordination andcollaboration — canmean the difference between the merely functioning and the profitable when it comes to procuringgoods and services
  2. 2. from vendors around the world and delivering them to global consumers as fast and inexpensively aspossible.Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption 9When it comes to global supply chains, the potential for disruption comes in many packages, from large-scale naturaldisasters and terrorist attacks to plant manufacturing fires, electrical blackouts, and operationalcontingencies suchas shipping ports too small to handle the flow of goods coming into a country. Experts from BCG andWharton say thatmanaging supply chain disruptions revolves around two goals: first, to thoroughly understand thepotential of identifiedrisks; and second, to increase the capacity of the supply chain — within reasonable limits — to sustainand absorbdisruption without serious impact.Supply Chain Enterprise Systems: The Silver Bullet? 14Supply Chain Enterprise Systems — information, communication and management technologies thatsupport supplychain functions — have quickly become a central element of supply chain management strategy. But,implementingthese systems is often a difficult undertaking with an uncertain outcome. For application of supply chaintechnologyto be successful, experts from BCG and Wharton argue that certain elements need to be in place:namely, a clearlydefined need based on supply chain strategy, as well as clear expectations about what such technologiescan and cannot do for a company. Creating the Optimal Supply Chain In the face of increasingcomplexity in global supply chains, more companies are realizing that supply chain management (SCM)is a mission-critical element, and no longer simply the domain of the warehouse manager or logisticsdirector. But even as companies adopt SCM strategies in an effort to keep up, experts from Whartonand Boston Consulting Group (BCG) report that many still lag when it comes to measuring how wellthey are doing, and balancing the trade-offs involved in keeping service levels high and costs low. “Themajor trends in business right now — low-cost country sourcing, outsourcing, customization,globalization and more — all create tremendous complexities in a supply chain,” says Steve Matthesen,vice president and global leader for supply chain at BCG. “In most cases, however, companies have not
  3. 3. changed how they manage this critical part of the business.” According to Matthesen, that’s largelybecause most company executives don’t have a supply chain background, and they tend to view thesupply chain function as “a black box” that they don’t understand or have limited visibility into. “CEOsfeel that their supply chain costs too much and doesn’t work very well. They’re quick to ask, ‘How hardcan it be to get the products to the right place at the right time?’ Well, it can be pretty hard,” he says,citing three major factors that have dramatically increased the stress on supply chains:• Fragmenting customer needs, resulting in a broader selection of SKUs (stock keeping units) aimed atspecific consumer segments, different price points, shorter product life-cycles, and less predictabledemand patterns;• Increased cost pressures based on global competition and shareholder demands to reduce workingcapital;• A new level of complexity brought on by more complicated distribution models, increasedoutsourcing, and “new technologies that promise efficiency but can increase complexity.” While supplychains are getting more difficult to manage, the competitive environment means that most companiesneed to further reduce costs. In such an environment, successful SCM “means getting better results withthe same, or fewer, resources,” according to Gerald P. Cachon, Wharton associate professor ofoperations and information management. “It’s like squeezing more juice from a lemon, or maybe bloodfrom a stone.” Knowing What to Measure “You can’t manage what you can’t measure,” says Morris A.Cohen, Wharton professor and Co- Director, Fishman-Davidson Center for Service and OperationsManagement. “And that’s as true for supply chain management as it is for other parts of a business’operations.” He says that many SCM metrics, like inventory turnover, are already built into a typicalaccounting system. But some of the more sophisticated benchmarks, including measuring the level ofcustomer satisfaction, take some work to develop. And a key issue is simply knowing what to measure.‘You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value“The major trends in business right now...all create tremendous complexities in a supply chain.” —SteveMatthesen, vice president and global leader for supply chain, BCG Boston Consulting Group |Knowledge@Wharton Special Report While the concept of understanding what performance levelcustomers want sounds simple, in practice it is not. Companies have two gaps, he says: a trueunderstanding of their current performance, and a deep understanding of what their customers need —and are prepared to pay for. “Every company has metrics that track performance,” he says. “The keyquestion is whether these metrics really provide visibility to performance as viewed by the customer.For example, one company measured itself by the percentage of orders received that day that weresuccessfully fulfilled on time. Their performance against this metric was very high (over 99%). However,they didn’t track the time between a customer placing the order and receiving their goods. Whenmeasured this way, the performance was much lower than expected. The reason was that often orderswere shipped from the wrong distribution center — resulting in longer delivery times and higher freightcosts.” Measuring customer needs is perhaps even trickier, he notes. “How do you know whether youwould lose business or gain business if you change your service level? In most cases, there isn’t much
  4. 4. hard data to work with. It’s also hard to ask your customers, since they are likely to respond that theywant higher service levels at lower costs. You need to dive more deeply into how your customers thinkabout your business and what role you play in their lives. [Companies] may also need to run someexperiments in the field to validate their assessments.” The Trade-offs Between Service and Costs If theessence of supply chain management is to provide the right products in the right amounts to the rightplace at the right time — all at the right cost — then a concept called the “efficient frontier” is a usefulway to gage capability. For any business function, an efficient frontier can be found by plotting pointsalong a trade-off curve between two or more performance metrics. Applied to supply chainperformance, “the efficient frontier is a twodimensional space, with service level and costs along thetwo axes,” says Mark D. Lubkeman, a senior vice president in BCG’s Los Angeles office. “At one end, youhave terrific, wonderful service at a huge cost. Or you could have lower costs and slow delivery times.The question is, where do you want to fall on the graph?” Matthesen agrees that the challenge ismeasuring the right things. “Most operations groups track a ton of metrics. The issue is whether theyare tracking the metrics that will identify how they are meeting the strategic needs of the company andwhat is relevant to their customers.” “When I asked a major car manufacturer if it considered customersatisfaction levels, executives advised me that they measured their customer service by the fill rate ofthe vehicles they sent to dealers,” relates Cohen. “Based on that, they said they had a high rate ofcustomer satisfaction. But when I asked them to survey the ultimate customer, the buying public, theywere shocked to find that consumers were not satisfied with the quality of the vehicles.” Cohen says,however, that more companies are beginning to realize that they need end-toend visibility in theirsupply chain management efforts. “SCM is about more than just sensing and responding,” he explains.“Companies need to anticipate demand, since it takes time to respond to demand-side changes. They’relearning, but there’s still plenty of room for improvement.” Matthesen notes there is an inherent trade-off in meeting that demand: “How much service level can I give my customers before everyone screamsabout what it costs?” he asks. “If I have a retail store, and I want to deliver every day instead of twice aweek, that will cost me more money. It’s all about service levels: how fast do I get you your productcompared to when you want it, when you ordered it, when you need it. And what will it cost?” But costis only one lens, Matthesen argues. “The goal is to maximize overall value. You want to have low costs,but first you need to have a strategy that will let you win in the marketplace. Sometimes that strategyrequires spending more cost to get a much higher margin.” To determine this, Matthesen sayscompanies need to make sure they have a “crystal-clear view” of what their customer really wants —what minimum service level is required to meet their needs, and what they will be willing to pay forsuperior service. Service level here includes all attributes of the supply chain as experienced bycustomers: in-stock rates, delivery time, product assortment, etc. In general, higher performance meanshigher costs, Matthesen notes. “Your company needs to make sure those costs are justified.” Creatingthe Optimal Supply Chain A company’s strategy should guide its supply chain design, he notes. Inaddition, many companies need to further segment based on the specific markets and customers theyare addressing. As an example, Lubkeman points to appliance retailing stores. “Retailers who competefrom a broad SKU base have high levels of in-stock goods where the goal is ‘to walk in and get it rightthere,’” he says. “But what about other appliance retail stores with narrower SKU mixes that don’t havea lot in stock? They may provide service and attention, and will do what needs to be done to getcustomers just what they want.” Those two businesses and the supply chains they require are very
  5. 5. different, notes Lubkeman. That means the efficient frontier for each is very different,too. The goal of any company, then, is to maintain aposition on the efficient frontier that protects bothits own interests and acknowledges the interestsand needs of its customers.“It’s dangerous for any company to say, ‘We haveone frontier,’” Lubkeman advises. “That doesn’tmake sense in any business, so why should it in asupply chain?”The key, he says, is really to “de-average” theefficiency frontier, to take apart the average andlook at the individual customer segments. “Formost, the efficient frontier is the point on the curvewhere you provide the service — no more, no less— that makes the customer happy at minimal cost,”he details. “That’s your frontier.”Cachon and others note that the trend towardsupply chain product segmentation “generallymeans more complexity, which makes getting to theefficient frontier harder.”Providing different levels of customization andvariety is tricky for supply chain management saysCohen. How do you ration your resources andprioritize when facing streams of demand fromdifferent customers for the same item, customers
  6. 6. who have paid a different price and to whom youhave made different promises? “It is inefficient tochop up the supply chain for different customers,but exploiting those things keeps you on theefficient frontier,” he counsels. “Keeping the supplychain flexible is key.”The efficient frontier is a helpful framework, butBCG’s Matthesen is quick to point out that mostcompanies are not getting the full value fromtheir supply chain investments. “Your infrastructureinvestments will have been made based ona trade-off between service level and cost, butin many cases, companies are actually off theefficient frontier — meaning they are getting lowerperformance and higher costs — because of howthey operate. For example, one of my clientsfound that they often shipped from non-optimaldistribution centers based on a number of factors.This meant that they incurred extra freight costsas well as delivered a lower service level to theircustomers. By addressing this problem they realizedimproved performance at lower cost — the elusivefree lunch!”Getting to the efficient frontier is not a simple task,notes Cohen. “You may not be managing processes
  7. 7. correctly, not using the right technology; there are avariety of reasons to explain why some companiesare not on it and others are.”“If you give me a set of parameters, a particularsupply chain structure and an assumed forecast,we can find the efficient frontier,” says Cachon.“But no firm ever has all the information they need.What are all the costs? What are the demand distributions?What are the uncertainties in terms ofweather, union strikes, and fires?”He adds that as supply chains become morecomplex, they have more participants, morelocations, and are geographically more dispersed.The amount of information needed to find theefficient frontier appears to grow exponentially.One important development, the burgeoning arrayof technological tools and software applications,can make it easier for companies to find theirefficient frontier.“Making it to the efficient frontier involves theapplication of optimization techniques which requirecareful data collection and generally customizationto the firm’s particular environment,” said Cachon,who studies how new technologies can improvesupply chains and consults for companies that
  8. 8. provide optimization solutions for retail customers.HighLowLow HighCostservice level“I have directly seen how the smart application ofoptimization technology can improve a retailer’sinventory performance, with higher service andhigher turns.”Lubkeman believes that incorporating new efficientfrontier software programs can be a plus. “Theybasically help you optimize transactional decisions,”he said. But he adds a warning: “Unless you’ve gotthe underlying understanding of the customersand articulated the strategies you need to servethose customers, you run the risk of having thetechnology drive the strategy instead of the otherway around.”Companies on the FrontierHal Sirkin, a BCG senior vice president in Chicagoand leader of its operations practice globally,believes that most companies are operating belowthe efficient frontier, and don’t realize how to makethe tradeoffs that are required to get to it.
  9. 9. “I don’t think they understand it,” he says. “I thinkthey want to improve their supply chain, but I don’tthink they know that there is an optimal operatingcapability and an optimal way to operate theirbusiness.”To improve their position on the efficient frontier,Sirkin suggests that companies take such steps asreviewing out-of-date technology and substitutingmore efficient programs that provide better dataand analysis; reviewing their warehouse locationsand designs and changing them as needed to gaingreater efficiencies; and reviewing their supplychains for costs. He also says to consider staffingrequirements and to look at outsourcing as a way tosave money or increase service.Matthesen adds, “While there are improvementspossible within the four walls of the supply chainfunction, the bulk of the benefit comes whenyou break down the functional silos and bettercoordinate across the entire business, and yoursuppliers and customers.” Key priorities are aligningthe supply chain with company strategy, aligningincentives across functions and with externalparties, arming people with the right data “so theycan make holistic decisions,” and building flexibility
  10. 10. to quickly respond to demand, rather than relyingon forecasts.“CEOs need to engage with their managementteams to understand how their supply chain workstoday — how it supports the business and how itprevents success. Together, they need to evolvethe strategy and supply chain to move the businessto a position where the supply chain supports andenables a winning strategy. This cannot be accomplishedby the head of supply chain alone,” he says.The pay-off is substantial. “A fully aligned supplychain and strategy delivers a superior businessmodel,” Matthesen adds. “Given the difficulties ofachieving this, the benefits are often sustainable andcreate real advantage. Your competitors are likelyto want to copy pieces of your strategy withoutrealizing how the entire strategy and supply chainwork together — and they will not be able to matchyour performance.” 3Boston Consulting Group | Knowledge@Wharton Special ReportCreating the Optimal Supply ChainIt’s no secret that supply chainmanagement has moved out of the shadows whenit comes to business strategy. Organizations thatonce focused primarily on distribution networks,
  11. 11. profit differentiation and improved marketing fortheir success have now embraced integrated supplychain management as a pivotal strategy componentfor growth and profitability in the global economy.But the process of getting the right product to theright place at the right time at the right price — thetraditional touchstones of supply chain success— remains a challenging and often-times elusivegoal. Although supply chains have undoubtedlybecome more sophisticated in the past few decades,a recent study in the Harvard Business Reviewfound that improved performance hasn’t alwaysfollowed: “Despite the increased efficiency ofmany companies’ supply chains, the percentageof products that were marked down in the UnitedStates rose from less than 10 percent in 1980 tomore than 30 percent in 2000, and surveys showthat consumer satisfaction with product availabilityfell sharply during the same period.”And over time, the real value of efficient supplychains and the true costs of inefficient supply chainmanagement have been clearly documented. In apaper titled “What Is the Right Supply Chain for YourProduct,” Marshall L. Fisher, professor of operationsand information management at Wharton and codirector
  12. 12. of the Fishman-Davidson Center for Serviceand Operations Management, cited a study of theU.S. food industry which estimated that “poorcoordination among supply chain partners waswasting $30 billion annually. Supply chains in manyother industries suffer from an excess of productsand a shortage of others owing to an inability topredict demand. One department store chain thatregularly had to resort to markdowns to clearunwanted merchandise found in exit interviewsthat one-quarter of its customers had left its storesempty-handed because the specific items that theyhad wanted to buy were out of stock.” A recent BCGstudy about supply chain integration for mergingcompanies noted that “any weakness in the systemon day one of the new organization’s life can quicklytranslate into excess inventory, stockouts, or evenlost customers. And the damage can be severe.In some industries, a flawed integration can driveinventory levels as much as 40 percent higher withina few short months. It can have a similar or even agreater impact on distribution costs, timeliness ofdeliveries, and a variety of other metrics.”Supply chain experts from Boston Consulting Group(BCG) and Wharton agree that a careful coordination
  13. 13. of supply chain elements and a high level of collaborationare among the primary criteria for creatingsuccessful supply chain management. Indeed, in aworld of heavy competition, these two supply chainelements — so often taken for granted — can meanthe difference between the merely functioning andthe profitable when it comes to procuring goodsand services from vendors around the world anddelivering them to global consumers as fast andinexpensively as possible.Avoiding the Cost of Inefficiency: Coordination and Collaboration inSupply Chain Management“The days when business was donethree doors down from the supplyroom are over.”—Steve Matthesen, vice president andglobal leader for supply chain, BCGBoston Consulting Group | Knowledge@Wharton Special Report“The days when business was done three doorsdown from the supply room are over,” said SteveMatthesen, a vice president in BCG’s Los Angelesoffice and a supply chain expert. “Everyone ispushing for more demanding performances againststronger competitors.… My clients are going tobroader ranges of SKUs [stock keeping units] in a
  14. 14. finer and finer segmentation of customer needs, inorder to meet the demands of a growing generalconsumer trend that says, ‘I want what I want; I wantit cheaper; I want selection; and if you don’t have it,I’ll go somewhere else to find it.’ The more of thiskind of complexity you have in a supply chain, themore difficult it becomes for things to work.”“A complex chain or network of resources has tobe managed so that when you go to squeeze yourtoothpaste in the morning, it’s there,” said MorrisA. Cohen, professor of operations and informationmanagement and systems engineering at Whartonand co-director of the Fishman-Davidson Center forService and Operations Management. “The goalis to match supply with demand at every stage, atevery value-added point, so that at the end of theday there is a customer who has a demand and thesupply chain figures out how to get the product tothat customer at a time and place and a price thatthey are willing to pay.”The elements of coordination and collaborationin supply chain management range fromthe very basic concepts of communication to themost sophisticated technology and electronicdata interchange available, as well as managing
  15. 15. or tracking everything from purchase orders tophysical logistics of inventory and tracking the flowof funds among business partners.‘A Huge Competitive Lever’“The whole supply chain management job is notan easy one,” said BCG’s Matthesen, noting that thetrend toward globalized outsourcing adds layers ofcomplicating factors. “I get calls from companieswho say, ‘I’ve moved my sourcing to China and mysupply chain is all screwed up’ — as though this isa surprise. They may not know why, but they won’thave the right product in the right place at the righttime. And they start yelling at their supply chainguys — ‘Why are you doing this wrong?’ Usually,the right product is in the wrong place, and toomuch of the wrong product is everywhere.”For instance, Matthesen said, a company may haveplaced a similar number of ski parkas in both of itsMiami and Denver stores. The Denver store is likelyto sell out quickly, while the Miami store will sellfew. This forces the company either to dramaticallymark down the items in Miami or ship the parkasto Denver. Either situation incurs substantial costs,for no benefit. When a company factors in otherexpenses — misplaced inventory taking up valuable
  16. 16. retail space for items that would sell, for example— you have “a lot of waste built in when you makean error in your supply chain. In many cases, theunderlying cause of the inefficiency lies in decisionsmade outside the supply chain organization, but theconsequences tend to show up there.“That said, if you have the right process,procedures, knowledge and strategy there, youcan make it work. You might never get to nirvana,but you can be smoothly functioning. And the partto me that is very interesting is that if you get thisto work right, it is a huge competitive lever. Yourcompetitors will see that you have an advantage,but it’s hard for them to replicate it. They will pick upon a few things, but they simply won’t get there.”Matthesen pointed to Dell Computers and its supplychain model of mass customization — a computerisn’t made until there’s a custom order for it. “Dell’swhole model is based on a supply chain advantage.You have Hewlett Packard trying to keep up withthem, but it has a different model, and it’s hard tocatch up. For a number of legitimate reasons, HPis not willing to do everything that Dell has done,even though Dell’s particular supply chain requiresall the pieces to work together. If you just take a few
  17. 17. pieces, you end up not accomplishing a lot.”Taking the Holistic ViewThe experts agreed that any supply chain has itsparticular “pain points,” or stumbling blocks thatprevent the organization from realizing its financialand growth goals. When a pain point is coordinationand collaboration, there are many different elementsthat should come under scrutiny, cautions supplychain authority Marin Gjaja, BCG’s vice presidentand director in the firm’s Chicago office.“The first hurdle to coordination and collaborationis within the four walls of your company,” saidGjaja. The basic principle behind supply chain organization,namely, “getting the right product to theright place at the right time at the lowest possiblecost, is not something that most companies areorganized to do well. You are cutting across organizationalboundaries, where individuals may be moreinterested in local optimization than global supplychain issues.”Creating the Optimal Supply ChainIn fact, a recent report by Supply Chain RedesignLLC in Raleigh, N.C., defines a lack of internal collaborationand business intelligence as one of the topsupply chain pain points. The researchers note that,
  18. 18. typically, “Poor communication between businessunits and disjointed legacy systems prevent coordinationand alignment of sourcing and logisticsstrategies,” and, moreover, “internal businessperformance plans are not aligned with externalcustomer demand requirements.”To understand how these issues play out, Gjajasuggested a quick review of the role of the customerservice center. “The main job of the customerservice center is to keep customers happy. Theytake calls from customers who are irate, and theirjob is to make sure the customer gets off the phonesatisfied. They will place an emergency order tohave something FedEx-ed to a customer, whichmeans you have a customer service officer whomakes the customers happy but is costing thecompany a lot of money. I have clients who haveincurred millions of dollars in shipping and freight,whose customer service departments shouldperhaps be reminded that they shouldn’t ship a $3item in a $20 package.”To avoid this, Gjaja suggests that the business takea more holistic view of its procedures, “We talk a lotabout holistic, end-to-end supply chains looking toboth meet demand and serve the customer. That is
  19. 19. as much an art as it is a science. Most organizationsare not managing the supply chain holistically, andhow you coordinate every day is a real challenge.If you look at the customer service center example,you have a mix of business rules, operatingprocesses and incentives that are set up as anindividual function, and [meeting those] optimumswill come at the expense of the company’s globaloptimums. This is at the heart of a lot of internaldysfunction in a supply chain, and it really comesdown to establishing cross-functional coordinationand collaboration.”Wharton’s Cohen agreed. “I would argue, in fact, thatif you haven’t figured out the internal problems —collaboration, coordination and information sharing— you are probably out of businesses,” he said.A second hurdle comes when a companyapproaches this problem outside the company’swalls. “You have fewer levers that you can pull froman incentive standpoint when it comes to workingon collaboration and coordination with suppliersand others outside the firm,” Gjaja noted. “Whatis the coordination cost of trying to work withsomeone outside the firm? With technology, we’vegotten better information. For instance, Wal-Mart
  20. 20. can provide information to Procter & Gamble abouttheir store because their incentives are aligned here— P&G doesn’t want its products to be out of stockany more than Wal-Mart does — but there is also alevel of trust. Wal-Mart is entrusting P&G with a fairamount of operational information. Information isone thing; trust is another. Information has facets— data, understanding of intent, communicationaround that, and many sub-dimensions. Buttrust is fundamentally different. It is based on anexpectation that you need to fulfill your obligationsto me as my partner in this work. I think we forgetthat collaboration and coordination require that.And when you lose that trust, the friction and thetransaction costs go up, and you start to experiencemore difficulty in working together.”The ‘Right’ Supply ChainFor Wharton’s Fisher, the essence of supply chainmanagement problems boils down to “shortagesand failure to get the product, and having toomuch of the product. Prevent that from happeningat a reasonable cost, and that’s supply chainmanagement. Having too much of any supply isproblematic. Think about apparel at the end of theseason, or cars at the end of the model year. You
  21. 21. can give back at lot of money at the end of theseason in order to reduce inventory and cut losses.”As a supply chain consultant, Fisher has workedwith an internationally-known and prestigiousjewelry maker, whose single biggest issue wastotal availability of product. “Everyone in the storestold us, ‘Just give us the product. There’s too littleproduct. We can’t sell what we don’t have.’ And themost popular items were frequently unavailable.”The jewelry maker’s supply chain challenges?Reliable, accurate forecasting; better understandingof new product demand; and improved inventoryplanning at individual store levels.Fisher’s answer to coordination and collaborationproblems within supply chain management is tomake sure a company finds the right supply chainfor each product. “The root cause of the problemsplaguing many supply chains is a mismatchbetween the type of product and the type of supplychain,” Fisher wrote in “What Is the Right SupplyChain for Your Product?” In the paper, he arguedthat products fall into one of two categories:primarily functional or primarily innovative.According to Fisher, functional products, whichinclude products like milk and food that satisfy
  22. 22. basic needs and can be sold in a wide range ofretail outlets like grocery stores, are characterizedby: predictable demand and easily matchedsupply and demand patterns; low profit margins;an average stockout rate of 1% to 2%; virtually noforced end-of-season markdown; and low productvariety. A functional product requires a supply chainthat delivers what Fisher calls a “physically efficientprocess,” one designed to “supply predictabledemand efficiently at the lowest possible cost.”But, said Fisher, innovative products like newcomputer systems, video entertainment productsand some fashion trends (like jewelry) have unpredictabledemand; an increased risk of shortagesor excess supplies; a potential for higher profitmargins; high product variety; an average stockoutrate of 10% to 40%; and an average forced endof-season markdown of 10% to 25%. Innovativeproducts require a “market-responsive process”supply chain, designed to “respond quickly to unpredictabledemand in order to minimize stockouts,forced markdowns and obsolete inventory.”Using sophisticated mathematical analysis andextensive data collection, Fisher helped create acompany called 4R Systems, Inc., an analytical
  23. 23. software business designed to improve supply chainforecasts and help companies make better decisionsabout their inventory dollars, particularly for shortlife-cycle products. One of the company’s programs,for instance, takes point-of-sale and inventory datafrom retail venues in the home fashion industryand converts that into information that enables thecompany to optimize stock levels from its distributioncenters to client retail locations.Cohen cautions, however, that coordination ofinformation doesn’t always solve supply chainproblems, particularly in certain industries where“the information is always changing, due to thenature of the beast when an industry supports somuch inherent uncertainty.” He cited a study heworked on regarding the semi-conductor equipmentindustry and its relationship with suppliers. “Oneof the things we found is that due to their businesscycle, there is rapid obsolescence in the product,no matter how much information coordination theyexperience. If they don’t have enough capacity, it’svery expensive, but if they have unused capacity, it’svery difficult to balance, too. With the uncertainty sogreat, they will never arrive at the best equilibriumjust by collaborating. In fact, it is difficult to see
  24. 24. equilibrium when everyone is acting in a collaborativefashion.”Which begs the question: Despite increasingattention paid to supply chains, why are very fewfirms successful at integrating processes andaligning incentives?Says BCG’s Gjaja: “My suspicion is that thecomplexity of product-based companies wheresupply chain is relevant is expanding at a fasterrate than information technology can keep up with.By that, I mean that the number of products anddifferent options and customers is expanding — sayit’s 100 products times 100 customers times 100different ways of getting there. You can see that youget this multiplied effect of complexity. The toolsyou have to deal with it can only evolve so quickly.It will always be a very difficult challenge — it’s oneof those perennial issues in management, one ofthose evergreen topics that you just have to stayone step ahead of.”And Fisher adds that no matter how “synchronizedand seamless you think your supply chains are, youare left with the uncertainty of consumer demand.People don’t like the fact that demand is unpredictable.Even if you have maximum coordination and a
  25. 25. high degree of communication, the one person youcan’t coordinate with is the consumer…. With supplychain management, you have to accept uncertainty.”The optimum answer, according to BCG’sMatthesen, is to “design a supply chain that isbased on a sound strategy, ensure all parts ofyour supply chain — both internally and externally— have access to good and consistent data, andempower people to make decisions quickly. Builda supply chain that is comfortable with uncertaintyand quick to react by taking down the barriers thatprevent success.” 3Boston Consulting Group | Knowledge@Wharton Special ReportCreating the Optimal Supply ChainWhen it comes to global supply chains,the potential for disruption comes in manypackages, from large-scale natural disasters andterrorist attacks to plant manufacturing fires, widespreadelectrical blackouts, and operational contingenciessuch as shipping ports too small to handlethe flow of goods coming into a country. Today’sleaner, just-in-time globalized supply chains aremore vulnerable than ever before to natural andman-made disasters — a reality that creates greaterdemands on companies to keep supply chains
  26. 26. flexible and integrate disruption risk managementinto every facet of supply chain operations.“So many companies are trying to get their piece ofthe global advantage that the operational risks andpossibilities of disruption are pretty high,” said DaveYoung, senior vice president in the Boston office ofthe Boston Consulting Group (BCG). And one of thebiggest challenges in managing these disruptionrisks “has to do with the fact that global supplychains are in a state of continuous evolution.”Like Murphy’s Law, disruptions in supply chains seeminevitable — a principle that Paul R. Kleindorfer,Wharton professor of operations and informationmanagement, argues “should be a high priority topicfor senior management and shareholders.”“Disruption risk has received increasing attentionin the last few years,” Kleindorfer, co-director ofWharton’s Risk Management & Decision ProcessesCenter, wrote in a recently published paper,“Managing Disruption Risks in Supply Chains.” “Thereason is undoubtedly that, with longer paths andshorter clock speeds, there are more opportunitiesfor disruption and a smaller margin for error if adisruption takes place.”Given the high stakes, experts from BCG and
  27. 27. Wharton generally agree that managing supplychain disruptions revolves around two goals: first,to thoroughly understand the potential of identifiedrisks; and second, to increase the capacity of thesupply chain — within reasonable limits — to sustainand absorb disruption without serious impact.Identifying the RisksKleindorfer has identified three main categories asthe primary sources of supply chain disruption risk:operational contingencies, which include equipmentmalfunctions and systemic failures, abrupt discontinuityof supply (when a main supplier goes out ofbusiness), bankruptcy, fraud, or labor strikes; naturalhazards such as earthquakes, hurricanes, storms;and terrorism or political instability.Which category would a company consider the mostthreatening? “Companies generally focus on therisks that they can see,” said Steve Matthesen, a vicepresident in BCG’s Los Angeles office. “And, to behonest, most of us focus on those risks that someonewould hold us accountable for. So when you get to[a risk such as] political instability or terrorism, mostpeople don’t worry about it that much, or they worrybut they don’t focus on it. For instance, you generallyare not going to get fired for not having a plan if a
  28. 28. terrorist blows up your building.”Flexibility in the Face of Disaster: Managing the Risk of Supply Chain DisruptionDisruptions in supply chains “shouldbe a high priority topic for seniormanagement and shareholders.”—Paul Kleindorfer, professor of operationsand information management, WhartonBoston Consulting Group | Knowledge@Wharton Special Report10In a report on “Risk Analysis and Risk Managementin an Uncertain World,” Howard Kunreuther, codirectorof Wharton’s Risk Management Center,explains why. “When it comes to developing astrategy to reduce the risks of future terroristactivities,” Kunreuther argues, “we do not know whothe perpetrators are, their motivations, the natureof their next attack and where it will be delivered.Hence it is extraordinarily difficult to know whatprotective actions to take.“We know from behavior following naturaldisasters, such as Hurricane Andrew or theNorthridge earthquake, as well as technologicalaccidents, such as the Bhopal chemical explosion orthe Chernobyl nuclear power plant meltdown, thatindividuals and companies are not very concerned
  29. 29. about these events prior to their occurrence,” hecontinues. “Only after the event when it is often toolate do they want to take protective action. Overtime this concern dissipates. Thus it is very commonfor people to cancel their flood or earthquakeinsurance policies if they have not experiencedlosses from one of these events in several years.”But it’s a different story when the supply chaindisruption is highly visible and forecast by worldwidetrends. For instance, what happens if acompany ships products into the ports of LosAngeles, the entry point for almost half of the goodscoming into the United States, and gridlock hits justbefore Christmas (as it did in 2004)? George Stalk,Jr., a BCG senior vice president in Toronto, noted ina recent BCG paper on volatile supply chains thatwhen this very real scenario played out at the LosAngeles-Long Beach ports last winter, “nearly 100cargo ships floated around cooling their keels andwaiting to be unloaded — a process that was takingup to twice as long as normal.” In a case like this,says Matthesen, “the CEO of a company might say,‘This is your job, Supply Chain Person.’ And thatperson would get flak.”Discovering Vulnerabilities
  30. 30. Supply chain experts suggest that the key to firstmitigating and then managing disruption risks isunderstanding a company’s vulnerabilities.“Your turn the problem on its head,” saysKleindorfer. Businesses determine and review theconsequences of various sources of disruptionto a global supply chain “through the process ofdiscovering vulnerabilities. Whatever the source ofthose might be — hazards, strike, terrorists’ bombsor some unforeseen event — the first thing youdo in the risk assessment process is to look at vulnerabilitiesin general, and then you have to havesupply-chain-wide visibility of vulnerabilities.”Experts note that vulnerabilities need to be analyzedthroughout the supply chain — from criticalprocesses and equipment to manufacturing andwarehousing sites, from technology and transportationto distribution and management. Granted, thisis not always easy, Kleindorfer noted, because it“requires information sharing across supply chainparticipants.” Typically, a company with “special vulnerabilitiesmay have every incentive to hide thesefrom other supply chain participants.” While currentcommunication and information technologies suchas ERP (Enterprise Resource Planning) systems
  31. 31. and CPFR (Collaborative Planning, Forecastingand Replenishment) methods allow for improvedinformation integration and supply chain visibility,“vulnerabilities to disruption are, by their verynature, more difficult to identify.”At the Wharton Risk Management & DecisionProcesses Center, supply chain experts and industryleaders have over the last decade developed a multistepapproach to disruption risk management. Itaddresses ways to help companies identify vulnerabilities,and includes the following four initial steps:• “Obtain senior management understandingand approval, and set up organizationalresponsibilities for managing the disruption riskmanagement process.• Identify key processes that are likely to beaffected by disruptions and characterize thefacilities, assets and human populations that maybe affected. Key processes typically include newproduct development, supply chain operations,and manufacturing. Key assets include bothtangible assets (property and inventory) aswell as intangible assets (brand image, publicperceptions).• Traditional risk management is then undertaken
  32. 32. for each key process to identify vulnerabilities,triggers for these vulnerabilities, likelihood ofoccurrence, and mitigation and risk transferactivities. This is the heart of the traditionalindustrial risk management process fordisruption risks.• Reporting, periodic auditing, management andlegal reviews of implementation plans and ongoingresults (e.g., of near-miss managementand other disruption risks) complete the businessprocess for disruption risk management. Theaudit process . . . is essential to providing onCreatingthe Optimal Supply Chain11going feedback to management and supply chainparticipants on the performance of their facilitiesand their compliance with agreed, supply-chainwide standards.”By taking these four steps, Kleindorfer argued, acompany defines its own “risk architecture — whichis a way of looking at the world that allows you notto be generally worried all the time.”Contingency Planning and the ‘Triple-A’ThreatWhat happens when a company that understands its
  33. 33. vulnerabilities as well as its overall risk architectureconfronts disaster? Consider the following example.In March 2000, a Philips manufacturing facility inAlbuquerque, New Mexico, was destroyed by fire;the facility supplied radio frequency chips (RFCs) forcellular telephone giants Nokia and Ericsson, andthe way the two companies responded has becomea textbook case for the dos and don’ts of disruptionrisk management, and a lesson in how the properapproach can turn into a competitive advantage.When the fire wiped out the plant, both companiesinstantly lost a key link in their supply chains. Asreported in Business Week:“Nokia’s response was two-fold. The companyimmediately created an executive-led ‘strike team’that pressured Philips to dedicate other plantsto making the RFCs that Nokia needed. Nokiaengineers also quickly re-designed the RFCs sothat the company’s other suppliers in Japan andthe United States could produce them.” The planworked: “Through quick action, Nokia was ableto meet its production goals, and even boost itsmarket share from 27% to 30% — a level more thantwo times that of its nearest rival.”“Ericsson, however, reacted much more slowly.
  34. 34. The company did not become aware of the supplyproblems for weeks, by which time its abilityto meet customer demand had been seriouslycompromised. And because Ericsson reliedexclusively on the Albuquerque plant for theRFCs, Ericsson — unlike Nokia — found itself withnowhere else to turn for these vital components. .. . Ericsson posted a nearly $1.7 billion loss for theyear, and ultimately had to outsource its cellularhandset manufacturing business to another firm.”Contingency planning — the act of knowingsecondary sources to turn to for supplies, manufacturing,or transportation needs when primarysources are interrupted — has recently receiveda lot of attention and research from supply chainexperts. Highlighting the value of contingencyplans, the story of Nokia and Ericsson was incorporatedinto a recent Harvard Business Review articlecalled “The Triple-A Supply Chain.” Arguing thatsupply chains can no longer afford to be merely fastand cost-effective, author Hau L. Lee argued that“great companies create supply chains that respondto sudden and unexpected changes” by building“Triple-A” supply chains that are agile, adaptableand aligned. Lee outlined objectives and methods
  35. 35. that companies should follow to achieve all threeTriple-A goals — a veritable blueprint for disruptionrisk management through the pursuit of flexiblesupply chains:• Agile supply chains “respond quickly to suddenchanges in supply or demand.” What methodscan companies use to incorporate agility insupply chains? “Continuously provide supplychain partners with data on changes in supplyand demand so they can respond promptly;collaborate with suppliers and customers toredesign processes, components, and productsin ways that give you a head start over rivals;finish products only when you have accurateinformation on customer preferences; keepa small inventory of inexpensive, non-bulkyproduct component to prevent manufacturingdelays.”• Adaptable supply chains “adjust supply chaindesign to accommodate market changes.”Methods to use? “Track economic changes,especially in developing countries; use intermediariesto find reliable vendors in unfamiliar partsof the world; create flexibility by ensuring thatdifferent products use the same components and
  36. 36. production processes; create different supplychains for different product lines, to optimizecapabilities for each.”• Aligned supply chains “establish incentives forsupply chain partners to improve performanceof the entire chain.” Methods to use? “Provideall partners with equal access to forecasts, salesdata and plans; clarify partners’ roles and responsibilitiesto avoid conflict; redefine partnershipterms to share risks, costs and rewards forimproving supply chain performance; alignincentives so that players maximize overall chainperformance while also maximizing their returnsfrom the partnership.”Boston Consulting Group | Knowledge@Wharton Special Report12Redundancy and Other Strategies forFlexibilityWhen it comes to maintaining flexible supplychains that can respond to disruption, BCG’s Youngsuggests that companies plan for the inevitable byincorporating a few simple steps. “A lot of this isgood old-fashioned block and tackling, but it takesdiscipline and segmentation,” he said.First, companies should carefully segment their
  37. 37. products and product lines in order to understandwhich ones are more time sensitive and critical thanothers. “If I’m going to spend time thinking abouthow I can bullet-proof the supply chain or make itmore resilient, I’m going to do it around products orprocesses where time is most critical,” said Young.Second, once these areas have been identified, “youwant to create a highly detailed assessment of allelements of the supply chain. Identify along thatpath the sources of greatest risk and look for waysto manage that — hedging inventories, looking atredundant carrier options, for instance. You want tobuild in redundancy for these critical items.”But, Young cautions, “you can only have time andmoney to build in so much systems’ redundancy.”Because building in redundancy isn’t cheap. In arecently published newspaper article, BCG’s Stalk andYoung wrote that offshore operations often expectand therefore plan for the unexpected by “buildingredundancy into the system, and probably back home.If such redundancy is included in the initial ‘costadvantage’calculation, the company may find it willtake 2 to 21/2 years to recoup all the start-up costsassociated with offshore sourcing and manufacturing.”BCG’s Matthesen notes that when planning for
  38. 38. redundancy, companies have to ask, “How muchprotection can you take? It’s like insurance — onlysome things are worth insuring against. It willdepend a lot on what your business margins areand what the costs of failure are. For instance, Iwork with a pharmaceutical company that maintainstwo different plants. Either one would serve theentire world of demand for their products. But oneplant is located in an earthquake zone; the other isonly 25 miles from an airport, and they worry thatan airplane could conceivably crash into it. So theymaintain both plants. In their case, they justify theexpense due to high margins and the human livesat stake.”When it comes to redundancy planning, transportationoptions or redundant carrier options are oftenhigh on a company’s list. To figure out why, look nofurther than the shipping backlog in Los Angeles lastwinter. But building in transportation redundancyor shipping flexibility is tricky. “If your shipment ison one of 50 ships waiting to unload, your choicesare a bit limited,” said Matthesen. Often, companiescan only hedge these risks by making sure theirshipments are last on and first off.In anticipation of rail or trucking strikes, companies
  39. 39. often split their shipping business in order to buildtransportation relationships with more than onecompany. “People do this a lot. They offer 80 to60 percent to one supplier, and 20 to 40 percentwith the other. But how important are they if theyare only doing 20 percent of their business with acompany? Do you really achieve anything? I haveone client who is a distributor, and we were lookingat the level of redundancy they had. We discussedwhat would happen if you gave all of the businessto one carrier, and then that carrier had a strike?Shouldn’t you keep two carriers? But the CEO said,‘Our margins are low. It makes business sense tosole source, and if we get into a strike situation,well, that will have to be the cost of doing business.’And I think that this was the right call in thatsituation.”Matthesen allows that the essence of riskmanagement boils down to adequately appreciatingthe risks that a company is exposed to for differentareas of business; identifying the ‘choke points’along the supply chain that would completely harma business if disruption occurred; and then takingthe right set of preventative measures to allowfor some protection, remembering to periodically
  40. 40. review your supply chain plans and risk assessmentpriorities.“But the real story is that you don’t have to runfaster than the bear; you just have to outrun thefolks you are with,” said Matthesen. “If you canBCG’s Matthesen notes that whenplanning for redundancy, companieshave to ask, “How much protectioncan you take?…It will depend a loton what your business margins are andwhat the costs of failure are.”figure out that there has been a disruption fasterthan others in your industry, you have a lot moreoptions. If you are the first person to come to aFederal Express and say, ‘UPS is going to have aproblem and I need your help’ — you get a goodresponse. If you are the fifth guy to come over,now they have a problem because their capacityis full. This is the case with many disruptions, andthis is the part to me that’s most interesting aboutthe Nokia and Ericsson example. It’s not that Nokiahad all these backup plans, but that they identifiedsomething was up and they acted on it beforeanyone else identified the issue.”The bottom line? “You can’t protect against every
  41. 41. risk,” said Matthesen. “But if you can be quickto identify that there is a problem emerging andyou’ve thought about it a little bit in advance andmobilized your options, that’s the essence of riskmanagement.” 3Creating the Optimal Supply Chain1314Boston Consulting Group | Knowledge@Wharton Special ReportSupply Chain Enterprise Systems: The Silver Bullet?Contemporary supply chains stretcharound the globe — a complicated matrix thatreflects the easing of international trade barriers,an increase in global trade, and dramatic growthin business outsourcing and offshoring to low-costsuppliers. Needless to say, the trends toward globalizationhave significantly increased the number ofplayers involved in bringing a product to a consumer.“If you were looking down on planet Earth, youwould see a lot of ships moving from China to India,from Europe to the United States, along with a hugeset of domestic activity with truck and rail and alsointernationally with air and cargo to support thesheer volume of international trade,” said Paul R.Kleindorfer, Wharton professor of operations and
  42. 42. information management.But, Kleindorfer acknowledges, there is something“going on simultaneously with this huge set ofactivity that you may not see.” Namely, an equallydramatic, “absolute revolution” in information,communication and management technologiesthat support supply chain functions and are knownas supply chain enterprise systems. “The fabricbeneath this increased trade is a fantastic ability tomanage large volumes of data.”Virtually nonexistent a decade and a half ago,supply chain enterprise systems affect numerousprocesses, ranging from scheduling orders,managing production, controlling inventory andpurchasing to sales support and customer relationsmanagement. These systems are represented bya seemingly endless alphabet soup of technologyacronyms, such as ERP, SCM, CRM, and RFID.Supply chain enterprise application vendors such asSAP, Oracle, Sage Group and Microsoft, along withsupply chain support vendors like i2 Technologies,4R Systems, Manugistics and MCA Solutions,have worked to create technological and softwaresolutions that are designed to help improve notonly supply chain performance but also corporate
  43. 43. financial returns and customer satisfaction.According to AMR Research, corporate investmentsin enterprise systems totaled more than $38 billionin 2001, with an expected increase of 9 percent bythe end of 2004.While there’s no doubt that technology hasmoved front-and-center in today’s supply chain,the application of technology has emerged as aleading “pain point” in the field of supply chainmanagement. According to supply chain expertsfrom the Boston Consulting Group (BCG) andWharton, applying enterprise systems technologyto supply chains is often a difficult undertakingwith an uncertain outcome; in reports and casescited by both BCG and Wharton, companies thathave implemented supply chain technologies oftenfail to leverage the new systems for a competitiveadvantage. A recent study from the Georgia Instituteof Technology analyzed the impact on corporateperformance of three commonly used technologicalenterprise systems: Enterprise Resource Planning(ERP) systems, which integrate data required toWhile there’s no doubt thattechnology has moved front-andcenterin today’s supply chain,
  44. 44. the application of technology hasemerged as a leading “pain point” inthe field of supply chain management.Creating the Optimal Supply Chain15manage a business and automate all of the transactionsneeded to support an entire enterprise; SupplyChain Management (SCM) systems, implementedas “add-ons” to existing systems that “look beyondenterprise transactions and out into the supplychain to provide supply-chain-wide planning andexecution support;” and Customer RelationshipManagement (CRM) systems, which “help trackand manage customer information and relationshipswith the goal of increasing customer loyaltyand retention.” The authors found that with theexception of SCM systems, the enterprise systemssimply do not “positively affect shareholder valueand operating performance.”For application of supply chain technology to besuccessful, the experts agree that certain elementsneed to be in place: namely, a clearly defined needbased on supply chain strategy, as well as clearexpectations about what such technologies canand cannot do for a company. When facing the
  45. 45. typically high cost of these systems, in many casesthe question is not which system to purchase,but whether or not a company will benefit frominvesting in one.Though the questions are often clear, the answersare not. “Once you get into technology,” admittedSteve Matthesen, a vice president in BCG’s LosAngeles office and a supply chain expert, “it is aridiculously huge space.”Support for the ‘3Bs’As international trade tops $8 trillion in importsand exports, effective and efficient supply chainmanagement translates into improved return onassets and a distinct competitive advantage. Ina chapter on global supply chains in a recentlypublished book called The Wharton-INSEAD Allianceon Globalizing: Strategies for Building SuccessfulGlobal Businesses, by Cambridge University Press,Kleindorfer identifies technology as one of the threemain pillars that support the burgeoning supply chain.“A supply chain is essentially a network consistingof suppliers, manufacturers, distributors, retailersand customers,” wrote Kleindorfer. “The networksupports three types of flows that require carefuldesign and close coordination: 1) material flows,
  46. 46. which represent physical product flows fromsuppliers to customers as well as reverse flowsfor product returns, servicing and recycling; 2)information flows, which represent order transmissionand order tracking, and which coordinatethe physical flows; and 3) financial flows, whichrepresent credit terms, payment schedules andconsignment arrangements. These flows aresometimes referred to as the ‘3Bs’ of supply chainmanagement; boxes, bytes and bucks.”The coordination of these three flows within thesupply chain, Kleindorfer argues, is supported bythree pillars: processes, organizational structures,and “enabling technologies, encompassing bothprocess and information technologies.” Whenapplied correctly, technology has helped businessesconquer what Kleindorfer calls “arguably the centralproblem in supply chain management” — efficientcoordination of supply and demand.And companies seem to recognize the potential oftechnological tools in managing their supply chains:According to AMR Research, the enterprise applicationsmarket (especially ERP and SCM systems) willcontinue to expand, from $20.7 billion in 1999 forboth ERP and SCM markets to nearly $42 billion in
  47. 47. 2004. And what do these systems promise to deliver?A lot, judging by the following three examples:• SAP, a leading supply chain management vendor,allows that its supply chain management systemcalled “mySAP SCM” helps companies build“adaptive supply chain networks” throughplanning, execution, coordination, and collaboration.The collaboration function alone promises toenable companies to “share information and setand achieve common supply chain goals throughcollaborative planning, forecasting, and replenishment(CPFR), support for vendor-managedinventory (VMI), and support for suppliermanagedinventory (SMI).”• MCA Solutions, founded by Wharton operationsand information management professor MorrisA. Cohen, promotes its Service Planning andOptimization (SPO) software as a product thathelps companies “determine the most profitableand efficient supply chain design,” forecasting“parts demand and determination of optimalstocking lists and stocking levels” and providingparts tactical planning “to meet service levelobjectives at lowest possible order cost.”• And then there’s 4R Systems, Inc., an analytical
  48. 48. software company designed to improve supplyand demand forecasts and help companies makebetter decisions about their inventory dollars,particularly for short life-cycle products. Createdby Marshall L. Fisher, Wharton professor ofoperations and information management, 4Rpromises that its products “take the guessworkout of product forecasting, replenishment andallocation.”Boston Consulting Group | Knowledge@Wharton Special Report16Technology in the FutureWhen it comes to emerging supply chain technologies,experts point to advanced technologies forretailers, including hand-held scanners; productsthat manage inventory and forecast demand whilecommunicating this information to the supply chain;vendor-managed inventory or VMI, where a vendoror supplier manages inventory for a retailer (onesuccessful example is Procter & Gamble, whichmanages its inventory in Wal-Mart stores); andimproved technology for CPFR.But perhaps the technology that’s getting thebiggest buzz along the supply chain right now isRFID (Radio Frequency Identification), a method of
  49. 49. remotely storing and retrieving data using devicescalled RFID tags. The new technology is beingtouted as the ultimate positioning device (is theitem on the shelf or in the back room? On a truck orinside a ship?), and one poised to replace bar codesto measure the flow and location of goods.To date, RFID has proved useful in tagging andtracking large containers of goods. But so far, theexpense of the individual tags prohibits their useon individual stock items, “and that’s where thebenefits and savings are, from knowing wherethe item is on the shelf,” said Serguei Nettissine,Wharton professor of operations and informationmanagement. Wharton colleague Fisher agreed:“The quality of data that retailers have on inventorylevels in their stores is far from perfect. And that’swhere RFID could come in.”However, RFID illustrates a problem that is atthe crux of adopting such technology: BCG andWharton experts note that one of the real challengesassociated with RFID — in addition to the cost— is actually using the information it produces,and turning that information into a businessadvantage. “The people promoting the technologyare talking about how valuable it is to know all of
  50. 50. this information and have it in real time,” Wharton’sCohen said. Just having better information is worthsomething, he adds, but “figuring out what to dowith it should be worth even more.”Garbage In, Garbage OutFor those companies that do know what they wantfrom their data, BCG’s Matthesen as well as BostonbasedBCG vice president Massimo Russo bothcautioned that every technology system is only asgood as the data it has access to. “There is the issueof garbage in, and garbage out,” said Russo.Matthesen outlined this example, using a retailsupply chain that has access to forecasting anddemand planning technology. “Let’s say I have 800stores and point-of-sales systems, so in theory Ihave quite a bit of data to use, and I need IT help touse that data and forecast with lead times of up tosix months out. But IT needs more input than justraw data. I may look at the data for the prior seasonand see that there is a big spike in a certain week ofsales. Is that due to the fact that I ran a sale? Or dueto the fact that we had a snowstorm and we soldmore snow shovels? Is that a normal seasonabilityspike, or a Mother’s Day sale?“You need a lot of human intervention for the
  51. 51. forecasting technology to work,” Matthesencontinued. “My experience is that companies puta lot of money into IT systems and then need helpfiguring out how to use them better. For instance,how do you feed good data into the system? Howdo you update the information, so the system canrecalculate the real math that is in there? A lot ofthese systems are set up and not tuned up on aregular basis, yet the software doesn’t know that.Where you get into real problems is when it hasbeen years [since you updated the data], or ifseveral functions have since merged.”And data intervention, he said, is dictated in partby the operation. Pharmaceutical supply chains— which exhibit “extremely high margins, andpeople will die if you don’t deliver the product”— are managed “differently, with second sourcingand buffers. If you have a business with a vendorbase that is quite stable, it’s pretty simple. If youhave a business that specializes in fashion itemswhere vendor bases move around and there is a lotof change in off-shore production, you may need tobe on this much more — maybe monthly would berequired. Otherwise, all hell breaks loose.”Russo agreed that when it comes to data configurations,
  52. 52. it is important to “constantly refocus, but notreconfigure. The more you get to real-time plans,the more you have to update.”Matthesen also notes that there are common“mistakes people make in the IT space whenmanaging their supply chain. On one extreme, theydo everything manually with Excel spread sheets,and it’s hard to have good, reliable data deliverythat way. The other extreme is that they put in toomuch technology — and expect it to do too much. Insome cases, people have added layers of systems— sometimes connected, sometimes not. If youhave 15 systems and they have to talk to each otherat once, the systems can get a little crazy.”Even worse, he adds, “people don’t like to believethe machine. Even when the system tells them tobuy 10 units, they say, ‘I don’t think I’m going to sell10 units,’ and they over-ride the system with higheror lower numbers. Even if you can see that the mathis right, people aren’t willing to listen to it. I’m notsure of a single company who lets the system do itsthing. They are always tweaking.”This tweaking can wreck havoc, particularly insystems where the architecture doesn’t give you thevisibility to the math inside the proprietary model.
  53. 53. “You don’t know exactly what the software isdoing, what settings work better than others,” saidMatthesen, “so changing the variables can makematters worse. If the outputs don’t seem right, it’simportant to identify why, and fix it, rather than justchanging the answer. If you set up the system right,hopefully it is giving you better answers than youcan get on your own. Otherwise, why have it?”Touchstone to Technology Success:Know your Supply Chain and moreIn answer to Matthesen’s question, Russo saysthe first step in choosing the right supply chaintechnology is to fully understand your own supplychain and strategy.“It should be the business that drives you to getone of these tools; otherwise you could end upwith a stranded asset that you cannot use. Let’ssay you have a dependent demand supply chain:I order a car and all the parts that go into that car,and I can define all the demand that I need in thatsupply chain. Then there is a service supply chainfor an airline, and I have to put inventories in thefield to use to service my airlines. Those are twovery different supply chains that require differentalgorithms. How do I set my supply chain strategy?
  54. 54. Where should I have a warehouse? It’s less a tooland more of a model that you need to understand.”And before investing in new technology systems,BCG and Wharton experts suggest that companiesreview IT systems that are already in place. “If itturns out that there is a big need, we always startfrom looking at the data, and understanding how wewant to function,” said Matthesen. “If a lack of IT isgetting in the way, we look at how to address that.It’s not rocket science, generally, but the standardprocess of looking at what is in the market, the sizeof the company and what IT they already have.”Russo adds: “Rather than buying new technologyand new tools, I suggest that clients make better useof the technology and the tools that they alreadyhave, to digest and really build on the supply chainnetwork. There is a lot of discussion now about‘shelf-ware,’ where companies only use a little of thefunctionality that is available to them. I think there isa lot of pent-up capability that needs to be tapped.”For those in the market for new supply chain technologies,Wharton’s Nettissine cautions that despitevendor claims, it is “very hard to calculate howmuch a particular technology helps.”Consider ERP software, which a large company
  55. 55. would use to centralize its data management:“This software offers an accounting system,financial system, operational systems, some supplychain management and production managementmodules. It is expensive, and implementation takesyears. No one knows if they pay off or not.”Implementation time for supply chain technologyis key, Nettissine notes. “As far as I know, supplychain management software provides somebenefits because the software is much smaller,more narrowly focused [than ERP systems], and theimplementation schedule is much shorter. With SCMsystems, it typically takes you about nine months toa year to implement a system. After a year, you canstart to track benefits. But ERP may take two, three,five years to implement. So it becomes much hardernot only to implement but to track any benefits.”Some experts have suggested that as supply chaintechnological applications get more complicated,failing to deliver improved performance will resultin firms cutting back on technology and IT spending.But Matthesen disagrees.“I don’t see people cutting back on IT spending,”he said. “They still look for the silver bullet. It’s partIT, part supply chain. To do this right, you have to
  56. 56. get a lot of pieces to work cross-functionally. Let’ssay I spend a lot of money on IT in the shippingdepartment; that’s not fixing the IT problem inother areas. But if you adjust all processes withIT in mind, it is a beautiful thing. If you just buysomething off the shelf and expect it to fix all yourproblems, you will be disappointed.” 3Creating the Optimal Supply Chain17http://knowledge.wharton.upenn.edu

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