Supply Chain Leader Supply Chain Leader

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Supply Chain Leader Supply Chain Leader

  1. 1. Spring 2006 Supply Chain Leader Ideas & Innovations from i2 Technologies What’s on the Horizon? Advanced systems, new business paradigms and new management processes will create unparalleled agility, speed and responsiveness to customer demand 7 Principles of Supply Chain Agility Creating Virtual Verticality in Horizontal Supply Chains A (Software) Platform for the Future Big Is Beautiful at Panasonic Plus: Technology Empowers Hurricane Relief Efforts • Impact of RFID Outsourcing Supply Chain Analytics Can Improve Business Results The Supply Chain Company TM
  2. 2. In this Issue Cover story What’s on the Horizon? by John Cummings Page 10 A new generation of supply chain management is at hand. Advanced systems, new business paradigms and processes will create more agility, more speed and greater responsiveness to demand than ever before. Supply chain management will become a competitive differentiator, with supply chains pitted against each other and supply chain clusters challenging today’s leaders. Features Page 15 Page 22 Page 24 7 Principles of Creating A Platform Supply Chain Virtual Verticality for the Future Agility in Horizontal by by Sanjiv Sidhu Supply Chains Emmanuel Sabourin by Hiten Varia and Aditya Srivastava Speed alone won’t win the race. New technology is achieving the The i2 Agile Business Process Platform Here are seven ways top-performing advantages of vertical supply chains offers big benefits through the companies are gaining speed and without the costs. power of two technology advances: better performance through agility. service-oriented architectures and expandable workflow/process libraries. Case studies Page 20 A major semiconductor manufacturer wanted to sharply increase its on-time delivery to customer-request dates, without increasing inventory. i2 Inventory Optimization provided a flexible, demand-driven approach. Page 27 When a major electronics retailer realized its disconnect between Purchasing and Logistics was costing it customers, it turned to i2 Supply Chain Visibility. Columns Page 29 Collaborative Material Management: New Systems Enable Synchronization Between Procurement and Material Planning, by Sharmistha Dubey Page 32 Transportation Management: Best Practices in Global Logistics, by Razat Gaurav Departments Page 3 CEO’s Perspective: Looking to a New Generation of Supply Chain Management, by Michael McGrath Page 4 Interview: Big Is Beautiful at Panasonic, an Interview with Mike Aguilar, by Victoria Cooper Page 8 Focus: Outsourcing Supply Chain Analytics Can Improve Business Results, by Amarnath Thombre, Madhu Rajendran and Lee Wilwerding Page 30 Opinion: What Impact Will Radio Frequency Identification (RFID) Technology Have on Supply Chain Management? by Michael Cohen Page 34 Beyond Business: Technology Empowers Relief Efforts During Hurricane Katrina, by Victoria Cooper Page 36 Inside i2: 2005 Recap–Focus on Financial Stability, by Mike Berry See Supply Chain Leader online at www.i2.com. The magazine is published three times annually by i2 Technologies, Inc., in spring, fall and winter. This is its inaugural issue. Supply Chain Leader / Spring 2006 1
  3. 3. CEO’s Perspective by Michael McGrath Looking to a New Generation of Supply Chain Management Welcome to the premiere issue of Supply Chain Leader. “engine,” the customization of software workflows for an In this inaugural issue, i2 Technologies heralds the next individual company’s unique supply chain processes was generation of supply chain management solutions and impossible. Now, both those hurdles have been overcome. practices, which will finally allow supply chains to be What are the advantages? The workflows stemming managed cross-functionally for superior performance. from management processes take advantage of best practices As was the case in all previous generations of improve- in different industries, so they have a “built-in” expertise. ment, new breakthrough technologies—service-oriented They’re also adaptable, so companies can customize them architectures and business process platforms—are enabling to their particular needs. And the combined capabilities the practices of this new generation. I predict the impact of a service-oriented architecture and a platform engine of this new generation will equal or exceed that of previous allow data, applications and workflow processes to be generations enabled by material resource planning (MRP), integrated not just across one enterprise but across enterprise resource planning (ERP) and advanced multiple enterprises, encompassing suppliers, channels planning systems (APS): and other strategic partners. • The MRP Generation applied the capabilities The opportunities for better supply chain management of large-scale computing to enable companies from these new capabilities are endless. Among the most to calculate material requirements based on what The emerging generation of solutions was needed to achieve sales forecasts. and practices will finally allow supply • The ERP Generation enabled the integration chains to be managed cross-functionally, of supply chain transactions across the enterprise, powered by the new client-server technology. for superior performance. • The APS Generation allowed for functional significant opportunties are the ability to shape demand optimization, using large-memory computing. This and achieve immediate visibility into data, leading to more resulted in dramatic improvements in optimization relevant and current information, and, consequently, of factories, demand and transportation. better modeling and forecasting, planning and decision- But now we’re in a new, faster, more complex and making. Now, forecasts and plans previously generated more demanding world of supply chain management. periodically can be created dynamically using streaming Globalization has necessitated outsourcing and created demand data. a greater need for multi-enterprise planning and risk Also, demand can be shaped based on supply chain management, as well as for more dynamic forecasting. contingencies engendered by man-made and natural The time has passed when a functional focus alone— events, supply and demand disconnects and competitive on optimizing factory production, transportation manage- actions. The greatest benefits of these new capabilities ment and demand forecasting—can be competitive. will come in increased revenues and gross margins. Yet, the idea that a company can build anywhere and sell At i2, we’re committed to continue our leadership in everywhere tugs at traditional notions of centralized versus creating innovative, new solutions based on a deep and decentralized organization and governance. It is now focused understanding of supply chain issues and processes necessary to rethink and reorder workflows, process and an insistence on pushing the bar upwards in achieving management, partnerships/alliances and business models— excellence and competitive superiority in supply chain all requiring cross-functional supply chain processes. management. Supply Chain Leader is not just a way for us Over the past five years, i2 has invested in developing to share our thought leadership with you; it’s also a way the i2 Agile Business Process Platform, built with to recognize your company’s supply chain leadership in a service-oriented architecture and a software library its own right. of workflows (i2 Studio). Before the advent of service- oriented architectures, the systems-integration cost to Michael McGrath is CEO and President of i2 Technologies, the founder assimilate data from a wide range of applications serving of two other software companies and the cofounder cross-functional processes was prohibitive. But with SOA, of management consultancy PRTM. He has authored five books on the subject of high-technology manage- applications can be “plugged in” as services. Likewise, ment. Contact: supply_chain_leader@i2.com. until the development of a business process platform Supply Chain Leader / Spring 2006 3
  4. 4. Interview by Victoria Cooper Big Is Beautiful at Panasonic The consumer electronics giant is betting on large-screen plasma TVs as the display technology of the future. In February, Supply Chain Leader interviewed Mike Why were you interested in moving from sales into Aguilar, Panasonic’s Senior Vice President of Supply supply chain management at Panasonic? Chain Strategic Initiatives. Aguilar has been with Panasonic for 29 years, recently moving into this position after leading I wasn’t. Our chairman, Yoshi Yamada, asked that the company’s North American sales operations for five I make the move, and I finally saw the wisdom in it. years. The consumer electronics division of Panasonic is Panasonic wants to maintain its market lead in plasma preparing for the conversion to the digital spectrum by the display sales and that will require changing the basic United States in February 2009. The question is, how fast business paradigm between us and our channel partners. and how big will the spike be in sales of high-definition Mr. Yamada thought that someone with a good sales products and which technology will win? To answer present background would understand what the channel partner demand and build for more, Panasonic is opening its fourth and the end-consumer need. He understands that the plasma display plant in Amagasaki, Japan. Once it is fully consumer doesn’t care so much about the technology as operational (expected in 2007), Panasonic will become the the solution: Is the picture quality good? Can the user largest plasma manufacturer in the world. The company show home movies and still photographs on the screen? commands the largest market share today (hovering at 50 Is the audio quality good? Mr. Yamada wanted to change percent) of a market expected to reach 10 million units by the marketplace, to enhance demand for larger screen 2009. Plasma TVs currently account for 90 percent of the displays, a high-ticket item. global demand for flat-panel TVs in sizes above 37 inches. Why is Panasonic betting on large-screen plasma display technology? We believe it provides the best quality picture and delivers a superior overall visual experience compared with other formats. It’s also a core technology at Panasonic—one we’ve been investing in and developing for many years. We’re the leaders in developing high- definition plasma display technologies in all large screen sizes, including the world’s largest plasma at 103 inches! We want to take advantage of our lead in this area and make the most of trends we are seeing in the marketplace for more at-home enjoyment of the “big picture” phenomenon. It’s actually an interesting phenomenon. If you look back at the TV business five years ago, you would have been hard-pressed to sell anyone a TV over $500 in value. And the largest screen was 36 inches. But, because people have seen the high-definition signal in malls and stores (and recently, the broadcast of the Winter Olympics in Torino, Italy in high definition), and experienced the higher quality, most are trying to get the largest screen that can fit in their homes. And prices have been falling, so that has also spurred interest. Photos by Jared Leeds
  5. 5. What’s at the root of the fascination with big-screen displays? Mainly, it’s the experience. It’s much more exciting— mesmerizing, actually—to see a sports program or a movie on a large screen with high-definition resolution and color. It’s interesting to look at the statistics on movie ticket sales in the past few years, too. They’ve been down, and you have to ask yourself why. I don’t think it’s because of the content. There are simply more people trying to duplicate the movie-theater experience at home and waiting until after the release of new movies to buy the DVD. Or they’re watching through their cable or satellite company. While they’re watching at home, they want to have a similar experience to what they see and hear in the theater. For that they need surround sound. So we’re designing home theater audio systems to go with the plasma display screens. In fact, when we look at this business we don’t just look at it as a TV business. We look at it in three categories: the TV business, the DVD player/ recorder business and the digital, still-camera business. Like the cable and satellite suppliers, these last two categories are really going to be providing the content In HDTV plasma technology, we have a category for home entertainment. similar to the computer industry in its price deterioration, The phenomenon has accelerated the furniture, shelving except at a much more rapid pace. In this three-year-old and wall-mount businesses too, since the big screens category, we’re going through 30–40 percent price become the focal point in a room and have to be designed deterioration every year. And it’s a price deterioration into the room either with cabinetry, designated spaces or based on products that have an average retail price of hanging fixtures. And, of course, once consumers can’t $5,000. We’re also entering a market that is going to receive the digital spectrum on their old, analog-signal TVs, replace all of the traditional tube TV business that the they’ll need to have a converter box to use their sets at all. average consumer has in his home today. So we’re going That will also spur a new category in consumer electronics. into a new territory. The price deterioration is the result Lastly, there are many competitors on the scene. Up of the extreme competition in this area—among companies until the last couple of years the computer manufacturers and technologies (liquid crystal display versus plasma, didn’t take up space in this category, but obviously there for example). are two ways to look at this convergence of technologies. The curve of adoption of this new technology is also One is that the home will be computer-centric and the interesting. Formerly, in consumer electronics, you would other is that the home will be display-centric and have add- introduce a new technology in a “boutique” channel: A on appliances to that display technology. Nobody knows high-end TV or audio system would start in a specialty who the winner is going to be. Obviously, we’re betting on store once the concept was established and had caught some the display-centric scenario with moveable media. momentum. And then it would move into electronics specialty stores and, finally, mass merchants. There was What is the magnitude of the phenomenon of high- a lot of cycle time required to develop and improve the definition plasma TVs, in consumer electronics terms? product because you’d start at the high end and then reintroduce new products at lower prices. We’ve never seen this monstrous spike in a new Today, that curve has been totally eliminated. Consumers category. Not with VCRs or CDs or DVDs. The amount want new technology immediately, and they want it in any of growth and the rapidity of growth in high-definition channel they choose to buy it in, whether a warehouse club, TV technologies and displays can’t even be compared a Wal-Mart, a Best Buy or a Tweeter. with that of other categories. Supply Chain Leader / Spring 2006 5
  6. 6. Interview (Continued) What are the problems this demand has created for Why do you think you can do this better than the supply chain? your retailers can? There’s no longer the luxury of taking a long develop- Ah, that’s a good question. The short answer is that ment time in a product cycle; the product cycle has to be we are looking at the data more carefully and with more married to a huge vertical launch, all at the same time precision than they can, because we have engaged in a with a massive amount of retailers. So the supply chain partnership with i2 Technologies to do so. Let me explain. has become extremely important in ensuring that all of When we took on the project of shifting our emphasis the retailers can supply all of the potential consumers at from supply to demand and shifting our forecasting to the same time. a POS forecasting system, we had two choices. We could Because of the size and vulnerability of the plasma go through the traditional process of buying software and screens, there are also special problems associated with installing it inside our company. (This would be a very packing, moving and storage. Plasma screens take up a lot of room on trucks and in warehouses. You can only fit 150 screens in a 53-foot semi, for example. For that reason, retailers were stocking small volumes, and with the spikes in demand of the past year or so, that has been a problem. Because these are high-priced items, it became obvious to us that for forecasting and planning purposes we needed to have closer knowledge of demand signals at the point of sale (POS). So we’ve had to transition from being a “sell-in” company to being a “sell-through” company. The real sale doesn’t take place when we sell “in” to our retailers; it occurs when the retailer sells “through” to its customers. We needed to become much more cognizant of what the retailers own and to look at end-to-end supply, which we never did earlier. How are you getting at that information you need— the data from the consumer end? Our traditional methodology was to collect POS information from our retailers once a week. And we collected it on a national level. But to really understand what is happening in the market, we’ve had to switch to once a day and to gather data from each individual store. So, in the case of our largest retail partners, we are collect- ing information from thousands of stores every day. This is a huge amount of information to process, and it is regional and local-store information, allowing us to adjust our marketing and promotions at that granular level. The result is that the channels have had to change the way they do business with us. We asked them to make a large investment in their IT infrastructure to share POS information with us. Traditionally, we had a buy/sell relationship with the retailers, and then it evolved into a collaborative planning, forecasting and replenishment (CPFR) relationship. But we have now taken that a step further and asked our retailers to let us help choose what merchandise to put into their distribution centers on a weekly basis. 6 Supply Chain Leader / Spring 2006
  7. 7. long process—up to two years—and it would entail hiring You’re doing a lot to ensure that you maintain your many more forecasting analysts than we have on staff.) lead. What about budgets? Do you have a massive If we had chosen this route, we would have missed a huge budget for advertising? part of the growth curve that’s taking place right now. The second choice was to have i2, which has extensive We’ve doubled our advertising budget every year in software development and consulting services in India, this three-year stretch so far. It has become an enormous perform the data capture and analysis for us. We decided amount of money we’re spending for two reasons: to to “rent” both the software and i2’s expertise in forecasting maintain and grow our market share and to enhance our analysis. We made several trips to India and were able to brand image. We believe that, especially with high-priced get this project going in just a few months rather than a items, people buy the brand as well as the product features. few years. Essentially, just as we are embedding ourselves in our channel partners’ supply chain operations, we are Panasonic is noted for its product innovation. But embedding i2 into our forecasting operations. We look at you also hold onto your manufacturing capability. this as a kind of insourcing. Why is that? The partnership is really among Panasonic Japan, Panasonic USA, and i2 Technologies and is working out We’ve always been strong in both product innovation well because of the advantages created by the time and manufacturing. We outsource very little, because we differences. We’re essentially cutting out a day from our believe our brand image is only as good as the quality forecasting process, because although our channel partners’ of the product we make. For that reason we make most weeks end on either Friday or Saturday, the information of our components. Once you start outsourcing the quality is in India on Sunday (their Monday). They work on it of your product, you are risking your brand on someone all day and deliver it to our desktops on our Monday. else’s production capabilities. In this way, we’re able to operate 24/7. Another help has come from a shift in our focus from What excites you most about supply chain supply-side management to POS-managed inventory. management today? To do this, we’ve brought in POS analysts, whom we have never had before, and demand analysts that are It plays an extraordinarily important role now. It’s concentrating on this project. We’re assigning analysts to the key focus of all of our management at Panasonic. each of our key channel partners so we have people who Everybody realizes that the only way to take cost out of are specialists dedicated to a product in a channel partner. the system now is on the supply chain side; every other They are not generalists taking a global view of a category, area has been attacked already. In addition to that, supply but rather gauging a slim slice of what each channel partner chain is the key to making sure you have the right product is up to. They are becoming experts in what is happening at the right place at the right time: the traditional quandary. at the retail end. What I think excites everyone here, including me, is not just trying to figure out how to take time out of the You have to have a strong plan to make the forecast production cycle, but also how to rapidly supply our dealers. good. Any new planning methodology? Instead of making them wait 11–18 days for a delivery, how can we get it to them in 1–3 days? So, we’re viewing We have a sales budget for every one of our channel supply chain management not just from the production partners for every week of the year. So we have to be very and supply side but from the perspective of fully integrating flexible and agile with our factories in order to change the logistics picture. As a result, we’re now repositioning production to be in sync with what’s happening on the our warehouse facilities as close to our channel partners demand side. In an earlier time, when the focus was all as possible. If you think about it, the more inventory you on supply rather than demand, you would try to lock your have with them, the less flexible they are. And it’s difficult channel partners into specific quantities. But now you for a large channel partner to transfer merchandise back have to be flexible enough to say, “There’s risk on both and forth. But it’s easy for a supplier to nimbly move that sides; we’re both going to take that risk, and, as the merchandise to where it’s needed as rapidly as possible. market changes, we both have to change as quickly as it’s By offering rapid replenishment to retailers, we can help changing.” So it’s a very different system than operating them keep their inventory at a low level and increase their with a locked-in production number. cash flow rapidly. We’ll all profit from that. See Mike Aguilar at i2 Planet in Las Vegas May 10 –12. Supply Chain Leader / Spring 2006 7
  8. 8. Focus by Amarnath Thombre, Madhu Rajendran and Lee Wilwerding Outsourcing Supply Chain Analytics Many companies in a wide range of industries have patterns in the marketplace. These insights, in turn, help realized major cost savings by outsourcing and offshoring companies maintain the right—that is, minimum—level back-room functions, call centers, IT and business processes. of inventory throughout the supply chain, for major cost As the expertise of outsourcing providers has improved— savings. Also, focusing on the right inventory strategy and confidence in their expertise has grown—companies can have a huge impact on service levels or availability, have begun to outsource increasingly sophisticated affecting revenue and market share. functions, such as specialty design and manufacturing. These insights can be especially valuable for companies Now, a handful of forward-looking companies are off- with a large number of SKUs. For instance, one large shoring the analysis of supply chain data to help make better manufacturer in the high-tech industry offered 10,000 operating decisions. By tapping into the analytical skills of different types of components. Keeping the right number lower-cost countries with a well-educated workforce—such available to meet changing customer needs was an ongoing as India—companies are getting valuable insights from data nightmare. But by outsourcing analysis of its sales data, that had once been too voluminous or too complex to deal the company discovered that 10 percent of its products— with quickly and in a cost-effective manner in-house. dubbed the A products—resulted in 90 percent of its ship- Managed supply chain services can ments. Another group of products—C products—was rapidly improve business results, rarely ordered at all. Also, the ordering patterns varied widely by customers. Certain customers gave four to six especially in demand management and weeks of lead time for delivery, while others wanted ship- inventory optimization. ment within three days of placing an order. Based on these Unlike traditional outsourcing and offshoring, which insights, the company decided to focus on keeping the always carry a degree of operational and financial risk— high-demand components in stock at all times. and in some cases, disappointing results—outsourcing The manufacturer also decided to follow an inventory supply chain analytics is virtually risk-free. It’s relatively deployment strategy that aligned with customer order lead easy to implement, requiring no exchange of people, times—for shorter lead times, following a make-to-stock processes or systems. It’s also flexible. Instead of being model, and for longer lead-time demand, adopting a build- locked into multi-year contracts, most companies simply to-order model with periodic inventory target recommen- subscribe to a data-analytics service on an as-needed basis. dations. Customer-service levels on these high-demand Outsourcing providers in India are able to spread one highly products soared. By contrast, C components were only skilled, low-cost expert across three or four accounts, for finished and shipped when a specific customer order came far greater leverage than an individual company could in. This segmentation strategy led to enormous cost savings achieve on its own. and greatly simplified inventory management—benefits that the company wouldn’t have realized without outsourcing. Better demand forecasting and inventory management Better data analysis can also pinpoint problems that Managed supply chain services can rapidly improve might have gone unresolved before. One consumer elec- business results, especially in the closely aligned areas tronics company had just started selling a new TV model in of demand management and inventory optimization. a discount store chain. The company shipped five weeks of By collecting and analyzing point-of-sale data, along with inventory to the store’s distribution network, then sat back data on inventory levels throughout the supply chain, and waited for the revenue to roll in. But sales were far product seasonality, the effect of promotions in different lower than expected. Working with data on sales per store, regions and competitive data, companies can manage per region, the outsourcer discovered that in the two regions demand far more effectively by quickly reacting to market that usually had the highest sales, the TVs had only reached changes and competitive actions to increase revenue. the discount store’s distribution centers, not the stores The insights gained can help companies target promo- themselves. In fact, the retailer had an undiscovered execu- tional spending to “shape” demand and make better tion issue. When the service provider showed the retailer decisions about when and how to replenish inventory. the analytics that revealed the log jam, the store quickly A flexible demand forecasting model that regularly corrected the problem. Sales doubled in those regions tunes itself to changing market conditions gives companies over the next three weeks. This level of analysis—and better guidance on how much inventory to keep and which the speed with which it was done—would have been channels and regions to distribute it to, based on buying impossible with the company’s existing staff and expertise. 8 Supply Chain Leader / Spring 2006
  9. 9. Can Improve Business Results Getting started in a specific supply chain competency, such as more With shrinking product life cycles, ongoing cost accurate forecasting or better inventory management. pressures and growing variability in customer demand, Then, the provider integrates with the customer’s data the supply chain must be more agile and effective than sources and determines how often to receive data, in what ever before. Yet many companies have been disappointed format and so forth. This process takes about two months. in their supply chain software, often after making major Then, the data-analysis service is up and running, and new investments in time and money. Add to this the fact that insights begin to accrue. the granularity and frequency of information are increasing Although starting up a data-analysis program is from such sources as POS data capture, market research, relatively straightforward, a company may find that getting the Internet and RFID. Subscription outsourcing is a way its employees to trust and use the findings will be a to improve supply chain planning and effectiveness quickly, challenge. Changing the way people work is always hard. at a reasonable cost. Getting started can take as little as Strong executive sponsorship is usually needed to ensure two months, so time-to-results is far faster and less costly that the new insights are acted on. Another hurdle for than implementing yet another software program or some companies is becoming comfortable giving developing the needed skills in-house, which takes even out proprietary data. However, most service providers longer because of the steep learning curve involved. have strong security measures in place and will sign non-disclosure agreements upfront. A more accurate demand forecasting At some point, many companies elect to bring the model offers better guidance on how data-analysis service in-house in a “co-sourcing” arrange- much inventory to keep and which ment, where the outsourcing team integrates with the client channels and regions to distribute it to. team and teaches them the needed data-analysis skills. Outsourcing supply chain analytics usually starts with Outsourcing data analysis holds great promise for a needs-analysis stage, where the service provider seeks companies that want to reach the next level of supply to understand the company, its supply chain and its data. chain effectiveness quickly, at a relatively low cost. Based on its findings, the service provider creates a By supporting better planning, demand forecasting customized data-analysis program designed to meet the and inventory management, this new category of out- company’s needs. Typically, the program focuses on a sourcing is delivering major returns to the companies specific problem or goal, such as preventing lost sales, that have tried it. increasing inventory turns or improving promotional Request more information at: supply_chain_leader@i2.com. effectiveness. These goals are then linked to improvement Supply Chain Leader / Spring 2006 9
  10. 10. What’s on the Horizon? by John Cummings
  11. 11. o ver the last third of the 20th century, supply chain management has been very important to global commerce. Today’s high-performance supply chains span synchronize hierarchies of suppliers and distributors by deploying money and information through efficient command-and-control networks. Their rivals will have few options but to set aside short-term competitive concerns, organizing into supply chain teams to compete. They won’t be able to catch up otherwise. the globe. Even if the time is right, can it happen? It has worked in the bricks-and-mortar world, when complementary Changes in business processes, companies have self-organized into geographic clusters: information flows, technology and financial leather goods around Florence, electronics around Santa Clara, for example. Global, multi-enterprise supply models will transform the world further chains are clusters’ natural successors––electronically in the next decade. These changes have organized and coordinated to compete with one another and with hierarchical giants, supply chain against everything to do with paradigm-changing supply chain. business models. The next generation in 2. Global process improvement will replace supply chain and business management “business as usual” is at hand. Of course, building strong, collaborative supply chains Eight predictions of things to come encompassing business processes, information management and financial models in supply chain management. takes more than motivation. Optimizing one company Changes in process management doesn’t transform a supply chain any more than optimizing 1. The multi-enterprise supply chain problem one machine transforms a factory. To enable global supply will be solved chains, next-generation supply chain management will There are few vertically integrated companies left in expand cross-functionally, without stopping at enterprise today’s world. Modern supply chains cross multiple enter- boundaries. Optimization will be based on a greater business prises, accumulating value from multiple tiers of suppliers, need, not simply on the needs of an individual, functional some of them half a world away. Synchronizing activities silo. Continuous process improvement on a global scale along these multi-enterprise supply chains is the next great will emerge as a fundamental requirement for business task of supply chain management. In short, it will require a success and a core competency among business leaders. scope of collaboration never before seen in modern business. The key to these next-generation processes is demand- While collaboration is an evergreen topic in supply chain supply synchronization, with “demand” in front and in charge. journals, many real-world initiatives in this realm have fallen Real-time demand, integrated across customers and customers’ flat. Disciplines like collaborative planning, forecasting and customers, will provide suppliers, and their suppliers, with replenishment (CPFR) are constantly undercut by unilateral complete supply and demand visibility up and down the service-level agreements, information-hoarding by channel supply chain. And since demand and supply are fast-moving masters and defensive and retaliatory behavior from partners. and interdependent, supply initiatives will merge with cross- What kind of motivation can overcome bad habits practiced enterprise Total Quality Management and Six-Sigma initiatives over decades? in a continuous cycle of improvement. Deming’s “plan-do- The answer is “survival.” Today’s toughest competitors check-act” cycles will flow as a continuous, real-time process. Supply Chain Leader / Spring 2006 11
  12. 12. 3. Agile supply chains will replace static hierarchies New models for information flow and Today’s collaborative supply chains are high velocity. decision-making End-to-end visibility and strong enterprise-spanning business processes accelerate inventory management, product 4. Rich data from smart devices will demand introduction and ordering and fulfillment cycles, for and empower new management practices increased competitiveness throughout the chain. As New information management models are already collaborative supply chains compete with hierarchical driving end-to-end visibility, supply chain agility and rivals and one another, victory will go to the most agile continuous process improvement across global, multi- teams (see article, page 15). enterprise supply chains. And the sheer volume of it Why? Because demand is never static. Even when its will make the 1990s Internet bubble look like a trickle. level stays put, demand mix shifts across products with Radio Frequency Identification (RFID), continuous different costs, production constraints and cycle times, from demand signals from mobile consumer communications one geographic region to another, and among customers and smart devices built into every imaginable product will as their requirements and demands shift. To meet the extend supply chain visibility down to the unit level and challenge of dynamic demand, supply chains must contin- throughout product life cycles. uously adapt planning and execution processes, organizations, Automobiles, airplanes and consumer electronics will sourcing strategies and networks––even the configuration of continuously report operational and usage information The process of dynamically changing the parameters of the supply chain will happen instantaneously and continuously. the parameters. The process of dynamically changing the upstream in the supply chain, enabling precision sales of supply chain will happen instantaneously and continuously. upgrades and replacements, continuous monitoring of con- Essentially, the supply chain will be tuned as it is managed. sumption habits, predictive targeting of maintenance and The supply chains that keep up––agile in the short run, repair, and, inevitably, a thousand new operations that can’t adaptive in the long run––will lead their industries. be seen from today’s frame of reference. Millions of devices Hierarchies, with static, top-down management and readers—each with its own Web address—will stay structures and redundant organizational overhead will be in continuous contact with supply chain hubs up and at a disadvantage in this new environment. Uncooperative down the chain. This new, rich information will be the practices, like hoarding information or pushing risk onto raw material for synchronization at every point along suppliers and distributors, undermine the trust that allows the chain, each member using whatever information a supply chain team to function as a single, efficient unit. is needed to optimize its contribution to the chain’s And yesterday’s static tools, incapable of looking beyond business effectiveness. functional boundaries, will prove no match for the vision To compete effectively, multi-enterprise supply chains and reach of new supply chain competitors. The best of the must develop new ways of absorbing, managing and using giants understand these dynamics. Toyota, for example, is all of this information. New systems must not just manage renowned for both its collaborative approach with supply an avalanche of information, but dynamically update chain partners and its nimble response to market changes. parameters and reconfigure themselves, invisibly and A decade from now, no one will see that combination as rare. instantaneously taking advantage of the trends they identify. 12 Supply Chain Leader / Spring 2006
  13. 13. As complex as all this sounds, there’s hope for managing E-commerce has changed the relationships between the complexity. With every new source of information buyers and sellers. Buyers can select between feature-rich comes a new point of leverage and a chance for the agile products available later or at higher prices and standard supply chain to meet or shape consumer demand. products available right now for less. This demand-shaping approach will become widespread in many industries. 5. Supply chains will know what an individual consumer’s needs are as the consumer does Technology advancements What will supply chains do with all of this information? The same thing they’ve always done: use it to align supply 6. Dynamic technology will compress with customer demand. Monitoring moment-to-moment information latency needs of individual consumers has the power to transform What kind of technology will be available in the future the way business has been done in the past. Visibility lets to help interpret and manage all of this information? supply chain partners align supply and demand along Supply chain management will move beyond the borders the entire chain at once, instead of functional area by of the enterprise, and solutions will follow. functional area. Evolution, change and adaptation will be the hallmarks A product development example: e-commerce of any system that connects dynamic supply and demand has already raised the velocity with which products are in an information-rich environment. As markets emerge, Evolution, change and adaptation will be the hallmarks of any system that connects dynamic supply and demand in an information-rich environment. introduced and phased through life cycles. Fashion grow and change, supply chains will reconfigure and adapt, companies—always at the forefront in product life cycle adding new partners, information and business processes management—are already working on rapid adaptation as necessary to deliver what the market has asked for. of product introductions to demand signals, down to Tomorrow’s supply chain management solutions will individual customization. A few leaders have cut so compress the latency of information to an absolute mini- much time from the demand-to-delivery cycle that mum, enabling instant global execution and visibility. More they’re repatriating manufacturing, because transport important, they will reduce time-to-act to the point where time costs them more than offshoring saves. synchronization of supply and demand seems instantaneous. Customization may take place at many stages in These systems will scarcely be recognizable from the per- the supply chain, not just during manufacturing. With spective of today’s ownership-focused, enterprise-constrained, thoughtful product design, a wide variety of industrial enterprise resource planning systems. As a practical matter, and consumer products are candidates for “postponement” they will empower supply chain leaders to accept orders, bid strategies—already widespread in high-tech industry— out production and distribution across a global network of putting off late-stage manufacturing, assembly and partners and promise a delivery date, all as the customer’s configuration until firm demand signals appear from cursor leaves the “buy it now” button. “Pay-on-scan” business consumers, smart devices and supply chain intermediaries. models are likely to have the entire supply chain sharing in the Alignment with demand is possible even after parts have risks, right up to the moment of sale to the end-customer. been manufactured. Supply Chain Leader / Spring 2006 13
  14. 14. 7. Advanced simulation tools will accelerate Summing up a business’s ability to reconfigure rapidly The complexity and speed of tomorrow’s markets Taken individually, none of these trends won’t be contained within static analytical tools. Business may seem revolutionary. Supply chain managers will use continuous process modeling and simulation tools at new levels of granularity, instead of coordination will continue to spread from static measurements, quarterly reports and deterministic spreadsheets, to model and simulate multi-enterprise its origins on the factory floor throughout supply chains. global, multi-enterprise, supply chain net- Business process design, rapid prototyping, testing and validation will all be accomplished in the simulated works. Collaboration, business processes business environment, before rolling them out in the market environment. Powerful supply chain competitors and process-improvement disciplines will will not have just a few tricks up their sleeves, but entirely grow to match supply chains’ own scale new business models—prepared, tested and ready to deploy when market conditions are right. and speed. Rich data will come from Examples of simulation-driven, rapid prototyping of business models exist today. Cutting-edge portfolio everywhere, all the time, and systems will companies prototype, assemble and operate entirely new emerge to catch up with and even pull supply chains, built from manufacturing, distribution and business-service partners in much the same way that fund ahead of events, using modeling and simu- managers design, build and manage stock portfolios today. Finally, modeling and simulation tools will accelerate lation. Supply chains, and the systems that continuous process improvement by providing a rapid, coordinate them, will accelerate insight risk-free way to test and tune business processes and scenarios before rolling them out in the real world. and action, response and adaptation. Changes in financial models Financial models will emerge to enable 8. Cash versus cost: financial models will catch up new ways of doing business, delivering with new business models ever-increasing value to consumers and Today’s financial models for supply chain processes are based primarily on activity-based costing. While this fair, and evenly shared, compensation to is an improvement over its cost-accounting predecessors, the tension between dynamic supply chain business the supply chains that serve them. processes and activity-based costing is already apparent. In the future, the world will be trans- Supply chain decisions using cash as the basis result in a significantly different outcome than those focused solely formed by new business paradigms, on cost. Conversion to cash-flow decision-making will reveal the actual value-contribution of supply chains, brought on by the convergence of and the real business impact of any disruptions. technology and management processes It’s a little surprising that the financial side of the supply chain transaction stream has received so little and a newly empowered customer base. attention. Look for this oversight to be corrected soon, as companies realize the value of cash-flow-based supply chain operations. Beyond even cash-flow and value metrics, a milestone in the evolution of financial models will come as many Contact: John Cummings is i2’s Chief Marketing Officer industries adopt pay-on-scan compensation for supply (supply_chain_leader@i2.com). chain partners. 14 Supply Chain Leader / Spring 2006
  15. 15. by Sanjiv Sidhu 7 principles of suppl chain agility y n today’s fiercely competitive global economy, almost 1. Agile organization every company faces the challenges of ever-increasing How can companies organize to enable agile supply supply chain complexity. In the past, a typical company chains? An agile supply chain is the result of synchronized, offered a limited number of products through a single inter-organizational processes, designed to enable a rapid channel, using one shipping method. No more. Now, response to shifts in demand or supply. Processes and companies face an explosion of SKUs, channels, suppliers systems facilitate the real-time transfer of information and delivery options, along with more sophisticated, and plans among multiple departments. Cross-functional demanding customers and changing governmental synchronization is especially critical, with shared goals regulations. Keeping up—while maintaining competitive and metrics that support agility. The following capabilities costs and satisfied customers—is getting harder, especially allow multiple enterprises and organizations within one because supply and demand variables are changing more company to act as one: rapidly than ever before. Synchronized planning: The primary tool that Despite these challenges, a handful of companies coordinates different organizations is a synchronized plan succeed year after year, consistently producing strong that optimizes company performance—not just depart- revenue and profit growth—companies like Wal-Mart mental performance. Once departments and groups within and Dell, whose supply chain excellence is legendary. a company agree to a shared plan, individual organizations What’s their secret? Market leaders exhibit a common can synchronize their sub-plans with corporate objectives characteristic: agility—an exceptional nimbleness and and goals. Then, different functional areas or cross-functional unparalleled ability to respond rapidly and appropriately groups are given the responsibility and authority to deliver to changing market conditions. Simply put, supply chain on their sub-plans with the understanding that not agility underlies the success of these companies. The delivering on an individual sub-plan can compromise the following principles outline the multiple capabilities that overall plan and hurt the efficiency of the entire company. companies with agile supply chains exhibit. In this regard, agile companies live and die by their plans. Fast escalation: In a dynamic world, variability always presents new threats and opportunities beyond the bounds 1. Agile organization of any plan. When these threats and opportunities arise, 2. Keeping commitments via agile companies can respond quickly if they have “process closed-loop plan management playbooks” in place. These playbooks operate in much the same way that football playbooks do: predetermined 3. Customer intimacy via closed-loop actions are taken when particular situations are identified demand management on the playing field. 4. Supplier intimacy via closed-loop Playbooks are effective because they’re built on the supply management reality that most situations recur frequently. And, often, 5. Efficient delivery via closed-loop pulling the appropriate course of action from a playbook fulfillment management is easier, faster and just as effective, if not more so, than inventing something new on the fly. 6. Rapid business reconfiguration How does a company construct such playbooks? They’re 7. Agile IT systems the result of contingency planning. For example, a company can outline the steps that should be taken if sales are down Supply Chain Leader / Spring 2006 15
  16. 16. 2. Keeping commitments via closed-loop plan management Agility is an In typical companies, most plans are “dead on arrival”: they’re out of sync with demand conditions, or violate supply constraints. Agile companies implement closed-loop exceptional nimbleness plan management principles that involve rapid formulation of a realistic synchronized plan and continuous monitoring and unparalleled ability of plan execution. In other words, they focus on making to respond rapidly and the plan happen. Every area commits to its own sub-plan and provides early warning if deviations occur, enabling appropriately to changing corrective actions that are rapidly executed and coordinated. In this way, the plan is globally optimized, and plan market conditions. management becomes a local focus. Plan execution is rarely a straight path. Agile companies understand that it’s an ongoing cycle of planning, doing, checking and taking corrective actions. This “plan-do-check- act” cycle is applied to closed-loop plan management, a cornerstone of agility. Closed-loop plan management is made up of the following capabilities: Constraint-optimized planning: The typical process followed when generating a plan is unidirectional, starting with a financial plan and followed by a sales plan, an inventory plan and a supply plan, and so on. The process is constraint-insensitive and slow. By the time the plan is generated, too many things have changed. Agile companies have the ability to use the latest information on constraints in the planning process and to consider multiple alternatives to arrive at realistic, optimal plans—fast. The rule of thumb is to create a plan in one- tenth of the time it will take to execute it; e.g., a 30-day plan should take no more that 3 days to create, review because of the weather, supply issues, shifts in market and roll out. demand, or a competitor’s pricing, promotions or product Proactive monitoring and analysis of threats: Once advantages. On the other hand, if sales are stronger than a plan is rolled out, it is subject to threats. For example, expected, a playbook can help a company capitalize on if the plan was to sell 300 units for the month at a rate of the opportunity and increase production to take advantage 10 per day, it’s useful to check point-of-sale data to see if of the situation, as well as direct products to regions with the expected sales are occurring. If 5 units were sold on the strongest demand. If there’s a weakness in supply at a the first day, it’s helpful to understand the root causes of competitor, a playbook can help a company move quickly the shortfall in order to take appropriate actions to recover. to fill the gap, winning new customers along the way. If sales are down due to supply issues, the corrective action Measurement of performance to synchronized plans: will be different, for instance, than if a competitor’s price One of the biggest obstacles to taking appropriate discounts are causing the slowdown. actions when unforeseen variables appear is adherence Corrective actions: Plan owners are expected to take to “local” metrics. For example, factory managers may quick corrective actions to ensure that their commitment keep making product that the market is not buying, to the synchronized plan holds. Preferred actions are reasoning that higher quantities decrease unit costs. those that can be taken unilaterally; e.g., sales teams Or Sales may promote a product to meet revenue can take pricing and promotion actions to reverse sales objectives, despite the fact that delivering that shortfalls. Such actions reduce the element of surprise product is causing huge supply chain inefficiencies and variability for the rest of the business. Of course, and eating into profitability margins. Agile companies sometimes a plan has to change—say, by reducing correlate each group’s performance to the achievement the plan by a certain number of units. When this of synchronized plan objectives. Did the sub-plan happens, it’s important to collaborate and communicate aid and abet achievement of the overall plan? If not, quickly with all involved parties, such as Procurement no points are scored. and Production. 16 Supply Chain Leader / Spring 2006
  17. 17. Post-mortems and performance management: A rigorous systems to quickly transfer the information critical for post-mortem of each plan period helps companies analysis and decision-making. understand the root causes of deviations and the Corrective actions: Sales groups can react to plan devia- reasons for corrective actions. This post-mortem can tions with many tactics, including promotions and pricing. help improve the planning process and hold teams But the problem is, such actions may come too late to be accountable for executing on plans. Such accountability effective. A lack of processes and tools for examining and greatly decreases the level of “gaming” the system by reacting to variability may prevent speedy and appropriate under- or over-forecasting. Emphasis also shifts from corrective actions. Or there may be a cumbersome approval asking the question, “why did this miss occur?” to process to overcome. Here is where the process playbook asking, “when did you first know about this and described earlier is useful. It helps agile companies take what actions did you take?” required actions fast. An example is markdowns. If smaller markdowns are made earlier—before the product gets 3. Customer intimacy via closed-loop stale—the overall lost revenue may be lower than if larger demand management markdowns have to be made later in the product life cycle. Although a forecast is undeniably important, at best Post-mortems and performance management: The it’s an educated guess of what might happen. The plan’s emphasis here is on understanding what data could have the thing to focus on. Many companies confuse the two better predicted the deviations from the demand plan, and thereby create limited accountability. While the fore- and what actions should have been taken that were cast is often “owned” by an analyst, the plan is owned by somehow missed. a manager with a commitment to making the demand plan happen, despite variability. This process of making 4. Supplier intimacy via closed-loop a demand plan happen is called “closed-loop demand supply management management,” where the plan-do-check-act process Supply management includes internal and external is applied to demand management. It involves the sources of supply. As suppliers vie to increase their return following capabilities: on assets, they actively reduce their excess capacity and Dynamic demand planning: While some companies inventory. The timely and accurate exchange of plans focus on historic information to formulate their plans, it’s between manufacturers and suppliers helps suppliers maintain their responsiveness to variability. Agile companies Order fulfillment is where the deploy “closed-loop supply management,” where the rubber meets the road in plan-do-check-act cycle is applied to supply management. supply chain management. The following are key capabilities in this cycle: more important in a dynamic market to focus on market Supply planning: Typically, companies take weeks to trends, competitive position, customer collaboration and convert demand plans to supply plans. Despite this care- point-of-sale data analysis. Agile companies understand the fulness, supply plans often fail because of an inability to leading indicators of demand better than the competition. correctly account for capacity, material and other logistical In the semiconductor or consumer electronics industry, constraints in supply lines. How do agile companies take for example, demand depends on channel inventory. Such care of this conundrum? They implement fast supply data become a key input to the demand planning process. planning processes that allow time for many iterations. Increased rigor in demand planning yields not just better The result is constraint-optimized plans. To support this understanding of what will be sold but also a far superior planning process, agile companies expect their suppliers to understanding of actions required for winning in the market. respond to different planning requests in a matter of min- Proactive monitoring and analysis of threats: Agile utes. In doing so, they are able to see the supplier’s ability companies monitor sales data at their door and at the to fulfill different demand requests and can quickly choose channel outlets on a frequent—often, daily—basis. They the optimal path. The different parties involved then receive know immediately if only 5 units sold on day one, when their marching orders, which they commit to fulfilling. the plan called for 10. Staying alert to shifts in customer Proactive monitoring and analysis of threats: Some demand or buying patterns can also present opportunities. suppliers will take all orders, whether or not they have the If 15 orders are coming in daily, when the plan was to sell capacity and materials to fulfill the order on time, resulting 10 units, agile companies will immediately begin research in poor customer service. Agile companies expect both to find out why. If it turns out that a competitor’s production internal and external suppliers to notify them promptly if line is broken, agile companies can quickly capitalize on they are unable to keep commitments made in the planning this revenue opportunity. Working closely with their phase. Similarly, they inform their suppliers as soon as channel partners, these companies have already established possible if their own orders will be smaller than expected organizational structures, management processes and IT because of changes in demand. Supply Chain Leader / Spring 2006 17
  18. 18. Corrective actions: Managing supply means finding existing customer orders, allocation rules, transportation and fixing supply problems promptly. If a supplier calls times and cost factors to determine an optimal delivery and says it will only be able to meet 50 percent of commit- plan for each request. Based on this constraint-sensitive ment, an agile company quickly determines other sources fulfillment plan, companies can then issue execution orders of supply and analyzes the economics of quicker modes of to different players and make a commitment to the customer. transport—air freight, for example. It may even have to pass Proactive monitoring and analysis of threats: Agile up customer orders if the margin doesn’t look promising companies continuously monitor the execution of the against additional costs. When scenarios change, the different actions required to deliver the customer order. company’s ability to perform “what-if ” analyses is critical. By doing so, they are able to maintain real-time visibility The typical questions here are: “If I can’t supply it, what’s into order status and generate alarms when any of the the cost to my company in lost sales? If we go into crisis milestones are missed. mode to find alternative suppliers, will those costs enable Corrective actions: When there is potential for delay, profitability or not?” All plans must be assessed in relation options such as using air freight, replacing the order with to corporate objectives. an upgrade or allocating inventory differently are evaluated. Post-mortems and performance management: Post-mortems and performance management: Agile Obviously, the critical factors in a supplier’s ability to companies evaluate historical fulfillment data to find new deliver to plan are keeping commitments and providing ways of speeding customer fulfillment while optimizing early warnings when problems arise. The flexibility and fulfillment costs. Such data analysis helps them create strength of the supplier’s own supply management process more effective corrective actions in the future and helps enable both of these capabilities, so companies need to to reconfigure their supply chain management processes probe their suppliers’ visibility into constraints and ability for greater customer satisfaction and loyalty. to rapidly respond to variability. Here, again, the critical question is not “why did this miss occur?” but “when did 6. Rapid business reconfiguration you first know about this, what actions did you take and To move at the speed of business, agile companies how will you improve your plan management process reconfigure their processes as well as their physical plants such that this will not happen again?” and human resources. As the market changes, they might continuously reconfigure their supply networks, inventory 5. Efficient delivery via closed-loop strategy, fulfillment strategy, product designs and many fulfillment management more contributors to their success. Order fulfillment is where the rubber meets the road How do they do this? Consider supply network design in supply chain management. Can the supply chain deliver as an example. Agile companies establish a small group orders reliably to customers’ expectations and promises? of experts whose full-time job is to evaluate alternative What is the optimal path to fulfill the order? Typical order configurations. Typically, this group uses computer-based fulfillment paths are rigid: If a product is manufactured in models of the network and continuously updates the China, it will travel from the Chinese factory to the U.S. data—such as fuel costs—that support the network. warehouse and from there to the channel’s distribution They then run optimization routines to determine center and then to the retail store. But, increasingly, the ideal network to meet corporate objectives. customers are demanding “direct ship” from the factory. Agile companies strategize how best to manage product One way that companies address this quandary is by design and production, too. For example, printing on labels responding to customer requests with commitments based rather than directly onto bottles allows companies with on a firm, optimized execution plan. Agile companies global operations to hold off deciding which market to send deploy “closed-loop fulfillment management,” where the products to—and which language to print on the label— plan-do-check-act process is applied to fulfilling customer until demand trends become clear. Agile companies aggres- orders. This process involves the following capabilities: sively deploy such postponement strategies to gain more Fulfillment planning: There are multiple paths flexibility. They tune their supply networks, inventory strategy, companies can take to fulfill orders. For instance, different fulfillment strategy, product designs and other associated inventory locations can be tapped, and different transpor- policies sometimes 10 times as often as less agile companies. tation modes can be deployed. The pathway may be more complex when multiple line-items are requested, or when 7. Agile IT systems a sequence of multiple activities must be performed to The processes described above need IT capabilities meet the request. Agile companies are able to respond that are beyond what is typical in today’s corporations. to complex order requests within seconds. They’re the processes of an agile company, integrating and The fulfillment planning process takes into account synchronizing cross-functional capabilities across different many factors—current inventories, latest supply plans, organizations and partners. 18 Supply Chain Leader / Spring 2006
  19. 19. The obstacles to this integration and synchronization Root-cause analysis: The ability to determine the are well-known in industry: Data critical for decision- causes of problems is a critical prerequisite for delivering making often do not reside within the four walls of one on commitments. But how does this work? Let’s say sales company. It’s difficult, for example, to gain visibility into are falling short of the demand plan. A process playbook the data that show the status of one’s own inventory, not to determine the cause may include the following steps: to mention that of the competition in the same channel. check to see if there was adequate inventory, then check Even data that reside within one company are usually sales of similar items, then check competitor pricing, and residing in different systems, with different formats so on. IT support to flexibly implement such workflows and at different levels of aggregation. is a key enabler of rapid analysis. Moreover, because IT systems have not been helpful to Planning and optimization: To achieve desired business planning processes in the past, the spreadsheet is still the results, plans must be continuously updated with current number one planning tool used in industry. But spread- knowledge of market demand and supply constraints. sheets cannot be optimized globally, making the plan- Because plan synchronization across multiple entities do-check-act cycle overly cumbersome and error-prone. requires a collaborative, iterative process among multiple Yet, today’s requirements for synchronization and parties, it’s essential to have IT that supports flexible integration call for systems and solutions that override the planning workflows. Optimization tools that evaluate shortfalls of multiple systems owned by different partners multiple scenarios and suggest ways to minimize the in the supply chain. The traditional approach of replacing impact of constraints are key to responding rapidly legacy systems with one new, centralized system is also no to changing conditions and creating high-quality plans. longer practical in terms of timeline or costs. Traditional Distribution of plan-execution tasks: We’ve discussed approaches for data integration are also falling short of the importance of making the plan happen. Often, this the current need for process synchronization. execution function is distributed among different organi- Fortunately, there is a new class of systems that is zations and enterprises, requiring time-sensitive coordination. rapidly becoming available. These new systems overlay Consider, for example, the customer order that contains existing systems and provide support for the plan-do-check- multiple line-items that need to be sourced from different act functionality required in today’s global business climate. suppliers and merged in transit to deliver a single shipment. They also provide the flexibility to rapidly reconfigure The execution plan for this order will be handled by multiple business processes. Here are the primary capabilities of parties—calling for solutions that can monitor and track these new, agile systems: progress across multiple systems. Visibility across multiple systems: Agile companies know how important it is to be able to read and interpret Summary critical data in different ways. Whether involved in plan- The concept of a closed-loop, plan-do-check-act cycle ning, monitoring execution or analyzing root causes of is simple, yet powerful, and companies have embraced it constraints and other variability factors, they strive to in theory since W. Edwards Deming’s articulation of the refresh their data continuously. Potentially valuable data concept. But change is another matter. Creating a change may come from a wide range of internal and external management process to bring about a new corporate sources—point-of-sale systems, the Internet, pricing culture focused on agility requires a big commitment. sheets, research companies, a company’s own databases Such commitments and the steps companies make to and internal systems—and may come in forms ranging support them are not foreign to industry. When faced from SKU numbers and product categories to specific with a challenge of variability in product quality in product names. Modern visibility tools that overlay existing the 1980s, companies adopted a systematic approach to data sources enable supply chain executives to tap into bring about process and attitude changes—Total Quality multiple data sources, and then convert data to formats Management. that are helpful in analysis. Similarly, now faced with huge inefficiencies caused by Event management: A flood of data is difficult to variability in business operations, companies must make handle, however. So an agile IT system acts like an intel- a similar commitment to applying closed-loop principles ligent assistant, evaluating what events call for action from to the process of generating and executing business plans. different levels of management at a company. Such “events” For most companies, the increased agility delivered by might be a change in a competitor’s pricing or a rise in the such a program will yield more return on investment than cost of a key component. Agile systems create a checklist any other program to improve efficiency. of factors to monitor on a regular basis, such as the weather, (See related CASE STUDY on next page.) competitive pricing or the price of oil. The timely notifi- Contact: Sanjiv Sidhu is Cofounder of i2 Technologies, Inc. and cation of events that have the potential to impact business Chairman of the Board (supply_chain_leader@i2.com). allows for more rapid correction. Supply Chain Leader / Spring 2006 19
  20. 20. CASE STUDY Managing Dynamic Demand in Electronics The revenues of a global leader in semiconductor was a different story. Here, any forecasts were quickly out- manufacturing had stalled over the last decade. The dated, resulting in unavailability of needed parts. Despite company wanted to increase its market share, especially the complexity of the company’s business, its inventory in the area of high-volume logic chips. One way to do control depended on just two main factors: the stage of this was by improving its ability to deliver chips more completion to which products were built, and the locations quickly than the competition. Explains Pallab Chatterjee, where they were stocked. chief delivery officer at i2 Technologies, “In the high- volume semiconductor market, the ability to deliver Adopting a postponement strategy the right chip when the customer wants it is key to The solution was to postpone the last stages of product getting the order and gaining market share.” manufacturing so that the company could delay making This was no easy task, however. The company made decisions about the final form of work-in-process products tens of thousands of different varieties of logic chips, and until demand trends were clearer. There are trade-offs to demand was hard to predict, since few customers provided this strategy, however. Postponement is a compromise forecasts. A customer might suddenly request 1 million solution. While it is quicker than build-to-order, it has chips—and want them delivered in two days. In the past, higher inventory costs. It is also cheaper than build-to- the company had negotiated delivery times, counter- stock, but not as fast on order fulfillment. Moreover, offering five days instead of two, for instance. It had always postponement puts limits on the second inventory-control been a leader in on-time delivery for these negotiated, factor—stocking location. While finished goods may be deliver-to-promise dates, but now the goal was to sharply shipped to distribution centers near customers, “postpone” increase on-time delivery to customer-request dates, work-in-process must be assembled and tested at upstream without increasing inventory. Performance in this area facilities that are usually farther away, adding shipping stood at almost 80 percent—not bad, but not good costs and slowing delivery performance. enough to gain a more dominant market share. Despite these drawbacks, the postponement strategy i2’s analysis revealed that while the overall volume of would provide far greater flexibility and bring the company demand was quite predictable, constant changes in how closer to an optimal, demand-driven approach to inventory demand was distributed among products and regions management. After implementing i2 Inventory Optimization, challenged the company’s forecasting efforts. For instance, the company was able to calculate the many complex factors changes in the demand mix meant shifting to products involved in managing its inventory. Working closely, i2 with different costs, production constraints or cycle times. and this manufacturer simulated different postponement Or demand shifts among regions rendered previous stocking and stocking strategies. This involved segmenting products decisions hopelessly outdated. The changes themselves in different ways—ranging from manufacturing constraints were often small—perhaps a customer wanted a different to demand profiles—until the company found an inventory part version, or to have more items delivered to one location management approach that optimized these factors. than another—but keeping up with these many small Mindful that any performance gains would evaporate as changes was too much for the semiconductor manufacturer’s soon as demand shifted, the company scheduled weekly planning and inventory management capabilities. check-ups and adjustments to the strategy to ensure that segmentation always tracked current demand. Taking a demand-driven approach to Results exceeded expectations. Delivery performance inventory management surged by 25 percent, almost double the simulation’s estimate i2 quickly understood the root of the problem: that no for one-time gains. Notes Chatterjee, “The original process fixed plan can accommodate dynamic demand. Manually had them negotiating with customers on delivery dates. correcting mistakes as demand fluctuated, however quickly, Today, the semiconductor manufacturer is able to meet the was not a viable, long-term solution. Instead, this company customer request date without negotiation more than needed a more flexible, demand-driven approach to 90 percent of the time, without increasing inventory levels.” inventory management that would continuously update Better still, the gains were immediate—unmistakable the plan. i2 worked with the company to put in place an after one month—and reached new steady states only inventory management system that would automatically four months later. Success metrics were off the charts. adapt to changing customer demand on a continuous Inventory savings alone made the project’s ROI virtually basis—not just once a year. i2 analysis showed that the semi- incalculable. Inventory Optimization delivered the conductor manufacturer’s delivery performance was satis- speed and agility the company needed to keep up with factory on fixed, predictable customer orders, but building changing customer demand. to stock—for inventory or in anticipation of demand— –– Martha Craumer 20 Supply Chain Leader / Spring 2006
  21. 21. Creating Virtual Verticality in Horizontal Supply by Hiten Varia Chains Now, new technology is achieving the advantages of vertical supply chains without the costs. To understand the advantages of virtual verticality shipping firms, the warehouse and overland transporta- and why it is key to the next generation of supply chain tion—meant attention was diverted from designing and management, it’s important to look at what was desirable manufacturing tires as efficiently as possible. about a vertical supply chain, and what disadvantages drove supply chains toward the horizontal model. The shift from vertical to horizontal In the vertical supply chain that was the rule in the As the century progressed, most manufacturers divested early 20th century, a typical manufacturing company themselves of non-core upstream and downstream activities. owned the assets required for acquiring and processing Shipping, warehousing and transportation services were raw material into a finished product. Most often, these contracted from specialists. Dealers and distributors handled firms delivered the finished product directly to the waiting the downstream activities for the manufacturer. In short, customer. Take, for example, a tire manufacturer. Typically, the supply chain shifted from vertical to horizontal. it owned the rubber plantations and facilities where the Organizations focused on performing their core activities sap was converted into a product used in the tire factories. as efficiently as possible. Information began to take the place It also owned the ships, the overland transportation of assets. This new way of doing business became important and the warehouses on the docks. This single owner- in the early 1950s, when the first commercial computers ship created a vertical supply chain, lock-solid in its were delivered. Coordinating the easy flow of goods and reliability for getting rubber to the factories. Once services in the supply chain using the unprecedented power manufactured, the tires were sold through company- of computers increased efficiencies many-fold. owned and operated stores. As information technology advanced, and client-server Because the manufacturer had its finger in every architecture took the place of the mainframe, the use of upstream and downstream activity, it had total supply computers proliferated exponentially. PCs became as chain control. But a vertically integrated company like this ubiquitous as the clipboard had been. Information systems paid a huge price for control. The depth of investment could now enhance operational efficiencies and controls in necessary to run each link in the chain meant there was functional areas. less likelihood of extra financial resources for new product Management innovation marked the 1980s with Total development. And the time and energy it took to run all Quality Management and continuous process improvement. the activities—managing the rubber plantation labor, the Michael E. Porter’s innovative concept of the value chain 22 Supply Chain Leader / Spring 2006

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