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
Technology Empowers Hurricane Relief Efforts • Impact of RFID
Outsourcing Supply Chain Analytics Can Improve Business Results
The Supply Chain Company TM
In this Issue
What’s on the Horizon? by John Cummings
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
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.
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.
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
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
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: email@example.com.
until the development of a business process platform
Supply Chain Leader / Spring 2006 3
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
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
What’s at the root of the fascination with
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
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
6 Supply Chain Leader / Spring 2006
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
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-
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
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: firstname.lastname@example.org.
effectiveness. These goals are then linked to improvement
Supply Chain Leader / Spring 2006 9
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
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
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
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.
Supply Chain Leader / Spring 2006 13
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
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 (email@example.com).
14 Supply Chain Leader / Spring 2006
by Sanjiv Sidhu
7 principles of
suppl chain agility
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
2. Keeping commitments via closed-loop
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
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
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
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 (firstname.lastname@example.org).
allows for more rapid correction.
Supply Chain Leader / Spring 2006 19
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
by Hiten Varia
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