Reinventing the Supply Chain

Unless they broke, supply chains were once regarded as operational concerns with little strategic importance. Not even meriting a name until about 20 years ago, the concept simply described the channels by which companies would receive raw materials or components from their suppliers so they could be turned into products, sent directly to the open market and sold for a tidy profit.

Then along came increased globalization, value-added resellers, the introduction of the Internet to business processes and a move toward so-called mass customization. Companies like Dell Computer, Intel and Ford found that by harmonizing supply chains with product innovation cycles, marketing and e-business, they were rewarded not only with lower costs but with significant advantage over competitors.

Now, unprepared corporations that haven't whipped their supply chains into shape are beginning to feel the squeeze in the form of slashed profit margins, anemic market share and plummeting customer satisfaction. They must either alter the way they do business—which more and more relates directly to the supply chain—or risk getting mowed down by nimbler, more progressive competition.

"The Internet is one of the biggest reasons the supply chain is changing. It is a force and it is accelerating the time frame in which businesses operate," says Megan Chase Skaff, an e-business and knowledge management consultant. "And because business is now done electronically and on a global scale, supply chains are no longer linear but are rather a complex web of relationships that must be carefully managed."

According to Skaff and others who follow this segment, managing the supply chain also means managing the knowledge that, on a daily basis, builds and optimizes the systems. This means companies need to meld an acute global vision of strategic supply chain planning—usually involving many dispersed but overlapping systems—with flawless operational and tactical execution on a local level. Enabling companies to become aware of this knowledge is the first significant challenge. An even greater challenge is for companies to create methods to systematically manage and mine their supply chains.

A step back

These are issues that Bill Hanson of MIT spends many of his waking hours contemplating. Hanson is the co-director of MIT's Leaders for Manufacturing program, which is a research partnership between MIT's schools of engineering and management and several prominent U.S. firms, including Ford Motor Company, AlliedSignal, the Boeing Company and Polaroid. The program brings graduate students, MIT faculty and industry leaders together to unearth and forge best practices, particularly in such areas as supply chain development, planning and management.

Hanson, who spent upward of 30 years in industry and manufacturing management, maintains that to truly wring knowledge from the supply chain, companies need to take a step back from their daily operations and look at the processes from a more analytical perspective. "People understand that they're in the business of maintaining a physical supply chain but they don't always understand that what's behind that is knowledge," says Hanson. "What companies don't realize is that what you're really trying to make work efficiently is the knowledge flow—the critical issue here is capturing the knowledge that allowed the supply chain to work in the first place."

But the challenges to the approach, Hanson suggests, are significant. First off, different segments of the supply chain have tended to be highly compartmentalized, which translates to myopic departmental perspectives. For example, those on the factory floor churning out widgets may only be concerned with high production rates, regardless of the inventory levels farther down the line—a dangerous game that can result in product glut or worse. "Historically, companies have been very functionality oriented," says Jim Rice, a colleague of Hanson's and director of the integrated supply chain program at MIT. "People see their own microcosm, and everything in a company supports that perspective. It's not until there's some crisis, maybe even as severe as a plant closing down, that companies decide to take action."

In addition, many companies have been focused on simply keeping operations running, as opposed to looking at the systemic health and potential of their supply chains. The result has been a patchwork quilt of short-term fixes and solutions. Vic Leo, manager of organizational learning at Ford Motor Co., said that part of his role is to address this near-sighted tendency. Leo has helped spearhead a supply-chain overhaul that is currently being rolled-out at Ford plants around the world.

"The unintended consequence of layering patches on top of complex systems like supply chains is that you eventually reach a point where no one understands the thing," says Leo. "You have to force yourself to examine the system much more critically, which is what we decided to do at Ford starting back in 1996."

Creative approaches

When the supply chain involves competitors within the same industry, the issues become even more complex. Some industries are taking extremely creative approaches to this problem. Many have unveiled online marketplaces, such as, which are run by third parties and manage to bring both suppliers and purchasers together for the benefit of all. Others are forming groups consisting of both competitive suppliers and buyers to figure out how to transform their supply chains for the next century.

"We're seeing consortiums and industry groups crop up all over the place," says Mary Murphy-Hoye, director of strategy and technology for Intel's Information Technology (IT) department. "People are finally seeing the value in looking inter-enterprise, not just inside of their own companies."

In the healthcare industry, for example, the Efficient Health-Care Consumer Response consortium was formed after a third-party study concluded that some $11 billion in savings could be realized if the healthcare supply chain for producing and delivering pharmaceuticals to the market was streamlined and automated. Though on the surface this was an outstanding idea, it was complicated by the fact that many of the healthcare providers, manufacturers, distributors and industry associations involved were competitors. As of this fall, this group, counting Owens and Minor, Becton-Dickinson and Deloitte Consulting among its members, is set to launch a pilot implementation of its updated approach, which includes a healthy dose of automation and technology, at the Lehigh Valley Hospital and Health Network in Allentown, Penn.

"Over the years, the consortium has grown from 20 to about 40 members, who are organized into workgroups like inventory management and information technology," says Roy Holland of Rollins College, who has provided much of the educational curriculum for the consortium. "They have all been working extremely hard at developing business processes and solutions, and we're now at last entering the implementation stage."

Poster children


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Despite the obstacles, many companies and industries recognize that understanding the knowledge that forms and lives in their supply chains can be crucial to long-term corporate and financial health. The oft-cited examples of Dell and Cisco are certainly sound ones. As most of us know by now, Dell has created what could be called a virtual supply chain. By building only customized computers on demand, Dell has nearly eliminated the bugaboo of excess inventory, and its financial performance is a testament to such methods. The company reported a 41 percent jump in revenue for the first quarter of 1999, with Web-site sales running around $18 million per day for that same period. Cisco has also fine-tuned the electronic sales and distribution engine for its high-end networking equipment and has experienced similar growth levels. In May, it reported a 44 percent increase in sales compared with the same period a year earlier.

In addition, new Web-based businesses are changing supply chains., a Web-based grocery delivery service based in the Northeast, has connected its system to White Rose, a major regional grocery-store supplier, to ensure that the stores on the site have the most updated sales and inventory information posted. They are connecting their systems with White Rose via Tempest Software's Tempest Messaging System.

Another player in the area of electronic supply chains is OrderTrust. OrderTrust provides an electronic supply-chain infrastructure through its network, connecting online merchants with banks, suppliers and distributors. OrderTrust basically takes over the fulfillment and distribution process from its member merchants once an order is placed. "We take orders from multiple channels, including the Web and the phone, aggregate them and distribute them to the suppliers on our network," says Jim Daniell, OrderTrust's CEO. "The whole time we're keeping track of each movement the order makes within this system." OrderTrust, based in Lowell, Mass., handled 100 million transactions in 1998, and that number is projected to be much larger in 1999. In addition, OrderTrust is creating new supply chains by bringing buyers and suppliers together who were previously unaware of each other, via its Product MarketPlace service.

Though what is occurring in terms of supply-chain innovations in new companies is intriguing, the more startling examples often come from established companies, as they may have greater obstacles to face. "For more mature companies, tweaking their existing supply chain structure can be extremely difficult," says Skaff. "An existing supply chain doesn't necessarily transfer to an electronic or Internet-centric model, for example."

Take the case of Ford Motor Company. Ford decided almost six years ago that it had to radically change the objectives for the supply chain of its car-manufacturing operations. It wanted to create a build-to-order production system that was entirely customer driven. The goal was to have a customer behind the wheel of his or her custom-made vehicle 15 days after it was ordered.

The wrong question

Vic Leo, Ford's organizational learning manager, was charged with pulling together the engineers and logistics planning managers who were involved in Ford's supply chain, in order to launch the initiative. "Before the problem was, `Okay, we need to build 250,000 of something,'" says Leo. "But we realized the system had to be driven by the consumer instead of by us, which introduces tremendous variability and requires a new way of thinking."

Leo's group started by building a computer-simulated model of how operations were run; they then were able to tweak that basic model to accommodate individual manufacturing and assembly operations. Though Leo and his group wanted the change to be revolutionary, they also wanted it to be minimally disruptive. Eventually, a relatively low-impact model emerged that at its core consisted of keeping less inventory on hand at the manufacturing plants. Instead, parts would be delivered to the plants on a just-in-time basis. This model was first deployed in early 1997 at a luxury plant in Wixon, Mich., and within one year the plant had saved $9 million because of lower inventory levels and increased space in the plant. Next, the model was rolled out to a plant in Germany, where it was also highly successful. By 2002, Ford intends to have each of its plants around the world using the new system. The company anticipates that $200 million will be saved in the next 10 years through the efforts of this program.

Along with Ford, Intel has been touted as a leader in supply-chain innovation in terms of both thought and deed. Though the company has many initiatives in place, one that has been particularly successful involves the company's OEM partners, such as Dell. According to Intel's Murphy-Hoye, many of Intel's OEM customers need quick response times to their orders. To facilitate that, Intel has created an electronic system to tie itself and its OEM partners together so that inventory flow meets demand as perfectly as possible. Intel and its customers have virtual conferences to share information about orders, inventory levels and sales trends. The result is a powerful common knowledge base that facilitates a well-defined action process. "We have created this environment that has made this part of the supply chain run better than it was because both parties are now involved in planning," says Murphy-Hoye. "It has created a greater understanding of inventory flow and patterns on both ends."

This system also ties into Intel's back-end systems, which positively affects the supply chain even further down the line. It also ensures that all parties are working off the same set of data at all times. However, as Murphy-Hoye notes, just as important as working off the same set of data is working off the same strategies for all parts of the supply chain to be properly aligned. Each person and part involved in the process needs to understand the larger goals involved.

Some companies are trying far less radical, but nevertheless successful, approaches. Kiwi, known primarily for its shoe polish products, has put IBM's Advanced Business Link middleware in place to allow its salespeople to keep track of inventory flow and levels, sales trends and the like. Pulling this kind of analytical data from the supply chain is growing at a rapid rate, according to Harry Kolar, manager of strategy and emerging technologies at IBM's Global Business Information Services Group. "The technology that's becoming available today is helping to drive business intelligence down into the supply chain," says Kolar. "The kind of tools Kiwi is using can help companies determine where things are going wrong as well as right along the chain." Intel is also using data-mining and business intelligence tools and technology to help them handle and assess what Murphy-Hoye calls the information tsunami.

Technology growth

As Kolar aptly notes, the technology options to support such changes in the supply chain are growing quickly. AMR Research predicts that the supply chain management market, which includes such players as i2, Manugistics and Baan, will grow 48 percent to $18.6 billion by 2003. "New trends and market opportunities, including the addition of customer-facing, Internet-enabled and optimal decision-support functionality, are now emerging to help shape this market," says AMR's Larry Lapide, vice president and service director of supply chain strategies. This past summer, Manugistics came out with its Internet-based e-Chain product line designed to help companies with supply-chain planning and forecasting, and i2 has added a suite of so-called eBusiness tools to its core Rhythm product line. Other tools integrating strategy, planning and logistics are offered by Baan, through its Supply Chain Solutions line of software.

Though impressive, the figures from AMR don't include some of the more cutting-edge supply-chain oriented products now reaching maturity, such as simulation and modeling tools. Powersim, Ventana, System Dynamics and Micrographix are all leaders in this field. Powersim, for example, has been used by Ford and the EHCR healthcare consortium. "You can use these kind of tools to see how an alteration to the system plays out," says Michael Bean, Powersim's vice president of sales and consulting. "Supply chains are very complicated, and small perturbations in the system cause huge fluctuations, which is why it helps to first try out changes virtually."

Other products on the market include the recently released SeeChain suite of applications for supply chain measurement and performance from VIT. SeeChain, which is being used by such companies as Nestle, Pfizer and Polaroid, provides a browser-based interface to all components of a company's supply chain and provides collaboration, decision support and data aggregation for users. Other new products are focused on providing better information for end users on different points within the supply chain to help them get their jobs done. Both Ventix and InfoImage, for example, have rolled out products with this goal in mind.

Shifting sands

Clearly, there is much work to be done so companies won't merely drag existing supply chains into the next century. Many barriers stand in the path, not the least of which is creating systems to promote the sharing of knowledge and information among individual workers, corporate partners and even competitors. As a key part of the business transformation to create frameworks for strategy, process, culture and technology, the reinvention of the supply chain is central to coming out on top of such shifting sands.

"We are only dabbling on the edges of what the possibility is because we're still doing business the old way, only now we're doing it on the Internet," says Intel's Murphy-Hoye. "New ways of doing business that haven't even been discovered yet are waiting for us out there."

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