Market Analysis: Supply Chain Management

The Four Links in the Chain

Why does SCM give so many companies fits? Because the process is complex across four key areas--demand, logistics, manufacturing and supply. To make sense of it all, remember one tenet: All the processes that make up SCM have one end game--optimization. The goal is to deliver goods and services to the customer in the most time- and cost-efficient manner (see "The Four Key Components of Supply Chain Management," left). Note that SCM is concerned with planning and management, not execution, which is the purview of SCE (supply chain execution) and ERP (enterprise resource planning) systems.

It's tempting for IT to toss all these issues to the business side because, after all, it's really their problem. But don't. Technology--whether packaged applications, like a BI (business intelligence) suite, or a set of tools on which IT can build custom software--is critical to SCM. Technology automates processes such as purchasing and kicking manufacturing into high gear. Technology can streamline order and fulfillment, reducing staff hours and costs.» Demand: Processes within this area predict the demand for products and services based on forecasts. At NWC Inc., our fictional widgets manufacturer (for more information on NWC Inc., see "RFI Scenario"), we noted that for the past three years, during the month of December, the demand for two widgets, Nos. 101 and 224, increased 250 percent, while demand for other widgets increased at an average rate of 50 percent. This tells us we must concentrate on having the resources available to fill that demand in a timely manner.

Volumes have been written about the just-in-time supply chain. What the MBAs don't tell you is how technology can manage your company's relationships with suppliers in various tiers and distribution channels. Demand planning can be accomplished in two ways.

The first method is automated, through demand-management software like that provided by Ross Systems, Siebel (Oracle) and NEC. Today's real-time, on-demand world makes good use of RFID (radio frequency ID) and tracking of goods. Companies that can track, in real time, inventory levels of all goods in warehouses, at distributors (such as retail stores) and on the road (transport) also know when and where goods are needed and at what rate they're being purchased. This information can then be analyzed automatically by sophisticated algorithms to determine need.

The second method is manual, using BI tools. BI suites can churn through vast quantities of data and forecasting based on past results, helping analysts determine where and when to send goods. The success of a manual approach is based on several factors, including quality and timeliness of the data used for analysis. Obviously, NWC Inc. must know what kind of demand we're likely to see in December before November rolls around, because manufacturing and distribution of our widgets require a specific amount of time that can't be altered without additional costs (see "One Suite to Serve Them All", for a rundown of BI suites).

For an automated process to be successful, the planning software must also recognize when it's time to gear up for seasonal/cyclical demand and make adjustments to the manufacturing schedule.» Logistics: Nothing says Christmas at our house more than receiving big brown boxes from Amazon and ThinkGeek. The distribution/delivery side of the chain is the key to success: If you build a better mousetrap but no one can ever use it, did you really build a better mousetrap? Distribution is about transportation and warehouses--where to store raw materials so you can get them to the right manufacturing plant, then where to situate goods for delivery to the retail outlet or directly to the consumer.

Although distribution to consumers is generally accomplished through a carrier such as FedEx, DHL or UPS, the more complicated task of transporting goods between manufacturing facilities and warehouses is done by your own fleet of trucks or an outside transportation company. Many organizations also take advantage of logistics firms, which are skilled at moving materials across the country in a time- and cost-efficient manner.

Logistics is also about where to store goods and raw materials. Inventory management and planning software, such as suites from Epicor and Wipro, feed data into this decision-making process.

» Manufacturing: Manufacturing is usually the weakest link in the chain. Although most components can be replicated and made redundant, manufacturing facilities are the exception. Even if you have multiple facilities, they're probably dedicated to a specific type of product, while the resources allocated to manufacture other types of products are likely limited. If disaster strikes your primary plant, a second plant may be able to take on limited production of other products, but not necessarily enough to meet demand.

Is there an IT angle here? Yes. ERP systems must take into consideration what volume of products can be manufactured, and where, to optimize manufacturing schedules. The technology processes in this area schedule manufacturing orders by combining material and capacity requirements to create production plans. In NWC Inc.'s case, we want to increase the production of widgets 101 and 224 during November, yet we also want to slightly increase the production of other widgets to improve year-end financials--provided our distributors don't have sufficient numbers already in stock. We find this out by the supply planning process.» Supply: These processes attempt to provide manufacturing with the resources to produce products on demand. This is one of the most beneficial SCM components in terms of return on investment. It's also the component most likely to be automated and is well-suited to an on-demand architecture.

Supply planning and management were some of the first SCM components to take advantage of electronic communications, and they continue to benefit from real-time communication and emerging technologies, such as XML and SOAP (Simple Object Access Protocol). The goal here is to order and receive the requisite resources for manufacturing in a timely fashion, at the best price. Many supply planning systems can interrogate multiple suppliers and choose one based on available stock and current price. These systems also can factor in variables such as time to receive, and they may suggest buying components at a higher price simply because they can be shipped faster, letting you fulfill demands quicker.

Supply-planning software also can watch for deals and make suggestions to buy components now to lower production costs over time. Such proactive decisions should be closely tied to demand. NWC Inc.'s systems know that December is a high-demand month, so they keep an eye out in September for deals on components necessary to manufacture our highly desired widgets 101 and 224. These supply-side shoppers also factor in the warehouse space required to house the deals.

Components of a fully operational SCM system exist within most large organizations. What might be missing are the links among disparate IT systems that can generate business and yield financial benefits to you, your suppliers and your customers.

You might already be hooked up to a transportation firm, for example, for distribution of your goods to warehouses or retail outlets. But you might not have communication links with your distributors or the warehouses in which your goods are stored, so it's difficult to assess inventory levels in real time. It's also difficult to evaluate your distributors if you have no mechanism for communicating with your sales channel. Without feedback from the outlets that interface with your customers, you have no idea what customer demand may be or whether your distributors are delivering stock in a timely manner.The relationship between distributors and the sales channel can often be fractious, with distributors punishing errant retail outlets by slowing delivery or even refusing to service them. Conversely, poor experiences with a distributor can cause a retail outlet to sever ties. If you have only one distributor, this single link could break your supply chain and leave segments of your customer base high, dry and unhappy. By providing visibility into the chain's underbelly, IT can help business users understand how products reach the customer and whether that process is efficiently serving both parties.

One of SCM's biggest monetary benefits can be achieved by integrating suppliers. Remember, the goal is to have available the right product at the right time for the lowest possible cost. SCM can assist in increasing your gross margin by enabling you to purchase the resources to manufacture goods on demand rather than months in advance.

How does that help? Consider NWC Inc.'s financial status before it linked multiple suppliers to its chain. All NWC Inc. resources were purchased from a single supplier for a single price. No matter how many widgets we sold, our gross margins never changed even though widget component prices were falling because of an increase in the number of component suppliers.

After NWC Inc. implemented SCM and took advantage of its on-demand planning capabilities, we reduced the components purchased at any given time to a number closer to demand and began taking advantage of multiple suppliers. Doing so decreased the cost of components over time as well as the cost of warehousing stock for distribution during our peak demand months in Q4 (see "The SCM Difference," left).By lowering the cost of goods sold through multiple suppliers in an on-demand component-purchasing model, NWC Inc. could reduce widget prices to generate additional sales. Using BI tools and SCM demand analysis, we might discover that customers prefer the lower-cost widgets we offer, and predictive analysis tells us we could increase our sales figures if we were to price our more popular widgets just 10 percent less than current figures.

Watch for Breakage

A flexible chain ensures customer demand is met while keeping inventory down and manufacturing optimized, but with flexibility comes the possibility of breakage--a disastrous situation for any organization. Keep inventory levels too low and you risk not having goods available to customers on demand. Keep them too high and you risk a huge financial outlay to warehouse extra goods when demand is lower than anticipated.

The variables involved in maximizing a supply chain are myriad, which is why SCM software exists. It can bind the disparate links in your chain and monitor them all. Thanks to the Internet, SCM software can provide instantaneous feedback if any of the links in your chain are in danger of failing, and it offers the tools to optimize all facets of the supply chain, creating more opportunities for higher profits, happier customers and--we hope--bigger IT budgets.

Supply chain management is a monster challenge, one into which IT may hesitate to delve too deeply. Indeed, halfway into this article, we wondered whether we were in over our heads seeking answers to NWC Inc.'s supply chain problems.Our objectives seemed reasonable enough. In "Chain Strain" we set out to break down SCM into manageable chunks and examine the complex technologies involved in SCM. Although it's tempting to dismiss SCM as mainly a business problem, don't. You may be surprised to find you have many elements already in place, just waiting for the technological glue to bind them together

In "Chain of Tools" we used our fictional widget maker NWC Inc. as the basis of an RFI (request for information) to explore ways to optimize our supply chain. We asked a variety of vendors to help us integrate distributors and suppliers using standards, such as XML and EDI; automate and reduce the cost of acquiring components for widget manufacturing; and eliminate the manual process our distributors use to order widgets for retail sale.

Only Fidelitone, Oracle, webMethods and Xenos Group answered our RFI. Check out the complete RFI responses (PDF).

NWC Inc. is a midsized manufacturer and retailer of widgets. It's headquartered in Green Bay, Wis.; its manufacturing facilities are in Syracuse, N.Y. NWC Inc. employs approximately 200 people, with most in the manufacturing plant.

NWC Inc. is a midsized manufacturer and retailer of widgets. It's headquartered in Green Bay, Wis.; its manufacturing facilities are in Syracuse, N.Y. NWC Inc. employs approximately 200 people, with most in the manufacturing plant.NWC Inc.'s IT staff is small, and the burden of integrating new business partners--both distributors and suppliers--is causing undue delays in manufacturing and hindering our ability to deliver products in a timely, cost-efficient manner.

In the hopes of saving ourselves years of custom supply chain management development--and lots of money long-term--we are exploring the feasibility of off-loading some or all the work to a third party. We are open to integrating a single set of products or using point solutions for specific needs within the SCM infrastructure.

We have three key IT goals: Speed time to integrate distributors using standards, such as XML and EDI; automate acquisition of components for manufacturing; and eliminate the manual process required for distributors to order widgets for retail sale. On the business side, our objectives are straightforward: Reduce the costs associated with acquisition of components; reduce time needed to integrate new distributors; and gain visibility into the supply chain.

Read more about NWC Inc.

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