Supply chain systems are constantly changing to keep up with the pace of business. Here is Management Today's guide to staying ahead.
Management consultants are always seeking fresh nostrums to sell to their clients. A decade ago, many of them latched onto the idea of the supply chain. This, explained the excited consultants, was a new way of viewing an organisation, a device for looking at the big picture - the firm, its suppliers and customers, and the transport and communications infrastructure that bonds them together. The logic was appealing. Optimising the working of the supply chain could cut operating costs, slash inventory levels, boost the response time that was offered to customers, and sharply reduce the level of fixed and working capital invested in the business.
With benefits like these, the idea took off. Unlike a number of the consultancy profession's other intellectual fancies, the concept of the supply chain has had a discernible impact on the way in which Britain's businesses structure themselves. Few - if any - blue-chip companies have been prompted to appoint board level executives with a responsibility for business process re-engineering or shareholder value. Not so with the supply chain.
The enthusiasm with which businesses seized upon the notion is testimony to the amount of slack that existed in most supply chains. Even the better ones have achieved extraordinary improvements once managers came to understand the impact that their actions might have further down the line. Tesco, for example, now has under one and a half weeks of on-hand inventory in its stores and warehouses. Prior to its own supply chain revolution it had four weeks' worth. Yet stock availability has climbed from 92% to 99%, boosting sales. How? Slicker physical distribution - including cross-docking, where goods simply pass from one vehicle to another - has played a part, but so have better forecasting systems, electronic links between Tesco and its suppliers, and the capture of point-of-sale checkout data.
Of coures, today's solutions are not always relevant for tomorrow's workplace.
So what is the advice for business over the next 10 years? Listed here are seven golden rules that experts believe will guide business supply chain initiatives in the decade ahead.
1 PARE PARTICIPANTS TO THE MOST EFFECTIVE LEVEL OF MANAGEMENT
Slimming the supplier base has always been a logical point for companies to start managing their supply chains more effectively. Vendor reduction brings two immediate benefits. Typically, prices improve as vendors fight to retain business. And suppliers' quality and delivery performance improve, as a focus on things such as delivery performance or quality forces vendors to shape up - or find themselves de-listed.
How large should the supplier base be? Instead of working backwards from the number of suppliers that they happen to have, leading-edge companies are now calculating from first principles the maximum number of suppliers with whom they want to have a trading relationship. Rather than buying-in components from a dozen suppliers in order to produce a sub-assembly, they buy the sub-assembly from one of the dozen - and make that supplier responsible for dealing with the other 11. Buyers are then free to concentrate on working much more closely with the company that remains.
Such a bottom-up approach underscored the vendor reduction initiatives of the two joint winners of the 1997 Best Engineering Factory Award, one of the Best Factory awards organised annually by Management Today in associated with the Cranfield School of Management. The Cheltenham bathroom shower factory of Caradon Mira conducted a strategic review with the intention of concentrating its manufacturing endeavours on a small number of core processes, in which it would invest and ultimately become world class.
With that decision made, explains managing director Mark Pickering, it was then only logical for the factory to buy solely from suppliers whose core processes were the components and products that they actually supplied, processes in which they would invest, and would build their own manufacturing excellence. In this way the number of suppliers was pared down from 633 to 220.
At the site of the Best Factory joint-winner Krone Technique (UK) - coincidentally also based in Cheltenham - the number of suppliers that the company elected to deal with was based on a methodical calculation of the number of suppliers that a single buyer could manage effectively. A hundred suppliers were thus reduced to 70, at which point the company's buyers would be able to devote enough time to each supplier to manage the trading relationship to maximum advantage.
2 ELIMINATE ACTIVITIES AND RESOURCES THAT DO NOT ADD VALUE
Over the past 10 years, the physical distribution of goods has been transformed out of all recognition. The operation of transport fleets and warehouses is now often outsourced to specialist third parties, leaving companies free to concentrate on their own core skills in design, marketing and manufacturing. But such arrangements are just the starting point for still further opportunities for cost-saving and improved supply chain efficiency: eliminating activities and resources, as opposed to merely outsourcing them.
Spanish car manufacturer SEAT wanted to eradicate its stocks of pre-production inventory, as well as secure just-in-time delivery to its assembly lines.
With this in mind, it persuaded 27 suppliers - who between them produced a diverse range of components that included instrument panels, fuel tanks, wheels, windscreens and exhaust pipes - to establish operations in a pre-assembly industrial park located some two kilometres from the assembly tracks.
The move would clearly eliminate the sometimes lengthy transportation times that had previously been required. More importantly, though, by shipping quality-assured and correctly sequenced components directly to the assembly lines, laborious and costly marshalling and storage activities could be eliminated. If the 27 suppliers could somehow achieve this in a co-ordinated manner, the potential savings would be even greater. To this end, a single third-party logistics contractor, Exel Logistics, was selected. Used by all 27 suppliers, the contractor brings clear economies of scale in the operation and maintenance of the fork-lift trucks, computer systems and delivery vehicles that each supplier requires.
More importantly, Exel links its computers to those of SEAT in order to optimise the transportation of components to the assembly lines. Components are carefully and accurately sequenced to match the order, colour and specification of the different vehicles on the assembly line, eliminating not only storage and handling operations but inspection and checking activities as well.
3 CREATE FULLY-FLEDGED ELECTRONIC TRADING RELATIONSHIPS
Experts such as Ian Walker, head of American giant CSC Computing's UK supply chain practice, are urging businesses to recognise that they may not have one but many supply chains to manage - each market served; each distinctive product group; and each type of sales outlet or delivery mechanism.
But to view these as one supply chain sweeps too much valuable information under the carpet. Electronic commerce used to hold onto this information has to date been restricted to major companies. But it looks set to boom once the advantages of managing supply chains through much closer scrutinisation are perceived more clearly.
Special promotions are an area where the 'one-supply-chain' viewpoint fails most frequently. Only by closely monitoring early sales and fine-tuning consequent supplies can retailers avoid either stocking-out or being left with inventory on the shelves. Given that major retailers may have several thousand items on promotion at any one time, the level of complexity is high.
This is where electronic commerce fits in. Tesco has recently invested in a pan-supply chain extranet. For the moment, it has been targeted on handling promotions, where the fixed timescales built into existing Electronic Data Interchange systems prove too inflexible. Following trials with a single supplier, early indications are excellent, says Joe Galloway, division director for supply chain systems: 'We can tell whether a promotion will be a success or a failure from the first day, and often from the first hour's sales.' Normally, such information was available too late, leaving the supply chain vulnerable to costs incurred by uncertainty about a promotion's success.
4 DEVELOP THE SUPPLY CHAIN INTO A VIRTUAL FACTORY
Within the complex factories of vehicle builders and aerospace companies, an engineering design technology known as Product Data Management (PDM) has now become the norm. Switched-on businesses are exploiting aspects of PDM technology into supply chain transactions. Stripped of unnecessary complexity, PDM can deliver a fast payback.
PDM systems operate by providing a single digital repository for the various forms of information that businesses hold about their products and the components and materials that go into them. Without a PDM system, a typical company might hold Computer-Aided Design (CAD) drawings of the product and its components on one system - and bills of material that describe what goes into each subassembly or part on another. Although such complexity is manageable, the procedures that must be put in place to achieve this risk slowing down the supply chain. The sluggishness is at its most extreme when suppliers are required to produce new components, or ones with a revised specification.
By exchanging up-to-the-minute design data digitally, PDM systems offer a way to manage this growing complexity throughout the supply chain. Even better, as businesses assign the responsibility for ever-larger aspects of their design and manufacturing process to suppliers and subcontractors, PDM forms the glue to stick these disparate parts of the supply chain together into a seamless 'virtual factory'.
Such is the objective of Diamond Multimedia, a San Jose-based manufacturer of the graphics and sound cards found in personal computers. Prior to installing a specialist supply chain-oriented PDM system, explains vice-president Bernard Miller, the company used to have to ship schematics, CAD drawings, spreadsheets and word-processor documents out to its contract factories in Singapore, Mexico, Taiwan, Germany and France. Now, personnel in these factories - as well as in the factories of their suppliers - access the company's PDM system over its corporate Wide Area Network, which has four entry points in Europe and two in Asia, as well as a number in the US. Once security concerns are overcome, the company may run the system on the internet.
LEARN TO LOVE THE BENEFITS OF CO-OPETITION
Supply chain practitioners have been getting excited over a new form of business-to-business partnership: co-opetition. Elided from the combination of 'co-operation" and 'competition', the words formed the title of a best-selling business book by two academics, Barry J Nalebuff and Adam M Brandenburger, who come from America's Yale and Harvard business schools respectively.
As the name implies, the basis of the idea is collaboration between competitors - a concept not so bizarre as one might expect. For a start those businesses with supply chain problems and requirements that are closest to one's own will generally be one's competitors. 'In some industries, co-opetition works very well,' notes Steven Gold, a partner in the KPMG's US supply chain strategy practice. 'It makes a lot of strategic sense: you're shipping on the same trucks and sharing the same overhead burden.'
The logic clearly made sense for Swedish paper manufacturer MoDo, whose location at Husum in northern Sweden - some 2,000 kilometres from the company's major markets - places it at a disadvantage in Europe's cut-throat office printer and copier paper market. Co-opetition was one of a number of innovative approaches aimed at overcoming this disadvantage that earned the company the overall prize in this year's Logistics Europe Awards for Excellence In Supply Chain Management.
'We're not afraid of co-operating with competitors,' says the company's European logistics director, Lars Nilsson. 'It's only by looking at each other's cost components that we can really understand how to reduce the overall cost and gain the required economies of scale.' MoDo thus makes use of its competitor's fleet of vessels in the North Sea, whilst the competitor has access to MoDo's fleet in the Baltic.
6 MAKE THE MOST OF OPPORTUNITIES ON THE INTERNET
The internet already does a lot - but it can do much more. By the end of this year, Dell Computer Corporation estimates that it will have sold $1 billion worth of computers online - up from zero just a year ago. Fast-growing networking giant Cisco Systems is already selling almost four times as much: last year, it generated revenues of $3.6 billion in on-line sales to the 900,000 visitors a month to its Cisco Connection Online.
Success stories like these tend to be associated most strongly with the sale of high-unit-value items. These are sold to customers that would probably have bought the goods anyway or - as in Cisco's case - sales to business customers with accounts. But countless small and not-so-small companies - from fledgling start-ups to America's giant Amazon.com show that products as diverse as books, flowers and wine can all be sold over the internet. Sales are growing, although profitability remains questionable.
Yet in the long run, the logic is probably sound as far as supply chain management is concerned. It will be more profitable to sell such goods without the need to fund and stock countless retail outlets dotted around the country.
Other, more challenging products will follow. For the real trick isn't making the sale, it's delivering the goods to the consumer at a cost-effective price. Books are undemanding objects to ship to consumers: the postal service suffices. The same is true for compact discs and other high-value, low-cubic volume items. Flowers (another popular on-line purchase) piggyback on the existing system, in which the actual delivery is made by a flower shop that is local to the consumer, not the online vendor.
The crunch will come from selling ordinary products such as groceries on-line. Sainsbury's and Tesco are already experimenting with on-line grocery services - chiefly following in the footsteps of Peapod, a US online grocer which has found that enough customers (in the admittedly small handful of cities in which it operates) are willing to pay a small premium to make the business viable. This will have a knock-on effect for the way in which supply chains are managed.
7 ASK WHETHER YOUR SUPPLY CHAIN MEETS THE CUSTOMER'S NEEDS
The customer is king. The phrase has become so commonplace within the business world that it has become almost trite. But many businesses know alarmingly little about what their customers want - or seem to understand that 50% of them are not kings, but queens. Traditional supply chain systems are market-centric, and lose sight of individual customers. Consequently, apart from being able to move products through their supply chains more quickly, businesses have been barred from using supply chains as product or service differentiators.
The distinction isn't easily made, but the newspaper analogy helps to understand the potential. Information from around the world is collated, edited, printed, and driven sometimes hundreds of miles to land on doorsteps before breakfast. But it's not tailored information: everyone receives exactly the same newspaper, and must ignore or discard those articles that they don't want. Adding special sections or supplements helps - but cannot disguise the fact that these are market-centric, not customer-centric.
The idea has obvious applicability for a business like British Airways, reckons Simon Ratcliffe, head of supply chain systems for the catering division of British Airways.'We're a service business, not a manufacturing business,' he says. 'Traditional systems such as MRP (materials resource planning) and even ERP (enterprise resource planning) just aren't appropriate.' Long term, he points out, the objective of a service business must be to service each of its customers individually - something that in theory is possible using the kind of data collected through, for example, the airline's frequent flyer and executive club schemes.
'We are not quite there yet,' stresses Ratcliffe.
'There are other pieces of the jigsaw to be put in place.' But the planning capability, at least, is now there - and that is a major step forward.
'It's quite exciting,' he says, painting a picture of a weary business traveller boarding an aircraft and finding his favourite drink, magazine and snack waiting at his seat.
'We're looking at a point in time when we can use the supply chain to change the service proposition on board the aircraft - with food, printed media and personal items being loaded onflights based on the known preferences of individual passengers.'
Conclusion: How effective are these rules likely to prove? The demonstrable success with which so many businesses have tackled their supply chains over the last decade is a double-edged sword. The benefits have been substantial - but can they be repeated?
The answer is likely to be 'yes'. In the nature of competition, any solution reached today needs re-examining tomorrow. And the technological environment within which businesses operate has changed substantially. Yesterday's solutions had an impact on the warehouses trucks and inventory policies that every business possessed.
Tomorrow's solutions must embrace the computer networks, closer partnerships and changed perspectives that characterise how businesses trade today.
Even so, selectivity in adopting particular rules is advisable. Although condensed vendor bases, activity elimination and electronic trading relationships are applicable to most businesses, whether the virtual factory or co-opetition are the logical next steps will depend to a very large extent on individual circumstances - and the pace with which businesses act to force through change.
This growth of supply chain 'know-how' is in itself an important development. Whereas once the supply chain debate evolved around questions that have now now long since been settled - the role played by simple technology-based 'solutions' such as automated warehouses and radio-controlled fork-lift trucks, for example - today's level of understanding of the issues is far more mature.
Individual rules or solutions are now being adopted for the right reasons and the result is a refreshing acceptance that supply chain effectiveness is much more about competitive advantage, and much less about cost-reduction, or doing something because a customer stipulates it.
It's more a case of doing something before it's done to you - or adopted first by a competitor. And in contemplating the efficacy of supply chain management's seven new golden rules, it's a viewpoint that is well worth bearing in mind.