Supply Chain Synchronization

SOA transformation in the mobile industry

My partners and I are in the final stages of implementing our Supply Chain Synchronization suite at a global leader in logistics services and distribution for the wireless / mobile industry. Our solution is based on a service-oriented architecture, so this article by Kevin Wei Wang, an associate principal in McKinsey’s Shanghai office, caught my eye because it explains how Shanghai Mobile transformed its IT architecture with SOA “to create a smarter, more efficient system.” That concept is one that resonates with my partners and me.

Here is the introduction to Creating competitive advantage with IT architecture: An interview with Shanghai Mobile’s CIO

“In early 2008, Shanghai Mobile’s general manager of information technology, Xie Qin, knew that his company's "complex legacy architecture presented competitive problems that would create even greater stumbling blocks in the new era. First, the company’s IT systems were largely siloed by customer channels—local branch stores, call centers, and online stores—which had inconsistent business policies for common processes, such as approving a subscriber’s eligibility for new prices or services. That translated into costly duplication for writing and maintaining software applications and increased spending on IT infrastructure. Second, the complex IT systems were very challenging to maintain. Under the existing IT architecture, for example, it was difficult to monitor system performance issues and to diagnose root causes. IT normally took a long time to resolve service breaks.

“By the spring of 2008, Xie launched what would turn out to be a ten-month overhaul of Shanghai Mobile’s IT systems to improve its sales and service capabilities and to make the system easier to maintain. The transformation required Shanghai Mobile to dismantle the existing architecture and to replace it with a new IT blueprint based on service-oriented architecture (SOA), which created a unified business-service layer for different front-end channel systems and allowed the channels to share customer information. The result: improved sales and service capabilities for the channel systems; an optimal use of program developers, data centers, and other resources of the IT infrastructure; and a more maintainable system.

“Although Xie’s goals were straightforward, implementing SOA within a business in flux can be risky. In this interview with McKinsey’s Kevin Wei Wang, Xie explains how he executed the strategy and how it has changed the carrier.”

Following are some of the key insights shared by Xie:

Two main reasons change was required

1. Market was becoming increasingly competitive
2. More and more difficult to differentiate product offering

Three key management lessons involved with process transformation

1. Clearly articulate business value
2. Realign roles to ensure people stick with new approach
3. Implement risk mitigation to minimize disruption to the business

Four results of moving to SOA

1. Reduced time to market by 30%
2. Reduced development effort by at least 50 %
3. Improved customer experience
4. Reduced system performance diagnosis from an average of 2 hours to 2 minutes

Three key IT problems addressed

1. Inconsistent business logic
2. Lack of information sharing across channels
3. Disconnected system monitoring

Most importantly, Xie clearly understood that while the IT benefits of switching to SOA were substantial, a project of this size and importance would only be funded and achieve success if it had the full backing of the entire business. Xie answered the question “An SOA transformation often means change and uncertainty in the business units. How did you convince them to go along?” this way:

Xie Qin: “We had to present the business case in a tangible way. We got the buy-in by addressing the real business issue—inconsistent business logic and lack of information sharing across channel systems—which is a real concern for the customer experience across our channels. While an SOA transformation also reduces IT costs and improves system performance, I don’t think we would have gotten our business team as excited by addressing these two factors alone.”

He is right. For those CIOs and IT execs working to fund and launch projects of similar scale, these are words of wisdom.

The complete article at McKinsey is available here.

Experimentation with customers and partners

Michael Chui, Pär Edin, and James Manyika of McKinsey have posted a new article making the case that "In the 'new normal' successful CIOs will search for value through experimentation with customers and partners."

The restructuring of the economic order now taking place is called by some the "new normal." According to the authors, key characteristics include: "persistent uncertainty, tighter credit, lower consumer spending, and greater government involvement in business."

In this environment, executives running large IT organizations will have to "make the IT function dramatically more productive, use IT more effectively to meet larger company goals, and embrace disruptive technologies that will shape the new economic terrain."

"First and foremost, CIOs will have to overcome hurdles that have limited IT’s performance in recent years:

• They must promote a much closer alignment between IT and the business units by embracing new organizational models that call for joint decision making. IT leaders will need better business skills, not just technical know-how.
• IT productivity efforts must leap beyond cost cutting at the margins. CIOs will have to make fundamental changes in the way IT operates and campaign for technological improvements that will transform cost structures and operating models throughout the enterprise.
• IT leaders must join with their business counterparts to seek out and implement technology-based innovations that will give companies long-term competitive advantages in a tougher economic climate.

In the past, IT performed satisfactorily if it made marginal progress in these areas. In the new normal, it must truly excel in all of them—the performance bar is higher, and the expectation that IT should contribute to corporate success is more insistent."

As CIOs adapt to the "new normal", my partners and I believe that supply chain synchronization will continue to gain in strategic importance. Supply chain synchronization goes beyond traditional supply chain management to break down data and process barriers between and across organizations. As this is accomplished, data flows in real time to those who need it and is presented in actionable formats. A key result is that organizations and their trading networks reduce costs while increasing customer service levels.

The transformation of a supply chain -- including both business processes and enabling technologies -- opens doors to support new business models and innovative services that were previously locked behind rigid and disconnected data and processes. When a supply chain has been synchronized, it often creates the best information available in a trading hub and has processes that can rapidly adapt to meet new requirements. As the McKinsey authors point out, disruptive technologies (often from smaller, innovative software firms) can help organizations experiment with customers and partners to achieve these types of results.

Cutting IT costs and complexity by aligning enterprise-wide requirements

CIOs are in a difficult position. As a recent article by Janaki Akella, Helge Buckow, and Stéphane Rey points out, "IT represents an important part of total spending—5 percent or more in some industries—and its direct contribution to revenues and profits is often difficult to assess."

The authors recommend IT leaders find significant additional reductions and efficiencies by "taking a broader look at the way they manage the IT architecture as a whole. The key to these economies is bringing business and IT leaders together in a combined effort to rationalize not only business applications and processes but also the core IT infrastructure and operations."

As anyone who has been intimately involved in IT understands, the reality is that short-term business wants and needs of individuals, divisions, and units are often addressed without full consideration to the larger requirements of the organization. While IT may design a long-term blueprint, the operational reality is that decisions often get made by divisions and business units with "relatively little regard for the impact on a company’s overall IT architecture" or the business processes than move beyond their division or unit.

The authors write: "CIOs at the corporate or division level generally do have substantial control over the core IT infrastructure components: servers, storage systems, and the associated infrastructure software. But the business applications, processes, and business model sitting atop the IT infrastructure often reflect the wants of the leaders of business units and functions, who understandably focus more on their own needs than on overall IT efficiency. Across a global company, the result is often an unwieldy, heterogeneous IT environment where incompatible (and often duplicative) hardware, applications, and processes sprout year by year, in every corner of the organization, in response to specific near-term needs....

"These patchwork systems require substantially more time and money for development, support, and maintenance—at the expense of budgets, new IT capabilities, and business innovation. At large companies, eliminating these duplications and inefficiencies can reduce IT spending by tens or hundreds of millions of dollars while improving the quality of the IT operation and the satisfaction of those who rely on it. The CIO alone, however, cannot reduce these costs; business leaders too must sponsor and participate in the transformation."

In their discussion about reducing costs and complextity, the authors mention two areas that my partners and I have also found to be of particular importance. The first is the need to develop an integrated data model (in our case, we have a common data model since our entire Supply Chain Synchronization suite is built on one data model rather than several that have been disconnected and then, later, integrated -- there are many benefits to the common data model approach). "[N]onintegrated databases greatly raise costs and result in inefficient processes, duplicative development efforts, longer times to market, business errors, and missed opportunities."

The other area of particular importance is the need to reduce interface complexity. "An IT staff can spend as much as 30 percent of its development time on applications making all of their interfaces work, largely because customized applications have so many point-to-point interfaces. Standardized interfaces, such as the enterprise service bus (ESB), can greatly ease the burden of system integration and minimize the chore of dealing with local changes." (Again, in our case we've developed our solution using SOA architecture and web services to the highest levels of cost savings while maintaining the flexibility to handle rapid change in the supply chain.)

When we talk with consultants and clients, they are often focused on the issue of customizations. My partners and I share the view articulated by Akella, Buckow, and Rey. They recommend that the focus on software customization should be in those areas that provide meaningful competitive advantage. They point out that rarely do functions like HR, finance, and accounting provide a competitive advantage in direct competition with other companies. Functions such as sales, product development, and supply chain are much better candidates for tailoring solutions that will create differentiation in the market. It should be noted that while it is very costly and time-consuming to customize most legacy ERP applications, some newer software in the supply chain and sales domains are specifically designed to overcome this limitation. Software such as our Evavi Supply Chain Synchronization Suite is designed for rapid tailoring and configuration, and enables companies to achieve market differentiation in the areas that matter.

Emerging technologies support new ways of gathering, managing, processing, and sharing information. In order to obtain the greatest benefits across the enterprise, legacy IT barriers must be removed and replaced with technologies that share common data models, provide easy data integration, and seamlessly enable planning and execution across business processes.  With an architecture in place that supports these capabilities, companies can then shape their future.

New technologies and technology adoption is setting the stage for novel business models

Jacques Bughin, Angela Hung Byers, and Michael Chui of McKinsey have recently posted an article reminding us that "The history of recession is also the story of technology advances that overturned the existing competitive order."

While we have all been working through the worst recession in 60 years, it is during this time that the seeds are being sown that will create new winners in the "new normal" economy. Bughin, Byers, and Chui write: "Though companies are tempted during a downturn to manage for survival, recessions in fact reveal periods when the competitive pecking order changes dramatically. Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession....In the here and now, new technologies and technology adoption is setting the stage for novel business models that portend disruptions as great as those of past downturns."

For those working in the supply chain space, the recession has naturally brought renewed focus on reducing inventory, eliminating obsolescence, and increasing inventory turns. Those companies that are also reevaluating their supply chains to enable new business models and create new areas of value will be strongly positioned to disrupt their industries. The challenge, of course, is to focus on cost reduction while simultaneously making strategic investments that will generate revenue from new services and offerings.

Supply chain is at the heart of the business logic of sustainability

Ray Anderson is one of my heroes.

As a young entrepreneur he founded the carpet company Interface in 1973. In 1994 he read Paul Hawken's book The Ecology of Commerce, and set out to fundamentally transform his business. He took to heart Hawken's message that business and industry must lead the transformation to sustainability. He realized that "with his company's global reach and manufacturing footprint, he was in a position to do something very real, very important, in building a sustainable world."

In the time since, he fundamentally changed his company's supply chain and business processes. He "focused the company's attention on sustainable decisionmaking, taking a hard look at suppliers, manufacturing processes, and the beginning-to-end life cycle of all its products. (For example: If you can't find a place to recycle a worn or damaged Flor tile, Interface invites you to send it back to them and they'll do it for you.) They call this drive Mission Zero: 'our promise to eliminate any negative impact our company may have on the environment by the year 2020.'"

Anderson spoke recently at a TED conference where he shared his inspiring story of fundamental transformation. This transformation not only has resulted in an ecologically-friendly company, but has also increased market share, profitability, and shareholder value. In this 15-minute talk, Anderson explains the business logic of sustainability. It is a message worth sharing again and again to those interested in understanding how sustainability is good business.

How CIOs should think about business value

CIOs are under increasing scrutiny to demonstrate the value that IT can deliver to the enterprise. Those CIOs who are able to successfully use IT to transform siloed business processes into new value-creating business processes that transcend hardened silos will be rewarded with influence on the enterprise far beyond the role traditionally reserved for IT.

There are many lenses through which value can be interpreted. In "How CIOs should think about business value" two consultants at McKinsey have provided a nice framework for thinking about this issue.

"If there’s any issue that routinely frustrates executives in many organizations, it’s how to get a true fix on the value that information technology adds to the businesses it serves. IT is undoubtedly central to creating value and therefore continues to account for a rising share of total investment. But defining, measuring, and maximizing that value remain elusive. To throw light on this crucial issue, McKinsey collaborated with CIGREF* to study the best practices of major French and international companies across various sectors."

Later in the article the authors provide important insight about change management and how HR is a necessary ally to ensure success. This is an area that is often overlooked when deploying sophisticated enterprise solutions that necessitate changed user behavior:

"If the corporate goal [of IT] is operational excellence, HR is more likely to be the CIO’s preferred ally. This is due to the critical role of change management. Take the example of deploying a new enterprise-resource-planning (ERP) system: the critical challenge is ensuring that the target processes are codified correctly in the system, and that when it is implemented, the end users are sufficiently trained to effectively leverage the potential of the new tool. This requires a joint effort from HR and IT to synchronize and coordinate their tasks from the initial design to the rollout and subsequent life of the system."

If this is not managed carefully, an IT project may be considered a failure with the blame being placed on the IT department and the software when the real problem may instead rest with the inability of the enterprise to effectively implement a change management strategy.

The following six points (and their accompanying Exhibits) provide additional insights about how CIOs can effectively engage with the enterprise to facilitate deeply meaningful success:

IT generates value at two complementary levels: the core asset value (eg, hardware and software) and the vitally important value-in-use (Exhibit 2).

In the context of optimizing investments, the value of IT derives from dynamic control over the impact of IT investments on each company’s operating ratios (Exhibit 2).

For CIOs focused on operational improvements, IT’s value is measured mainly by process performance indicators: productivity, on-time delivery, and quality (Exhibit 3).

Developing value-in-use requires a CIO to examine new levers found at points where the IT department and the business units intersect (Exhibit 4).

The CIO builds alliances with peers in areas relevant to supporting the company’s priorities (Exhibit 5).

The best companies at creating value-in-use embed their IT governance within the broader governance practices (Exhibit 6).

Be sure to also read the section "Next steps: Identifying the challenges" for a helpful framework explaining the dynamics of value creation through IT.

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*CIGREF, the “Club Informatique des Grandes Entreprises Françaises,” founded in 1970, strives to “promote the use of information systems as a driver of value creation and a source of innovation.” It includes more than a hundred public and private organizations from every economic sector in France.

About the McKinsey authors: Michael Bloch and Andres Hoyos-Gomex are principals in McKinsey’s Paris office.

Google's chief economist, Hal Varian, on how the web challenges managers

Google's chief economist, Hal Varian, "compares the current period to previous times of industrialization when new technologies combined to create ever more complex and valuable systems—and thus reshaped the economy." In a recent interview with McKinsey, he shares some of his insights.

Varian's ideas are organized in six main groups:

1. Flexible innovation
2. Corporations and work
3. Free goods and value
4. Workers and managers
5. Computer monitoring and risks
6. Reshaping industries

Varian discusses how networked digital technology should improve the way we work and increase productivity. In addition to personalization of data and better user interfaces, Varian emphasizes the importance of making sure that the data gets to all of the necessary players so that they can make timely and well-informed decisions. He also notes that since computers can monitor transactions, companies can make sure that transactions are carried out in the way intended.

At Evavi, we take this one step further with what we call "intelligent transactions." Rather than simply monitoring transactions and then correcting them, we seemlessly combine planning/decision support with execution/transactions so that supply chains operate optimally with transactions that are intelligently planned before they are executed. By eliminating the disconnect between planning and execution, the focus shifts from monitoring transactions to compressing the cadence of the supply chain with perfect orders.

You can view the interview here or read the transcript here.

A conversation with Léo Apotheker, co-CEO of SAP

Léo Apotheker, co-CEO and a member of the Executive Board of SAP AG and Andrew Mcafee of the Technology and Operations Management Unit at Harvard Business School, share their ideas about IT and enterprise software in this 25-minute interview with Charlie Rose.

Both explore ideas about cloud computing, open source, and enterprise application integration (EAI) -- three big trends that have now been evolving for a while. The focus on application integration has become central to most forward-looking enterprise software companies. However, the boundaries for cloud computing and open source in the enterprise space are still being explored.

Léo and Andrew agree that business is evolving quickly and that more collaboration will occur in networks of trading partners powered by IT. Léo also noted that leading companies are taking the economic downturn as an opportunity to invest in critical enterprise applications -- such as supply chain -- to further reduce costs and become even more efficient so that they can be positioned to grab market share.

Silos and forecasts

In their McKinsey Quarterly article, Building better links in high-tech supply chains, Gautam Grover, Eileen Lau, and Vivek Sharma take a look at how silos negatively impact forecasts. This is a problem that our clients are regularly working to address, and that must be transformed in order to improve forecast accuracy and inventory planning. The solution to this challenge has more to do with the structure of an enterprise than with the enabling technology. Of course, the technology (such as Evavi's Synchronized Supply and Demand solution) must support properly aligned business processes, but the processes themselves must be designed into the structure of the enterprise. 

The McKinsey authors had this to say about silos and forecasts:

"OEMs in many industries organize themselves around functional units. But in high technology (and other assembly industries), units such as manufacturing, sales and marketing, and product development often send conflicting forecasts of demand and production to their partners. Not surprising, supply chain responses are often based on guesswork, and forward planning is difficult. In one variation of this problem, OEM sales reps provide "lowball" estimates of demand rather than a truer picture, so they can more easily beat internal goals. Alternatively, when components are in short supply, forecasts by manufacturing functions often are overly optimistic in a play to maximize the allocation of scarce products from suppliers."

Building better links in high-tech supply chains

Gautam Grover, Eileen Lau, and Vivek Sharma from McKinsey have just published an important article about the need for transformation in high-tech supply chains. In this article they explore how the increasing complexity of high-tech supply chains require enhanced collaboration between OEMs, supplier, and retailers.

The authors examine the following areas that significantly impact the ability to improve high-tech supply chain synchronization:

Roadblocks to better collaboration

1. Partner complexity and churn
2. Silos and forecasts
3. Poor quality of data
4. The mistrust spiral

Building bridges across the supply chain

1. Breaking down silos
2. Improving trust
3. Sharing assets
4. Joint product development and risk sharing

The article starts:

"The supply chains of high-tech companies are globe-spanning marvels. Over the past 20 years, looking for ready sources of components, lower-priced labor, and talented designers and engineers, these companies have ranged throughout the world. In a highly competitive and fast-moving marketplace, they have sought to maximize their strengths and flexibility as products change rapidly and prices continue to fall.

But the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks, and eliminating waste from duplicative efforts is an ongoing challenge. As product life cycles shrink, we see inventory buildups in the supply chains of some companies, while others cope with rising distribution costs, on-time delivery problems, or delays in getting new products to market.

In fact, high-tech companies have let complexity undermine collaboration in their supply chains: they aren’t working as closely as they could with their supply chain partners—sharing information or streamlining processes—to smooth out volatility and eliminate waste. This failure is surprising. The high-tech industry creates products that promote collaboration, openness, and efficiency. We all know stories about companies in other industries such as retail and consumer-packaged goods that have improved their operations significantly by using technology to collaborate more closely with suppliers—yet high-tech companies have been slow to follow. For a host of reasons rooted in the way they are organized and compete, their executives have been less than enthusiastic about pursuing the benefits of collaboration with their supply chain partners.

This lack of enthusiasm is fast becoming more costly for OEMs. ..."

You can read the complete article here.