Supply Chain Synchronization

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.

Increasing the energy efficiency of supply chains

Today, the transportation of goods consumes 15 million barrels of oil a day—roughly one-fifth of total production. Wow.

This staggering amount reflects the fact that supply chains of many manufacturing sectors went global when oil was cheap. In 2008, when oil hit $150/barrel, this variable in the supply chain equation proved that a supply chain model predicated on cheap oil is no longer viable. It also exposed the opportunities to increase margins and reduce risk by decoupling a supply chain as much as possible from energy.

Tobias A. Meyer, an associate principal in McKinsey’s Frankfurt office, has published a fascinating interactive to illustrate the challenges and show the opportunities to reduce energy costs in supply chains. Meyer has made an important contribution to McKinsey's ongoing study of efficiency in supply chains. McKinsey has "looked at numerous opportunities to reduce the amount of oil used to get goods from a manufacturer’s dock to a retailer’s shelf. These opportunities are available not only to manufacturers but to wholesalers, distributors, carriers, and third-party businesses. [They’ve] grouped these opportunities into six levers to illustrate possible next steps. Of course, the players in a chain operate independently from one another, so achieving all of these gains would require coordinated efforts and investments—a considerable challenge."

The six levers (divided into two groups) are:

        Supply chain set up

1. Increase value density
2. Reduce average transportation distance
3. Change the mix of transportation modes
   
   Transport assets
   
   
4. Address asset technology (e.g. rail, tanker, trucking)
5. Assess usage of individual assets
6. Assess usage of collective assets

Improving energy efficiency has become a top concern for executives, Tobias Meyer's interactive is a helpful tool to begin exploring levers for potential energy-efficiency gains in each stage of the supply chain. The ability to obtain the maximum gains will be contingent on the supply chain participants coordinating activities and sharing better information. The technology tools necessary to do this have been emerging over the past 5 years, and are becoming mature enough to help make a significant difference.

Business flexibility constrained by legacy software

A client of mine sent the following video to me thinking that this was Evavi's. As companies work to free themselves from rigid, inflexible legacy systems, solutions such as Evavi's Supply Chain Synchronization offer new levels of flexibility and extensibility. If this video represents some of the challenges you are facing with your supply chain, we'd be glad to talk about how we are delivering the enterprise software of the future -- today.

Getting supply chain software right

With global markets charting uncertain territory and the economy shrouded in uncertainty, the conditions are ripe for companies to closely examine their supply chains to find areas for improvement. “Getting supply chain software right,” from The McKinsey Quarterly, offers some useful insight for those wanting a solid introduction to key supply chain concepts and to how software can help in this domain. Here are some excerpts:

“An urgent need to improve supply chain management can arise when product margins shrink, demand drops, customers ask vendors to manage inventory for them, or new products are introduced. … Because the costs of managing the supply chain — inventory, the warehouse and distribution center, and freight — can represent 10 to 15 percent of sales in most industries, the savings that effective supply chains bring have a genuine impact.

“…A supply chain, simply stated, comprises the flow of a company’s products, information about them, and the money that changes hands between the company and its suppliers and customers. When a company manages the processes that support these flows well, it can fill orders from customers quickly yet keep its inventory to a bare minimum. When it doesn’t, the supply chain breaks down. Customers place orders but hear that the products are out of stock, even when they might be available somewhere in the company. Raw materials fail to show up on loading docks, and shipments to customers arrive late. Factories run below capacity because customers cancel their orders. The result can be a quick drop in sales, lost margins, and inventory write-offs.

“…Managers often focus on automating transactions, something that might be important but typically fails to extract the greatest value from supply-chain-management software. The greatest value tends to come from harnessing its ability to improve decisions — how much of what product should be shipped to which warehouse, for example — by making forecasts more precise. Since decision support affects inventory turns and customer-service levels (avoiding stock-outs, for example), improving it has more impact than, say, migrating an order process from telephones or fax machines to computer systems, a change that at best reduces head counts.

“…The promise of real benefits rests on the potential for seamlessly integrating data flows and work processes across entire enterprises and even industries.  The primary benefits will come from their ability to speed up the flow of information and to make it available more widely — which alone can produce gains large enough to justify big investments.

“…When supply-chain-management software works, it can help cut inventory levels, improve delivery schedules, and ensure that supply meets demand—all of which should make customers more satisfied.

“…The performance of supply chain software depends not just on its features and quality but also on the way people use it. This is particularly true of forecasting and inventory planning solutions. Four guiding principles to consider when implementing supply chain software:

        1) fix only important broken processes
        2) promise only what you can deliver
        3) improve training
        4) make people accountable                     

“…The greatest improvements in supply chain management occurred when companies both improved their processes and correctly installed and used the software.”

Read the complete article here

Companies on the Frontier

Steve Matthesen, vice president and global leader for supply chain at BCG is right on when he talks about “the bulk of the benefit [in supply chains] comes when you break down the functional silos and better coordinate across the entire business, and your suppliers and customers." This is what Supply Chain Synchronization is all about.

In the article, 'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value, Matthesen lists the key priorities to transform a supply chain as:

1) aligning the supply chain with company strategy
2) aligning incentives across functions and with external parties
3) arming people with the right data ‘so they can make holistic decisions’
4) building flexibility to quickly respond to demand, rather than relying on forecasts.

"CEOs need to engage with their management teams to understand how their supply chain works today -- how it supports the business and how it prevents success.  Together, they need to evolve the strategy and supply chain to move the business to a position where the supply chain supports and enables a winning strategy. This cannot be accomplished by the head of supply chain alone," Matthesen says.

The pay-off is substantial. "A fully aligned supply chain and strategy delivers a superior business model," Matthesen adds. "Given the difficulties of achieving this, the benefits are often sustainable and create real advantage. Your competitors are likely to want to copy pieces of your strategy without realizing how the entire strategy and supply chain work together -- and they will not be able to match your performance."

Getting the right supply chain alignment, and enabling and supporting this alignment with the right technology, can be a challenging task. It requires the leadership and support of the CEO and other senior executives. It is not a task that can be accomplished by only the supply chain team or the technology team. The supply chain touches every element of a business, and supply chain transformation requires the sustained support of a broad coalition of senior executives in order to succeed. When it does succeed, it unlocks hidden value and helps to propel the company forward.

ABC: An Introduction to Supply Chain Management - What is the extended supply chain?

If you are looking for a quick introduction into the basics of supply chain management, Ben Worthen, at CIO Magazine, has compiled ABC: An Introduction to Supply Chain Management which is a good place to start.

One of the questions he addresses, What is the extended supply chain?, is a critical one that executives must think through carefully if they are going to unlock new value in their supply chain. Internet-native supply chain applications -- such as Supply Chain Synchronization -- are enabling a whole new way of embracing the extended supply chain.

Worthen describes it this way: “The extended supply chain is a clever way of describing everyone who contributes to a product. So if you make text books, then your extended supply chain would include the factories where the books are printed and bound, but also the company that sells you the paper, the mill where that supplier buys their stock, and so on. It is important to keep track of what is happening in your extended supply chain because with a supplier or a supplier’s supplier could end up having an impact on you (as the old saying goes, a chain is only a strong as its weakest link).”

To the extent you can collaborate with your extended supply chain, you will have greater visibility into important events and will have the ability to more rapidly react to changes. Perhaps more importantly, you should be able to develop and provide new types of services for your clients that will unlock value for all parties involved. The extended supply chain is a big concept that offers unparalleled opportunities for differentiation and value creation.

ABC: An Introduction to Supply Chain Management - What are the roadblocks to installing supply chain software?

Ben Worthen, at CIO Magazine, has compiled ABC: An Introduction to Supply Chain Management. This compilation provides a good starting place for those wanting to learn about the basics of supply chain management.

One of the questions he looks into is: What are the roadblocks to installing supply chain software? His answer looks at three typical roadblocks that can be anticipated and should be preempted:

1) Gaining trust from your suppliers and partners.

“Supply chain automation is uniquely difficult because its complexity extends beyond your company's walls. Your people will need to change the way they work and so will the people from each supplier that you add to your network. … To get your supply chain partners to agree to collaborate with you, you have to be willing to compromise and help them achieve their own goals.”

The degree to which your people will need to change the way they work will be dictated by what business processes you are changing, and how flexible the software is to accommodate the elements that are unique to your business. Ideally you will transform business processes because they will improve your business, and not because the software dictates that you do things in a circuitous way. Supply chain solutions should only be considered that are flexible enough to model what is unique about your business, rather than forcing you to change those things that your customers already value. You should be able to tailor role-based workflows that perfectly fit the needs of the business, and that support adoption by end-users. This is a foundational concept of Supply Chain Synchronization that distinguishes it from simple Supply Chain Management.

2) Internal resistance to change.

“If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people are accustomed to dealing with phone calls, faxes and hunches scrawled on paper, and will most likely want to keep it that way. If you can't convince people that using the software will be worth their time, they will easily find ways to work around it. You cannot disconnect the telephones and fax machines just because you have supply chain software in place.”

Without successful change management, most supply chain initiatives will flounder and may ultimately fail. Some clients I have worked with have forced supply chain solutions in without gaining the necessary consensus from the end-users. This normally results in additional time and money to cycle back after the implementation to train, cajole, and encourage the end-users to get on board -- much more effective to get this done at the beginning of the project.

3) Many mistakes at first.

“There is a diabolical twist to the quest for supply chain software acceptance among your employees. New supply chain systems process data as they are programmed to do, but the technology cannot absorb a company's history and processes in the first few months after an implementation. Forecasters and planners need to understand that the first bits of information they get from a system might need some tweaking. If they are not warned about the system's initial naiveté, they will think it is useless. … Once employees [understand] that they [are] merging their expertise with the system's increasing accuracy, they [will begin] to accept and use the new technology.”

The best supply chain software has the ability to be programmed in advance with as much of a company’s historical data as can be obtained. However, even when this is done, the system will take a while to reach equilibrium. Supply chain solutions are designed to be intelligent – they learn as they go. At the same time, most supply chain functions (such as forecasting and inventory planning) are not designed to run on autopilot. These solutions require regular monitoring and adjusting (though the best ones will automatically direct the end-user to the places that need the most attention). End-users need to understand that they are indeed merging their expertise with the system’s intelligence. Working in concert, the results can be spectacular.

The 'Right' Supply Chain

When people ask us why we started Evavi, one of the things my partners and I point to is the increasing complexity of supply chains and the inability of legacy software solutions to keep up with the pace of change. One of the main stumbling blocks to effective supply chain management has been the historic disconnect between planning and execution. When these functions are disconnected, as they are in legacy solutions, the supply chain is exposed to unnecessary risks caused by lack of visibility, lack of synchronization, and lack of optimization.

In regard to the difficulty of integrating processes and aligning incentives, the article Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management quotes Marin Gjaja of BCG: "My suspicion is that the complexity of product-based companies where supply chain is relevant is expanding at a faster rate than information technology can keep up with. By that, I mean that the number of products and different options and customers is expanding -- say it's 100 products times 100 customers times 100 different ways of getting there. You can see that you get this multiplied effect of complexity. The tools you have to deal with it can only evolve so quickly. It will always be a very difficult challenge -- it's one of those perennial issues in management, one of those evergreen topics that you just have to stay one step ahead of."

My partners, who include the founding technologists at i2, started Evavi for this very reason. They were frustrated by the requirement to pull legacy code forward while the pace at which Internet-native technologies were maturing was exploding. They realized that these new technologies would fundamentally change the way supply chain processes would be modeled, and that the best way to influence the future was to help create it from a fresh code base capable of operating in real-time across the extended enterprise.

Our Supply Chain Synchronization suite is helping to deliver on what BCG’s Matthesen believes is the optimum answer solution: "to design a supply chain that is based on a sound strategy, ensure all parts of your supply chain -- both internally and externally -- have access to good and consistent data, and empower people to make decisions quickly. Build a supply chain that is comfortable with uncertainty and quick to react by taking down the barriers that prevent success." 

ABC: An Introduction to Supply Chain Management - What is the goal of supply chain management software?

What is the goal of installing supply chain management software? Ben Worthen at CIO Magazine answers this questions and others in his ABC: An Introduction to Supply Chain Management which is a compilation of SCM basics.

Worthen provides the following as a way of describing the goal of installing supply chain management software: “Before the Internet came along, the aspirations of supply chain software devotees were limited to improving their ability to predict demand from customers and make their own supply chains run more smoothly. But the cheap, ubiquitous nature of the Internet, along with its simple, universally accepted communication standards have thrown things wide open. Now, you can connect your supply chain with the supply chains of your suppliers and customers together in a single vast network that optimizes costs and opportunities for everyone involved. … The goal of these projects is greater supply chain visibility. … The payoff of timely and accurate supply chain information is the ability to make or ship only as much of a product as there is a market for. This is the practice known as just-in-time manufacturing, and it allows companies to reduce the amount of inventory that they keep. This can cut costs substantially, since you no longer need to pay to produce and store excess goods.”

As companies become more and more sophisticated about supply chain practices, they begin to focus not just on visibility and cost reduction, but transforming business processes across their supply chain with Supply Chain Synchronization so that they can create entirely new service offerings that meet the diverse needs of their customers. To do this requires support for intelligent transactions that synchronize planning with execution, and guide constituents towards the most value-added activity.