Supply chain, supply chain

The nature of business competition is changing in a fundamental way, and the repercussions for IT are profound. The classic model of company vs. company is starting to give way to a new model: supply chain vs. supply chain. In the 21st century, being the best at producing or selling a superior product is no longer enough. Success now depends on assembling a team of companies that can rise above the win/lose negotiations of conventional trading relationships and work together to deliver the best products at the best price. Excellence in manufacturing is just the admission fee to be a player in the larger game of supply chain competition.

We've all seen the harbingers of this upheaval. The stories of how Dell and others devastated their competition by reinventing their supply chains are now firmly established in business folklore. But the implications of the new competition run far deeper than a few spectacular success stories. Getting the supply chain right is no longer just an exciting opportunity. It's a survival skill.

There are two other business stories that should be posted in our collective consciousness right beside those of Dell: the tortuous experiences of Nike and Cisco Systems when they ran into trouble with their supply chains. In Nike's case, the crisis came in May 2001, when the company announced that the sales for the preceding quarter were US$100 million lower than expected because of confusion in its supply chain. This loss, while impressive, was soon eclipsed by Cisco's announcement that it was writing down $2.2 billion in unusable inventory due to problems in its supply chain. It was the largest inventory write-off in the history of business.

These are compelling demonstrations of the importance of keeping supply chains running smoothly. But these operational losses, large as they are, represent only part of the true cost of supply chain failures. The larger hit comes when companies reveal their mistakes to the financial markets. The day Nike announced the breakdown in its chain, the company's stock dropped 20 percent, an amount so staggering that it makes the $100 million loss seem like pocket change.

That's a huge penalty to pay for a single failure, but it's not atypical. A US study last year examined supply chain problems at 1,131 companies from 1989 to 1999. They found that companies reporting such problems suffered an average drop of 7.5 percent in their stock price the day of the announcements. This loss of value was no temporary setback; the decline in valuation began as early as six months prior to the announcements and often continued for six months afterward. The total drop over the 12-month period was a whopping 18.5 percent, with an estimated loss in shareholder value averaging more than $350 million per incident.

How does this shift in the nature of competition affect IT departments? For starters, it means they need to support yet another generation of enterprise applications, with all the growing pains and integration problems that entails. Although supply chain management software forms a tidy category on industry analysts' charts, in reality, it's an odd conglomeration of packages from a variety of vendors, few of which are large and stable players.

The mainstay application is the advanced planning and scheduling (APS) system, which offers a mix of design and planning tools that use mathematical techniques to optimize the flow of goods across the chain. It generally includes separate planning modules for managing demand, distribution, production, material requirements, purchasing and fulfillment, all of which have some overlap with the modules of enterprise resource planning systems. Linking an APS system to an ERP system, although simple in principle, is a major integration project.

Other supply chain applications include multimodule systems for managing warehousing, transportation, customer relationships and supplier relationships. There are also newer systems for monitoring the chain as a whole and responding to problems as they occur. These packages come from many vendors and are built using a wide range of technologies, which further complicates the integration process. Integration problems are gradually being solved, largely through major ERP vendors incorporating supply chain applications into their flagship products, but the industry hasn't yet matured to the point where installing supply chain software is simple or safe.

The examples cited previously illustrate how great the burden of failure can be. Nike's supply chain crisis was caused by a failed installation of i2 Technologies' APS system. And Cisco's $2.2 billion write-down was due in large part to a materials planning system that allowed demand for components to be double- and triple-counted across its suppliers.

Another example is Kmart (US), which announced in May 2000 that it was spending $1.4 billion on software and services to overhaul its supply chain, including planning systems from i2 and warehouse management software from EXE Technologies.

A year and a half later, before the systems ever went live, Kmart announced that it was abandoning most of the software it had purchased and was instead buying $600 million worth of warehouse management software from Manhattan Associates. This new push also failed to solve the company's supply chain problems, and it went into bankruptcy in January 2002.

In short, managing the adoption of supply chain software is a perilous business at best. But the difficulties of implementing a new generation of enterprise software are only a small part of the challenge facing IT organizations. The greater challenge lies in the fact that, in the new competition, the true enterprise is the supply chain itself, not the companies that make up that chain.

To date, supply chain software has taken a company-centric view, with each member of the chain hosting its own systems and independently representing its trading partners and their actions. This is a stopgap measure at best; effective supply chain management will ultimately require systems that cross organizational boundaries at will. The days of closed corporate software are coming to an end. The new competition will usher in an era of highly distributed, multicompany software systems.

A New Model

The infrastructure to support these distributed systems is now in place, and the software stack for this new generation of systems looks very different from the classic model. The platform for multicompany systems is, of course, the Internet, though the resulting networks will usually be implemented as extranets for security reasons. The key communication protocol is XML, which has already become the standard for information exchange between companies. The next key ingredient is the Simple Object Access Protocol, which allows applications to make remote procedure calls to one another using XML to format their requests and replies. SOAP is the enabling technology for Web services, which allow applications to be more loosely coupled and call upon each other on an ad hoc basis.

This is a formidable stack of new technologies, but they're only the basic platform for the real business functionality. To enable multicompany planning and transactions, existing applications for managing local production and supply have to be made accessible to Web-service requests so they can become part of a larger, chain-spanning system. Beyond this, some form of collaboration software is required to coordinate the efforts of planning and production teams across member organizations. And all of this will have to be installed, managed and maintained by teams of IT professionals drawn from different companies and operating out of different locations.

Sound like a challenge? It is, but look on the bright side. IT organizations spent the last part of the 1990s struggling to solve the Y2k problem before the clock ran out, only to be hit by cutbacks and austerity measures following the tech wreck of 2000. The emergence of Internet-based, multicompany supply chain systems is an opportunity to breathe new life into IT groups that are now bogged down in maintenance and repair. In short, the new competition brings with it an exciting mission for IT organizations. This mission may seem only slightly less daunting than putting a man on the moon, but who could resist the opportunity to take up that kind of challenge?

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