The next link in the chain

Once ERP, then CRM, now supply chain management is being touted as the glue that will hold business processes together, providing the Holy Grail of business in the 21st century: the seamless e-business/e-commerce process that encompasses all B2B and B2C players, upstream as well as downstream, in a cost-effective and fully-automated system.

But is it so?

Supply chain management (SCM) is not new; as a concept of linking suppliers, manufacturers, distributors, retailers and eventually consumers, it has been around for some time. Phone and fax orders are, after all, forms of supply chain management.

Early leaders in SCM were the automotive industry, with the “just in time” philosophy that is seen as underpinning what SCM is all about. Subsequently, the FMCG industry (fast moving consumer goods — or CPG, consumer packaged goods, depending on your consultant) took up the baton, and currently, according to Jeffrey Russell, managing partner with Accenture’s SE Asia supply chain practice, the electronic and high tech industries are the standard bearers.

“All industries are ‘getting it’ and starting to put practices in place,” he says, “albeit at different speeds.”

But whether SCM is the next big thing, or another over-hyped, over-jargoned, wanna-be for vendors in search of large contracts, only time and the market will tell.

Certainly the predictions of market growth in SCM solutions are impressive.

Last year, IDC predicted the SCM services market will grow at a compound annual growth rate of 15.1 per cent to reach $US55.3 billion in 2006. The SCM market, like all IT areas, suffered a slowdown in 2001, when it had growth of 3 to 4 per cent and a total market of about $US$7.4, so seeing the market double in five years is evidence of considerable confidence. The product-life cycle management and procurement segments will be key growth areas, IDC said. But note that these predictions were based on an anticipated economic upturn in the US by the end of 2002.

A fallout in the SCM vendor scene, with notable mergers, acquisitions, consolidations and disappearances, has seen the number of suppliers diminish in recent years.

“Top of the list in planning are i2, Manugustics and SAP,” Russell says. “Top in procurement are Ariba, SAP and probably Oracle.” Then there are a number of smaller, often specialist suppliers padding out the market.

However, IDC is not alone in predicting growth. Meta Group predicts that “by 2006/07, [Global 2000] companies will strategically share their planning, management and performance measurement systems with most of their supply partners and customers”.

They’ll have to get a move on. A survey by UK-based Conspectus last year found that “a tiny 2 per cent of the sample [surveyed] describe their supply chain as ‘completely integrated internally and externally’, with only 16 per cent claiming to have achieved complete integration internally. In comparison, nearly half (44 per cent) reckon to have a supply chain which is partially integrated internally and externally, and a third (32 per cent) have achieved only partial integration.”

A further fly in the ointment is that almost half of the survey group “admit that they find coordinating distribution and logistics plans at their sites either ‘moderately’ or ‘very’ difficult.”

So how do you implement SCM successfully, what are the issues you will face and the emerging technologies to assist you?

ERP and SCM

First of all, almost all commentators agree that you will need a good ERP system.

US-based industry commentators and software evaluators TechnologyEvaluation.Com says that, “Where SCM was once viewed as a way to obtain competitive advantage, companies are now beginning to perceive it as a logical and necessary extension of ERP.”

Certainly ERP holds some elements that could be construed as forming at least part of an SCM system. But SCM is not ERP, or vice versa, although some would suggest the lines of distinction are growing fuzzy.

IDC senior software analyst Natasha David says: “Some modules within a traditional [enterprise resource management] package (such as materials management and procurement/sales order processing) can be mistakenly identified as support for SCM activities. Following this, the lines between SCM and ERP are rapidly blurring in end-user organisations’ minds.”

“You need a stable base, and SCM sits on top, but ERP is not the same as SCM,” says Russell. “ERP provides the data and SCM provides the planning and procurement. SCM are support tools, not transactional tools like ERP. Those who have got a good ERP system in place have a good base for SCM.”

Gordon Towell, CEO of ERP and SCM supplier IDS Enterprise Systems, takes it one step further. “There’s definitely a blurring of the two. ... But it would be difficult to envisage any company implementing a supply chain management system without having an embedded ERP system. In other words, you cannot do SCM without ERP.”

The Net and EDI

While you are consolidating your transaction processing ERP with your planning and procurement SCM, you need to assess how you will communicate with your upstream and downstream partners.

“Collaboration” is the current buzzword being thrown around the market. Phil Manning, a business consultant with SSA, says collaboration implies “access to databases”, which he says is a defining characteristic of SCM.

Greg Mills, COO of Cincom, says the implications of collaboration take it beyond the physical access. “It’s about extending beyond your immediate neighbours, it’s about the ‘whole of venture’ looking at a single point source, the consumer, to determine demand.”

He cites the example of a farmer, rather than waiting for orders from a manufacturer, looking at day-to-day soft drink consumption, via the information resources available to retailers and distributors, to determine his sugar planting. He admits he can’t cite an example of such full collaboration, but he says that such a scenario is just around the corner.

Manning agrees. “Actively achieving collaboration is difficult. This is primarily due to the human instinct not to volunteer information and also because in the past, the available technology hasn’t been able to optimise collaboration.”

A lot of what is currently being promoted as empowering collaboration revolves around the Net, seen as a democratisation of supply networks.

Mills says, “I really think of SCM as more a philosophy than a piece of software.” The ability to hop on the Net to place your orders opens up opportunities to a much greater number of potential players than the old days of hard-wired electronic data interchange connections, which limited SCM to well-heeled players (and, in the process, limited SCM’s market potential).

“Big companies can no longer dictate the technology you use. For $5000 you can become a player in the supply chain relationship.”

Towell, who admits to finding the whole field “very exciting”, envisions that “SCM will be the death of a lot of technologies. The revolution is in getting it down to the consumer. Who will want EDI when you can be Web-enabled?”

Others are not so convinced. “EDI is dominant,” Russell says. “It’s still alive and well, like the phone and the fax.”

“The Web supports EDI links,” Manning says. “While the Web might be alright for the Mum and Dad corner store, you need EDI to place tens of thousands of order lines in one hit. The Web is not the right tool for that amount of data. Security and validation in EDI is also very tight [compared with the Net].”

Certainly fruit juice and drink manufacturer and distributor Berri uses both EDI and self-service via the Net. Recently Berri “unified its ERP with supply chain optimisation” using JD Edwards solutions to bring its disparate branch-based operations into a national organisation. Particularly for its export market, overseas customers will be able to log onto a portal to undertake a number of functions, including placing orders, checking the status of orders, and reviewing receivables in terms of their payment status.

“This will give our customers real benefits,” says Ross Bradley, Berri’s IT director, “Faxing, e-mailing and trying to put phone orders across the world with different time zones, currencies and languages can be very difficult for all involved.

“Our new system, with [JD Edwards’] OneWorld and Advanced Planning at its core, will let Berri work with key suppliers and customers on extended supply chain planning. Closed-loop electronic order to pay processes is our first priority. In the future, Berri plans to pass planning schedules directly to its suppliers’ systems so they can better meet Berri’s needs and optimise operations.”

That optimisation should result in Berri achieving multimillion dollar costs savings.

Nintendo installed an Odyssey ERP system from Melbourne-based Mid-Comp to handle distribution of its GameCube, beginning with the launch last year. Odyssey is delivered over a browser. Nintendo IT manager Peter Stroud said: “We didn’t need to invest in high-cost PCs with complicated configurations. We simply need a standard PC with a browser allowing us to push our business front to wherever there is an ISP connection.” Nonetheless, it uses EDI to connect to retailers such as Myer and to carriers.

The Conspectus survey puts the Net-based SCM promotion into perspective. “While many organisations are only too happy to acknowledge the advantages of what the Internet has to contribute, they are finding it much harder to put the theory into practice.”

While just over a quarter (28 per cent) do use Internet-based options throughout their supply chain, a similar percentage (26 per cent) do so only at the front end, and the same percentage again are using the Internet solely as a marketing aid.

Half the survey sample say they use the Web for purchasing, with 40 per cent doing so for either selling or order status applications. Slightly smaller numbers are opting for Web solutions in areas such as order management (38 per cent), track and trace (38 per cent) and supplier management (28 per cent).

Overall, it says, online activity seems not to have increased substantially during the 12 months prior to the survey. A clear majority (74 per cent) continue to use EDI for communication within the supply chain, “a percentage which has not dropped significantly in our surveys of this area over the past three years”. Respondents most commonly use EDI to handle purchase orders (48 per cent), invoices (42 per cent) and supplier notifications (32 per cent).

Radio frequency identification

One of the emerging solutions said to make SCM even more attractive and effective is radio frequency identification (RFID) technology.

Using small radio tags that can be attached to individual products and packages, RFID is promoted as a replacement for barcodes. The latter are limited to generic information only, and require barcode readers and human labour to access the limited data available. RFID, on the other hand, can hold a much greater amount of information (specific to the package it is attached to), offers increased tracking and can be read without human involvement.

RFID information can be instantly downloaded to the Net, making it, according to Accenture supply chain group associate partner Mark Reynolds, “a supply chain integration tool”.

“It is inherently collaborative,” he says. “It will be a driver to supply chain collaboration.”

Not all commentators are so bullish. Nucleus Research, in its 2003 Technology Almanac, dissects what it sees as the emerging developments “that promise to reshape information technology’s key sectors in 2003”.

RFID is one of those developments, but with major caveats: “Nucleus believes that deploying RFID in 2003 would be too big a gamble for most companies. Costs will be steep: a single price tag’s price hovers near $US1, receiver stations have to be deployed densely enough to keep all tags within about six metres of a station, and maintenance costs will probably show an increase over barcode systems, at least initially. ... Most supplier partners will not be willing to invest in RFID, limiting companies’ efficiency benefits to what they can squeeze out within the confines of their own businesses.”

In summary, it says that “except in cases where reduced labour costs alone will be sufficient to cover a worst-case TCO, Nucleus advises companies to hold off on RFID investments, at least until many more objective cases studies are available.” Reynolds refutes some of Nucleus’ claims. He says tag prices have been brought down to 5c per unit, albeit for low-tech versions. He adds that improvements in RFID technology have allowed the reading of a pallet load of tagged items at the one time, replacing human effort with no issues of reader “confusion”. Admittedly, not all products are taggable, such as aluminium cans, which interfere with radio signals.

“The first uses will be in very specific areas,” he says. “Critical mass will be reached in 2004 to 2005. The US and Europe, because of their economies of scale, are only months away; Australia is several years away.” He adds that RFID is probably best considered, at least for the time being, as an adjunct to barcodes.

Nonetheless, Visy in Melbourne, he says, is already using RFID for internal use, and Gillette in the US is using RFID in an unusual application to tag individual Mach razor products. These are the company’s most frequently stolen items off the shelf, and it is using RFID to track the whereabouts of products at all times.

Manning says his company has clients who are using RFID, adding that their decisions to do so “were made purely on the basis of ROI”.

Measures of success

So what benefits should you expect from an SCM implementation?

Manning suggests that the following figures, based on industry and client experience of SCM-based collaboration, are achievable (although admittedly some of the ranges quoted are broad):

- Delivery performance: 16 to 28 per cent improvement
- Inventory: reduced by 25 to 60 per cent
- Forecast accuracy: 25 to 80 per cent improvement
- Fulfilment cycle time: reduced by 30 to 50 per cent
- Overall productivity: 10 to 16 per cent improvement
- Supply chain costs: reduced by 25 to 50 per cent
- Fill rates: 20 to 30 per cent improvement.

And to show that it’s not all abstracted and broad results, he quotes the real-world example of Heineken, which has spent five years in collaborative commerce with 450 distributors.

That company has achieved the following:

- 40 per cent reduction in inventory
- 50 per cent reduction in order lead time
- 20 per cent increase in sales productivity.

And then there’s something that Manning says he is particularly pleased to see — a fresher product on the shelf.

“When the left hand knows what the right is doing, and when supply is being produced to more accurately cater for demand, it is inevitable that overall productivity will increase.” Not to mention cost savings and, hopefully, happier customers.

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