Simple secret for supply chain success: know more, do more and spend less

It was moderately efficient, as far as it went; but it didn't go very far, and it certainly didn't optimise the organisation.

You know the scenario, because it still exists today: different people have their own targets. The purchasing manager may do a fabulous deal for his company by buying in bulk, but that in turn will reduce the stockturn in the warehouse on which the warehouse manager is measured.

The arrival of the integrated supply chain in the boom years of the 1990s sought to fix all that, and the impact has been considerable. Companies that implemented an integrated solution have achieved significant business improvement and wondered how they ever managed without it.

The most recent beyond the integrated supply chain has been the networked or adaptive supply chain, in which all the participants are able to interact with each other. This allows companies to contract out everything, including manufacturing, to the point where sales and marketing are the only core functions within some global brands.

The next stage of supply chain development will be the "snap-on" supply chain, where an infinitely expandable network of suppliers and buyers can collaborate with each other and strive collectively for ever-greater efficiencies. This is the on-demand supply chain, where no integration is needed. It's a grid, where people can snap-on and trade at will.

The supply chain grid will deliver significant opportunities for greater streamlining, cost savings, speed and efficiency. At the same time, we will see supply chain event management become the norm over the next four years. We have track-and-trace for small parcels now, but RFID technology will give us full supply chain synchronisation and visibility.

That's where we're going as an industry, but it's important to remember that about 80% of companies today are way behind the curve: they stand between the traditional "silo" supply chain approach and the integrated model. The challenge for these companies is to transform their SCM approach so that they can move quickly to the networked solution, perhaps even in some cases leap-frogging the integrated stage completely.

Open architecture is the key that allows transformation to a networked supply chain. This was a vision only four years ago but is a reality today. The technology is there, but the barriers are largely cultural - people ask: "How will I be measured?" You can help people to change, but you can't force the pace.

However, early adopters like Toyota, Dell and Sony are continually pushing the outside of the envelope, looking for new functionality and new ways to compete. Their efforts, supported by the leaders in enterprise software, ultimately serve to raise the bar for everyone.

My vision for SCM is simply a world where the majority of businesses across the globe are able to achieve the levels of improvement taken for granted by those early adopters and envelope-pushers.

SCM is not an ivory tower discipline. It's a hard-nosed approach to value creation at the sharp end of any business, where the rubber hits the road, and its importance is recognised at the highest levels of finance and industry. The American Production and Inventory Control Society said in June this year: "Value creation in the supply chain spurs corporate strategies and attracts investor attention." Research by Accenture has shown that the stock prices of public companies that invested in getting their operating model right with the aid of supply chain technology outperformed their rivals by 20-25%.

This demonstrates that companies with the right supply chain model will win in their vertical markets, because the overall cost of serving their customers will be lower. They will have the most efficient turns of inventory and the highest working return on assets. Leveraging that advantage delivers better market results.

On the other hand, supply chain failures can be very costly. A study published in 2000 by Georgia Tech and the University of Western Ontario, covering 861 public companies who reported supply chain problems over a 10-year period, stated: "When a company announces a supply chain malfunction such as production or shipment delays, its stock price tumbles nearly 9% and losses can be as great as 20% over six months." So the stakes in SCM are enormous. How can companies play to win?

Let's look first at business goals. Effective supply chain management can drive clear business improvement in three primary areas: cost reduction, innovation and risk management. Each of these areas in turn has its own value creation levers.

For cost reduction, you can cut procurement costs on goods and services; slash infrastructure costs on warehousing and equipment; and reduce inventory, in both WIP and finished goods. The innovation levers are price management, unit or volume increase and new product introduction. And the risk management levers are a reduction in obsolete inventory and an improvement in risk profile through a reduction in risk exposure.

Using these levers involves a simple three-stage approach: "know more, do more, spend less". Knowing more means being able to drill down into your database and finding the information buried there that answers some of the fundamental business questions:

• Planning: How accurate is the forecast? What causes the variability? How can I minimise my inventory?

• Procurement: Which are my best suppliers? Are we paying too much? Which departments have the lowest compliance?

• Manufacturing: Is it in compliance? Is it meeting our quality standards? Are we manufacturing efficiently?

• Fulfilment: Do I have the capacity to meet this order? What carriers should I use? Am I using warehouse space efficiently?

• Maintenance: Is asset reliability improving? Which assets expose us to the greatest risk? What are my total maintenance costs?

The key to knowing more is using a common data model for all business processes, across all languages and currencies and all organisation structures. For example, concept-to-release is a business flow with a single data model; everyone sees the same data - marketing, sales, production - and they can all collaborate. Furthermore, managers can receive daily business intelligence that is accurate and up-to-the-minute, because it comes from a "single source of truth".

They can review the company's profit and loss, marketing leads, sales forecast, service requests, contract renewals, orders processed, headcount, on-time shipments - indeed, any measurable aspect of the business. And, because it all comes from a common data model, they can drill right down to the level of individual customer orders to understand any variance.

So now you know more, and that enables you to do more. If you have data on total spend and supplier ratings, you can source strategically; if you know more about inventory, you can improve turns; know more about product quality and delivery accuracy, you can increase customer satisfaction; know more about your labour, asset and material costs, you can reduce your manufacturing costs.

In fact, armed with the right information, you can do all kinds of things that all managers would agree are desirable: improve demand accuracy; reduce inventory; maximise capacity utilisation; improve quality; reduce cycle times; optimise asset utilisation - in short, you can streamline and optimise your whole business. That early vision for ERP is alive and well and delivering results for a whole host of companies.

Let's look at some examples. General Dynamics used this approach to manage the $2.3 billion Bowman Programme for Britain's Ministry of Defence. This is a secure digital voice and data communication system that will be used by all Army vehicles and service personnel by 2007 and provide the infrastructure to support all digitisation applications over the next 30 years. In a project where time really was of the essence, General Dynamics was able to implement three key ERP modules in just 28 days and the key manufacturing module in just 60 days.

The UniCredito Italiano bank has been unifying its information systems as part of its strategy to expand into Eastern Europe by acquisition. Using the single data model approach, it has cut personnel administration costs by 50%, halved its paper purchasing requests, reduced the time to close financial data by 40% and cut indirect materials expenses by 20%.

Sony España has improved productivity by 15%, reduced time to market by 30%, cut its planning cycle from three days to four hours and reduced inventory levels from 40 days' stock to just 15. The Spanish white goods giant Fagor used this approach to cut its administrative costs by 60%, reduce its supply period by the same amount, cut expenses for direct materials by up to 3% and for indirect materials by 25-30%. In total, the group has saved €1.8 million in indirect materials costs.

Other companies at the cutting edge of the supply chain revolution include Kvaerner, which has reduced inventory costs by $1 million and cut order processing time by 83%; Hitachi, which has cut inventory costs by 75% and procurement costs by 70%; Timex, which has reduced human interaction by 90% and improved its order fill rates; McData, which has reduced inventory costs by 37% and increased on-time shipments by the same amount; and American Power Conversion Corporation (APC), which reduced inventory costs by 56% while moving from 13 systems to a single global instance.

The scope for making those results a reality not just for visionary adopters but for all business users is absolutely enormous. And the beauty of the opportunity is that customers have the chance to spend less, not more, to get there. Most people expect that by streamlining their operations they will see a reduction in their total supply chain cost - if not, why bother? But not everyone appreciates that they can reduce their infrastructure costs - and especially their IT costs - in the process.

A typical SCM implementation is characterised by scope creep, surprise costs, unexpected consultancy fees, on-the-fly advice and success that is often based as much on luck as on experience. However, best practice today sees implementation focused on specific objectives, on a project with a fixed price and fixed scope, using certified procedures, delivering business flows at less risk and lower cost.

Then there's the potential for savings in hardware by migrating to the Linux operating system. Linux has a number of advantages: for a start, it's free, so implementation cost drops significantly. Secondly, it runs on lower-cost, non-proprietary hardware, so you can deploy on low-cost commodity hardware. Thirdly, Intel Linux is demonstrably three times faster and five times cheaper than conventional systems. Fourthly, it's also easy to automate en masse and it's highly reliable. The growing list of companies using Linux for their e-business applications includes Dell, 7-Eleven, Paperhat, Marso, UTT Logistics and Three Rivers Pharmaceuticals. There are at least 700 others around the world, and more will follow.

Other ways for spending less in SCM implementation are to use business flow accelerators, opt for pre-configured software and outsource your software management. Business flow accelerators typically get your applications up and running in 66% less time and at 35-50% lower cost. Pre-configured e-business software will cut your cost, project complexity and risk, and implementation is usually under 30 days. And outsourcing is increasingly popular with forward-looking IT directors. Why? Well, try costs that are 50% lower, according to one independent authority. Just as important, outsourcing customers are realising 60% fewer service requests, 50% faster problem resolution, 60% fewer outages and close to 99.99% availability.

A vision for the future of SCM? More companies able to know more, and so do more, and spending less in the process. Like many visions, it sounds revolutionary. The beauty of this one is that it's very real, and it's attainable now. All you have to do is ask.