The Challenges of Demand
As long as there have been customers, suppliers have been challenged to get the right products to the right place at the right time. In a fluctuating global economy, getting an accurate fix on what customers need, when they need it, has become more challenging. So, suppliers need to forge highly synchronized, highly responsive supply chains.
The reasons suppliers have responded in this way aren’t hard to find. Synchronized supply chains offer more flexibility, increased velocity, lower inventory levels, reduced obsolescence, and improved customer service. These benefits provided early adopters with a clear competitive advantage that expanded both market size and market share.
The vision of a synchronized supply chain that responds automatically to point-of-use and point-of-sale data is nothing new. Most companies spent much of the ’90s laying a foundation for this vision by investing in technology and thoroughly overhauling critical internal business processes.
At the same time, pioneering companies experimented with a variety of promising replenishment methodologies, including efficient customer response (ECR), vendor-managed inventory (VMI), and collaborative planning, forecasting, and replenishment (CPFR). Each of these was designed to wring time and cost out of the supply chain.
Why Early Initiatives Failed
Despite major investments in processes, people, and technology, most of these early efforts failed to achieve the hoped for results across the supply chain. Rather, the much heralded inventory reductions seen at the OEM level often showed up as inventory increases at the supplier level.
Most of the blame for these failures can be attributed to two factors – the complex and highly dynamic nature of the supply chain and the heterogeneous nature of the technology infrastructure. Major system implementations used to be described as something akin to changing a tire on a moving vehicle. Until recently, implementing a synchronized supply chain solution could have just as easily been described as changing the tires on a whole fleet of vehicles, all moving in different directions and at different speeds. There are three key reasons that the goal of a synchronized supply chain has been so elusive.
First, global supply chains are incredibly complex and dynamic. Manufacturers constantly seek to identify new suppliers that promise better quality products, more reliable delivery and ever more competitive pricing. At the same time, manufacturers continuously introduce new products and phase out existing ones, open new markets and close others, and add new divisions and divest non-core or non-performing divisions. All this frenetic activity ensures that every aspect of the global supply chain is in a continual state of flux.
Second, many manufacturers are moving from a vertically integrated business
model to a virtually integrated one and from a make-to-stock to a make-to-order
model. Together, these changes promise to cut batch sizes, increase agility,
lower inventory carrying cost, cut product obsolescence, enhance profitability,
and more tightly link supply to actual demand. But, these same changes further
complicate what was already a difficult process — forging a synchronized
Third, relatively few supply chains share the same technology infrastructure. There is often little standardization of technology and processes within the enterprise and even less across the extended supply chain. As a result, it often seems as if the implementation rate of business solutions is outpaced by the rate of technological change.
Private Trading Exchanges
Despite this seemingly bleak backdrop, leading manufacturers are now synchronizing supply chains to deliver dramatic ROI for all trading partners. Early adopters have reported 300 to 400 percent improvements in inventory turns, the virtual elimination of buy-side processing costs, greatly improved supply chain visibility, enhanced collaborative production planning and new, unattended order processing capabilities.
While earlier efforts stumbled due to the dynamic business environment and a mix of disparate business systems, the new implementations succeed thanks to the advent of the private trading exchange (PTX). Simply defined, a PTX is a single technology interface for the outside world. The PTX aggregates diverse procurement activities, manages the content and flow of information among trading partners, presents customers with a consistent interface, and generally eliminates the headaches involved in forging a synchronized supply chain system. Analysts advocate the PTX strategy and predict that from 10-30 percent of all e-commerce transactions will flow through private exchanges by 2005.
With a PTX, advanced SCM concepts can be implemented reliably and cost effectively. Collaborative planning methodologies, implemented through a PTX, improve supply chain responsiveness by sharing demand and supply information and coordinating the planning of retailers, distributors, manufacturers, and suppliers. The basic idea is to improve end-to-end processes by capturing customer point-of-use data and/or retailer point-of-sale data and using it to improve inventory replenishment, manufacturing activities, and supplier schedules back through to the raw material level.
These collaborative methodologies allow the rapid exchange of data, require
minimal technology investments, provide strong user-level security, support
plan reconciliation, fit with existing software standards, and provide partners
with the flexibility to define processes, data and rules. Collaborative models
— VMI, CPFR and ECR – have proven successful when implemented where relatively
stable trading partner relationships and common technology platforms exist.
With the PTX, those benefits can be realized in a more dynamic organization
or across an extended supply chain. Because plugging into a PTX is easy, a lack
of sophisticated technical resources at the supplier level isn’t a challenge.
Practically any company with Internet access can quickly begin collaborating
with its trading partners.
Not all collaborative supply chain solutions are equal. The best ones accommodate the nature and fluidity of relationships and the technological competence of each partner. Further, the applications must include integrated planning and execution functions based on lean manufacturing practices.
Relationships and Technology
Many early collaborative solutions used a centralized supply chain management
model, where every trading partner was required to use the same systems for
all internal and external supply chain functions. Typically, this means that
each supplier must replace its enterprise software with software chosen by the
dominant supply chain partner. Because many suppliers participate in multiple
supply chains, this creates conflicts around the supply chain software that
should be used.
With the centralized SCM model, it is nearly impossible to undertake a transformation
of this magnitude and get all the partners to agree. Few supply chain participants
will willingly throw away investments in existing technology — particularly
ERP systems that require significant investments in time and money to implement.
And with most trading partners participating in more than one supply chain,
it is unlikely that a centralized model can ever cover all the nodes.
An approach more suited to the heterogeneous nature of SCM is a a decentralized
model, often called the PTX model. This focuses on providing linkages between
each node of the supply chain, while still providing support for a hosted or
centralized model — where appropriate. The architecture supports input
from open systems ERP and advanced planning and forecasting systems, to provide
planning and real-time release data back through the chain. Trading partners
can use existing planning and control systems, or migrate to a newer technology.
The Bullwhip Effect
One of the core challenges for any supply chain planning solution is matching
supply and demand, a task made more difficult by the bullwhip effect. Sometimes
known as demand amplification, this type of demand distortion happens when each
node of the supply chain makes locally optimum decisions about replenishment
quantities and timing. Generally, demand amplification results from using order
point replenishment in a dependent-demand environment, varying lot sizing rules
and lead times at each level of the supply chain, planning one way and releasing
another, and making replenishment timing and quantities decisions at every node
of the supply chain.
your planning approach doesn’t model the replenishment environment, if you planning
differs from your execution, or if your replenishment rules differ from use
one, use replenish one, you’ll probably see the bullwhip effect. Figure 1 plots
demand at each node of a multilevel distribution network; relatively smooth
customer demand gets translated into increasingly lumpy demand upstream as a
result of lot-sizing at each node.
Deliberate lot sizing techniques are not the only causes of demand amplification.
Infrequent ordering can generate the same demand surges through the supply chain.
These surges can best be minimized by a replenishment methodology that synchronizes
supply with consumer consumption – supplemented by a demand planning system
that provides visibility of known seasonal or special event variations.
Corporations pursuing an collaborative SCM solution typically want evolution,
not revolution. To achieve this, companies need collaborative with the following
• A decentralized architecture that permits phased implementations, in the sequence that provides the maximum value, with minimal disruption
• The ability to define unique policies and practices that enable event-driven interaction between supply chain nodes
• Collaborative planning and real-time signaling functionality to synchronize material flow through the supply chain
• A PTX platform that integrates sell side, buy side, and replenishment processes
This type of flexible, scalable SCM solution must provide a comprehensive set of replenishment planning and execution capabilities that increase supply chain responsiveness — to provide the key functions to link replenishment activities at each node in the supply chain, on both the buy side and sell side.