Charting the Course to Successful Supply Chain Management

How? Companies today have realized that partnerships are the key to competitive advantage. Although improved supply chain management has proven extremely beneficial within the single enterprise, companies around the world are now proving that true advantage lies in effective management of the entire supply chain ­ from raw materials suppliers through to the end customer.

With this knowledge, leading-edge companies are working to create extended supply chain "communities" that leverage the core competencies of each partner. The result: increased growth with unparalleled efficiency. Working together, these companies will be able to optimize their efforts. They'll be able to flow materials and information through the supply chain pipeline, gaining the ability to respond to customers faster and more accurately than ever before.

As companies around the world head toward this supply chain ideal, they are migrating through five general stages of development in supply chain management ­ from beginning fundamentals to the development of synchronized supply chain communities. Interestingly, many companies do not fit cleanly into any one stage. Although many fall between Stage II and Stage III, as a whole they have aspects of their business that span multiple stages. The reason: companies are driven by the need to compete effectively in their marketplace as well as the need to meet the demands of their customer base. For example, it is not unusual to see companies tailoring products for individual customers, or even managing their own inventories in customer locations, even when they do not have the requisite process integration and information architecture required in Stage IV of the model. Therefore the activity is conducted outside the normal business process in a more costly and inefficient manner, adding strain to already thin margins and complexity to stretched infrastructures.

The Five Stages of Manugistics' Supply Chain Compass
Stage I: The Fundamentals
The focus in Stage I is on quality -- from the quality of the products being produced, to ensuring that they are delivered in a way that gets them to customers with the quality still intact. The primary business problem for companies in Stage I is the cost of providing this quality. So the driving goal of the organization is to produce dependable, consistent, on-spec products at the lowest possible cost.

Figure 1.	Manugistics Supply Chain Compass

Each department or function also looks to put standard operating procedures in place to ensure reliable, predictable execution. The ultimate goal is to achieve predictable costs, delivery times, and production rates, as well as accuracy of inventories, bills-of-material, and invoices. Little forward planning is done. Instead,the concern is one of best expediting today's workload. Scorekeeping metrics are put in place to measure quality and predictability of times, rates, and costs.

In order to enable this predictability, companies in Stage I typically focus on automating existing functions and tasks. Automated process controls are put in place to ensure consistency and quality of products coming off the production lines. Much time is spent on maintaining legacy-based transaction and execution systems, such as item masters and bills-of-material, mostly through the use of home-grown or heavily-modified MRP applications. Other transaction systems include order processing, freight rating, inventory control, accounts payable and receivable, etc. Simple planning is accomplished using spreadsheets or legacy systems that often require manual intervention, serving more as data repositories than planning tools.

Stage II: Cross-Functional Teams
The focus in Stage II is on serving the customer, because the real problem in the business shifts toward unreliable order fulfillment. Predictable product quality and cost are a given at this stage, and the emphasis turns to shipping orders complete and on time in order to satisfy customers' demands. In fact, to remain competitive, customer service becomes the driving goal ­ at almost any cost. Expediting orders through the supply chain and maintaining stockpiles of inventory are all-too-common methods for meeting customer service goals. This often leads to companies incurring excessive costs in the form of frequent, unplanned production changeovers; higher transportation, material acquisition, and inventory carrying costs, and additional analysts/expediters.

Typically, companies in this stage are still organized around key functions, although there is consolidation in some areas, such as combining distribution and transportation into logistics, and manufacturing and purchasing into operations, etc. The key measurement utilized in this stage is orders shipped complete and on time. Companies often create cross-functional teams to plan and execute initiatives aimed at improving communication across departments, with the ultimate goal of better meeting customer demand.

The key execution tool at this stage is MRPII to integrate the manufacturing environment. Planning software typically implemented at Stage II includes point tools to address particular pieces of the customer service equation. A forecasting tool may be implemented to better predict customer demand, and a DRP tool to effectively position inventories in anticipation of customer demand. However, these tools and the business processes they support are still fairly specific to the consolidated functional areas discussed earlier. Due to the lack of integration of these processes and tools, order expediting and inventory stockpiling at each hand-off point in the supply chain still rule the day.

Stage III: Integrated Enterprise
The focus in Stage III is on efficiency. The driving goal: to be highly customer responsive -- leveraging the ability to quickly deliver high-quality products and services -- at the lowest total delivered cost. Meeting this goal of profitable customer responsiveness is complicated by many Stage III companies' strategies of offering a wider variety of standard product and service offerings to the customer base.

Stage III companies become highly responsive by investing in operational flexibility, as well as integrating their internal supply chains, from the acquisition of raw materials to the delivery of product to the customer. Cross-functional processes -- such as 'create demand,' 'fulfill demand,' 'source supply,' etc.-- commonly replace traditional functional silos. Consensus forecasts, intelligently combined with customer orders, drive all downstream operations planning. By integrating the internal supply chain and focusing on the critical organizational metric of lowest total delivered cost, Stage III companies are able to dramatically reduce the amount of expediting and inventory found in the Stage II environment.

In order to support the integrated enterprise, Stage III companies typically implement two types of systems -- supply chain planning and ERP. The information technology focus with each type of system is on horizontal integration across the enterprise using a client/server architecture. Effective supply chain planning systems integrate all of the key planning and decision-making processes in the business, including consensus forecasting of customer demand, inventory planning, time-phased replenishment planning, deployment, vehicle loading, load consolidation, optimal routing, constraint-based manufacturing planning and scheduling, material and capacity planning, and purchasing planning. ERP systems integrate the key execution functions across the business, including order management, financials, inventory control, manufacturing (including costing, bills-of-material, shop floor control, etc.), and purchasing execution. In a typical Stage III environment, supply chain planning and ERP systems are linked together via event-based integration technology which supports due date quoting, available/capable-to-promise, and overall customer responsiveness.

Stage IV: Extended Supply Chain
The focus in Stage IV changes once again as creating market value becomes increasingly important. In many markets, relatively slow growth and increasing margin erosion lead companies to a strategy of increasing their share of the customer base by achieving 'preferred vendor status' with key customers. The driving goal is one of profitable growth, which they accomplish by providing customer-tailored products, services, and value-added information, which differentiate them from competitors. Vendor Managed Inventory, Efficient Health Care Response, and the emerging practice of Collaborative Planning, Forecasting and Replenishment are excellent examples of industry processes that companies are using to move toward the goal of preferred partner status. By developing close partnerships with key customers, suppliers, and service providers, companies can collaborate on forecasts and production and shipment plans, as well as actually work with their partners to jointly design product offerings, including products, services, and value-added information.

Stage IV companies often re-orient their organizations and processes to integrate external parties into their supply chain view. They segment the markets, channels and customers they serve with the goal of instituting different trading relationships and fulfillment strategies with each group depending on their key objectives. For key customers, many companies create customer-focused teams comprised of members across a number of different functional areas that function as a unit to handle all aspects of serving these customers. To further establish favorable relationships, companies offer a 'menu' of options for collaboration -- forecasting, production planning, delivery scheduling -- for which each jointly executed process results in a pricing or other advantage. Less common, but no less critical, are cases where this partner collaboration extends to the process of influencing demand, which typically involves the pricing, new product introduction, and in some industries, promotions processes.

The operations functions of a Stage IV company must be very flexible in order to rapidly respond to the tailored products and services offered to customers. Operations must be able to make-to-order for some customers, assemble- or finish-to-order for others, while serving additional customers from products made-to-stock, depending on the customer segmentation discussed above. This strategy of committing resources to specific customers at different points in the process is called a 'supply chain customization' strategy, and it is crucial to a Stage IV company's success. The ability to execute 'mass customization,' or the tailoring of products to customer-specific requirements, is often done through postponement, a strategy of producing products to a certain base form, but only completing the final products upon receipt of customer orders. Postponement frequently accounts for a large percentage of a Stage IV company's business.

The information technology focus of a Stage IV company is interoperability, or making internal systems able to interact with those of customers, suppliers, and partners. Internet and message-based communications are utilized to achieve this goal. The key planning system implemented in this stage is consumption-driven supply chain planning. These systems integrate actual consumption data and every consumption point in the supply chain with optimized sourcing, constraint-based, dynamic supply planning, and manufacturing scheduling, and must enable supply chain customization capabilities. Consumption-driven supply chain planning systems enable everyone throughout the supply chain to operate from a single view of the extended supply chain. On the execution side, customer management systems such as sales force automation and order configurators are frequently implemented.

Stage V: Supply Chain Communities
The focus in Stage V is on market leadership. It is the point at which a consolidation of companies into supply chain communities takes place, excluding enterprises that have not mastered supply chain operations. And as a consolidation of customers, whether they are retailers, distributors or other manufacturers, into fewer, more powerful companies occurs, becoming a preferred supplier is a necessary ingredient to be included in the community. These companies will have the ability to enact highly efficient business practices and deal with a limited number of suppliers for most products and materials. At the same time, disintermediation takes place within the networked enterprise, directly connecting networked companies with networked customers and even consumers, frequently bypassing traditional channels of distribution. In order to compete and survive in this marketplace, companies form dynamic value nets that demonstrate flexibility, speed, innovation, and detailed knowledge of the market. They also leverage instantaneous information transfer into previously unknown response. Supply chains become rapidly reconfigurable organizations, linked by Internet commerce software, that organize to meet the needs of customers and then disappear, only to be reassembled as other demands are identified and different combinations of companies dynamically connect to service them. They forge direct links with customers, suppliers, and consumers through real-time information transfer throughout the community, enabling shared processes, services, and goals. Companies not prepared to participate may find their market distribution/penetration opportunities limited to second-tier outlets.

Figure 2.	The Roadmap

Stage V companies reinvent entirely new business processes and methodologies, centered on synchronous integration of the community through implementation of common goals, objectives, and metrics, including real-time information broadcasts that link enterprises together as virtual companies. Shared practices utilizing detailed customer and, when appropriate, consumer information transform traditional sales processes into customer management activities. Strategic relationships forged with customer partners in the community generate long-term plans which are evaluated and implemented by account management teams who competitively differentiate their activities and product/service offerings based on mutually agreed upon efficiencies of operational excellence. Real-time updates to these plans are generated through the use of consumption information. Intelligent filters automate exception management processes as the means for managing change within the community. Traditional transactional processes are eliminated and replaced with value-based decision support activities leveraging the competencies of the different enterprises within the community. Real-time information is communicated throughout the community, resulting in a demand and automatically generating a coordinated response among all members of the community.

Shared goals and objectives span channels and are agreed to and implemented across the community using joint scorecards. Through these shared goals, the community links its streamlined cost structure with its ability to create growth in its dominant channels to drive profitability for partners in the networked enterprise. The key metric for individual companies in the community is maximizing net worth.

The key enabling technology in this environment is a combination of the Internet and various intranets, while the key application is synchronized, extended supply chain planning. In addition, traditional transactions are eliminated and replaced by network-centric commerce tools that join organizations and individuals together as networked enterprises, providing the infrastructure for conducting commercial operations in real time. This is the future of business and electronic commerce. This is the synchronized supply chain.

CONCLUSION
Although the current and future challenges presented by the constantly changing business environment are tremendous, it is clear that a number of opportunities exist for companies throughout the supply chain continuum:

• the ability to collaborate with your supply chain trading partners can have a significant impact on your future competitive advantage
• industry-wide adoption of best-of-class supply chain practices will increase the threat to existing competitive advantage increases and the urgency to move along the continuum
• regardless of their current position along the continuum, companies can achieve significant benefits by aligning business strategies with supply chain and organizational strategies
• the extended synchronized supply chain is quickly moving toward reality, and those companies prepared to operate in this environment can reap significant competitive advantages

Whether you find that your organization is striving to emerge from Stage I or breaking into Stage IV, your future success hinges on your ability to accurately determine which processes and technology are enabling your business today, and, based on your unique business strategy, define precisely what action is necessary to build and maintain your competitive advantage far into the future.

About the Author
Mary Lou Fox is the senior vice president of supply chain products at Manugistics, Inc. She is responsible for crafting and driving Manugistics' product leadership strategy, differentiating Manugistics' solutions for customer-centric supply chain optimization, launching Manugistics' solutions across a broad spectrum of industries, and managing Manugistics' engineering organization.

Fox was a 1998 recipient of the Salzberg Medallion by Syracuse University for her strategic vision and outstanding contribution in the field of logistics and transportation. In 1995, Fox was named the "Logistician of the Year" by the Center for Logistics Research at Pennsylvania State University.