Creating Greater Customer Value by Synchronizing the Supply Chain

• Buy in small quantities
• Buy customized products
• Postpone the buying decision to be close to the act of purchase
• Enjoy and be rewarded by the buying experience
• Get instant gratification of their needs

Figure 1.	Cost of "Infrastructure Turns"

The natural response of the business environment to this dilemma has been a structural change in the design of today's business infrastructures. An erosion of the monolithic, vertically integrated infrastructures of the past has led to the increasingly component-based infrastructures of the present. These infrastructures are made up of multiple independent business partners engaged in a single consumer transaction. Their focus is economy of scope of services in addition to the conventional economies of scale of production.

The Opportunity and the Challenge:
The legacy of a business infrastructure inherited from the Industrial Age has left a substantial unrealized opportunity on the table ­ namely the inefficiencies masked at the interfaces between supply chain partners. A recent Benchmarking Partners study¹ indicated that more than 60% of the variable costs of an organization are driven by decisions that are external to that organization.

The challenge, and conversely the opportunity, to wring out the inefficiencies that exist between the supply chain participants is particularly difficult when the business infrastructure itself may be constantly changing. In order to do this, there has to be significantly more emphasis on coordination through developing trusting business relationships, communication, collaboration and planning. These are the common themes of what is termed a supply chain synchronization strategy. In this new business environment a higher premium is placed on synchronization capability than on production capability alone. The highly successful and much studied companies of today such as Amazon.com and Dell can be seen to have capitalized on this insight.

While these and other leaders have fundamentally changed the power balance in the industry, much of the business community and, therefore, the consumer still has to reap the benefits of such insight. Many businesses have some form of reengineering or change initiative in progress but the focus of such initiatives is rarely the entire supply chain and all of its participants. This focus on a small part of the entire supply chain can often result in a net re-distribution of assets across the supply chain. The Automotive Benchmarking Study conducted several years ago by Accenture indicated that manufacturing efficiencies gained by the three big auto-makers may have come at the expense of additional inventory held at lower tiers in the supply chain. The mindset of re-engineering initiatives must recognize that unless net assets are taken out of the supply chain, the consumer ends up paying for those inefficiencies regardless of how far removed and hidden these might be from the end-consumer.

This requires a holistic approach to synchronizing the entire supply chain where the focus is not only on the internal processes of an organization but equally, and perhaps more importantly, on dealing with potential inefficiencies hidden at the boundaries between participating organizations within a supply chain. The challenge is complicated by several factors:

Complexity ­
A complete supply chain is a highly complex system with an infinitesimal combination of alternatives and choices for the various operating factors involved.

Variability ­
There can be wide variability in the demand patterns as well as the execution of the distribution and production processes. Many of these are caused by natural phenomena such as customer taste or production methods but many are created or exaggerated by the design of the supply chain itself.

Conflicting Objectives ­
Synchronization by definition requires alignment of the often conflicting objectives of the different constituencies not only within a participating organization but also between the different independent members of the supply chain.

Those leading companies meeting the challenge can gain significant improvement in their financial performance. For example, an Accenture Global Electronics study showed that total inventory in the U.S technology industry supply chain was around $0.5-1.5 trillion and turned less than ten times per year while the most efficient end equipment manufacturers like Dell can turn their inventory 50 times a year.

Figure 2.	Supply Chain Synchronization

Supply Chain Synchronization
In tackling the complexity of a supply chain synchronization strategy it is helpful to consider the key high level activities of the different components of a supply chain. Figure 2 illustrates a framework for these activities over three time horizons, namely strategic, tactical and operational.

Supply Chain Configuration deals with structural design and configuration of the relationships between an enterprise and its suppliers and customers that define the supply chain. The scope of activities includes customer segmentation, channel design, postponement approaches, network design, customer service territory planning, sourcing, service and supplier contract negotiations and joint product development.

Supply Chain Planning encompasses activities such as planning and coordination of procurement, production, distribution, demand, transportation, load building, supply-demand matching, product allocation, and available/capable to promise functions. The scope of this definition should be expanded to also include activities associated with the tuning and steering of execution activities based on monitoring and feedback as the plan is executed.

Figure 3.	Total Supply Chain Synchronization

Supply Chain Execution includes day to day transactional activities such as order management, billing, financials tracking, inventory and material and other resource tracking.

To achieve supply chain synchronization there must be seamless integration and coordination of supply chain configuration, planning and execution processes across all members of a supply chain. (see figure 3). Without this, an intense focus on performance improvement, at say an OEM, without appropriate consideration of the entire chain can lead to increased inefficiencies at lower tiers ­ which are eventually passed on to the end consumer. If, however, the focus of such an analysis was extended to span the entire supply chain, as if it were one seamless entity, the resulting actions would be different and in the end create more value for the end consumer.

As Fig 4 illustrates, there has been varying activity in the industry regarding integration of the different levels of supply chain configuration, planning and execution.

While coordination at the execution level has existed in some form for some time, for instance EDI, the proliferation of Internet as a low cost means of communication (with specifically low ramp-up and switching costs) has energized such activities enormously. Consequently, much of the existing focus on Business-to-Business collaboration has been in the Supply Chain Execution area. For example, consider the sharing of information such as manufacturing work-in-progress between business partners and new web-based procurement processes commonly called eProcurement. Availability of process-specific software has been a key enabler of these developments.

Figure 4.	Supply Chain Synchronization Activities

Collaboration between business partners at the supply chain configuration level has been less influenced by Internet capabilities due to its strategic and less immediate nature. However, collaborations such as joint capacity investments between buyers and suppliers in capital-intensive industries like semiconductors are being utilized to leverage each partner's strengths.

Supply chain planning activities between business partners remain a most urgent untapped opportunity and one of the key enablers of a synchronized supply chain.

Supply Chain Planning
Planning activities within the supply chain define and drive the execution activities. If the execution of the activities among the supply chain partners is to be fully coordinated and synchronized then the planning activities must be designed and built with this in mind. There are a variety of improved capabilities, methods and requirements that would distinguish synchronized supply chain planning from conventional planning activities.

Application Technology
Tremendous progress has been made in recent years in developing new supply chain planning paradigms and encapsulating these within toolkit-oriented software packages such as Advanced Planner and Optimizer (APO) from SAP, Rhythm from i2 Technologies, and the suite of products from Manugistics. These packages are being extended to provide collaborative planning and currently now provide key capabilities such as;

• Simultaneous planning of material, capacity and distribution that was not available in the sequential MRP-II paradigm
• Sophisticated forecasting algorithms
• Highly reactive scenario planning capabilities
• Planning around real world constraints and priorities
• Optimization logic to plan supply chain activities, and
• Rapid order configuration and order promising

Communication Technology
While inter-enterprise communication used to require significant ramp-up and switching costs that allowed only a few organizations to collaborate beyond their organizational boundaries, the internet has all but taken this issue off the table. The concept of a 'web tone' propagated by Sun Microsystems as the enterprise-equivalent of 'dial tone' where enterprise applications (or appliances) can be plugged in and out is very attractive and perhaps realizable.

Tuning and steering of execution activities
Through insight gained from actual execution experience related to customer behavior and financial and operational key performance indicators, the planning process becomes "plan, monitor, adjust" rather than the traditional "plan the work, work the plan". An example is a dynamic sourcing process where a message from a supplier on problems with his supply or from a customer about an unexpected peak in demand can quickly trigger a search for and planning with another supplier for the required additional supply.

New or highly modified process
Understandably, many processes within the planning arena have changed radically. For example:

• Collaborative forecasting methods create a single forecast from input not only from the stakeholders within one company but other supply chain partners.
• Sales and operations planning processes now drive a consensus for a single unified plan among sales & marketing, finance, production, procurement and product design.
• Technology innovations in promising logic have removed some steps altogether and some of the planning burden is being shifted to the customer support representative at the time of customer order.
• Collaborative capacity planning processes allow suppliers and customers to work together to decide how a supplier's capacity can be allocated to provide mutual benefits to both parties.

Supply chain planning will continue to evolve to better support a synchronization strategy. In particular, the processes that affect the cross-enterprise activities are at an early stage of development and in most cases are uniquely designed to fit the specific situation and relationship. These processes will evolve over the next few years to become more widespread, commonly understood and standardized.

Considerations for Supply Chain Planning Initiatives
Experience has shown that while many of the capabilities that are required to support a synchronization strategy are enabled by technologies such as supply chain planning software and the Internet, the scope of change required is far greater than a technology implementation. The following considerations are critical to successfully delivering benefits in a supply chain planning initiative.

Channel and Supplier Relationships
The nature of the channel relationships on the front-end and supplier relationships on the back-end of a supply chain determine the environment regarding inventory positions and velocity of execution. This impact can significantly enable or hinder seamless supply chain planning across the chain. Even the most sophisticated technology initiatives will be unable to overcome an inefficient channel and supplier relationship environment. Hence the need for a critical focus on these areas in any collaboration program, particularly for material and distribution-intensive industries.

Product Postponement and Configuration Approaches
Some environments have a large number of potential end-product possibilities that could be configured on a platform comprising a relatively smaller set of standard components. In these cases, postponement of the point of product differentiation as close as possible to the end-consumer can positively impact the efficiency of Supply Chain Planning processes. For instance, forecast aggregation of demand around a common base product can have significant improvements for forecasting. Similarly, there are planning benefits in replenishment, material procurement and inventory processes. This postponement approach has been particularly effective in the PC industry.

Process Integration
The many advances in application and communication technology have automated and improved planning processes. However for certain aspects of process there is no substitute for human deliberation and judgement, particularly those that balance the needs of multiple stakeholders. Building new planning processes around this human intervention is critical to reap the benefits of speed and effectiveness gains in other areas of the planning process. Certain collaboration software, for instance that provided by Extricity Software, allows flexible and extensible approaches to implementing a collaboration process that preserves the integrity of human judgement. It also allows customized definition of process components that are public for the entire supply chain or private for a single participating member only. For instance wafer fabrication companies whose prime customers are large chip manufacturers are also contemplating co-housing parts of their supply chain planning organizations at their key customers to facilitate a seamless cross-company planning process.

Economic Incentives
A significant barrier to wide-spread collaboration today is the absence of a generally agreed upon framework for equitable revenue and cost sharing amongst all participants. The price that an end-consumer pays is indicative of the total value the consumer places on the sum total of all activities associated with that product throughout the supply chain. Today, there is significant variability in the margins each participating member makes in a complete supply chain. How should one allocate value and thus the margin that each participant makes from a single end-consumer transaction? Many successful examples of collaborative supply chain planning today have been driven by those providers on the front-end who have the market power to elicit the desired behavior from upstream members of the chain. However, this issue will grow as continued componentization of the business infrastructure increases the number of choices available and advances in technology, such as the Internet, drives down the switching costs for changing business partners. Building a benefits structure that balances the rewards with each partner's understanding of their contribution is crucial to maintain close partnering relationships.

Change Management Issues
The on-going integration and coordination of supply chain planning activities within an enterprise and the natural direction toward integration across enterprises has also highlighted certain job and skill issues. The integration of once disparate planning functions is challenging the traditional roles of facility, material, capacity and demand planners. It highlights the need to update traditional definitions of jobs, roles and performance metrics to be aligned with the new post-MRP-II planning paradigm. Additionally, the advent of a new generation of ATP (Available To Promise), CTP (Capable To Promise) and allocation management capabilities has meant planners whose traditional interaction with the market was remote and possibly only at the aggregate level, are now likely to be involved in the critical order management loop. Similarly the customer support representative by using this functionality is in effect completing some of the planner's role ­ a very different skill set to their normal duties. The understandable fascination with new technology must not dilute the need to focus on the critical change management challenges it raises. In the end, many technology initiatives fail not because of a fundamental flaw in the technology but due to short-changing the enablement activities that integrate it into the human side of the work environment.

Software Product Architecture
Supply chain planning encompasses a variety of related planning functions such as material management, capacity management, demand planning and distribution planning. To realize the maximum benefits of seamless and integrated planning across a supply chain, all planning functions need to be coordinated smoothly as opposed to being compartmentalized as they have been in the past. This brings to light certain architectural challenges for the software that enables such integrated planning. Constructing a software product architecture that provides the necessary smooth and seamless data exchange between various internal product modules is a very difficult task, particularly when managing version releases of different products. However, a successful solution will have long term cost of ownership, performance and maintenance advantages.

Data Integration and Standardization
Regardless of advances in integration technology, data integration costs are likely to continue to be a significant portion of the cost of collaboration initiatives for some time to come. Many initiatives in supply chain planning that fall short of realizing their projected benefits on schedule will point to data issues as a key factor. The challenge to having applications communicate across a supply chain, when each organization has a unique vocabulary, can be frustrating and costly. The solution is obvious but its realization may be difficult. What is needed is a common, perhaps industry-specific, vocabulary for Process and Data subscribed to by a vast majority of the players in that industry and the associated application software vendors. Organizations like the Supply Chain Council and its work on the SCOR (Supply Chain Operations Reference) Model are examples of such industry efforts to create a common process vocabulary. Another example is the potential use of technologies such as XML to create data elements that can be shared and understood across companies regardless of platform or application. Historically, the grass roots acceptance of such industry-wide standardization efforts has not been without problems.

The opportunity to create value through synchronization of supply chain activities is so great and the timing so appropriate that it poses a very interesting dilemma for prioritization of improvement initiatives within a supply chain. In an environment of constrained budgets, there is a difficult choice between improvement investments for the internal processes of an organization or tackling the inefficiencies at the business interface with customers and suppliers. The answer will depend on the circumstances, but in many cases it will be surprising, as synchronization across supply chain partners will likely yield the highest returns and the largest increases in customer satisfaction.

About the Authors
Masud Arjmand is a Partner within the Accenture Enterprise Business Solutions Practice, focussed on assisting clients to create business solutions in the area of Supply Chain Planning. He has worked with clients that include several large global corporations in the Computer, Semiconductor, Chemical, Apparel, Consumer and other industries. Mr. Arjmand has over 15 years of experience in implementing Supply Chain Planning solutions and is a recognized expert and thought leader in this area. Prior to joining Accenture, he worked for Texas Instruments and held responsibility for the development of advanced supply chain solutions. Mr. Arjmand holds a Ph.D from the University of Colorado.

Stuart Roach is a Manager within the Accenture Supply Chain Practice focussing on the development of the supply chain services. Mr. Roach has over eight years of supply chain technology implementation and consulting experience.

Footnote

1. "The Power of Business to Business Integration" - Benchmarking Partners ­ December 1998.