Dynamic Supply Chains Alter Traditional Models

Large companies' supply chain operations are in turmoil. Channel dominators and mass market retailers are wreaking havoc on their suppliers by pushing inventories up the supply chain. Meanwhile, retailers and distributors are demanding special handling and shorter order-to-delivery cycles from manufacturers.

To survive, supply chains are going to have to work at Internet speed, which will mean turning outward and cooperating with customers and suppliers in a new way. Executives must implement changes to prepare their companies for "dynamic trade" -- the ability to satisfy current demand with customized response -- by creating supply chain networks that include dynamic planning, constant communication, and make/move logistics.

A recent Forrester survey of Fortune 1000 companies found that customer demands are forcing these firms to adopt new supply chain models to address key logistical challenges like rapidly changing customized products and shorter time to market expectations. Meeting these new demands means firms must know what they rapidly have in stock at all times. This is nearly impossible in a supply chain when over 80% of respondents collect some of their inventory and order data manually, and 48% update this data less than once a day.

Figure 1.	The Logistics Apps Soup

Lack of visibility into product availability and order status slows responsiveness to customers. Systems integration is a roadblock as well, since 60% of interviewees have three or more different software applications (apps) managing their supply chains (see Figure 1). While most plan on moving towards a packaged solution by 2001, 69% of users feel that their current supply chain systems won't make the grade in this multi-enterprise world, citing app's lack of electronic commerce capabilities and integration with internal systems as the biggest setbacks (see Figure 2).

Traditional Supply Chain Can't Support Dynamic Trade
In noting the importance of the external supply chain, forward-looking firms have identified the growing importance of coordinating activities between companies, across the supply chain. They recognize also that their current supply chain apps are simply not going to make the grade in this new world, because traditional supply chain management takes an over-the-wall approach to filling customer demand and time lags between systems make it impossible to commit to orders in real time. Manufacturing determines production and tosses finished goods to distribution. Distribution packages the goods and passes them to transportation, which delivers them to the customer (see Figure 3). And the apps that plan these environments do so sequentially, delivering commitments that cannot be fulfilled efficiently, leading to solutions that are, at best, expensive and, at worst, impossible.

Figure 2.	Current Apps Won't Work Eventually

The stovepipe processes of logistics -- distribution and transportation -- can't react to changes in customer demand because distribution focuses inside the four walls and transportation manages equipment. Distribution planning systems allocate goods to warehouses and warehouse management apps package up products and get them to the shipping dock. But these systems don't have access to real-time information about production plans, inventory in other facilities, or customer delivery routes. Transportation management systems move product between manufacturing and distribution sites and get it to the customer. But these apps don't see manufacturing materials and capacity or current inventory in the warehouses they deliver product to.

Lack of integration among manufacturing systems and the apps supporting logistics creates breaks in the process of fulfilling customer demand. And at each handoff between applications, increased uncertainty leads to overstocked inventories, longer product wait time, and slower customer response. These problems are early indicators that the traditional model of supply chain isn't working. The emergence of what Forrester calls dynamic trade will accelerate the breakdown (see Figure 4). Why? Because in a dynamic trade environment:

• Services eclipse products.
  Firms will use services like vendor managed inventory and direct store delivery to differentiate themselves. This will require on-the-fly business process change as companies modify their logistics operations to meet unique customer needs.
• Demand drives production.
  Electronic components currently lose value every day they sit in stock and unused production capacity is wasted -- costing companies a lot of money. So firms are postponing production until demand is well-understood -- moving increasingly to make-to-order and late-assembly strategies. Companies may even choose to source products from competitors to meet urgent customer needs.
• Price matches market conditions.
  Yield management allows firms to reduce perishable inventory and maximize profits in commodity or supply-driven markets. The Internet allows virtually every industry to leverage variable pricing across distributed inventory -- using new intermediaries like brokers and auction houses to move excess capacity.

Figure 3.	Traditional Manufacturing And Logistics

Creating Dynamic Trading Networks
Supply chains that prosper in environment of dynamic trade will change their information flows, from the current sequential flow along predetermined paths to dynamic exchanges across all supply chain participants. Forrester calls this new type of supply chain a dynamic trading network -- a network of business units that share planning and execution information to satisfy demand uniquely with an immediate coordinated response. Instead of passing information and goods sequentially from company to company, dynamic supply chains share information broadly and use it to coordinate reactions across the entire supply chain.

Packaged apps vendors see this supply chain opportunity and are rushing products to market. But these players provide only pieces of supply chain functionality today and this is diminished as firms extend their supply chains to partners and customers, because:

• ERP vendors offer limited functionality in inflexible systems. They lack cross- facility capabilities and are designed to standardize transactions to drive efficiency -- not rapidly enable new dynamic trade activities.
• Planning systems rely on aggregate data from existing execution systems to derive plans, but if that data is out of sync, the plans may be unrealistic for the actual environment in the factory or distribution centers. Even if good data exists, users typically run planning systems at weekly intervals, thereby making reaction to real-time feedback impossible.
• Execution specialists sit close to the action -- offering narrowly focused systems that optimize daily logistics activities like kitting and materials receipt. But these players are relatively small and lack expertise across the entire supply chain, forcing them to rely on partnerships with ERP and planning vendors.

Figure 4.	Dynamic Trade

Since no silver bullet will emerge from packaged apps vendors until 2001 or later, firms must lay the groundwork for dynamic trading networks themselves. In order for firms to coordinate their own activities and interact with the supply chain community, they must employ a complete planning and execution architecture. Users need to choose primary vendors that will enable them to plan dynamically, communicate continuously, and execute according to the plan. Additionally, firms must unify their fragmented management of separate supply chain functions to implement and leverage dynamic trading networks.

Applications for dynamic trading networks will reorient the axis of planning from functional to customer-focused. Planning dynamically will include:

1. incorporating real life constraints of the entire delivery system --from customer through supplier;
2. planning new solutions incrementally as commitments are made, and
3. selecting or rejecting orders within seconds based on the profitability and feasibility of those orders. Forrester expects vendors like i2 Technologies, Synquest, Baan and PeopleSoft to fill the role of coordinating supply chain response and creating optimal plans. Their constraint-based planning engines and architectures allow for speed and coordination between overall supply chain plans and point solutions.

To communicate continuously, firms must provide the pathways for information to flow between business units and external organizations. Dynamic trading networks require a connection management infrastructure that enables fast, unambiguous exchanges of information on a broad range between participants.

This infrastructure will help business units to establish connections quickly and operate them efficiently, routing information to planning systems according to pre-determined business rules. A connection management infrastructure must contain a flexible rules engine that operates the connections, data translation and transformation capability, and security and directory management for access to subscription details. This communication infrastructure between supply chain systems will be achieved by deploying a messaging framework like those from Active Software or Vitria to pass data between apps and enlisting communication monitors from vendors like i2 Technologies, Extricity, or Descartes Systems. Most monitors will decipher and logically route cross-company messages from any data source -- including out of the box EDI, hand held devices, and the Internet.

To execute plans effectively in a dynamic trading network, companies need to execute on a single process that turns materials into products and moves them closer to the final customer. Simply put, individual manufacturing, distribution, and transportation activities must flexibly combine and recombine into a single flow. Forrester calls this strategy make/move logistics. Make/move logistics has two threads (see Figures 2-3): 1) Make: all activities -- including manufacturing -- that alter materials into goods, assemble components into products, and package products into unique customer orders must be managed together; and 2) Move: the move thread of make/move logistics controls the flow of goods through the supply chain and stores them when they are not in use, driving fulfillment across all locations.

Once firms have established the planning infrastructure for a dynamic trading network, they must share and receive information between their partners to execute effectively. Business units will publish attribute-coded, encryption information about itself to an Internet-connected server to be distributed to subscribers of that information. Subscribers will quickly interpret messages from publishers and take action based on a set of predefined rules.

Technology Underpinnings for Dynamic Trading Networks
Building the internal structure for a dynamic supply chain with key partners can be done in 24 months, but entire dynamic trading networks will take at least 4 years. These supply chains will require a technology foundation that includes a combination of packaged applications and custom-built foundations.

The first step to creating dynamic trading networks requires firms to create a component architecture because it will give firms the flexibility to alter processes by adding or reordering components or outsource processes to partners without rewriting the system. When choosing packaged apps firms must consider that most apps today -- packaged or homegrown -- are not component-based and will require IT to build component wrappers to support dynamic supply chains in the near term. This will allow partner apps to connect through standard APIs to receive data and update inventory and transit status.

After choosing a technology foundation, firms must build a messaging backbone and supply chain monitor. Tools from apps suppliers like i2 and Manugistics track inventory and order data through the entire supply chain, allowing IT to tie purchasing and materials management into an established supply chain architecture. Vendors like Descartes will also track operational data across multiple companies, providing an integrated view of this information across a user's supply chain as a service.

To extend the messaging capabilities outside the organization, firms must automate supplier and customer communications and include additional features like security and business process management. Tools from vendors like Extricity and Descartes are still in their infancy but will mature quickly to enable automatic communication with suppliers and customers.

Firms can leverage this messaging technology to immediately improve data gathering. To coordinate the dynamic supply chain across all facilities, companies will need accurate moment-by-moment data about where goods and orders are in the process. After creating a messaging foundation, users should invest in data collection devices like remote frequency scanners and wireless monitors to extend data gathering beyond the facilities to include in-transit tracking and partner locations.

After the foundation is set, firms should implement a constraint-based planning tool for master planning on top of this integration layer. Firms will integrate planning apps from vendors like i2 and Synquest into their order management system to do real-time order promising. As supply chain transactional systems become capable, firms can move from static to dynamic available-to-promise quantities. Those who are standardizing around an ERP vendor's architecture should consider that vendor's offerings as long as these apps instill flexibility throughout their systems.

In parallel, firms should drive planning into execution. Given the tight time horizons of dynamic trade, companies can't rely on weekly planning exercises to run daily operations. Enterprise apps must feed order data and revised forecasts into their scheduling systems hourly so that schedules can be revised continuously to optimize production and fulfillment. In turn, these apps must send material requests and current capacities to procurement and planning systems for available-to-promise calculations on an event-driven basis.

Firms must also choose vendors that meet their specific needs -- process versus discrete manufacturing and bulk versus small package distribution -- and the sales channel it supports -- business versus consumer and distributor versus direct. But users should also evaluate the vendor's strategy, looking for dynamic trade capabilities like multi-site manufacturing and product fulfillment or real-time scheduling and execution. Foundation vendors should have a near-term component strategy that supports the same component platform -- either COM or CORBA and SAP or Oracle APIs. This will facilitate the integration of supply chain processes and enable users to plug new homegrown or purchased components into the mix. For those systems that will touch external suppliers and customers, firms should select vendors that have the capability to translate messages of any type, including EDI.

Organizational Preparation For Dynamic Trade
But technology is only half the battle. Implementing a dynamic trading network will drive major changes into a company's manufacturing, procurement, and distribution organizations and will thus require strong support from senior management. Firms must tackle a series of operational issues.

Moving to a dynamic trading network will require firms to publish information to supply chain members. Companies can leverage their current extranet-based information-sharing efforts with suppliers and key customers to feed improved demand and materials availability information into the supply chain architecture in the short-term. As collaboration between suppliers, manufacturers, and distributors grows, companies will move beyond information sharing to allow real-time interactions with supply chain systems.

In the longer term, firms must codify relationships with suppliers. Business analysts within firms will codify the work processes and rules that manage the information that are shared with suppliers. These associates will be required to communicate clearly to insure proper delineation of responsibilities between firms is being achieved.

To govern these analysts, firms must appoint a supply chain coordination czar. This czar will coordinate the dynamic supply chain across multiple locations and firms. Highly centralized companies may have a VP of supply chain operations, but in firms with autonomous product lines, dynamic coordination will have to be implemented at the business unit level -- the political battles of anointing a single owner would be insurmountable. These firms should create a supply chain ombudsperson who will enforce company wide customer priorities and maximum cost policies.

This czar will be responsible for tying the organizational strategy back into the technical ones. In order for firms to implement a component-based architecture, organizational groups will have to deconstruct their monolithic processes into piece-parts. Firms must think of manufacturing as a series of mixing, assembling, and packaging operations and distribution as receiving, picking, and loading activities. With processes broken down, firms can model the flow of their supply chain activities that will best meet the unique product, package, and delivery requirements of each customer.

Impact of Dynamic Trading Networks
The evolution of a dynamic supply chain in the packaged apps market and within large companies will shift current dynamics. Firms will deliver locally tailored products to global customers. Dynamic trading networks will allow firms to treat global customers holistically -- applying consistent service levels worldwide while meeting unique product requirements at the regional level.

CONCLUSION
Complex virtual companies will thrive because dynamic trading networks can support incremental outsourcing of different pieces of a process with minimal disruption of the flow of products or information. As a result, companies will experiment to find exactly the right combination of processes ownership and outsourcing and will choose best-in-class niche providers for specialty work like returns processing and field service parts management. This will drive larger logistics players to emerge as portfolio assemblers -- expanding their expertise in transportation, final production, and fulfillment to become one-stop shops. These players will assemble their own supply chain systems from homegrown and purchased apps components to support a variety of services ranging from simple delivery to complex repair en route and then resell these portfolios to partner companies.

About the Author
Stacie McCullough
Analyst, Packaged Application Strategy
Forrester Research

Stacie focuses on packaged business applications. Her primary experience is in supply chain apps, warehouse and logistics management, and manufacturing systems.

Stacie joined Forrester from Metasys, Inc., where as a director of product strategy for their transportation management and optimization suite, she was responsible for leading a team in developing product plans and marketing strategies. Prior to serving as a director, she focused in strategic planning and market analysis. Her experience in strategic planning, market analysis, and product marketing allow her to guide both end users and vendors in assessment and development of supply chain applications.

Prior to joining Metasys, Stacie held numerous positions in operations management focused on leveraging technology to automate and redesign business processes for distribution-centric companies, such as JC Penney Corp. and Northern Telecom. She also focused on production planning, facility redesign, and cost analysis.

Stacie holds a bachelor of science degree in industrial engineering from North Carolina State University, and attended the University of North Carolina graduate school of business management.