The Future of Supply Chain At the Heart of the Customer-Driven Enterprise
A
Changing World
The world of business is being changed forever by new forces — global competition,
increased information availability, educated consumers, rapid innovations, and
increasingly complex products. No industry is left untouched. From the commoditization
of mobile phones and personal computers, to a shift in responsibility from automotive
OEMs to tier-one suppliers, companies everywhere are faced with significant
challenges and opportunities. In response, they are learning to shift their
focus from production to customer demand. They can no longer consider consumers
as homogenous groups; with the never-ending advances in technology customer
offerings must be increasingly customized and differentiated. Large-scale and
long-term capacity must make way for rapid "infrastructure turns" that match
the customer's changing needs. The value proposition a supply chain delivers
no longer is based on the product alone, but also on the company's total offering,
including services and complementary products. The ability to compete in the
face of such rapid changes finds its basis in supply chain management.
Ericsson Mobile Communications is one such company whose supply chain has undergone a massive transformation in response to market changes. Mobile phone usage rates are slowing from an average annual increase of 40-50 percent to about 20-30 percent, and supplies are starting to fall more into line with demand.
Ericsson's leaders saw this change coming as early as 1997, well before mobile mania reached its zenith. More importantly, the company realized that a leveling off of demand would cause the mobile phone market to become even more competitive. This would subsequently compress margins, increase product commoditization, and redirect most marketing efforts from product-centric differentiation to customer service. To thrive in such an environment, Ericsson needed a leaner, more efficient organization that could fill orders quickly, mass-customize products as needed, and provide outstanding support throughout the product lifecycle.
In effect, Ericsson Mobile Communications needed to change the way it did business. And because customer service was driving the change, a global network of highly consistent, customer-driven, flexible fulfillment operations were positioned as the transformation's centerpiece. New capabilities, such as build-to-order manufacturing, supplier-managed inventory, and streamlined logistics ensure that Ericsson achieved the highest levels of supply chain performance. And the change is paying off. Just months into the new program, inventory was slashed in half and supplier performance increased by 25 percent. And, delivery accuracy — a measure of on-time and accurate performance — improved to levels close to 100 percent. Ericsson's supply chain strategy is key to providing superlative customer service regardless of whether the phones are coming from Lynchburg, Virginia or Kumla, Sweden.
The Strategic Response
Like Ericsson, every company must understand its customers. Every company needs
to recognize its own unique competitive position in the marketplace and the
value it can deliver to the customer. However, the common need to focus on the
customer means there is a general theme that underpins the value a company's
supply chain can deliver. A typical supply chain is too often a sequence of
disconnected activities, both within and outside of the organization. The linkage
between these activities and the needs of the end consumer is frequently weak,
especially at the lower supply chain tiers.
This lack of cohesion destroys value in the supply chain. Across all industries redundant inventory abounds, needless processes are carried out, lead times lengthen and obstacles are created to providing consumers exactly what they want.
Tackling this inherent lack of coordination is the value creation opportunity that will drive supply chain management over the next five years. Grasping the opportunity requires tight coordination of supply chain activities — initially within the enterprise and then extending beyond to the entire supply chain. This need for intercompany coordination is at the heart of the supply chain-Internet link. Successful supply chain management depends on tight coordination between supply chain partners. The Internet provides the perfect communications channel for the information, decisions, transactions, and processes that form supply chain management.
It is a transformation that is already underway. To keep up with the evolution of supply chain management — and remain competitive in their markets — future supply chain leaders will need to simultaneously exhibit tight coordination at three levels: integration, collaboration, and synchronization.
Integration
Integration is the coordination of supply chain activities such as purchasing,
manufacturing, distribution, spares management and customer service within a
single enterprise. Many leading companies have made great strides with internal
integration. While integration now provides a competitive advantage in some
cases, that advantage will quickly erode over the next few years.
Collaboration
The next level of coordination, collaboration, can be found outside the enterprise.
Collaboration involves sharing operational and planning information with strategic
business partners to coordinate supply chain activities between the company
and its direct customers and suppliers. The arrival of the Internet has energized
many companies to experiment in this area and begin developing their collaboration
capabilities.
Synchronization
Synchronization extends the scope to the entire supply chain. The ultimate goal
is to synchronize the activities of all supply chain participants, both within
and outside the company, to the demands of the end consumer. No organization
has yet created a truly synchronized supply chain. A significant constraint
is the shortage of other organizations to interact with because few have developed
the sophisticated collaborative capabilities required. But those organizations
that are ready to move to this level of sophistication have a powerful incentive
to seek companies among the less advanced and assist them along this journey.
Once a critical mass has been achieved, the pace will accelerate — and
the laggards will be shut out.
The Elements of Success
Having accepted the challenge to create a synchronized supply chain that can
compete in the future e-economy, what concrete capabilities must then be mastered?
Although it is impossible to prescribe the exact supply chain architecture a
company will need without first assessing its specific circumstances, certain
core elements are critical for future success.
Achieving Operational Excellence
A company's supply chain brings together multiple areas of the organization
— customer service, product development, manufacturing, distribution, transportation,
procurement, and service management. Leaders must excel in conducting basic
operational activities in all of these areas with efficiency, consistency, and
accuracy. Mastery of the disciplines and best practices that lead to such world-class
performance are a source of competitive advantage; it is a competitive necessity.
World-class product quality, accurate inventory tracking, lean operations, customer-focused
service, and rationalized supply base all will be expected as the entry price
to synchronization.
Mastering Supply Chain Optimization
The widespread introduction of ERP systems has provided shared data and operational
processes across the supply chain functions that can be the bedrock of integration.
Building on this foundation, supply chain optimization techniques have become
the catalyst for integrating each functional area of the enterprise into a finely
orchestrated operation. Sophisticated forecasting, scenario planning, constraint-based
planning, optimization algorithms, and order configuration are among the advances
made in supply chain planning software.
When correctly implemented, these innovations can provide the decision support and planning tools to manage the complexity of an integrated global supply chain. Companies need to learn how to master these tools — and quickly. This implies shifting the company's outlook from a functional orientation to a supply chain wide view to ensure that the technology implementations are matched with changes in operating processes and organization structure. Examples of such changes are implementing a global Sales and Operations Planning process or incenting salespeople based on the needs of the supply chain.
Creating Internet-Enhanced Supply Chain Capabilities
The breakthrough to collaborative relationships requires an open, economical,
and flexible communications medium. Whereas EDI has found only limited uses,
the Internet has created a wealth of potential for enhancing many supply chain
processes. Further technical innovations such as XML (Extensible Markup Language),
the development of broadband communication, and ubiquitous access through "Internet
appliances" will continue to drive progress. These developments will increasingly
impact every functional area of the supply chain by enabling new business processes
and capabilities.
In procurement, the most well developed e-enabled capability thus far is e-procurement. Software companies such as Ariba, CommerceOne, and Netscape are helping to facilitate, integrate and streamline the procurement process. When applied to buying non-strategic operating resources, e-procurement projects can quickly create substantial value at very little risk. For example, a leading provider of energy and petrochemicals is implementing an e-procurement system across its international operations so that its 100,000 employees will be able to purchase goods and services over the Internet at the simple press of a button. By controlling preferred supplier agreements, capturing key purchasing information for contract negotiations, and standardizing the purchase-to-pay processes, the company expects to save several hundred million dollars annually.
The Internet also is impacting supply and demand planning processes through new processes and applications such as Collaborative Planning, Forecasting and Replenishment, Efficient Customer Response and Vendor Managed Inventory. These and similar initiatives, coupled with the extension of supply chain planning software functionality in this area, promises to unlock a significant amount of value. Accenture's Customer-Driven Demand Network study estimated that the value of such initiatives for a representative personal computer supply chain could reach $330 million.
In manufacturing, e-commerce will force many companies to evaluate their build-to-order capabilities to differentiate themselves by customizing products to each customers needs. In fact, traditional build-to-stock models are becoming obsolete for some product types because of the massive inventories required to support constant SKU expansion. The build-to-order model and its various incarnations have arisen as a mechanism for reducing inventories while increasing flexibility of its manufacturing operations.
In the product design arena, new Internet tools will allow a variety of parties to participate in a concurrent collaborative design process. Electronically linked in real time, key suppliers, manufacturers, engineers, marketers, designers and customers will be able to collaboratively design products faster. In a world of shortening product lifecycles, it is crucial that products be rolled out faster — without the "silo" issues inherent in traditional sequentially oriented design activities.
While the order process for e-commerce models may be virtual, whenever there are physical products there are hard "bricks and mortar" supply chain implications. E-Fulfillment is a term being used to distinguish the unique aspects of providing products and services to e-commerce customers that are stretching the performance of fulfillment operations. The performance levels demanded by e-commerce customers for availability, choice, and delivery accuracy will quickly filter down. And even those companies not operating in the virtual world will see the pressures on their supply chain increase in order to compete. A recent Accenture study of online holiday purchases highlights this performance gap. The study targeted 100 companies that sell products on-line to consumers. The group included traditional store-based retailers with a Web presence, pure on-line retailers or "e-tailers" and catalogers who provided an on-line order capability. The results showed that the linkage of on-line customer interaction and physical fulfillment operations can in many cases be very disappointing. Some of the key highlights were:
- Users were only successful in 75 percent of the 480 attempts to place an order. Reasons ranged from site inaccessability to being unable to complete a transaction.
- Less than half of companies could provide real-time in-stock information, highlighting the challenges of integrating the customer Web interface with the back end business systems.
- When they could provide stock information, sites only showed stock when it was available except for the sites of catalogers who are more attuned to taking back orders. This arguably creates a lost sale that a back order capability might eradicate.
- Less than one third of companies could provide expected delivery date information. Often even this information was somewhat difficult to interpret giving only a range of days.
- The leading e-tailers are apparently investing in customer goodwill providing, on- average, delivery one day faster than the typical five days. They are also least expensive when it comes to shipping and delivery charges.
- Store based retailers could meet their delivery commitments in only 25 percent of cases compared to 62-86 percent for catalogers and e-tailers.
These examples illustrate that across the supply chain's functional areas there are opportunities both for making Internet-based performance enhancements and modifying traditional supply chain operations to support e-commerce businesses. This represents the first significant impact of e-commerce on enabling supply chain to become more customer focused.
Adapting to New Business Models
The new economic and business rules of e-commerce will have profound impact
on the underlying assumptions and principles upon which traditional supply chains
have been built. Thus the second, and probably greater, impact that e-commerce
will have on supply chains is to energize or create entirely new business models.
New types of companies and current leaders will opportunistically fill gaps
in the changing supply chain structures that support these new business models.
Much change and innovation has already taken place in the business-to-consumer marketplace. Recent years have seen the rise of the consumer-direct model for all manner of products, from computers to toys. This has resulted in a huge revenue growth, much of it benefiting package shippers. Online grocery services such as Webvan and Streamline intend to build new channels of physical distribution to the consumer.
There is even more as yet untapped opportunity for innovation and change in the business-to-business portions of supply chains. Forrester Research expects business-to-business transactions over the Internet to reach $1.3 trillion by 2003. Goldman Sachs estimates that total business to business revenue will grow to $1.5 trillion in 2004, up from $114 billion in 1999 — a rate of 67.5 percent CAGR. In a variety of industries there will be innovative solutions from new start-ups or alliances as well as current leaders recasting themselves.
It is difficult to predict the nature and success rate of these ventures since they will opportunistically answer value propositions that emerge as supply chain structures change. However, a review of some of the early examples of the new business models, such as the Web-based industry marketplaces and exchanges, illustrate how different and aggressive the new players might be. Any company who believes e-commerce is simply a way to update and enhance current capabilities may be jeopardizing its very survival. Companies must be alert and monitor the emergence of new types of partners and competitors. They must not only build their capabilities to collaborate with current partners, but also rapidly form relations with new players as they emerge. And, of course, each company needs to be aware of its own potential and capabilities to take lead in building a new business model itself.
As we look to the future, supply chain management will continue to have a significant influence on a company's success, it's creation of shareholder value and it's customer focus. Supply chain disciplines and Internet innovations will combine to tightly synchronize all supply chain activities to best satisfy the customers' needs. Those leaders that enhance their supply chain prowess with e-commerce capabilities and bring supply chain skills to bear in the e-economy will be unstoppable. Those companies that do not will likely face a much more challenging future.
