Implementing Supply Chain Management Systems in Large Enterprises

The business case for supply chain management² (SCM) improvements and the potential for dramatic gains in operational performance have been addressed in numerous publications and conferences. Anecdotal reports of companies realizing major cost reductions and improved competitiveness abound in sales literature. The 40% annual growth rate of supply chain management and related software revenues further demonstrates that businesses are embracing these initiatives to improve their competitiveness (see Figure 1).

Figure 1.	Reported Status of SCM Information Management Systems Projects

Unfortunately, accompanying this dramatic growth has been rising evidence that many implementation efforts tend to be late, over-budget, and when declared complete do not meet corporate expectations. In a recent survey³ conducted by Lockheed Martin of Fortune 500 companies, almost half of all projects were not completed within the initial projections. As shown in Figure 1, survey respondents reported that almost half of all SCM improvement projects exceeded budget, were late, or did not meet expectations.

In analyzing the success and failure of SCM project implementation, it is useful to use a systems approach that begins with the identification of the overall objectives of an enterprise and then assigns the achievement of those objectives to components of the overall system. This approach is most often associated with information management system design but was originally conceived as a cross-disciplinary approach that encompassed the physical, biological, behavioral, and social sciences.⁴ It is extremely useful for the analysis of supply chain management activities since it lends itself to a cross functional, cross enterprise approach. That is, the conduct of supply chain activities can be assigned to various elements of an organization, suppliers or even customers based on an evaluation of the cost or value of a particular activity. (The approach also permits identification of valueless activities that can be eliminated)

Using data derived from the responses of organizations attempting to implement supply chain management improvements, it is clear that there are often disconnects between business objectives and implementation activities.

Figure 2.	Major Drivers for SCM Improvements

SCM Business Objectives
Most businesses report no difficulty in determining the business objectives for supply chain management improvements. It can be said that the only elements of a business's balance sheet that supply chain management effects are the top line and the bottom line. As shown in Figure 2, corporations cite customer satisfaction, cost reduction, improved profits, improved product quality, and increased sales as the major drivers in undertaking SCM improvements. These drivers can be closely associated with major balance sheet line items or are factors in determining those line items. Sales, costs, and profits are easily calculated. Customer satisfaction, product quality, and time to market are critical in determining sales volume. Growth and market share are measures of a company's performance against its competitors within the marketplace.

When asked to determine which SCM efforts were likely to produce the greatest benefit, businesses tended to value traditional logistics activities as the areas for focus. As shown in Figure 3, purchasing, inventory management, transportation, and warehousing were considered high value areas. Additionally, demand forecasting was rated very highly by businesses seeking to target improvements.

Figure 3.	Perceived High Value Improvements

One would expect that given the weight placed on customer satisfaction in the prioritization of strategic SCM objectives, manufacturing and product development would have been perceived as higher value SCM efforts than were reported by companies. At first glance, it was assumed that the weighting might be skewed based on systems or processes that were required and not yet in place. In other words, the absence of a purchasing system might provide an overwhelming argument to implement one. The data indicated, however, that the most "valued" systems were already in place at the vast majority of the organizations.

There are two reasons that the "new" supply chain paradigm has not resulted in objectives that are distinct from classical logistics objectives. First, virtually all companies have existing processes and information technology infrastructure (or legacy systems) that support logistics functions.⁵ These processes and systems provide the frame of reference for companies considering implementing "new" technical solutions. Second, many organizations reporting activities in supply chain management information systems are implementing technology that is designed to facilitate processes within their traditional logistics organizations ­ not cross-enterprise, supply chain solutions. Both of these factors contribute to a bottom-up approach rather than a top-down approach.

This is the first and perhaps most important disconnect in the implementation of new supply chain initiatives. Strategic objectives may not be reflected in tactical or operational programs.

Issues in SCM Improvements Projects­ Definitions and Measurement
Several factors constrain how companies look at supply chain improvements. First, there are a number of ways of defining supply chain management. Some argue that SCM is identical to integrated or strategic logistics⁶, others that it is limited to the interchange between enterprises, and some argue that it includes everything within the enterprise with the exception of marketing and sales. As a result, there is significant overlap between a traditional logistics approach and supply chain management. Inconsistent definitions also make the communications between the supply chain (customers and suppliers) more difficult. Second, competition within the information systems marketplace is fierce and software companies tend to claim support for supply chain management even if their products provide only marginal capabilities. Third, historically, companies have performed supply chain and logistics activities in functional stovepipes (e.g., purchasing, inventory, warehousing, transportation, finance) and most existing software has evolved from these functions. As a result, legacy systems and commercial off-the-shelf-technology tend to reflect traditional business operations processes.

Along with the problem associated with determining what supply chain management is or is not, many companies do not monitor the performance or the cost of their supply chain management systems. Only 54% of companies report that they monitor the performance of their supply chain activities and only 41% of companies indicate they monitor the costs of their supply chain activities. There is evidence that even among the companies that have some system of performance and cost measurement, these measures are inconsistent and incomplete.

Issues in SCM Improvements Projects­ Project Definition
As a result of incomplete and inconsistent definitions and measurements, it is very difficult to design and develop information management systems that can realize the potential for dramatic supply chain management improvements.

This problem has been reported by companies that have completed or are in the process of completing supply chain management projects. These companies indicate that their greatest challenges are in three principal project areas: 1) project definition, 2) project management, and 3) coordination with customers and suppliers.

Successful project definition depends on how well an organization determines the objectives of a specific project and its associated scope. Project management is successful if it can remain focused on the objectives and monitor project activities to ensure that the scope of the project does not unintentionally expand beyond that required to achieve the project's objectives. Business objectives with specific performance measurements are independent of the technology or processes to be implemented.

Figure 4.	Invest in IT or Modify Business Process?

There is considerable evidence that most organizations employ similar steps in defining projects. A gap analysis matching objectives to existing systems followed by a trade-off study is normally conducted by organizations to determine the technical approach that will be implemented. In some instances, a specific project is identified that is required to match a competitor's offering, support customer or supplier requirements ( e.g., vendor managed inventory), or achieve a specific strategic objective (e.g., improved supply chain response time).

In most instances, organizations will identify a project objective and then rely on technology vendors to specify operational and technical details based on the capabilities of the information management systems that are currently (or soon to be) available. The underlying premise of this approach is that the development of SCM information management systems is outside the core competency of the implementing organization.

This approach will fall within the spectrum illustrated in Figure 4.

At one end of the spectrum, the organization buys commercial off the shelf software and changes its business processes to conform to how the software product is constructed. This approach is the fastest and least expensive from a technology perspective. It reduces the risk associated with software product versioning (new releases of software making product support of purchased software and systems unavailable). The cost and uncertainty associated with changing business practices is the highest in this scenario. In many instances, changing business practices is more expensive and time-consuming than the technical implementation. (The cost for implementing and integrating a supply chain information system can range from one to over ten times the cost of the software license. This does not include additional costs such as: conversion of legacy data, disruption of business operations, or the maintenance of parallel information systems prior to cutover.) At the other end of the spectrum, business practices remain unchanged and the commercial off the shelf software is tailored / customized. This approach is more technically challenging but results in less disruption to business operations. Most organizations will find a middle ground between these two extremes.

The gap analysis will generally identify a broad technical approach and candidate commercial off the shelf technology for project. Most organizations appear to be fairly successful with this step but it is in the next phase of program development that most organizations appear to have difficulty. Many businesses abdicate the specification of technical performance requirements to their software vendor rather than identifying the requirements themselves.

Following the initial determination of the technical approach (establishing constraints), explicit system requirements should be developed and documented. The organization should employ a rigorous methodology that centers on the specification of performance requirements which are measurable, translating those requirements into technical requirements which are measurable, and managing the information systems project tasks from a requirements perspective. This step requires the user, not the vendor, to decide what information needs to be collected, disseminated, analyzed, and at what frequency. The performance requirements should directly support the business objectives that were originally specified in the initial project definition. When this task of performance specification is complete, software selection should be re-visited and technology procurement can then evolve to keep pace with changes in technology. Software selection should only take place after discussing with customers and suppliers who may use different technical solutions.

It should be noted that requirements identification does not end with the identification of the explicit performance requirements. Experience has shown that there are five to seven implicit requirements for every explicit requirement in large scale system integrations. These, too, should be identified and managed. Frequently, an underlying implicit requirement (such as conforming a financial system to national auditing requirements) may be a cost-driver in system development.

Attention to the front-end design of supply chain information management systems can result in greater flexibility during implementation. A technical approach can be developed that permits incremental development and deployment as opposed to the "big bang" of a major system implementation. With an incremental approach, the risks of large-scale failure and unrecovered sunk costs are avoided and the time-phased approach permits designing project tasks with a view to rapid return on investment.

In employing this technical approach to deliver large SCM information management systems that interface to multiple legacy systems and a wide array of customers and suppliers with varying levels of SCM competence and technology, it is recognized that there is a challenge in coordinating up and down the supply chain. A standard set of SCM definitions, SCM processes, and SCM business criteria to augment a businesses' in-house processes can accelerate implementation projects, particularly those that span enterprises. These standards support:

• Defining supply chain management activities,
• Measuring supply chain management performance and costs,
• Specifying SCM project requirements,
• Aligning information system architectures with strategic objectives,
• Developing integration strategies for SCM systems and legacy systems, as well as customer and supplier systems
• Supporting technical trade-off analyses, including commercial-off-the-shelf hardware and software selection.

CONCLUSION
With companies investing the equivalent of an average of 11/2 percent of their annual sales in SCM information systems it is important to them, their stockholders, and their customers that the investments show a reasonable return. A failure rate of almost half of the projects associated with these investments should be unacceptable.

It is interesting to note that when asked to identify challenges associated with implementing supply chain systems, companies ranked information system technology much lower than difficulties in program definition, program management, and communication between organizations. Studies in business process reengineering efforts (not specific to SCM) and software development (not related to SCM) have resulted in similar findings. There is an abundance of evidence that by carefully identifying and managing requirements, the risks, costs, and time required to deploy large-scale information management systems can be significantly reduced.

About the Author
Scott Stephens
Supply Chain Council

For the last fifteen years, Mr. Scott Stephens has assisted military and commercial customers in all phases of systems development, including required definition, system design, system implementation, program management, and system life-cycle support. Mr. Stephens was previously a U.S. Naval Officer serving aboard destroyers and hydrofoils in Europe and the Caribbean. He received his undergraduate degree in 1976, his MBA in 1992, and is currently a Ph.D. candidate in Management with a focus on the application of technology for logistic system transformation. Mr. Stephens served as the Lockheed Martin Business Manager for Commercial Supply Chain Management, from which position he lead a research initiative sponsored by Lockheed Martin and supported by Pennsylvania State University's Center for Logistics Research to assess the state of the art in logistics systems integration. Mr. Stephens publishes and is a frequently invited speaker in the field of supply chain management. He was named Chief Technology Officer of the Supply Chain Council in November 1998, supporting the needs of the council's rapidly expanding membership and managing the technical education programs related to the Supply Chain Operations Reference model (SCOR), as well as the Council's Technical Committees and website. Mr. Stephens is also a member of the Council of Logistics Management, APICS, and INFORMS.

Footnotes

1. Proceedings of the Gartner Group Conference "How to Manage the Supply Chain: Integration, Implementation and Optimization," April 1997 p.1.
2. There are a number of definitions associated with supply chain management arising in part from software vendors' attempts to differentiate their offerings. This paper supports the following definition: the management of all internal and external processes or functions necessary to satisfy a customer's order (from raw materials through conversion/manufacture through shipment). This definition implies that SCM includes traditional logistics activities, provides a cross-functional perspective, and extends the management of those activities to suppliers and customers.
3. Survey of Fortune 500 companies conducted by Lockheed Martin with support from Pennsylvania State University's Center for Logistic Research, CGR Management, and Advanced Manufacturing Research, 1997, reported at the Conference for Logistics Management, October 1998, Anaheim, CA.
4. Survey of Fortune 500 companies conducted by Lockheed Martin1997, reported at the Conference for Logistics Management, October 1998, Anaheim, CA. Survey data indicated that virtually all companies reported using some form of information system for supply chain or supply chain-related functions. Activities most frequently supported by information technology were: inventory control (87%), order processing (78%), purchasing (77%), electronic commerce/Electronic Data Interface (73%) and inventory planning and forecasting (50%).
5. Council of Logistics Management, "Logistics is the process of planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements".
6. Bertalanffy, Ludwig Von, General System Theory: Foundations, Development, Applications, pp.295, New York: George Braziller 1968.