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Supply chain management is more than a functional issue today -- it is a boardroom issue and a driver of company performance. Lowering costs and executing effectively make all the difference.

"Less than half of currently available new, and presumably profitable, supply chain technologies have been put to use." — Alan Greenspan, Jan 11, 2002

You haven't implemented all of the supply chain software you bought over the past two years. Pressure to generate cash is paramount. Your competitors are perceived to have a significant advantage in cost of goods sold from better pricing, lower cost supply and lower overhead. You need a breakthrough — and a high performing supply chain is still the answer.

Supply chain management is more than a functional issue — today it is a boardroom issue and a driver of company performance and cash. Look at the top performers — Dell, Wal-Mart, Target, Procter & Gamble — done correctly drives free cash flow from five key sources:

• Total Cost of Operations: This is the most obvious nugget in the supply chain — the place where everyone says they can save you money. It includes the costs of direct and indirect materials, manufacturing/processing/packaging costs, logistics costs, returns and post-sales service costs, the costs of overhead of (planning and administering operations) information technology, and infrastructure. The key attribute is to determine early on what problem and market issues you really want to solve, then go after it with a strategy, measurable business goals, and a solid multi-functional team.

• Working Capital and Liquidity: This is a critical balance sheet issue. Most supply chain improvement programs focus on cycle times to get to working capital reduction, but this approach doesn't get to the real issues. To achieve real improvement in working capital and to increase your liquidity, you must focus on variability in your direct products and processes and the deployment of inventory by segment. System-wide inventory and spares investment (including that held by partners, suppliers, and channels) as well as safety stock and risk management programs feed your payments and payment cycles (the true drivers of your working capital cash generation) and accounts payable. To be really effective, your program must focus on generating cash and tightly coordinating product movements to design, production, and customer sales.

• Fixed Capital: The second major area of focus in the consulting holy grail of the supply chain is to maximize productivity of fixed assets. Most groups will standardize your production and optimize it, planning on a flow control system to feed and ship products in a regulated way to make the overall approach work. Sounds great, until the real world steps in. Delays, adjustments, changing market conditions, customer orders that were not forecasted, and store closings require a more flexible approach to fixed capital optimization and a total system approach, rather than a production-based approach. Optimizing the use and return on fixed capital investments (plants, distribution centers, equipment) while reducing break-even volumes — maximizing throughput and moving the cost structure from fixed to variable is the key. Getting the
information to make it work while outsourcing of non-core capabilities and marginal assets.

• Tax: Largely overlooked by most, the globalization of supply mandates that companies focus on — tax, transfer pricing and duty free opportunities — in planning the timing of ownership of overseas sourced goods, or when locating global development, manufacturing, or distribution centers. Modes and methods of transportation are crucial to this analysis, as is the ability to comprehend regulations and achieve strong results. Most supply chain projects will focus only on a specific business result but if you don't think globally, you will lose money.

• Profitable Growth Increase: Linking sales, marketing, creative design, and CRM systems to your supply chain initiative is the key to getting it right. Marketing drives revenue growth and new customer acquisition; sales close the deals; and supply chain drives customer retention, satisfaction, and profitability; and CRM systems remind that not all customers are equal. If you want brand control, you need the ability to design and introduce new SKUs and new products at will. To maximize sales to your top accounts, leverage store-based demographics and regional sales variances, companies must connect your systems to effectively manage its data. And make no mistake, managing this data is integral to achieving higher margin sales, customer service levels, customer loyalty, and brand strength.

The Global Supply Chain

The global supply chain is complex, but it doesn't have to be scary. The challenge is complex — both on a domestic and global basis. A look at the real supply chain (as opposed to stylized versions usually shown) shows non-linearity, multiple entities, multiple systems and data standards, multiple processes, multiple geographies, multiple customer segments and channels, and multiple types of products that make up the typical supply chain.

This already complex environment has several key attributes that increase complexity. These attributes are competition, industry dynamics, and the disruptive technologies and practices that constantly change the landscape. Compounding these business issues are: ideas on the latest approach to technology and process, matching the "best-in-class" players, and avoiding the pitfalls experienced by others (it is fairly obvious that a large number of ERP-based systems implementations fail to achieve savings goals).

Figure 1 - Factors Driving Supply Chain Management

Competitive Imperatives

It's always important to know your competition and to focus on methods to achieve competitive advantage. But if you plan to follow your competitor, don't spend a lot of money and time on such analysis. Most executives know what other companies are doing. To match it should involve some forms of technology, but will usually involve a far more significant focus on process culture and change management.

To beat the competition, companies must develop their own plans based on strategic advantages and leverage them via their supply chains. The areas of focus are the classic ones; the key is to determine the mix that best optimizes your company's strengths for competitive advantage. Leading companies have always recognized them as basic, always relevant, and their key to highly effective operations and sustained advantage.

• Back to the basics — liquidity, profitability, growth: cash is king
• Speed is just as important — in creative design to production and to finished goods order fulfillment to customers
• Revenue per employee is a key metric - administration and overhead costs must be cut to the minimum, then cut again
• End-to-end visibility - of orders, components, parts, and shipments (and their status) is critical to successful execution, delivery precision, and supply and demand response
• Total delivered cost and cost-to-serve information for managing operations and achieving customer-centricity
• Managing and contracting for risk and variability is another vital management responsibility
• Reverse logistics, returns, and spares management, yet another major component of customer satisfaction and cost

These competitive imperatives dictate some key actions and initiatives. But effective supply chain management does not equate to information systems. In the past few years, supply chain management has acquired the veneer of yet another business technology fad, and an expensive one at that. It has been simplified into some of its component systems parts - such as advanced planning, collaborative software, product lifecycle management, suppler relationship management, and enterprise resource planning. These are important aspects of the solution, yet most of these are merely enablers and tools. They are not a substitute for effective supply chain processes; change employee actions and make real-time data available of real-time information that enables them to make effective decisions in a fast-paced business operation. Supply chain management is not just technology, but it can be technology-enabled.

Keys to Effective Global SCM

Given the complexity of today's global supply chain, effective management relies on the perfection of the underlying basics — visibility, integration, and risk management. As always, execution is all important.

The Focus

There must be consistent, accurate visibility, and status information across the various systems in the enterprise, and across the different systems in the extended enterprise (suppliers, partners, providers, channels, customers). This involves integration among multiple systems and entities, using both mature and emerging technologies, while having the processes to react quickly. Real-time visibility into components, orders and supply is what enables the other supply chain systems to work. It's what makes possible high-speed response to changing supply chain conditions and it enables real adaptive execution to maximize new product introductions on the front-end — and customer availability and fulfillment on the back-end. It also drives minimized inventory risk, effective utilization, and optimization of fixed assets.

Manage risks by tightly matching demand with supply, while contracting for key material supply. The risks here are those of supply price variance and demand changes under fixed supply contracts; and supply capacity and inventory levels (excess and obsolete) given demand variability. Manage your demand and supply variability to ensure customer product availability and lower total purchase price, while maintaining low inventory levels and capacity utilization.

Processes

Processes count — make them flexible, with multiple fulfillment models to deal with multiple geographies, product types (e.g., standardized/high volume, customized/ high volume, innovative/lower volume), and multiple channels (retail, OEM, direct). Then consider the enabling systems. Take a complete execution-oriented view - hardware, network, financing, facilities, and don't underestimate people.

All operations must be managed for simultaneous outcomes: maximum speed of operations, lower total cost, and maximum liquidity. Outsourcing all non-core competencies and processes to increase asset flexibility and break-even volumes.

Initiatives

Successful execution consists of several short-term, high benefit to time initiatives within a longer-term strategic supply chain framework. Global, multi-year, "big bang" implementation efforts simply don't work.

This is by no means an easy task, given organizational inertia, the need for short-term cash results, the demand for scarce resources and investments, the changing business landscape and, often, the lack of knowledge in the company about leading, appropriate practices and their implementation. However, leading companies execute successfully and always experiment to improve and change the game to maintain their competitive edge and flexibility. Others find the usual excuses as to why things won't work.

Implementation

Fortunately, there are some tried and proven methods by which to tackle and execute successfully - while not necessarily sequential, they do follow a logical pattern. Successful supply chain management execution demands a portfolio of skills and capabilities, both inside and outside the company. Define the anticipated results, targets (cost, liquidity, customer satisfaction, channels, segments), metrics, and parameters (including speed) of the supply chain(s).

Assign firm accountability at the individual (not organizational) level and set metrics. Design the overall process at a high level, then identify and prioritize the discrete initiatives and time frames necessary to
execute over a series of short-term time frames; focus on the key points that provide maximum operations impact:
• Information and visibility first - how to get the information and how to integrate it across the extended supply chain
• How to mitigate demand and supply risk, and manage for it
• Manage inventory levels, deployment, and customer service to reduce costs, capital investments, and retain customers

To achieve this, work with the right skills (functional, industry, customer, supplier, integration, infrastructure, finance, technology evaluation, project management). Build in innovative constructs - hosting, outsourcing, financing, shared services, and cost sharing. Most importantly, plan, execute, evaluate, then execute again; the key is not to fall into a planning cycle that requires excruciating detail. Instead plan to a high level, then execute (often through a pilot, or by integrating with one set of suppliers or customers), then evaluate, replan and re-execute. Such a speed-focused approach is critical in today's environment. Then, and only then, look at the appropriate, cost-effective supply chain system applications very carefully.