Significant improvements in performance are increasingly difficult to achieve for supply chain leaders. Fortunately, a number of opportunities for significant improvement remain.
by Stuart Roy, August 2010
The job of Chief Supply Chain Officer is not getting any easier. Financial pressure for cost containment is relentless, while customer expectations remain high and the complexity of products and service offerings increase. The pace of globalization is accelerating, extending the geographic span of supply chain operations as companies enter new markets and leverage low-cost country sourcing. Complexity and interdependency increases as businesses outsource more strategic capabilities and establish deeper and more complex relationships with multi-tier supplier networks and outsource partners. At the same time, volatility has increased, with large fluctuations in commodity prices impacting production and transportation costs while economic uncertainty clouds forecasts.
Strategies deployed by leaders
Supply chain leaders are deploying multiple strategies to address the evolving supply chain challenges. They have transformed into lean, demand-driven supply chains, leveraging postponement to reduce inventory while providing high service levels. Process integration across the extended supply chain enables reduced cycle time, increased efficiency and predictable outcomes. Collaborative planning and supplier orchestration synchronizes execution across the supply network by ensuring all partners execute against common objectives. Supply chain performance can be categorized by using process capability maturity to segment companies into leaders, followers and laggards. Leaders, which represent about 12 percent of companies, embrace sales and operations planning to maximize financial, operational and customer outcomes by ensuring alignment between key stakeholders. Leaders also adopt a total-landed-cost perspective in making supply chain decisions, and have invested in supply chain systems to automate processes and enhance planning and execution capabilities.
Potential areas for improvement
Advanced supply chain maturity is associated with superior performance. Laggards and followers have the opportunity to significantly improve performance by adopting business capabilities associated with evolved supply-chain-process maturity. For leaders, however, significant improvements in performance are increasingly difficult to achieve. Inventory reduction efforts, which paid big dividends in the past, have stalled, and evolving process maturity beyond current advanced maturity levels may not be viable or financially justified. Opportunities for further incremental improvement by leaders clearly exist. However, these are better suited to continuous improvement methodologies rather than major project initiatives.
Fortunately, a number of opportunities for significant improvement remain, in large part driven by the changing global environment:
1. Extending visibility: Today, supply chain organizations have an unprecedented amount of data available to drive decision making. However, executives frequently cite difficulty leveraging decision-making information, poor data access or limited visibility — across their own as well as partner organizations — as significant issues. Poor integration between internal systems, functionally oriented organizational silos, data quality or latency issues, and lack of tools to transform the mountain of information into actionable data are typically to blame. Limited partner visibility frequently results from disparate infrastructure and applications between partners as well as inconsistent data taxonomies.
2. Collaborating with suppliers: Despite a greater dependence on global suppliers and customers, increased outsourcing of higher-value activities, and dependence on multi-tier supply networks, supplier collaboration is generally limited to placement of electronic orders, checking payment status, sharing spreadsheet-based forecasts, and periodic operations calls. Typical reasons cited for limited collaboration include limited tools and resources to support collaboration efforts.
3. Increasing supply chain flexibility: In the past, planning and cost containment was done methodically, with established targets and static plans evaluated and updated periodically. Today, volatility is the new norm, with the pace of change accelerating. Supply chains need to respond effectively to commodity cost swings, political uncertainty, economic conditions, natural disasters, escalating labor costs in low cost centers, and increasing globalization. Executives generally lack the information needed to drive decision making to respond effectively to unanticipated changes.
4. Managing risk effectively: The rapid pace of globalization, lean inventory levels, increasing geographic span and dependence on supplier partners create supply chain risk. Risk management and planning processes have not evolved to manage the increased risk. Most companies have compliance procedures in place with key partners and have implemented process controls for key operations and logistics activities. However, many lack event-level monitoring to identify supply chain disruptions and evaluate resulting potential risk. Supply chain planning and risk management activities are also not integrated, increasing the time required to effectively manage and respond to risk.
Framework to enable improvement opportunities
Both process and IT capabilities are required to realize potential improvement opportunities. Commonly, IT limitations hinder deploying capabilities to provide improved visibility, enhanced supplier collaboration, effective risk management and greater flexibility. These gaps include:
Multiple supply chain systems with limited integration and a functional orientation
Limited integration with partner systems due to disparate applications and inconsistent data taxonomies
Difficulty transforming transactional information into business insight
With most supply chain organizations deploying multiple systems and platforms, it is often difficult to establish a clear path forward. IT frameworks can provide a useful tool to structure and plan IT initiatives. For companies that have already deployed supply chain systems, business value delivery does not end with deployment of the solution. Significant incremental value can be generated beyond implementation by integrating disparate systems, extending capabilities across the organization and partners and optimizing operations across the extended supply chain.
Integrate disparate systems
Supply chain organizations typically rely on a combination of third-party, legacy and enterprise solutions with limited integration. This results in data latency, questionable data quality, manual bridging of processes and desktop-based spreadsheets and data. The effect is to limit visibility, hinder decision making and reduce flexibility. An integrated supply chain platform is essential to enable integrated business processes, extend visibility and provide advanced capabilities.
Replacing multiple systems with a single-vendor, enterprise-wide supply chain platform may be justified if the disparate applications do not provide the needed capabilities, are difficult to support, or create business risk. However, this approach may not be justified financially if the primary challenge is integration versus system capability or risk. In this case, mapping processes and information flows will highlight integration gaps. These can be closed by standardizing on a common integration tool, such as Application Integration Architecture (AIA), to establish integrations between the disparate systems.
Extend collaboration capabilities to partners
The supplier collaboration model is dictated by the strategic importance of each supplier. The collaboration strategy is developed by segmenting the supply base into several categories. A collaboration approach is developed for each segment with attendant process capabilities increasing as the supplier segment evolves from transactional to strategic.
The IT challenge is to develop a scalable collaboration platform to cost effectively support collaboration with each supply base segment. The collaboration platform must support tiered sets of capabilities so that it can be developed once but deployed across multiple suppliers and segments. The adoption of Service Oriented Architecture (SOA) simplifies this task as it enables a company to develop reusable, device-independent services that can be deployed across multiple platforms. Standards-based communication protocols can then be used to bridge system gaps with suppliers. Master data management can be used to unify data from multiple supplier platforms so that subsequent analysis and planning is based on a single, accurate data set.
As the geographic span, dependency on partners and globalization increase, the importance of effective planning across the extended supply chain has never been greater. Companies can extend existing planning tools or deploy new capabilities to increase effectiveness and geographic span:
Extend planning capabilities to provide integrated planning across the extended supply chain, from sourcing through customer delivery
Drive planning to a more granular level to include market, customer and product to address increasing geographic and product complexity
Use multi-echelon inventory optimization to streamline inventory across the extended supply chain while strategically positioning inventory to provide maximum flexibility and mitigate risk
The dynamic nature of today’s business environment mandates that companies respond to continuously changing business conditions. Static planning models with periodic revisions are no longer sufficient to provide the flexibility needed to excel today. Companies can take a number of steps to improve flexibility:
Deploy dynamic planning models to respond effectively to disruptive business events and changing business conditions
Drive demand sensing close to the point of consumption, improve demand forecasting to increase accuracy and proactively steer demand to maximize operational and financial outcomes
Use business intelligence to monitor operational and financial performance against objectives and provide business insight
The accelerating rate of globalization, dependency on partners, increasing complexity and continuing economic volatility create opportunity for improvement, even among supply chain process maturity leaders. But first, integration gaps need to be closed and collaboration capabilities extended across the supply chain. Companies can then refine existing or deploy new capabilities to optimize performance, increase flexibility and effectively manage risk. Stuart Roy is Senior Director of Industry Strategy and Insight at Oracle.