Supply chain management (SCM) is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service and deliver it to customers. The following are five basic components of SCM.
Supply chain management software is possibly the most fractured group of software applications on the planet. Each of the five major supply chain steps previously outlined composes dozens of specific tasks, many of which have their own specific software. Some vendors have assembled many of these different chunks of software together under a single roof, but no one has a complete package that is right for every company. For example, most companies need to track demand, supply, manufacturing status, logistics (i.e. where things are in the supply chain), and distribution. They also need to share data with supply chain partners at an ever increasing rate. While products from large ERP vendors like SAP's Advanced Planner and Optimizer (APO) can perform many or all of these tasks, because each industry\rquote s supply chain has a unique set of challenges, many companies decide to go with targeted best of breed products instead, even if some integration is an inevitable consequence.
It's worth mentioning that the old adage about systems only being as good as the information that they contain applies doubly to SCM. If the information entered into a demand forecasting application is not accurate then you will get an inaccurate forecast. Similarly, if employees bypass the supply chain systems and try to manage things manually, then even the most expensive systems will provide an incomplete picture of what is happening in a company's supply chain.
Many SCM applications are reliant upon the kind of information that is stored in the most quantity inside ERP software. Theoretically you could assemble the information you need to feed the SCM applications from legacy systems (for most companies this means Excel spreadsheets spread out all over the place), but it can be nightmarish to try to get that information flowing on a fast, reliable basis from all the areas of the company. ERP is the battering ram that integrates all that information together in a single application, and SCM applications benefit from having a single major source to go to for up-to-date information. Most CIOs who have tried to install SCM applications say they are glad they did ERP first. They call the ERP projects "putting your information house in order." Of course, ERP is expensive and difficult, so you may want to explore ways to feed your SCM applications the information they need without doing ERP first. These days, most ERP vendors have SCM modules so doing an ERP project may be a way to kill two birds with one stone. Companies will need to decide if these products meet their needs or if they need a more specialized system.
Applications that simply automate the logistics aspects of SCM are less dependent upon gathering information from around the company, so they tend to be independent of the ERP decision. But chances are, you'll need to have these applications communicate with ERP in some fashion. It's important to pay attention to the software's ability to integrate with the Internet and with ERP applications because the Internet will drive demand for integrated information. For example, if you want to build a private website for communicating with your customers and suppliers, you will want to pull information from ERP and supply chain applications together to present updated information about orders, payments, manufacturing status and delivery.
Before the Internet came along, the aspirations of supply chain software devotees were limited to improving their ability to predict demand from customers and make their own supply chains run more smoothly. But the cheap, ubiquitous nature of the Internet, along with its simple, universally accepted communication standards have thrown things wide open. Now, you can connect your supply chain with the supply chains of your suppliers and customers together in a single vast network that optimizes costs and opportunities for everyone involved. This was the reason for the B2B explosion; the idea that everyone you do business with could be connected together into one big happy, cooperative family.
Of course, reality isn\rquote t quite that happy and cooperative, but today most companies share at least some data with their supply chain partners. The goal of these projects is greater supply chain visibility. The supply chain in most industries is like a big card game. The players don't want to show their cards because they don't trust anyone else with the information. But if they showed their hands they could all benefit. Suppliers wouldn't have to guess how many raw materials to order, and manufacturers wouldn't have to order more than they need from suppliers to make sure they have enough on hand if demand for their products unexpectedly goes up. And retailers would have fewer empty shelves if they shared the information they had about sales of a manufacturer's product in all their stores with the manufacturer. The Internet makes showing your hand to others possible, but centuries of distrust and lack of coordination within industries make it difficult.
Over the last few years most companies have gotten over the trust issue. In many cases "gotten over" is a euphemism for "have been bullied into sharing supply chain information from a dominant industry player." Want to sell your goods in Wal-Mart? Better be prepared to share data.
The payoff of timely and accurate supply chain information is the ability to make or ship only as much of a product as there is a market for. This is the practice known as just-in-time manufacturing, and it allows companies to reduce the amount of inventory that they keep. This can cut costs substantially, since you no longer need to pay to produce and store excess goods.
Let's look at consumer packaged goods for an example of collaboration. If there are two companies that have made supply chain a household word, they are Wal-Mart and Procter & Gamble. Before these two companies started collaborating back in the '80s, retailers shared very little information with manufacturers. But then the two giants built a software system that hooked P&G up to Wal-Mart's distribution centers. When P&G's products run low at the distribution centers, the system sends an automatic alert to P&G to ship more products. In some cases, the system goes all the way to the individual Wal-Mart store. It lets P&G monitor the shelves through real-time satellite link-ups that send messages to the factory whenever a P&G item swoops past a scanner at the register.
With this kind of minute-to-minute information, P&G knows when to make, ship and display more products at the Wal-Mart stores. No need to keep products piled up in warehouses awaiting Wal-Mart's call. Invoicing and payments happen automatically too. The system saves P&G so much in time, reduced inventory and lower order-processing costs that it can afford to give Wal-Mart "low, everyday prices" without putting itself out of business.
supply chain automation is uniquely difficult because its complexity extends beyond your company's walls. Your people will need to change the way they work and so will the people from each supplier that you add to your network. Only the largest and most powerful manufacturers can force such radical changes down suppliers' throats. Most companies have to sell outsiders on the system. Moreover, your goals in installing the system may be threatening to those suppliers, to say the least. For example, Wal-Mart's collaboration with P&G meant that P&G would assume more responsibility for inventory management, something retailers have traditionally done on their own. Wal-Mart had the clout to demand this from P&G, but it also gave P&G something in return-better information about Wal-Mart's product demand, which helped P&G manufacture its products more efficiently. To get your supply chain partners to agree to collaborate with you, you have to be willing to compromise and help them achieve their own goals.
If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people are accustomed to dealing with phone calls, faxes and hunches scrawled on paper, and will most likely want to keep it that way. If you can't convince people that using the software will be worth their time, they will easily find ways to work around it. You cannot disconnect the telephones and fax machines just because you have supply chain software in place.
There is a diabolical twist to the quest for supply chain software acceptance among your employees. New supply chain systems process data as they are programmed to do, but the technology cannot absorb a company's history and processes in the first few months after an implementation. Forecasters and planners need to understand that the first bits of information they get from a system might need some tweaking. If they are not warned about the system's initial naivet\'e9, they will think it is useless. In one case, just before a large automotive industry supplier installed a new supply chain forecasting application to predict demand for a product, an automaker put in an order for an unusually large number of units. The system responded by predicting huge demand for the product based largely on one unusual order. Blindly following the system's numbers could have led to inaccurate orders for materials being sent to suppliers within the chain. The company caught the problem but only after a demand forecaster threw out the system's numbers and used his own. That created another problem: Forecasters stopped trusting the system and worked strictly with their own data. The supplier had to fine-tune the system itself, then work on reestablishing employees' confidence. Once employees understood that they would be merging their expertise with the system's increasing accuracy, they began to accept and use the new technology.
The extended supply chain is a clever way of describing everyone who contributes to a product. So if you make text books, then your extended supply chain would include the factories where the books are printed and bound, but also the company that sells you the paper, the mill where that supplier buys their stock, and so on. It is important to keep track of what is happening in your extended supply chain because with a supplier or a supplier\rquote s supplier could end up having an impact on you (as the old saying goes, a chain is only a strong as its weakest link). For example, a fire in a paper mill might cause the text book manufacturer\rquote s paper supplier to run out of inventory. If the text book company knows what is happening in its extended supply chain it can find another paper vendor.
Just in time manufacturing isn't the only way companies have used their supply chains to reduce cost. Manufacturing in developing countries is substantially cheaper than in the U.S. because of the low cost of labor. For example, the median wage at a Chinese manufacturing plant is 1,000 yuan, or about $120, per month, according to a 2005 survey by The MPI Group. But foreign manufacturing brings with it another set of challenges. It isn't as easy to set up real-time data sharing with a factory in, say, China as it is with a factory you own in the United States. And the sheer distance that overseas goods need to travel not to mention the number of vessels they need to travel on in order to reach the U.S. increases the chance that they will get delayed. The bottom line is that foreign manufacturing brings back a lot of the uncertainty that supply chain systems were designed to eliminate. The good news is that technology capable of tracking shipments throughout the world is getting better. The bad news is that a lot of this technology is still pretty expensive, that some of the places you would want to deploy it don't have the necessary infrastructure in place, and well, there isn't a piece of technology out there that can make up for the whim of a Chinese Customs official. Furthermore, labor costs in some places are so low that IT automation and monitoring projects may add more to costs\emdash in terms of software, hardware and still-precious (and unreliable) bandwidth\emdash than they save in productivity. Hence, some low-tech or commodity products may not be worth monitoring at all until they hit a ship in a foreign port.
In the meantime, the best bet is to use whatever systems you can to gain as much visibility into the global supply chain as possible. It may be impossible to replicate the just in time model on a global scale, but by applying whatever technology you can, and by choosing the supply chain partners who have the capability to share data with you, you can get many of the benefits of just in time while paying low foreign prices.
The most notable is Radio Frequency Identification, or RFID. RFID tags are essentially barcodes on steroids. Whereas barcodes only identify the product, RFID tags can tell what the product is, where it has been, when it expires, whatever information someone wishes to program it with. RFID technology is going to generate mountains of data about the location of pallets, cases, cartons, totes and individual products in the supply chain. It's going to produce oceans of information about when and where merchandise is manufactured, picked, packed and shipped. It's going to create rivers of numbers telling retailers about the expiration dates of their perishable items\emdash numbers that will have to be stored, transmitted in real-time and shared with warehouse management, inventory management, financial and other enterprise systems. In other words, it is going to have a really big impact.
Another benefit of RFIDs is that, unlike barcodes, RFID tags can be read automatically by electronic readers. Imagine a truck carrying a container full of widgets entering a shipping terminal in China. If the container is equipped with an RFID tag, and the terminal has an RFID sensor network, that container\rquote s whereabouts can be automatically sent to Widget Co. without the truck ever slowing down. It has the potential to add a substantial amount of visibility into the extended supply chain.
Right now the two biggest hurdles to widespread RFID adoption are the cost of building the infrastructure and the lack of agreed-upon industry standards.