If you think back ten years and consider how things were then, your mind tends to wander to the few things that were important to you at the time. For me, it was witnessing the birth of my first child; an incredible experience. I remember being amazed at the expertise of the nurses, although in hindsight there was far less technological gadgetry used than is now seen in a hospital.
Music was a great interest of mine in 1993. I had a large collection of vinyl’s and cassette tapes, having steered clear of the cartridge fiasco. I used to take a trip into town and spend hours pouring over vinyl albums of my favourite groups who by now, of course, have disbanded and become estate agents. So what of the supply chain over this period and what have my ramblings got to do with it? The reality is that the very same changes that have affected our lives, have also driven many of the changes in the supply chain.
An increase in complexity
The administration needs and supply management requirements to support the process of patient care are much more complex now than in 1993. For one thing, advances in medicine have increased the complexity of the goods supplied to a hospital. Time-tomarket of new drugs can take 15 years, so many of the drugs coming to market today were first conceived before 1993. In addition, regulatory changes have impacted how pharmaceutical goods are moved, stored and used. There are also more companies supplying the sector and a massive proliferation of product variations to satisfy the similar requirements. As such, branding has become an essential element of product development and supply. Even the manufacture of drugs and pharmaceutical appliances has altered dramatically during the past ten years, with many supplies not even being manufactured by the companies that own and develop the products. In addition, third party logistics providers have been employed to provide Just-In-Time product delivery to multi-channel sales outlets. All of the above highlights the importance of fast return on investment, close cost control and stringent traceability, if the product is to payback on the vast product rollout investment.
But the changes in the pharmaceutical industry are also seen in most other industries. Ten years ago, the supply chains of most companies were linear, i.e. they started at one end and flowed to the other with a relatively small number of companies inbetween. Over the ten years, supply-chains have become networks of process flows, involving manufacturing and design partners, different types of logistics providers along the chain and a complex structure of sales channels which are enough to give anyone the need for a headache tablet. Supply chains then tended to be split by department, not as one continuous flow. For one thing, companies were structured differently. Each department looked after its own inventory and processes, before handing them over to the next. Visibility within a department was rarely shared outside. In the ten years that have ensued, companies have learned the value of the joined up supply chain. Unfortunately, the chains themselves have many more links, so even today companies struggle to provide complete transparency.
But let’s not forget the music, lest we have to face it one day. Consumer technology has changed beyond most people’s dreams in the last ten years. The Internet existed then, but not in our homes or even most people’s offices. Now, most companies and many individuals can track the delivery of their goods on the Internet. But the physical supply chain has also changed during this time. The cost of transportation has increased, just as the journey times have also become more tortuous. Taking a trip into town is no longer a pleasurable experience, especially if you are driving a truck with a delivery window of 15 minutes in order to meet early morning city haulage restrictions. There are many more carriers available today, yet there are also more channels through which we provide product. Massaging a supply-chain plan in order to maximise efficiencies has become an art, and there are not many good artists.
The last ten years has seen the supply chain move from relative obscurity in terms of the boardroom, to being a business differentiator and a high cost element within a companies budget.
The expanding charter of Supply Chain Management (SCM) has forced companies to lookbeyond the traditional requirements of plan, source, make, and deliver. With the desire to outsource key operations has emerged the concept that AMR Research calls Extreme SCM. Extreme SCM needs to be managed in a different way than traditional SCM. Many companies have not faced up to the transformation taking place in their industries.
The migration to extreme supply chains is an outcome of forces in globalisation, economics, and the quest for competitive advantage. However, in the rush to get lean, many firms have overstated their goals and have become operationally anorexic, while others have barely begun the journey and suffer from bloated financial performance. A few leading companies have dodged these fates by concentrating on the systems and procedures required to manage and prosper within this new environment. This is Extreme SCM.
A focus on outcomes
In virtual supply chains, companies outsource, but they still fundamentally manage the business in the same way, offloading their traditional processes, systems, etc. on their supply partners. In Extreme SCM, the focus changes to outcomes, making use of the third-party infrastructure, technology, and lean processes: High visibility across the global value chain allows multi-tier visibility; globalisation is driving up the requirements to be a qualified partner; more focus is now placed on real-time Information Technology (IT) integration; and the major drivers are customer fulfilment and supply management.
In Extreme SCM, we are moving from a process environment to a business model scenario environment, where many activities are dynamic, not the outcome of repetitive, deeply legal, staid business routines and relationships. Another aspect of extreme supply chains is operating in a mixed partner mode, a world of both spot opportunities and one-on-one relationships.
The traditional CEO still sees the supply chain as a place to reduce cost. At the same time, many CEOs are also attempting to achieve higher levels of performance by transforming the business models of their companies. However, the supply chain is also the vehicle to fulfil the needs of customers, creating conflicting forces within the business strategy. When these forces converge, the result is extreme supply chains:
Since the CEO has seen the supply chain as a place to reduce cost, firms are leaner and have eliminated facilities and staff. Nevertheless, customers are demanding more customisation and services, expecting extreme process deftness.
In the drive to remove assets from the balance sheet, firms have turned to outsourcing, creating extreme supply chain structures, such as outsourcing manufacturing to Asia to serve a global market.
The business model is extreme – well-honed partnerships and pilots as well as spot markets have created dynamic relationships. There is a need to transact and monitor these modes of operation to manage and control daily business activities. A vast span in participant types means more integration to heterogeneous environments. These are extreme technology environments.
Extreme performance requirements means Wall Street, or similar, is not satisfied with excuses like, ‘I missed the quarter because…’ No longer can cash be tied up in working capital, inventory, or accounts receivable.
These demands on the supply chain have had a dramatic impact on lower-tier players, which are used by their customers because of their flexibility and dependability. Now they are asked to pile on more risk in order to maintain business relationships. But by starving lower-tier players of capital or other options to maintain their performance, the objective to reduce costs at the high end is actually increasing the probability of glitches in the overall chain.
Viability is not an understatement. In fact, many firms have blamed their poor performance or increasing waistline on supply chain inefficiency or glitches caused by miss calculations of upside and downside demand or poor showing by suppliers. Consider these challenges: Shareholder value – more difficulty in raising needed funds, closing or selling of non-performing divisions; loss of markets or customers – lost sales, defection or poor performance by suppliers, poor credit terms, increases in selling expense; risk exposures; increase in operating expense – carrying costs, obsolescence, increased transportation costs, shrinkage, nonconforming materials, returns, excess inventories, poor cash-to-cash cycle times (which increase the cost of capital); glitches – missed revenue, idle lines from poor forecasts to suppliers.
In this extreme business environment, the supply chain will obviously need even more attention than it currently receives. And the objectives are clear: increasing expectations, customer focus, and customer fulfilment. The means are also clear: supply management, where both suppliers and logistics providers blend to provide performance-driven capabilities. Firms cannot fall back on their own plants or inventory or a subservient outsourced supplier model. It is in an extreme supply chain where partners manage the actual execution of these critical processes for success. They owe performance – but not adherence – to traditional processes.
The externalisation of these two major focuses of customer fulfilment and supply management is at the highest layer. With mass customised expectations, the definition of fulfilment is not just pulling finished goods, but a demand-driven architecture through the whole supply chain.
Instead of the traditional model of source, make, and deliver, where manufacturers build to stock and pre-position the whole supply chain (inventories, manufacturing capacities, and even stand-by transportation), the processes are now customer fulfilment designed. Based on customer requirements (and economic realities of scale, supply availability, etc.), companies can now operate defter fulfilment processes and rethink the approach to satisfy customers. The postponement point can be moved, therefore creating leaner, more customised customer fulfilment processes.
The real operations, embedded within customer fulfilment and supply management, occur at a level below these big block processes with dynamic business scenarios based on the business model deployed. These business model scenarios are externalised and have become quite dynamic and personalised interactions in the last few years. They take a component-like approach, breaking apart an application into object-like scenarios and libraries of discrete routines, such as replenishment, availability checking, promising, carrier selection, load tendering, status check, electronic kanban, inbound quality non-conformance, trace and track, and Advanced Shipping Notices (ASNs).
So, the challenge in the traditional monolithic approach to application buying is that these coded processes do not line up neatly with the enterprise packages and suites you bought a few years ago. A significant contributor to outsourcing has been the inability of the enterprise to manage the order process through these monolithic systems. Worse, the platform and messaging resides between enterprises. Furthermore, the process participants are multi- layer, multi-enterprise, and with leaner supply chains, which require a higher degree of visibility and personalised contact.
Personalised contact is so critical. The well-known reality is that phone, fax, and e-mail still reign supreme in supplier management communications. In addition, extreme supply chains require functionality that resides between trading partners: trace and track, international trade compliance, and the ability to re-map messaging standards as well as draw conclusions and make decisions among partners. Enterprise-centric architecture just doesn’t hit the mark here.
The current health of the SCM software market is a reflection of this reality:
Manufacturing in Asia means buffer inventory in Aberdeen. Responsiveness and deft multimode packaging are driving up WMS sales.
More shippers are turning to up-to-date transportation capabilities, but not full-suite TMS applications – whether from exchanges, packages, or through services offered from their Lead Logistics Provider (LLP) or Third-Party Logistics (3PL) provider.
More companies are buying global trace and track from the physical level with Radio Frequency Identification (RFID) from firms like Savi through data networks and transformations from Descartes and Transcentric.
International Trade Logistics (ITL) has become a major focus and can be bought in components rather than suites from, for instance, NextLinx, Vastera, Qiva, and Open Harbor.
Enterprise suites don’t work in inside-out externalised scenarios. In fact, AMR Research sees more examples of users buying and extracting components from the suites to implement their processes rather than implementing large, complex projects in one go:
Users are extracting and implementing components from the SCM planning vendors, including i2 Technologies, Manugistics, Logility, webplan, and J.D. Edwards. And users are beginning to integrate their supply base, so firms like Adexa that are moving into Supplier Relationship Management (SRM) are involved. In addition, new firms like Apexon, SupplyWorks, and Eventra, firms that were born on the Web, link up supplier trading networks in externalised business processes.
Business may also just focus on attempting to finally get demand right, and so sales have increased for vendors focused on demand planning, like Prescient, Demantra, and Demand Management. But beyond these bright spots, there are major challenges now for the technology market. Supply chain transformation activities are at an all-time high, in fact. If you are wondering why you are having trouble implementing an enterprise system over this virtual model, the problem is architectural dissonance.
Industry initiatives and investments are creating big waves in SCM – Retail, Automotive, and High- Tech are examples – but software deal sizes do not indicate the size or impact of these initiatives. While deal size was used as a barometer in the past, firms are paying a lot less for these projects in today’s buyer’s market.
There is a huge shift in SCM operations to centres of expertise. Global enterprises want their third parties to play a role in everything from sourcing through aftermarket. Tier one companies and the third parties have a major challenge: establish and manage capital asset bases while providing world-class services and technology. In order to get the contract, they must do this at a lower cost than their customers can. Think about it: less cost with inherently less visibility to demand. This problem only gets solved with technology. However, third-party providers tend to be latecomers to the technology party.
Value chain transformations
The leading firms are on their way, undertaking multiple projects focused on value chain transformations. They are also participating in large standards efforts to reap the rewards of increased system investments, ensuring that data quality is high and that they are receiving as real-time information as possible – an effort to avoid glitches like stockouts in these lean chains.
Retailers and Original Equipment Manufacturers (OEMs) – the very large players – are busy changing their supply management strategies, negotiating performance- based contracts from their suppliers and providers, and improving their own supply chain prowess. For suppliers and carriers in these chains, it is critical to think about the implications here. If your customer is spending on supply management improvements, shouldn’t you be busily focusing on customer fulfilment enhancements?
Both customer fulfilment and supply management are occurring in many industries, and some of these examples represent major industry-wide changes. These initiatives span the firms’ supply chain partners at a minimum and, more importantly, are changing the principles of how these industries work. They will have a fundamental impact on enterprise competitiveness or an even broader impact on a sector’s operating model. How large and extreme are these efforts becoming? Schneider Logistics, UPS, FedEx, and Exel, for example, some of the largest carriers and 3PLs in the world, provide end-to-end LLP and various levels of customer fulfilment integration and services to a myriad of customers. Their investments in these Web- and messaged-based infrastructures are huge and growing. Note, however, that there are no dominant Extreme SCM vendors yet today.
Companies need to reassess SCM deployments and technology decisions to align themselves with the requirements of extreme supply chains. The relentless drive to virtual models as well as demanding more responsibility from trading partners is creating challenge and opportunity around the globe. Being integrated and ready for real time is fundamental in this universe. Firms lost huge ground in the past by debating SAP versus Oracle or Manugistics versus i2. That was hardly the point. In fact, many of these debates had no impact on their strategic direction or ROI. The real missed initiative was driving deft performance in customer fulfilment and supply management, which are now fundamental.
Business will need to develop business scenarios that reside on extreme physical supply chain topologies. More significantly, the language between the CIO and the business owner is inadequate and has to change. This shift of language is significant because it points to key architectural needs that are different. It is not just functionality but the business model we operate in.
So, Business Process Reengineering (BPR) is dead, and scenarios are in. Business process automation, workflow, and event-driven communication based on sensing deviations from plan are now the stated needs in extreme supply chains. Relationship management is the underpinning of scenario management. Businesses want to execute a new relationship in record time: the moment a contract is signed, they want results.
Third parties, like Electronic Manufacturing Service (EMS) and 3PL providers, should embrace Extreme SCM as part of their core capabilities – and soon – if they expect to win and keep business in support of their customer’s initiatives.
Ann Grackin is vice president of AMR Research’s Supply Chain Service.
Nigel Montgomery is research director at AMR Research and is a specialist in the supply chain