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Control of the supply chain turns critical

By Stephen PritchardPublished: September 19 2007 03:00 Financial Times UK

An efficient supply chain is a prize worth striving for. According to Accenture, the consultancyfirm, "supply chain leadership" can increase a company's market capitalisation by between 7 and26 per cent above the industry average, but for a business, even competing for that prizedemands a significant investment in resources. In sectors such as consumer goods and retailing,established companies have already achieved the easiest supply chain efficiencies.

"Things that are likely to move the dial have to make a significant difference, rather than betechnology experiments," says Stephen Proud, a partner in Accenture's supply chain practice.None the less, an efficient supply chain is a must for a widening range of businesses. Fashion, hi-tech and grocery retailers grasped early on the importance of ensuring the right stock reached theright store at the right time. No one wants a warehouse full of summer dresses in October, orindeed shelves of last season's mobile phones in the run-up to Christmas. But the supply chain isnow moving up the agenda in slower-moving sectors such as heavy manufacturing.

Effective supply chain management is the only way to make efficient use of global sourcingstrategies and especially, the huge manufacturing capacity of China and the Pacific Rim.Although globalisation has reduced production costs in a wide range of sectors, the trend tosource components or even finished goods from China and elsewhere has made the supply chainmanager's task far harder.

"Our internal systems handle more than 700 suppliers," says Christian Verstraete, worldwidesupply chain expert at Hewlett-Packard. "We have to be able to ex-change messages not justwith them, but with their suppliers." Supply chain managers in many sectors are looking forgreater visibility of what is happening in their supply chains and faster access to more accuratedata.

This means that if there is an unexpected event, be it storms affecting shipping or a productionshortfall, companies can divert stocks or bring in alternative suppliers. "Companies are not justasking suppliers why there is a problem with an order," says Sanjiv Sidu, president of supplychain management software vendor i2. "They are asking: 'When did you first know, and why didyou surprise me?'"

In sectors such as retail, supply chain problems lead to "stock outs" or empty shelves, which sendcustomers elsewhere. In heavy or complex manufacturing, supply chain problems can lead tocancelled orders running into billions of dollars, or severe penalties for late delivery. Asmanufacturers move away from vertically integrated production, the supply chain suddenlybecomes critical.

"In aerospace and defence, we are 10 years behind the hi-tech or even automotive sectors andhow we improve the performance of our supply chain is quite a challenge," explains Bill Black,chief quality officer at aerospace manufacturer EADS.

"The cost of running our supply chain logistics is minor, set against the $100m cost of an aircraft.But the cost of failure is enormous." About 80 per cent of the cost of an aircraft is accounted forby suppliers and partners, says Black, making EADS.

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"I need to know if an event can affect our master schedule and that means that I need to knowwhat is happening, not just with my tier one, but with tier four, five or six suppliers." Theincreasing demands of customers, as well as the drive to cut supply costs, are causingmanufacturing companies in particular to renew their investment in supply chain technologies. Butefficient supply chain technology can also open up business opportunities.

For Kautex-Unipart, an automotive component manufacturer based in Coventry, in the UK,supplying BMW's Mini production line with fuel tanks came with an onerous condition attached.The company had to achieve 100 per cent delivery accuracy, matched to BMW's JIS 5000manufacturing process. Kautex-Unipart is BMW's sole tank supplier for the Mini plant at Cowley,in Oxfordshire. It has to supply 250,000 tanks each year, in exactly the order specified by BMW,for each of the 13 tanks used on the Mini car. The tanks even have to be stored the right wayround in the shipping containers. If they are not, BMW's production robots cannot fit them. Thecompany used a photographic identification system, Visidot, from Israeli vendor Image ID toensure that tanks can only leave Coventry if the order exactly matches BMW's requirements."Getting supply wrong is the cardinal sin in the automotive industry," says Jan Parylo, IT managerat Kautex-Unipart. "But the BMW contract has also brought us benefits. We used to have 24 to 48hours' visibility of orders. Now BMW can give us six days. As a result, we have more flexibility inour manufacturing and supply processes."

Visidot is one of a number of new technologies that are helping businesses improve supply chainvisibility and the speed at which they collect supply chain data. Others include radio frequencyidentity (RFID) tags as well as three-dimensional and even colour bar codes.

"In the past, for manufacturers [supply chain] visibility stopped at the batch or lot level," saysKrish Mantripragada, head of RFID and Auto-ID solutions at enterprise software vendor, SAP."But recalls and quality issues are putting a lot of pressure on companies to make their data moregranular, and to be able to track single items." The response to RFID, however, differs fromindustry to industry. Mr Mantripragada says that interest is greatest in sectors such aspharmaceuticals, aerospace and defence "where complete traceability and product integrity arethe priorities".

In other industries, some companies are looking to use RFID to make their supply chains moreefficient, but they are finding the costs to be higher than expected. The costs of RFID tags maybe heading downwards, but there is far more to a supply chain project than the tags alone. RFID,for example, produces a unique serial number for each product, while conventional trackingsystems may be designed just to record a product's stock code, and assume that each productwith the same code is identical. "It is partly an infrastructure problem, with the need to deploysensors. But the second problem is serialised data management," says Mr Mantripragada. "Manyproduction processes batch supplies, so business processes need to adapt to handleserialisation." Business processes that are already designed around items with individual serialnumbers often lend themselves best to technologies such as RFID; for others, bar codes orsimilar scanning technologies might be good enough for some time to come. "We are certainlynot wedded to RFID as a technology. If the project is about better serialisation and that could bedone as well with coloured dots, that would not be an issue. And there are environments where

radio frequency technologies are not applicable," says Mr Proud at Accenture.

For businesses considering their supply chains, the most important step is to look at the businessprocess and how it could be improved, and then pick the technology that fits best. Nick Costides,portfolio manager for UPS Supply Chain Solutions, based in Atlanta, says: "As an expressdelivery company, barcodes meet our needs. But in the long term, there are opportunities. Forexample, if every item in a warehouse had an RFID tag, it would make taking physical inventoriesmuch easier."

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Companies also need to consider how access to item-level data, or indeed more up-to-datestatus information from the supply chain will support decision making. "Distribution centreoperators clearly have different needs from C-level executives," says Mr Costides. "We give themthe information they want to see, so they are not overwhelmed."

Fortunately, modern enterprise IT systems have the capacity to handle the increased data

coming in from systems such as RFID. But technologists caution against relying on a singlechange to improve supply chain performance. "There is not one killer application but rather aseries of incremental steps before we see the ground shift," says SAP's Mr Mantripragada."Some customers have seen significant returns on investment from better data accuracy andvisibility, but no two customer scenarios are the same."

A business case for Supply Chain Performance ManagementSupply Chain Performance Management (SCPM) has been a critical area for consumer packagedgoods (CPG) companies in efforts to develop an agile, lean and efficient customer-oriented supplychain. A robust SCPM infrastructure is crucial to realize the benefits of various collaborativeinitiatives. However, CPG companies need to resolve crucial questions before making

significant investments in SCPM initiatives. These include

Is there an enterprise-wide awareness and understanding of strategic and financialobjectives?

Is there an understanding of the financial impact of supply chain performance onoverall corporate performance?

Are all processes and roles in the supply chain mapped to key metrics to determineperformance?

Is there a mechanism to periodically review actual supply chain performance andredefine performance measures in the changing business context?

Is there an integrated single view of supply chain performance across functions andhierarchies?

Is senior management able to quickly determine the causes for supply chain failures?

This paper focuses on defining and building a metrics framework to effectivelyleverage and drive supply chain performance management.

A balanced set of metrics, aligned to various supply chain functional areas - demandplanning, customer management, warehouse management, need to be identified toaddress decision-making requirements. These metrics should be mapped to theprocesses of each supply chain function, the overall business strategy and the roles

responsible for executing these processes.