Energize your supply chain network

Alec Hutcheon, Managing Consultant, Business Consulting Services, IBM Indonesia

Supply chains are facing more challenges than ever before. In addition, traditional supply chain business models are giving way to the emergence of new horizontally integrated, high-performance on demand value chain networks.

These two trends were the basis of a recent survey conducted by IBM Business Consulting Services and IndustryWeek Magazine, which sought to gain a better understanding on where supply chain management is today and how it is evolving.

The survey was expected to provide a perspective on the continuing evolution of supply chain and value chain management principles.

Specifically, the value chain survey sought to identify current practices, capture significant trends and establish operational performance benchmarks in five key areas of SCM, namely, new product development, supply chain planning, customer order management, procurement and logistics.

It consisted of 18 to 24 questions about overall business objectives, enabling technologies and current practices as well as core performance data, such as level of resources, cycle times or efficiency rates.

Out of 25,000 surveys distributed, a total of 1,461 responses were received from companies in the consumer products and industrial products industries in the U.S., with representation from distribution and transportation, high technology, energy, services, retail and wholesale industries.

Clearly, new supply chain strategies are opening up competitive advantage opportunities to those with the ability to execute at a high level of performance. Companies that fail to energize their supply chain by implementing new and innovative business models may face significant obstacles in delivering expected profitability on the long-term basis.

The supply chain executives and managers participating in the survey identified three areas of focus, namely, profitability, performance and partnership. For them, profitability has become the new top objective of SCM. Pure cost reduction and pure revenue increase will be secondary objectives if they do not lead to increased profitability. The quest for profitability is demonstrated through supply chain initiatives that can deliver a rapid return on investment.

Performance of the supply chain has received a renewed focus, too. Companies are challenged to continuously improve their performance indicators-for example, reduced time to-market, reduced lead times and on-time delivery-and to increase their compliance including adherence to plan and perfect order.

At the same time, companies are broadening the reach of their key performance indicators to measure the extended value chain network that includes their customers, suppliers, service providers and other partners.

In relation to partnership, it is clear that collaboration is becoming the next frontier of improvement to reach a new level of operational excellence. True partnerships are required to develop new, more complex and better products and services faster.

Companies and their partners are hard pressed to produce hybrid and cost-effective products and services, and then deliver them through multiple channels.

In the past, companies have focused on supply chain improvements with initiatives centered on operational excellence- including rapid return on investment -- and cost cutting. Today, new SCM business models are required to meet the expected level of profitability, performance and partnership.

Following the best-in-class supply chain leaders, companies are now investigating how they can leverage the supply chain to outperform their competitors and progress in supply chain maturity.

The survey revealed that today's supply chain executives are concentrating on operational excellence while meeting profitability and other business performance objectives.

Here is what the respondents said in regards to each of the major areas:

In the New Product Development (NPD) area, they reported that cost and time were two crucial factors that were driving their NPD strategy. Product innovation management was essential to optimize the return on investment for NPD.

Companies are developing strategies for cost reduction, which includes increasing the level of commonality of components, platforms and assets for reuse. They are also implementing strategies for revenue growth, such as increasing the speed to market.

Also, many are implementing integrated, collaborative processes with their partners to manage product change and new, derivative product launches.

The second area, Supply Chain Planning, is about sensing and responding to market trends. Advanced planning systems and innovative supply chain practices have been implemented or piloted to increase the responsiveness to customer's demands.

The complexity of products and markets has forced companies to extend their strategy to an end-to-end supply network. Market leaders are increasing their capability to sense market changes while developing capabilities to respond faster through improved collaboration with their partners.

Customer Order Management means real-time processing to ensure superior customer experience. Order-management processing is critical to delivering superior customer service and perfect-order standards.

The demand for on-time delivery against the inability to fulfill sales orders due to out-of-stock conditions continues to be the chief challenge in meeting customer responsiveness and satisfaction targets. It also turns out that companies have been slow to embrace leading customer relationship management (CRM) practices of self-service, automated cross-selling and up-selling and purchasing customer focus groups.

Procurement must go global to achieve the next level of advantage. Today, the trend toward global sourcing is on the rise, with growth rates of 6 percent - 8 percent from three years ago. Attainment of perfect delivery at the original request date is growing rapidly, but supplier lead times have remained somewhat static.

More than 30 percent of the respondents indicated average supplier lead times of 20-plus days. Their information technology focus was on the integration of internal procurement and supplier management functions, as well as on external integration with their trading partners.

The last area, logistics, focuses on differentiating competencies through outsourcing. Specifically in logistics transportation, warehousing/distribution and freight bill audit and payment, outsourcing was a theme for 70 percent of the respondents. Companies are implementing flow-through strategies (cross-checking, merge-in-transit) to provide specialized logistics services by the customer segment.

Over 50 percent of the respondents are achieving order-filled rates of 97 percent or greater, but on-time delivery rates are low. Now technologies, such as Radio Frequency Identification (RFID) are creating significant change in logistics performance and inventory control.

However, the focus for the majority, as evident by this year's results, has remained operational excellence attainment (performance through partnership) and managing the supply chain to deliver increased profitability.

Continuous global and local economic fluctuations have increased the stress on manufacturing businesses. SCM processes are challenged to provide operational excellence, lean, cost- effective and rapid delivery of products and services globally. Product's life cycles are becoming even shorter as customer's demands are becoming increasingly volatile. Markets, supply and operations are becoming progressively more global.

In summary, the results of the 2003 IndustryWeek Value Chain Survey show that new key trends are emerging and evolving. First, Supply Chains increasingly include outsourcing and partnerships, presenting even greater challenges in managing demand and supply, and controlling logistics spending.

Second, real time and accurate access to relevant customer and supply chain operational data, such as inventory, orders and shipments is essential in meeting customer-service-level requirements.

Third, pure product innovation is lessening in importance as the focus moves toward the product time-to-market and life cycle management to support higher sales and profitability objectives. Increased importance is also being placed on product "afterlife" management.

Results also show that optimizing supply chain performance, productivity, and responsiveness has become increasingly important to achieve cost-and-service-level objectives.

Finally, technology components with proven and rapid return-on-investment are favored to support critical supply chain processes, such as leaner manufacturing processes, demand-driven supply chain processes, and customer responsiveness. New technologies, such as RFID, are changing the game in SCM.