SUPPLY CHAIN MANAGEMENT.

Delivering a Competitive Edge

One of the largest cement-producing companies in the world, CEMEX, has embarked on a new global supply chain initiative designed to provide better customer service and reduce costs. In collaboration with its information technology partner, i2 Technologies Inc., CEMEX is transforming its supply chain to move the right products more quickly to its customers through an integrated forecasting and planning process.

"we want to have inventories at the right place, at the right time, in the right quantities, and allocate them to the right customers and channels," said Juan Pablo San Agustin, executive vice president for e-business for CEMEX.

When completed in 2001, CEMEX expects to save US$20 million annually just from its North American operations. Other benefits to effective supply chain management include improved profitability, higher market share and greater responsiveness to customer demand.

In Latin America, as in the rest of the world, effective supply chain management (SCM) is no longer a luxury - it's an essential tool for success in both the B2B and B2C markets. An organization that can order raw materials from its suppliers in the right amounts at the right time can be more efficient in its manufacturing process. In turn, a carefully planned manufacturing process results in reduced waste on the factory floor or fewer wasted hours for a service provider.

Managing the distribution and delivery of a product or service efficiently to wholesalers, retailers or directly to the end consumer is also a vital tool in responding to customer demand - especially as customer expectations for fast service and quality products continue to rise.

With fierce global competition affecting the pricing of many goods and services, SCM provides an opportunity for an organization to improve its operating margins, while delivering better, more responsive service to the customer.

Greater profitability and better customer service are cherished goals for most businesses. But those are only the beginning of the long list of benefits possible through effective supply chain management. Others include:

* Faster time to market

* Lower development costs

* Common business framework with partners

* Rapid exchange of information

* Availability of analytic and management tools

* Reduced inventories

* Assured delivery schedules.

"At the highest level, supply chain management is helping companies make their own operations more efficient," said Lane Smith, president of i2 Technologies in Mexico City. "It's all about helping companies get closer to the customers. That means making the transition to the new economy and taking advantage of the tools now available through e-business."

THE BASIC CONCEPTS

A supply chain is a cyclical system that covers the entire process of how organizations produce and deliver their products and services to their customers. It includes a company's suppliers, who provide the basic raw materials; the distributors who get products to the wholesale or end user customer; and the retailer, who in many cases offers the organization's product to the consumer or business customer.

The supply chain covers all the traditional organizational activities associated with the production and sales process, including:

* Sourcing of raw materials

* Processing customer orders

* Inventory management

* Production planning 

* Distribution and warehousing

* Customer sales and service.

Supply chain management allows organizations to make well-informed decisions along the entire supply chain, from acquiring raw materials to manufacturing products to delivering finished goods to the end customer. SCM lets businesses make the best choices about what their customers need and how they can meet those requirements at the lowest possible cost.

With SCM, the informational linkages between suppliers, manufacturers/service companies, distributors and customers can be complex - making the use of Internet-based solutions virtually mandatory. For example, a Latin American technology company might allow customers to place orders online, then forward those orders to its assembly plant, and notify its distributor of the customer's request so that shipping and delivery can be arranged.

"Online supply-chain management will stay one of the hottest B2B technology fields," said a recent report from the U.S. consulting firm Jupiter Research. "Companies are only now starting to figure out the efficiencies and cost savings they can realize with web systems that allow buyers and sellers to access the same information online."

AN INFORMATION MODEL

Using the Internet as a starting point, numerous vendors have developed applications and systems designed to assist companies with managing some or all of the supply chain process. Today, information technology is the "glue" that makes supply chain management solutions work, according to Charles Poirier and Stephen Reiter, who worked with more than 100 businesses in preparing their recent book, "Supply Chain Optimization."

Technology links the members of a supply chain to the information network, which improves effectiveness, reduces paperwork and pushes costs down. "The emerging concept is to eliminate the significant costs embedded in inventories and warehouses by developing closer links between actual consumption and production," wrote Poirier and Reiter. "Using ever-increasing databases containing information on what has been purchased by specific customers, it is now possible to pull products and services in direct response to what has been consumed."

Technology also opens new informational pathways within large organizations. Supply chain management solutions from companies like i2 Technologies and Ariba Inc. tend to cut across an organization's "silos" or conflicting department goals.

For example, in a large business, the customer service department typically wants to increase inventory and distribution centers in order to be more responsive to customer needs. On the other hand, the financial department looks at inventory and warehousing as cost centers that should be reduced. "New SCM systems allow managers to take a more global perspective to create the most optimal solution," said Smith.

That expanded viewpoint is possible because SCM solutions can encompass both internally oriented enterprise resource planning (ERP) and external customer relationship management (CRM) solutions.

"Despite considerable investments in ERP and supply chain planning systems, companies have found that these systems are focused on internal processes and are not designed to address the unique nature and breadth of interactions between enterprises as they work together to create value," said a recent report by Ariba Inc., a California-based developer of "value chain management" solutions. "Companies need a new class of solutions that are focused on inter-enterprise business processes."

Such broadly based SCM systems cover the entire exchange of information and movement of goods between suppliers and end customers, including manufacturers, distributors, retailers, and any other enterprises within the extended supply chain.

Today's SCM systems cover the entire production and sales cycle in a collaborative process with both customers and suppliers:

* Collaborate with customers to forecast demand

* Prepare a demand plan

* Match the demand to supply

* Allocate supply to customers

* Commit the supply and promise orders

* Deliver to customers

* Collaborate with customers to forecast the next round of demand.

"To meet new consumer-driven challenges, companies are reinventing their supply chains in order to succeed," said Dale Renner, managing partner of Accenture's global Customer Relationship Management practice in Austin, Texas. "They now seek partnerships with organizations whose complementary capabilities can give the whole supply chain a competitive edge. Their goal is to bring together the production, delivery, and service capabilities of multiple supply chain partners, and to have them operate as though they were one seamless organization. This is the driving force behind supply chain synchronization -- the competitive business strategy for the next decade."

CHALLENGES TO IMPLEMENTATION

Latin American companies that seek to benefit from effective SCM solutions can succeed by remaining focused on the end result: an efficient system that builds customer loyalty and retention by meeting their evolving needs.

However, there are some challenges. First is the need to develop faster, more consistent, and much more interactive processes with their supply chain partners. Today, in much of the region, these connections are still largely dependent on phone, fax and personal contact. The growing use of e-mail, online ordering and creation of "extranets," where data is accessible by a select group of vendors, may go a long way toward relieving that problem.

Another is challenge posed by the physical infrastructure in serving diverse Latin markets that may or may not be joined by adequate roadways, railroads or seaborne trade routes. While SCM solutions don't make those difficulties disappear, they do allow businesses to minimize their impact. For instance, if it takes three days for mission-critical parts to travel from Santiago, Chile, to a remote telecommunications facility in the Andes Mountains, a parts depot could be established on site. That way the telecom equipment can be operated with only minimal downtime.

The biggest issue facing organizations may be internal. Transforming an organization that has been successful in the past is never an easy task. But that type of change is exactly what's needed to be successful in the future.

"SCM solutions can clearly help Latin companies move to become more customer-centric," said Smith of i2 Technologies. "With the adoption of new technology and business practices, SCM solutions provide a catalyst for internal change -- with the ultimate beneficiary being the organization's customers."

SUPPLY CHAIN LEXICON

Back-end systems: Legacy enterprise systems that handle order processing, inventory, and receivables management for both buyers and suppliers.

Customer relationship management (CRM): Activities related to developing and retaining customers by establishing and maintaining customer satisfaction.

Direct procurement: Purchasing raw materials and parts needed for manufacturing finished goods.

Electronic commerce: Any of the various computer and telecommunications methods of conducting inter-company business transactions.

Electronic data interchange (EDI): The paperless, electronic exchange of documents such as purchase orders, shipment authorizations, invoices and shipment notices.

Enterprise relationship management (ERM): An integrated information system that serves the "front office" departments, such as sales, marketing and customer service.

Enterprise resource planning (ERP): A software application that seeks to effectively plan and control all of the tasks involved in fulfilling customer orders from order placement through manufacture and shipping. It integrates accounting, inventory, engineering and process, as well as customer information.

Just In Time Manufacturing (JIT): A Japanese management philosophy that has been applied to meet consumer demands with minimum delays.

Logistics: The process of planning, implementing and controlling the efficient and cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption, for the purpose of conforming to customer requirements.

Materials requirements planning (MRP): Managing the materials required to produce products. This includes collecting, inventorying and distributing parts in the most cost-effective and efficient means possible.

Parts warehousing: Maintaining a supply of mission-critical parts at a customer's site or in a central depot for delivery on an as-needed basis.

Supply chain: A series of organizations involved in creating a product or service, from raw material extraction to delivery to the end customer and final disposal or recycling.

Supply chain management (SCM): A strategy where business partners jointly commit to work closely together to bring greater value to the consumer and/or their customers for the least possible overall supply cost.

Supply chain planning (SCP): Activities such as creating a set of suppliers, responding to buyer forecasts, or generating internal forecasts of usage.

Universal description, discovery and integration (UDDI): A platform-independent, open framework for describing services, discovering businesses, and integrating business services using the Internet.

SOURCE: thesupplyChain.com, ValuEdge, Inc., and Ariba.

CRITICAL PARTS LOGISTICS

For Latin American technology companies, having an assured source of mission-critical parts is one of the prerequisites for success. By contracting for replacement parts, repairs and service, a fast-moving company can ensure that its critical operations will continue 24/7.

Since its acquisition of Comlasa last July, the UPS Logistics Group has focused on providing Latin technology companies with customized logistics solutions. "We provide critical parts with a response time in keeping with our customers' needs," says Mike Arias, managing director for logistics operations for Latin America and the Caribbean. "We do this by leveraging the UPS infrastructure, which includes air, package and ground cargo."

By resolving complex parts support issues on a global basis, UPS Logistics is a one-stop solution provider, according to Arias.

Raul Echeverria, operations manager, adds that UPS Logistics solutions go well beyond simply stocking, maintaining, importing and distributing parts. "We dispatch technicians to the site who are trained on a customers' technology, bring the parts back to our facilities and repair them if necessary," he says.

UPS Logistics is currently assisting technology companies like Hewlett-Packard, Dell, Compaq, Cisco and 3Com. "This model has been very well-received in the market," says Echeverria. "Our biggest challenge has been to grow fast enough to meet the needs of our customers. We already have a presence in more than 40 countries in the region."

The UPS Logistics Group, a subsidiary of United Parcel Service Inc. (NYSE: UPS), offers these key services: supply chain management, transportation services, logistics technologies and service parts logistics. For more information, visit www.upslogistics.com.