The Technology-Enabled Supply Chain Network.

Executive Summary

Top-level managers have recognized the strategic significance of supply chain management Advances in technology have created many new opportunities to enhance supply chain networks for greater profitability.

Five years ago, if you had mentioned supply chain management to a typical CEO, you may have been met with a blank stare and little interest. However, today the topic is firmly at the top of the CEO'S agenda and a hot topic in the general business press. A study completed last year by Cap Gemini Ernst & Young and Industry Week magazine surveyed companies from multiple industries to discern best practices, performances, and barriers to successful supply chain management. One of the key findings was that in two-thirds of the companies surveyed, the CEO or a vice president had responsibility for the supply chain. Clearly top-level management has recognized the importance of this strategic area and given it the priority it requires.

This article will explain the changes wrought by technology; the supply chain challenges of select industries; and how an effective supply chain impacts shareholder value.

Technology changes

Technology has been at the center of changes taking place that affect the supply chain. There are two key technology factors that have had enormous impact on how companies manage their supply chains: the Internet, which allows for connectivity and collaboration, and the ready availability of tremendous computing power, which allows for optimization.

The Internet has fundamentally changed the manner in which businesses interact with each other and the way businesses interact with customers. Consumers can go online 24 hours a day, seven days a week and have access to myriad goods. The supply chain challenge is to ensure that the goods ordered are delivered to the consumer when promised. The downfall of some popular Web sites has been their inability to deliver on promises. Many e-commerce companies learned the hard way that a nice user interface is a necessary but not sufficient component of success. When customers place orders, they expect to receive their items on the date promised, They also expect up-to-date information about inventory availability, shipping status, and backorders.

The Internet presents challenges as well as opportunities. The upfront ability of customers to connect and order over the Internet creates tremendous challenges for the back-end supply chain to deliver on those promises. There are fundamental differences in the business-to-consumer supply chains that serve Internet business and those that serve more traditional business models. In supply chains serving Internet businesses:

* Customer expectations are higher. People order online for convenience, and therefore they anticipate a very high level of service.

* Fulfillment of e-commerce orders requires the shipment of small packages as opposed to the bulk shipments most companies are best equipped to handle.

* Returns become a significant requirement and a significant logistical problem.

* Customers are interested in unique configurations of products as opposed to standard models. However, they also want the low cost that results from standardization. This is the challenge of mass customization.

* Customers want real-time information about the status of their orders. They not only want to have visibility about the shipment, they also want to know if the shipment is deviating from its schedule.

All of the above create challenges that must be addressed by the business-to-consumer supply chain.

The Internet has created an unprecedented ability for companies to connect and collaborate. But in fact, the Internet may have more potential for impact in the business-to-business arena than it does in the business-to-consumer arena. The Internet can fundamentally change the way whole industries operate and deal with customers and suppliers. Instead of single-enterprise linear supply chains, there is an evolution toward interconnected supply chain networks of suppliers and customers.

In the traditional linear supply chain model, a company will plan inventory and production levels using forecasted estimates of sales based on information that may be three or four levels removed from the end consumer. Based on the plan, the company will

* buy direct materials, then

* make the product, and

* move it to a distribution center to wait for an order to arrive to

* sell the product.

Information about what is sold is then gathered and used in the planning process. The problem with this model is that the majority of the supply chain has little or no visibility to true customer demand and is operating in a reactive mode, not really knowing what level of demand to expect until an order arrives. Product is flowing linearly in one direction and information is flowing linearly in the other.

In the Internet world of connectivity, there is an opportunity to change this model and transform the entire supply chain - from supplier's supplier to customer's customer. In so doing, every member of the supply chain becomes connected to part of a larger network. Each member of the network can be apprised in real-time of true customer demand and understand the impact of that demand on their operation. The sell function moves to the front of the process line, and the entire supply chain reacts to actual customer demand. Buying, making, and moving product throughout the supply chain of suppliers and service providers occurs in synchronous fashion to support real customer demand. Additionally, instead of merely reacting to demand, the supply chain network can influence demand by dynamically pricing product based on available inventory and capacity in the network. With dynamic pricing, available supply is marched to demand, which reduces excess inventory and maximizes revenue. Instead of being reactive, the sup ply chain becomes adaptive.

The second technological factor that has had a strong influence on how the supply chain can be managed is the inexpensive, almost universal availability of considerable computing power. The supply chain is a complex structure with many constraints, processes, and requirements. Modeling the supply chain and minimizing costs can require complex mathematical structures. In years past, modeling and scheduling tools for supply chain optimization were typically run on a monthly basis because of the time required to complete the computations. Today, optimization can be done on a real-time distributed basis, allowing for decision support technology to be built into and implemented throughout the supply chain.

Supply chain challenges

The combination of Internet access and computing power has dramatically changed the options available for managing supply chains. The result is that supply chains can be managed much more effectively Companies that effectively use these capabilities will develop adaptive supply chains in which:

* all members of the supply chain -- from supplier's supplier to customer's customer -- are connected through the Internet, allowing accessibility of information about inventory status, production capacity order status, and customer demand.

* Companies throughout the supply chain use shared information to make decisions collaboratively about supply chain planning and execution.

* Decisions are made in real time using up-to-date information on event status in the supply chain.

* Revenue and profit are used as the performance metrics for the supply chain.

Those companies that transform themselves to take advantage of the capabilities will thrive; those that do not will be at a tremendous competitive disadvantage. Supply chain challenges and solutions vary across industries. Following is a brief discussion of several key industries and their unique challenges.

Companies in the high-tech industry have been leaders and some of the most effective in terms of adapting their supply chains. Because of the very short life of most of their products, the industry's supply chain must be adaptive and responsive. At the end of a product's short life, its value falls dramatically. So to ensure profitability, there must be a tight connection of supply and demand as well as excellent customer responsiveness and communication throughout the supply chain.

Outsourcing is used often in the high-tech sector, with contract manufacturers and third-party logistics providers frequently a part of the supply chain. The supply chain, therefore, is very much a network of interconnected service providers that must be given up-to-date information about demand and supply status in the network. The leading practice is for the company to maintain responsibility for the control functions in the network but to outsource much of the execution. This tactic provides the company the ability to change service providers without disrupting the network.

Information flow throughout the supply network is essential to provide visibility of product and components to all service providers as well as to provide up-to-date information to customers on the status of their orders. Demand can be captured in real time as orders come in over the Internet, and information is provided to all members of the supply chain network so that they can work to actual customer demand. Additionally, service providers are given visibility to forecasts so they can appropriately plan capacity Accurate information on inventory and capacity allows customers to receive realistic product delivery dates.

Effective companies use dynamic pricing to balance supply and demand. Selling over the Internet facilitates that process. Prices can be adjusted dynamically based on available inventory, production capacity, and the remaining available life of the product. Customers get the ability to compare prices in real time, order over the Internet, and receive accurate delivery data.

In the consumer products/retail industry, one of the key issues is synchronization of supply and demand throughout the supply chain. This industry deals with a significant amount of promotional activity, which distorts the supply chain and prevents an effective understanding and response to true consumer demand. Therefore, an essential area of the supply chain surrounds collaborative decision making between suppliers and retailers so that production can be aligned to real consumer demand.

Collaborative planning forecasting and replenishment is a technique to coordinate demand and supply activities between retailers and suppliers. The process allows companies to share information and collaborate on forecasting and supply planning. The retailer keeps the supplier informed with forecasts, including information about planned promotions. This allows the supplier to plan capacity requirements and provide the retailer with updated information about its ability to meet the retailer's need. In this environment, the retailer will not plan a promotion only to find that the supplier is unable to supply sufficient product to service the promotion.

Collaborative planning forecasting and replenishment has had limited success and application in the industry. One of the issues is that it has involved one-to-one relationships between retailers and suppliers -- each relationship must be developed individually. This structure has limited the application of the process.

In the automotive industry, one of the major challenges is producing what customers want in a short timeframe, thereby avoiding excess inventory of vehicles that customers do not want. Common supply chain issues in the industry include long lead times and excess inventory. Resolving these issues will require a more flexible supply chain that is reactive to actual customer demand. Rather than the current push model of selling what is produced, the industry must move toward a pull model in which production is based on actual customer demand. This model requires a flexible, connected supply chain with excellent communication throughout the multiple tiers of suppliers and service providers. All members of the supply chain must have visibility to and be responsive to actual demand.

A pull demand model allows for dynamic pricing: Revenue can be maximized by adjusting prices based on actual demand and available capacity. Cars in short supply are priced higher; those in excess capacity are priced lower. A pull model based on dynamic pricing and supported by a responsive supply chain can reduce lead times and eliminate much of the excess inventory currently in the automotive supply chain.

Impacting shareholder value

Each industry faces challenges and has opportunities to leverage technology. Those that meet the challenge will realize significant payoffs to the bottom line. An effective supply chain can have direct impact on the share price of a company Listed in Figure 1 are five drivers of shareholder value.

There is significant opportunity to leverage an effective networked supply chain to reduce working capital:

* Inventory can be reduced by connectivity and collaboration among supply chain partners. An understanding throughout the supply chain of true customer demand, coupled with effective demand/supply management, allows inventory to be replaced with information.

* Operating the supply chain in a networked rather than a linear manner changes the flow of cash and reduces the cash-to-cash cycle time. Rather than moving linearly through the supply chain, cash moves more quickly. In a make-to-order environment, it is possible to receive payment from the customer before suppliers are paid.

* Reducing lead-time in the supply chain allows product to be shipped more quickly Therefore, invoices are sent and payments are received sooner.

* Bringing product into the supply chain on an as-needed basis to meet actual customer demand reduces the amount of time parts and supplies sit in inventory and delays the timing of supplier payments.

Clearly, revenue growth has a big influence on company value. But note that we're talking about profitable growth, not just growth. Following are some key supply chain enablers to achieve profitable growth:

* All customers are not equally profitable and therefore should not be treated equally Customers must be analyzed and segmented to determine which are most profitable and what level of service is appropriate for each. High-volume customers may be visited frequently by a sales rep, whereas low-volume clients may be serviced exclusively through a Web site.

* A necessary condition to maintaining a profitable customer base is delivering products to the right place at the right time in the right quantity The connected supply chain allows this to happen by providing visibility throughout the supply chain. When problems arise, they can be immediately identified and corrected.

* Global markets provide opportunities for expanding markets to new customers. The Internet is a key enabler for reaching those markets and serving them effectively

Continual introduction of new and innovative products is essential for growth. The networked supply chain allows collaborative product development, which reduces the time to market for new products.

* Returns processing, spare parts distribution, and customer service are essential for keeping customers happy All are enabled by information and connectivity

* Adjusting prices in line with inventories and capacities allows the maximum amount of product to be sold at the most profitable price. The practice also reduces quantities of excess inventory.

There are many opportunities to leverage the power of technology to achieve cost reductions in the supply chain:

* Process costs can be reduced through a variation of adaptive manufacturing concepts. Adaptive manufacturing builds on lean manufacturing concepts and Internet connectivity and combines them with the adaptive organization. Connectivity enables responsive decision making by connecting the shop floor to the top floor and to customers. The use of real-time data in critical supply chain management applications improves decisions and optimizes the full network of plants and assets. Adaptive organizations will respond to changing environmental and business circumstances through distributed decision making, self-directed work teams, and rapid optimization with the use of agent-based systems.

* The networked supply chain allows optimization of all logistics costs associated with an order: transportation, product handling, and order management.

Sourcing and e-procurement solutions allow companies to connect with suppliers from their desktops and maximize the organization's purchasing power. By consolidating buying volumes, negotiating improved pricing, managing suppliers, and enhancing catalog maintenance and control, direct savings in purchasing costs are achieved.

* Viewing the supply chain as a network of interconnected suppliers, customers, and service providers allows a company to make strategic decisions about which functions should be completed in-house and which should be outsourced. Outsourcing often provides significant cost advantages and allows a company to focus on its core competencies.

* Sharing services with similar but non-competing companies can result in cost reductions.

There are fixed capital efficiencies to be gained by using technology to its fullest:

* Collaboration and distributed optimization throughout the supply chain results in effective demand/supply matching, which leads to efficient use of available production capacity In addition, using adaptive manufacturing improves capacity management.

* Network modeling tools using sophisticated optimization approaches can ensure the structure of the supply chain network is optimizing investments in plants and warehouses.

* Connectivity and communication throughout the supply chain allow for outsourcing of manufacturing and distribution functions, which reduces the need for capital expenditures.

Tax implications in the supply chain network can be substantial. Considering tax implications when structuring the supply chain network can significantly reduce costs. Network optimization modeling must take into account tax considerations to create the lowest cost solution. Some of the key tax considerations include asset and sales locations; transfer prices; customs duties; and commission structures

Summary

The technology revolution has dramatically changed the structure and importance of the supply chain. Those companies that take advantage of the new opportunities by transforming their supply chains will prosper. Those companies that do not may not be around for long.

The Author

Barbara A. Rosenbaum is a director with Cap Gemini Ernst & Young's global business-to-business supply chain service line. In addition to more than 20 years of supply chain consulting and industry experience, she has served on the faculty of Johns Hopkins University and Loyola College, published numerous articles, and been a contributing author of two books. Rosenbaum is the co-author of the recently published book The Supply Chain Network at Internet Speed.