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Effective supply chain management. (Special Section: Supply Chain).

Supply chain management (SCM) is undergoing a paradigm change in aligning its activities, measures and customer focus. No longer does supply chain management operate as mutually exclusive teams with separate sets of metrics in managing their activities. Today's successful companies use a master strategy or balanced scorecard approach to managing the organization as a connected enterprise.

Scorecards at the enterprise level now include strong metrics for measuring performance throughout an organization. In essence, scorecards include the "vital three" elements -- people, process and enabling technology -- in addressing future growth, enterprise transformation and enterprise resource planning (ERP)-enabling initiatives. The scorecard uses leading and lagging indicators as one overall enterprise blend.

This enterprise blend incorporates the activities of sales and marketing, SCM, the enabling functions of finance, human resources and others, and actually goes one step further. It incorporates external activities and enablers such as bankers, suppliers of goods and services and the customer's customer into the equation, which is imperative. Today's enterprise operates in an environment of end-to-end management, collaboration, vision and working for the good of the customer, stockholders and society, and emphasizes long-term cooperative growth.

Companies are recognizing a need to stretch traditional boundaries. No longer can they count on time-honored factors to spur business growth, such as:

* Improved performance through price increases.

* Decrease manufacturing costs year over year -- for example, a 6 percent per year over three years cost-reduction initiative.

* Line extensions, new products and acquisitions.

Some speak of the supply chain as "the final frontier" -- underscoring the importance of attacking the cost of process inefficiencies resulting from disjointed enterprise activities, and going beyond the "traditional" approaches shown above. Scorecards of forward-looking companies now include supply chain metrics such as shipping accuracy through perfect order metrics, cycle time reduction and others.

The Vital Three -- A New Paradigm

Effective SCM plays a role within organizations that are willing to break down functional silos and eliminate time through speed and process innovation. This is a very basic approach, but hinges on analysis surrounding the vital three factors of people, process and the enabling technology. Wrapping the technology around a well-skilled team and simplified processes will yield the greatest technological advantages and best results, and employing ERP solutions can have long-term benefits.

SCM technology enables operations to perform with greater efficiency, as well as at unprecedented levels of interactivity. However, without incorporating the vital three factors into the solution through enterprise-wide people and process simplification, the organization won't get the desired results.

Management must understand market segmentation and what the customer is looking for. To achieve top performance results, customer expectations must be understood and met.

In the case cited in the accompanying table, the basics of people and process were redesigned prior to installing a technological change. An improvement in line item fill-rate percentages was achieved within a six-month period, among many other things. The client's customers could not understand the internal structure of the organization, nor did they care. However, people and process changes quickly yielded favorable results.

Customer losses -- or non-renewal of contracts at expiration -- serve as a reminder that every order must stimulate an organizational rallying, resulting in perfect execution. Orders must be received, fulfilled, delivered and closed as well as the marketplace expects in order for the organization to have longterm viability.

Supply Chain of the Future

A critical element in the supply chain is the presence of front-end teams operating interactively as one unit, or "face to the customer." The customer expects transactional ease and perfection in order fulfillment and quality. A redefined customer relationship in the enterprise of the future will have a direct correlation to how many times an order is fulfilled correctly on the first try, according to what participants in that marketplace segment are looking for.

The future supply chain organization will be one that feels that it has a direct impact on market share, among many other non-traditional metrics. A company's market share is directly and indirectly impacted by a supply chain organization in the following ways:

* Minimizing warehouse mis-picks, transportation or cross-dock errors, etc., can result in a one-time market share increase within a period. This keeps the customer from moving to a competitor to complete the order, which would cost market share.

* Sustained performance improvements can help an organization satisfy customers and minimize any tendency to go elsewhere.

* Routinely meeting customers basic expectations means repeat business and more customer loyalty.

Both customers and suppliers are striving to improve efficiencies, and a quality customer would love to engage in discussions and interactions in order to avoid inefficiency and subpar performance.

Digital Loyalty Networks

One important concept to ensure long-term sustainability and growth is the use of digital loyalty networks, which use new communication and processing technologies and permit online sharing of information across the enterprise and with trading partners. This creates a true end-to-end interaction, resulting in a network of collaborators and loyalists aimed at satisfying everyone associated with the transaction, business or network.

Of fundamental importance is portfolio management, which sorts out the one-sided expectations that may result from a weakness in the supplier's core competencies, unrealistic customer expectations or other factors. This portfolio approach offers the supplier a choice of dealing with a group of customers or not. It challenges all aspects, segments and needs of the current and desired customer portfolio, and examines whether the supplier can meet certain customers' expectations.

If not, the supplier needs to decide whether it wants to invest in what it takes to make that business work. That decision hinges on issues such as cost or the lack of a core competency. It's commonly recognized that companies devote 80 percent of their efforts to satisfy customers representing less than or equal to 20 percent of their revenue base.

Historically, purging customers was unheard of, and it is still not popular. Doing so doesn't necessarily mean losing share in the long run, since the company would be focusing its energies on building business in the market segments where digital loyalty network members are present. However, knowledge of what you can, can't or are willing to do is a powerful criterion for positioning the company for growth.

Supply chain and technical "collaborators," or those who bridge external and internal activities, along with "loyalists" -- those who interface with the customers -- must operate effectively for digital loyalty's promise to be realized. Connecting the loyalists and collaborators is the ultimate goal for the enterprise of the future. The result is an enterprise approach to optimizing the path for improved return on investment (ROI) metrics and improved business architecture. Digital loyalty networks represent a vision for today and the future. Indeed, many companies are now in the early stages of maturation in collaborative and loyalist activities.

The world is changing more rapidly today than ever before, and enterprise technology professionals are joining with ERP technological enablers in order to demolish and transform the inflexible organizations of the past. The focus is on the one key common denominator -- the customer's order -- which is every teammate's top priority.

To reiterate, an effective supply chain management operation understands the importance of the vital three elements of people, process and enabling technology. Indeed, the mantra among successful SCM teams is adherence to them as the keys to achieving operational excellence through perfect order fulfillment.



Behavior warehousing customer service transportation finger pointing as to true cause of service level breakdowns (fill rates 72%)

Approach functional non-metro driven race for who is the hero (Department/Individual)

Process control non-existent

Communications to executive leadership non-metric driven leading to perceptive not pinpointed actions

Customers threating to switch vendors

Customers could not understand the internal structure nor did they care!


Consolidated departments into one group including planning and purchasing

Metrics driven with teaming customer care teams put in place. 'One face to the market'

Process redesign a part of everyday necessity

Executive sponsorship and buy-in resulted in crisp communications through metrics

Introduced SCM on balanced scorecard for the first time

Fill rates improved within 6 months to 91% by:

Reducing stock mis-picks

Carriers intructed to accept Only perfection

S&OP company wide revitalization

Joseph Slota is a supply chain professional with Deloitte & Touche LLP. He is a former vice president for supply chain management with Philips Electronics NV and held positions in finance, marketing and operations management with Johnson & Johnson, Mobil Oil, Reckitt & Coleman and American Cyanamid.
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Author:Slota, Joseph
Publication:Financial Executive
Geographic Code:1USA
Date:Mar 1, 2002
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