Supply chain management is emerging as the way to separate the best from the also-rans. The key is finding a new way of thinking about it. Derek Parker reports.
Professor Hau Lee, Professor of Operations, Information and Technology at the Graduate School of Business at Stanford University in California , has a story that illustrates the importance of clear thinking about supply chain management.
Looking for a range of productivity improvements, Flextronics began to develop a business model of building industrial parks to accommodate its extensive supply needs. The plan was to be able to shorten supply lines and share information and it became a crucial advantage when Microsoft decided to increase production of its Xbox platform.
In the space of 10 years, Flextronics moved from number 22 in its sector to number one.
The case, says Professor Lee (who is also co-director of the Stanford Global Supply Chain Management Forum), underlines the importance of thinking about supply chain management in strategic terms.
Supply chains that focus solely on cost efficiency or material speed cannot sustain long-term success, he says. Companies may gain some ground over their competitors in the short run but may not be able to hold it. Companies today face a multitude of supply chain challenges that did not exist a decade ago. Increasing supply-and-demand uncertainties and the accelerating pace of product and technology changes add an unprecedented degree of complexity. A successful supply chain strategy requires distinct capabilities to meet these challenges.
In Australia, supply chain management is a part of business practice that has come into its own in the past five years, although many companies are still in a transition phase.
There are still of lot of old-guard managers who equate higher profits with increasing sales and a supply chain as just placing purchase orders, says Brad Harrison of Rhaisorn Pty Ltd, a freelance supply chain consultant. But there is a new generation coming up; people who have been through university courses specialising in this area and see it in strategic terms, as a means of adding value and improving competitiveness. The challenge is for them to spread that view throughout the organisation, right up to the top.
This view is shared by Tom Sherlock, Managing Consultant with IBM Business Consulting Services, which provides advice on a wide range of supply and logistics issues.
It’s simply a matter of staying in the race, he told Management Today. But good supply chain management can also be used to differentiate a company, make it stand out in a crowded marketplace. The first step for a company that realises its supply chain management needs to improve, is to understand their existing situation, including their market and the trends operating in it. It can be surprising to find that many companies have not much idea about these basic things. But coming to grips with these issues is crucial in developing a strategic view.
Considered in this way, supply chain management is not just about traditional areas such as transport, warehousing, and inventory control, but extends even to issues such as marketing and product development. It involves seeing other players in the supply chain not just as companies with a contractual link but also as collaborators in a drive for more effective business practice.
Generally, the US is considered to be further along the curve than Australia in optimal supply chain management; in some cases, suppliers and customers are even able to examine each other’s inventory through an intranet. Few Australian companies are at this stage yet, although it is significant that Fosters’ CEO Trevor O’Hoy, in public discussion of his company’s takeover of Southcorp, paid particular attention to supply chain issues.
Sherlock admits that many Australian companies have some catching up to do, although he notes that some major retailers in particular have invested heavily in supply chain management, and are now, he says, amongst the best in the world.
Information sharing is emerging as the heart of good supply chain management, allowing for rapid responses to market changes. This extends to forecasting the demands of end-customers as well as broader economic and financial issues.
Agility is crucial, says Professor Lee. Agile supply chains respond to uncertainties in a flexible, cost-effective manner. Building agility requires strong supplier relationships, the right buffer inventory, appropriate capacity levels, product and process design, parts commonality, efficient logistics systems, back-up plans for supply and logistics, and an information system that enables fast and accurate information on supply and demand conditions.
For this, there must be a good relationship between supplier and customer. Large supply relationships are usually governed by a contract, although Harrison believes that the document should be kept in the bottom drawer. In my experience, good supply relationships are founded on solid working relationships and on a free flow of information. If you are constantly referring back to the contract, it usually means that something isn’t working.
Sherlock takes a slightly different view, arguing that a good contract should be able to stop disputes from happening. It can also be the formal mechanism, he says, that sets out how information will be shared between the parties, and the confidentiality that applies to it.
Smart companies devise relationships and contracts that align their partners’ incentives with their own interests to maximise the chain’s overall performance, notes Professor Lee.
A second dimension here is the alignment of identity that is, the roles and responsibilities of the partners. Issues such as responsibility for replenishment, forecasting, order fulfilment and customer service need to be well-defined and, if need be, redefined.
Rethinking the numbers
Good supply chain management can require a readiness to rethink production methods. There is a growing trend towards more frequent deliveries of smaller volume. While there is great variety between industry sectors, suppliers may need to consider ways to shorten production runs and allow for greater product customisation without compromising overall costs.
You have to be careful of something called the ‘bullwhip effect’, Harrison warns. Think of it this way: a retailer of widgets sees an increase in demand from its customers, so it orders an extra hundred from its supplier. That supplier thinks ‘Well, I’ll produce my usual batch size of 150’, and says to its supplier, give me the components to manufacture 150 widgets. That supplier thinks ‘We’d better make components for 200, just to be on the safe side’. And so on. It’s called a bullwhip because, on a graph, the gap gets wider as you move further from the original orderer. Eventually, someone or everyone gets stuck with a lot of unwanted inventory.
Solving this sort of problem means that you have to listen to your customers, and know enough about their business to understand what they say.
A common dilemma is whether to diversify supply sources. Diversification used to be mainstream practice, as a risk management device. The idea was that if one supplier failed to deliver, others could pick up the slack.
The idea has some sense, but too often the costs aren’t understood, says Harrison . Managing a supply relationship takes resources, and multiplying your suppliers can mean adding to your costs. A good compromise might be to always have a back-up supplier in your phone book, in case something goes wrong; it might even be an event out of the control of the supplier, like a natural disaster. But generally, a single good relationship is better than a number of casual ones.
Sherlock points to a number of developments with the potential to improve the flow of information between suppliers and customers.
We have done quite a bit of work for clients on data synchronisation, he says. This involves drawing on a system called European Article Numbering, or EAN, as a means of describing particular parts and items. The EAN data pool (EANnet), and a method to sustain and update it, can be shared by the participants in a supply chain to ensure that orders are correct and suitable. There is a lot of room for positive leverage in this type of system, and there are obvious opportunities for adding value.
Even more, the next step is radio frequency identification, or RFID, which allows for the automatic recognition and tracking of items along a supply chain or across a distribution network. It’s still fairly new in Australia, although there are some companies, such as Moraitis, a producer and distributor of fresh food, that are using it very successfully.
As for Flextronics, it has successfully extended its industrial park’ approach to low-cost locations such as Hungary and Mexico , investing in facilities for processing and sub assembly as well as utilities and transportation networks. These investments operate as an inducement for suppliers to co-locate in the parks, so that the suppliers benefit from the infrastructure and Flextronics is assured of the inputs that it needs.
Moraitis’ supply chain
Moraitis, one of Australia’s largest fresh produce wholesalers is currently running an innovative Radio Frequency Identification (RFID) track and trace system developed in conjunction with IBM.
Since the system’s implementation at Moraitis’ tomato grading and packing operations at Homebush Bay in NSW and Tatura in Victoria last year, the company has seen a steadily increasing return on investment through an improved distribution system.
The RFID system provides accurate data on origin, packing date, type, quality and size of the four tonnes of tomatoes leaving Moraitis every day. The system has allowed Moraitis to dramatically change the way they do business and has facilitated a reduction in waste, lower inventory and handling costs, and increased accountability and traceability of goods across the entire supply chain.
Key points for managing the supply chain
Freelance supply chain specialist Brad Harrison believes these are the key points for a management team managing the supply chain.
Is there a head of the supply chain function on the management team of the business? This function should not report under operations. The right person in this role will start to challenge your strategy and modus operandi. They will broker new solutions across the business that improve customer satisfaction at the required cost. Look at your organisation and where the various components of the supply chain report to. Will the business be better served by having these functions under a supply chain professional?
Yes, it is important to have accurate forecasts. But don’t forget they are only forecasts. Break down the culture of inflexibility within the business. Why can’t operations shorten the production runs and improve cycle times? Your suppliers will have to re-engineer their business to be able to offer shorter lead times at a satisfactory cost. The benefits of reduced inventory, less obsolescence, greater flexibility and improved customer service should outweigh any costs incurred.
Sales and operations planning
Does your business have an effective S&OP process? Without it your business is probably operating on several plans, one for finance, one for sales and one for operations. You should have one shared plan. Without effective S&OP processes the business is not asking the right questions when issues arise and you will be operating at sub-optimal levels.
Driving a broken process harder will not suffice these days. You must discuss processes and identify inefficiencies within your business. Create a culture of continuous improvement so that you start to treat the root cause and not just alleviate the symptoms. Develop cross-functional teams that are project based to improve ineffective processes. Allow these teams the time and resources to achieve something. Do not expect them to do this in addition to their already busy daily schedules. This may require you to contract short- term resources to assist with project workloads or to provide project management skills to steer the team’s efforts.
Do you have the right KPIs in place that measure the process and operation improvements required across the business? Businesses can spend so much time measuring things that they end up with a lot of data but no real information. Ensure your KPIs do not conflict across functions. The right blend of KPIs will assist in having one plan and real cooperation across functions; hopefully this will remove the silo mentality that can often exist.
Brad Harrison at Rhaisorn Pty Ltd is a freelance supply chain specialist who assists companies to improve their supply chain processes.
- Managing the Supply Chain: The Definitive Guide for the Business Professional, David Simchi-Levi, Philip Kaminsky and Edith Simchi-Levi, McGraw-Hill, 2004
- Supply Chain Management: A Planning Kit, Rodney Overton, Martin Management, 2004
- Essentials of Supply Chain Management, Michael Hugos, Wiley, 2003
- Supply Chain Strategies: Customer Driven and Customer Focused, Tony Hines, Butterworth-Heinemann, 2004
- Supply Chain Strategy, Edward Frazelle, McGraw-Hill, 2001
- Extending the Supply Chain: How Cutting-Edge Companies Bridge the Last Critical Mile into Customers’ Homes, Kenneth Boyer, Markham Frohlich, Tomas Hult, American Management Association, 2004
- Strategic Supply Chain Management, Shoshanah Cohen, Joseph Roussel, McGraw-Hill, 2004
* From ‘The Triple-A Supply Chain’, Professor Hau Lee, Harvard Business Review, November 2004.