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Supply chain improvement efforts, like any project management activity, needs a blueprint to succeed. Without a blueprint, it is not possible to envision how the different pieces fit together within the existing infrastructure to form an integrated whole and finally resulting in delays, rework, and escalating costs. In supply chain management, that blueprint is the Supply Chain Architecture. This supply chain architecture lays out in detail the different processes, applications, and information needed for the evolution and improvement of the supply chain. It clearly specifies the rules about the relationships in the processes between business entities and ensures the alignment between these processes and the supply chain infrastructure.
Companies with supply chain architectures in sync with their business goals have better overall business performance. Their supply chains are "fit for purpose." They're easier to implement and operate. And perhaps most important, they can be reconfigured quickly as business needs change-a valuable source of competitive advantage.
Let's now look at the process architecture, which includes four primary components:
â-†Descriptions of all supply chain processes (plan, source, make, deliver, and return) and the various relations between them
â-†A depiction of the interactions between the supply chain processes and other core enterprise processes
â-†Supply chain support processes, including the data and performance indicators needed for process execution and control must be described in detail
â-†A description of communication processes and data integration and the frequency of the various communication processes
TESTS OF SUPPLY CHAIN ARCHITECTURE
For supply chain process architecture to be effective, it must satisfy the following four tests:
1. The test of strategic fit.
The company's overall supply chain strategy must be the driver of the choices made in the supply chain architecture. State-of-the-art practices in supply chain management are important, but priority should be given to those practices that are truly the basis of competition.
2. The test of end-to-end focus.
The company's supply chain processes must ensure end-to-end management. This requires a set of shared objectives that coordinates the work of each player in your supply chain and also an architecture that provides an end-to-end vision of the supply chain.
3. The simplicity test.
Good supply chain architecture comprises of simple and streamlined processes that minimize the complexities that add cost and reduces manageability and flexibility. The processes should be clear and easily understood by those who use them.
4. The integrity test.
The supply chain architecture must be highly reliable i.e. it must ensure coherent and robust links among processes, data, and information systems.
Let's look at each of these tests more closely.
There are certain best practices as far as supply chain management is concerned some of these have been proven to support effective, efficient performance such as only entering customer order data once, considering the total cost of ownership when selecting suppliers, and using cross-functional scorecards to measure supply chain performance. While these "best practices" may be highly correlated with superior performance, they don't necessarily deliver depending on the company's supply chain strategy. It's important to think critically about why you need to operate a certain way before deciding how you want to operate. Market leaders can be differentiated their deep understanding of the critical supply chain practices which truly support competitive and brand differentiation.
It is possible for any organization to these practices, but, their relative importance is determined by the company's specific supply chain strategy. While thinking of what practices and processes to make part of the supply chain, one must consider to what extent they'll drive forward the supply chain strategy. Just as not all supply chain strategies make sense given the overall business strategy, not all practices are equally important given your supply chain strategy.
Amazon, which boasts of having the "Earth's Biggest Selection of books" provides a good example of how to align business practices with the supply chain strategy. The company that sells millions of different products, stocks only those items designated as top sellers; a vast majority of
products are offered through partner companies or purchased from distributors when needed to satisfy a customer order. This business model means that Amazon cannot directly control the delivery schedule for most products; hence it is not possible for them to follow the best practice of giving customers an exact delivery date when they place their orders. Providing shipment dates is easy if the product is in stock: The customer is therefore informed that the products "usually ship within 24 hours." Recent and actual lead times and are taken into account for other products and quoted as usually ships in x days," where x is consistent with recent activity.
Though failing to perform in terms of this "best practice" Amazon still manages to maintain its customer satisfaction ratings by allowing the customer to check order status at any time after an order has been placed and proactively notifying the customer when each product has been shipped. Also Amazon provides links to the carrier's Web site that allows customers to track order status and the scheduled delivery date after the product has been shipped.
Therefore Amazon's customers benefit from an unparalleled array of products, it achieves customer satisfaction and at the same time it optimizes its inventory investments, keeping supply chain costs low.
Supply chain strategy is dynamic and changes from time to time to suit the changing business environment. Along with this change in in the strategy the importance and relevance of specific supply chain practices changes. In its infancy, Amazon never considered developing a core competency in order-fulfilment management a key element of its strategy. The original business model was to hold zero inventory and simply order products directly from manufacturers or distributors as customers placed orders. The supply chain was designed to take advantage of the fact that warehousing of books (which is its primary product) was already done already by book distribution companies. Amazon planned to only place orders to these warehouses and not worry about managing inventory.
This model however did not provide adequate control over the supply chain and the customer's experience and associated transactions. This led Amazon to build and operate its own warehouses. They invested in some costly physical assets but also became experts at warehousing.
Amazon tripled its warehouse output productivity between 1999 and 2003, through automation and a persistent focus on productivity-enhancing practices. Its operating costs fell from nearly 20 % of total revenues to less than 10 %.
Warehousing performance became so good that Amazon started a side business of running the e-commerce back end of other retailers, including Toys "R" Us and Target. Allan Lyall, Amazon's vice president of European operations, notes that keeping Amazon's supply chain strategy in line with the company's business strategy is a constant challenge. "It's not like we make fundamental changes to our strategy all the time," he says, "but we do make tweaks. That means we need to tweak the associated supply chain processes. For example, we started experimenting with next-day delivery in certain locations. Everything we had done until that time was based on a model where trucks leave our distribution facilities at 8:00 P.M. With the new strategy, suddenly we had to rethink some of our most basic processes-one pickup per day was not good enough."
Mark Mastandrea, director of fulfilment, explains how constant process improvements are managed: "We place an emphasis on understanding each element of the end-to-end process. So even though we have warehouses that were built at different times and therefore have different levels of automation, we break the process into small enough increments that we can get to the point where we have common denominators that apply across all facilities. Then we do internal benchmarking to understand the best way to perform that particular process, and put those practices in place in the other facilities."
Amazon calls this a structured methodology and uses teams consisting of industrial engineers, Six Sigma experts, and representatives from all major functions continuously to "cut" the overall process into increments that can be shared across the company. Mastandrea notes that this approach is effective, even though the warehouse infrastructures can vary significantly. "One warehouse might use processes A and B, and another might use processes A and C. We want to focus on optimizing how we do A [and] then do it the same way in each location." Today, Amazon has moved to a mixed approach consisting of stocking high-volume products and using partners to inventory lower-volume items, as well as large or irregularly shaped items that use warehouse space inefficiently. The disadvantage of this strategy is maintaining single-shipment orders when items originate in multiple locations. Customers can choose to consolidate all items into a single shipment or have the products ship as each becomes available. If the second option is selected, products are shipped directly from the locations in which they are stocked. In some cases, Amazon may not allow the customer to consolidate all items and will ship certain purchases directly from a partner. With the consolidation option, customers pay only for a single shipment, but the cost to Amazon actually may be higher than sending multiple shipments. Each non-stocked item is shipped to one distribution centre, held until all items are received, and then repackaged and shipped to the customer. Amazon uses highly sophisticated algorithms to plan stocking levels and locations to minimize these split shipments; these algorithms are reviewed and enhanced continuously. Allowing the customer to choose the delivery mode clearly enhances the customer's experience and also has a significant impact on supply chain processes. Amazon's process design emphasizes the importance of demand planning to predict sales and to determine the appropriate inventory levels to stock at each location. This focus has allowed the company to become highly efficient at organizing warehouses to stock items close together that tend to be purchased at the same time. One indication of the success of tailoring processes to the strategy has been a reduction in order-fulfilment costs to 9.6 % of sales in the first quarter of 2003 from 10.6 % in first quarter 2002.
While numerous practices can support your chosen strategy effectively, we caution you to avoid the trap of choosing costly leading-edge practices that provide only marginal support. Analyse the contribution that new business practices actually will make, letting your supply chain strategy determine best-practice priorities. These are the practices that you should focus on optimizing.
You know that your architecture has met the test of strategic fit when
â-†The value of new practices is quantified before they are integrated into the supply chain architecture.
â-†New business practices are prioritized based on their ability to drive forward the supply chain strategy.
â-†The supply chain architecture is reviewed regularly to ensure alignment with current strategic direction.
A supply chain architecture with an end-to-end focus identifies where integration-both internal and external-can create value for the company as a whole. Here the word, Integration means shared goals and alignment of the processes, systems, and organizations needed to achieve those goals.
The following example will make the importance of an end-to end focus exceedingly clear.
A global manufacturer of computer peripherals had poor delivery performance relative to its competitors despite maintaining high levels of inventory. The company had invested in a costly, worldwide enterprise resource planning (ERP) system to better manage orders, manufacturing, procurement, and accounting and had completed a number of supply chain improvement projects. Despite all this, it still had poor performance and wondered what was accounting for it. A close look at operating practices revealed that areas such as purchasing, manufacturing, logistics, and sales were focused on achieving their functional objectives-at the expense of enterprise-level outcomes.
The manufacturing department had redesigned its facilities and set up just-in-time (JIT) supplier deliveries, which boosted production quality with impressive results. Total production time, had been cut to less than four hours, best in class for the industry. Similarly, the company's logistics department had achieved industry leading transportation costs by following practices such as allowing only full truckloads to move product from manufacturing facilities to distribution centres.
But because the company couldn't envisage an end-to-end view of the supply chain, these "good" practices actually were hurting its delivery performance. The company's order-management system assumed that product was shipped shortly after production and confirmed customer delivery dates based on the end-production date plus a fixed transportation lead time. As a result, customer orders were being confirmed with delivery dates that couldn't be met. Without a focus on end-to-end supply chain processes, overall results suffered: Despite having more than 80 days of finished-goods inventory, on-time delivery performance to customer commit date was only 75 %, compared with 85 % for the industry leader.
To fix the problem, the company put in place new supply chain processes with a focus on overall business performance. One of the first steps was to define company-level cross-functional objectives-what we call end-to-end targets. To set the targets, the project team created a supply chain scorecard. The critical need to improve customer service and working capital led to targets based on four metrics:
â-†On-time delivery (to commit date).
The percentage of orders fulfilled on or before the internal commit date. Delivery measurements are based on the date a complete order is shipped.
â-†Order fulfilment lead time.
Average, consistently achieved lead time (in calendar days) from customer order origination to customer order receipt.
â-† Cash-to-cash cycle time.
The time it takes for cash to flow back into the company after it has been spent on external purchases. Cash-to-cash cycle time is calculated as total inventory days of supply plus days of sales outstanding minus average payment period for materials.
â-† Total supply chain management cost.
Total cost to manage orders, acquire materials, manage and hold inventory, and manage supply chain finance, planning, and information technology costs, represented as a percentage of revenue. Targets for each of these metrics were based on industry benchmarks, and goals for each function were then aligned to these business level objectives (see Figure 3).
Within each region, finished-goods inventory was held at both the regional distribution centre and the country warehouses. Each country managed its own supply chain operations. This practice led to different work practices and dedicated inventory in each country. As a result, there was no inventory visibility at the regional level, and there could be a shortage in one country and excess inventory in another for the same product. In addition, although each region was up and running on the worldwide
ERP implementation, different countries used their own stand-alone information systems to manage warehousing and transportation.
To put in place an end-to-end management capability, the company had to redesign its supply chain processes and embrace many new practices. One of the first goals was to make better use of the ERP system by consolidating country-level inventory data into a single database to provide inventory visibility at the regional level. Given the promotion-driven nature and short product life cycles of consumer electronics, the company also focused on shortening order-fulfilment times. By consolidating product-customization activities-previously done in each country-into one regional centre and shipping directly to customers, the company was able to shorten lead times and eliminate the need for country-based inventories.
The company reduced the supply chain planning cycle dramatically by redefining the sales forecasting and supply planning processes. The previous processes were based on monthly cycles and provided limited visibility into actual customer demand patterns. The project team set up a weekly cross-functional supply chain planning process using the existing ERP platform and put in place a new advanced planning system (APS). The APS-enabled demand planning led by sales and supply planning managed by logistics, manufacturing, and purchasing. Using the new planning process, the planning group analysed current sales data and promotion information each week to decide on adjustments to the supply chain plan. Although these actions improved overall performance, it became clear that the company would need to improve the flexibility of its external suppliers if its delivery performance targets were to be met. Supplier lead times were long, and the ability to make changes to existing orders was limited. Greater supplier flexibility was needed to avoid costly inventory build-up of products that no longer matched market demand. The company identified the need to integrate business processes with internal key-component suppliers as a priority. Vendor-managed inventory (VMI) was implemented, replenishing component inventories at final assembly factories. High-value items from Asia were replenished weekly by air. This new collaborative planning process cut supplier lead time by 50 % for some key components and greatly increased supply flexibility (see Figure 4).
As this company's experience shows, putting in place an end-to-end process is a major undertaking. Defining and deploying new shared objectives is at the heart of the end-to-end supply chain and can be even more challenging than defining and implementing new practices and information systems. It's critical that companies take the time to define those shared objectives, whether for internal integration among functions or for external integration with customers and suppliers. Without shared objectives, it doesn't make sense to invest in end-to-end processes. When supply chain architecture meets the test of end-to-end focus
â-† Processes and supporting information systems are integrated within and beyond the enterprise-reaching key suppliers and customers.
â-† Supply chain resources such as capacity and inventory are optimized across the organization and with key suppliers and customers.
â-† Standard metrics and quantitative objectives are shared across the organization and with key suppliers and customers.
â-† Performance visibility and management are shared across the organization and with key suppliers and customers.
Complex supply chains are hard to understand, improve, and manage because complexity obstructs the "line of sight" needed to identify what is and what is not working. The costs and risks of complexity are highest when companies integrate their processes and systems with those of their customers and suppliers. When effective supply chain management is dependent on managing beyond your company's borders, each process, data element, and system must be clearly defined and agreed to. And if your internal processes, data, and systems are complex or convoluted, the likelihood of your being able to reach consensus with your supply chain partners is greatly reduced. Simplicity is the solution. But before we see how this complexity can be simplified, let's examine the different drivers of complexity. We see four:
â-† Supply chain configuration
â-† Product and service proliferation
â-† Process and information systems inconsistency
Supply Chain Configuration
The first source of complexity is your supply chain configuration-how you've structured your network of physical assets and distributed activities within that network. The decisions you make to support your channel strategy, operations strategy, and other components of your supply chain strategy can lead to complex supply chain configurations. And complex configurations drive process complexity. Do you have a large number of order-entry desks, warehouses, factories, engineering centres, and other physical locations? Are you trying to manage too many customer and supplier relationships directly? Each location and relationship is another node in the supply chain that must be designed and managed. Consider how Alcatel Enterprise, Europe's largest provider of business voice and data Internet Protocol (IP) servers, simplified its supply chain configuration for business advantage. In the late 1990s, Alcatel management realized that the market for its products-business handsets and PBXs-was maturing. The company had to find a way to improve customer service without increasing costs. Alcatel wanted to provide faster transactions with better traceability while reducing inventory levels and eliminating the need for multiple suppliers across different geographic regions.
For Alcatel, the answer was to adopt a cost-based supply chain strategy with a much simpler supply chain configuration; in its case, this meant outsourcing supply chain operations not considered core competencies. Many of these activities were part of the deliver process-getting equipment to customers, having it installed, and then initiating service. The company decided to move most sales, installation, and service activities to its channel partners, resulting in the percentage of indirect sales growing from 25 % in 2001 to 95 % in 2002. In addition, Alcatel worked on simplifying the interactions with channel partners, creating an extranet - The Alcatel Business Partner Web site, which sharply reduced order-management costs by replacing electronic data interchange (EDI), fax, and mail orders with self-service processes. Alcatel used the move to indirect sales as an opportunity to streamline physical distribution of its products around the world. The company managed a huge number of logistics service providers-more than 30 in Europe alone. These complexities made it difficult to measure and improve supply chain performance, so it decided to move all final packaging and distribution from internal operations to a fourth-party logistics provider (4PL). Alcatel chose UPS Logistics, and UPS now manages relationships with logistics specialists covering such operations as kitting, storage, inspection, final tests, picking and packing, and customer delivery.
Alcatel Enterprise created four standard processes to guide UPS and to ensure integration with its manufacturing, sourcing, and sales departments. Instead of producing to stock based on forecasts, Alcatel used demand frequency, volume, and item value to design differentiated processes that minimized inventory risks while meeting service requirements:
â-† Configure to order applies to telephones with documentation, cables, accessories, etc.
â-† Build to customer order applies to complete systems (chassis and boards) built and integrated per customer order and requirements.
â-† Pick to order applies to high-volume printed circuit boards (PCBs).
â-† Purchase to consumer order applies to high-value peripherals procured from external suppliers
As a result of these changes, customer delivery-to-commit-date performance improved from 65 % in 1999 to 95 % in 2001, whereas total supply chain costs declined from 5.8 to 5.1 % of revenue.
Product and Service Proliferation
Another key driver of supply chain complexity is product and service proliferation. There are two primary causes. The first is a failure to phase out or retire certain products as they are replaced by newly introduced alternatives. The other cause is related to the availability of technologies that allow organizations to "mass customize" their product offerings. These systems, combined with increasingly high customer expectations for products tailored to specific requirements, can lead to an enormous number of product and service offerings. Most companies, therefore, find that they tend to carry an ever-increasing number of products and services. This means more items to plan, source, make, and deliver-all of which drive supply chain costs and inventory.
Motorola's mobile phone division wrestled with product proliferation. Mobile phones have hundreds of components-aerials, battery connectors, PCBs, connectors, integrated circuits, keyboards, liquid-crystal display (LCD) screens, lenses, microphones, phone housings, screws, speakers, and more. Planning for and procuring these components is a challenge in this fast-moving market. Because of this complexity and the growing cost of high inventory levels, Motorola analysed its component mix, seeking ways to cut back. As it turned out, the company was using far too many nonstandard and product-specific components, many of which could not be justified. By standardizing components to a greater degree, Motorola was able to greatly improve flexibility and sharply reduce inventory obsolescence and rework costs.
Process and Systems Inconsistency
A third driver of complexity is inconsistent processes and information systems throughout the supply chain. We often find that different locations within the same company have different, incompatible processes. Even when the same software package is installed, it's often configured differently, in keeping with each location's process. Inconsistency can result from acquisitions, but more typically it arises because companies are simply not aware of the benefits of standard process architecture-or haven't invested the resources needed to create one.
When different locations have different processes and systems, the company loses speed and efficiency and is less able to leverage knowledge across the organization. And each location means added investment and maintenance costs. Inconsistency also creates inflexibility. Work can't be transferred among locations as demand shifts because each site works differently. Moreover, cross site leverage in terms of shared back-office activities, such as strategic sourcing, is harder to achieve.
Finally, process and information inconsistency makes it difficult to integrate with customers, suppliers, and other business partners.
The emergence of decision-making applications for supply chain planning and performance management has led to a new driver of supply chain complexity: over automation. Over automated processes are difficult to manage because the people who use them don't completely understand how they work. Without this understanding, users can't judge the quality of their output or improve their performance.
Supply chain planning tools offer powerful functionality, but rules and algorithms need to be selected carefully, for these systems contain far more features than are needed by most organizations, with some functionality better adapted to some industries than to others. And trying to build models that represent very complex operating environments can itself be a cause of failure. One leading company in the semiconductor industry simply turned off its system after a two-year effort at building a model that represented its multitier global manufacturing network. No matter how you focus your improvement efforts, address supply chain complexity as a priority. Complexity is the single greatest cause of poor investment returns in supply chain management. Even without major changes to business practices, companies can improve performance greatly just by making their operations more manageable and creating the visibility that comes with simplification. In addition, simplifying the existing supply chain is a necessary first step toward more advanced supply chain practices, especially in supplier and customer collaboration.
You'll know that your supply chain architecture meets the simplicity test if
â-† Supply chain process architecture standardization rules are defined and enforced.
â-† Product and service complexity and related costs are measured and tightly managed.
â-† Standards for components and materials are defined and adhered to.
â-† the physical supply chain configuration (warehouses, order desks, factories, supplier locations, distribution centres) is reviewed regularly and simplified where possible.
Your improvement efforts will encounter major delays and budget overruns if your supply chain architecture doesn't have integrity in the form of integrated applications, accurate data, and documented processes. You can't introduce new supply chain practices without a solid foundation.
During the IT investment boom of the late 1990s, many companies added new best-in-breed applications such as advanced planning and scheduling, customer relationship management (CRM), and supplier relationship management (SRM) to their portfolios of systems. These applications often were added without fully reworking the underlying business processes and data. Despite the advent of enterprise application integration tools, the skills needed to create bulletproof integration were not available, and software vendors were slow to provide off-the-shelf integration for common ERP packages. Advances such as portal technology, which can connect multiple locations with multiple applications, are helping to resolve these integration challenges, but many companies still have "applications islands" (see Figure 5)- stand-alone applications that support only one piece of the end-to-end process.
The best supply chains have an integrated flow of information. Unfortunately, too many companies use non-integrated applications that require manual data re-entry, changes in data formats, and multiple quality checks. Missing links between processes and information systems result in fragile supply chains that depend on specific individuals, manual handoffs, and work-arounds. The result is a high risk of error, longer cycle times, and added costs.