Having committed to spending $400m (£280m) on installing new supply
chain management (SCM) software from i2, one of the leading
vendors, Nike's chief executive, Philip Knight, blamed a shortfall
in footwear sales on the fact that i2's supply planning software
did not work properly.
His statement was one of the first public complaints about
Internet-based e-business projects which, unlike larger
mainframe-based projects, have suffered from little adverse
publicity - probably because those customers feared giving their
rivals the competitive edge.
According to Knight, malfunctions in the system caused trainer
shortages and, conversely, surpluses in some of Nike's Asia plants,
which cost the company $100m (£70m) in sales for the third quarter,
While i2 confirmed there were complications with its Nike project,
it was reluctant to reveal what they were and what caused them for
fear of upsetting Nike further.
I2 already has a string of blue-chip customers, including Proctor
& Gamble, Barnes and Noble, Panasonic, Southwest Airlines and
Toronto Hydro, implementing key supply chain projects.
Analysts believe Nike's problems stemmed from a combination of
factors: the packaged software required a high degree of
customisation to be able to separately forecast both style colour,
and within each colour a separate forecast for each size.
At the time, no package solution was available that could deliver
this level of functionality, so there was no option other than to
customise. Nike failed to realise there was a much greater
difference in the risk profile between implementing packaged
application software that has already been proven to work
successfully, and customising that package hoping it will still
work.
According to i2 executive vice-president Pallab Chatterjee, i2
proposes that customers use its industry templates and recommends
that only 10-15% of the software is modified. "Those who refuse and
start from scratch are the ones that run into problems."
Cap Gemini Ernst & Young's revenue programme leader for supply
chain, Richard Platts, agreed that the more customisation involved,
the more difficult it makes a project. Both SAP and i2 have argued
that the need for customisation of their products is minimal.
Nigel Ford, SAP solutions marketing manager, said that like i2 it
uses industry templates of its software which can be configured,
not customised, to match an organisation's needs. What makes supply
chain system projects more complex is not the number of systems
involved, but how far across the organisation those systems
penetrate, said Platts.
As a result, it is crucial to carry out a pilot project which is
rigorously tested before implementing it across the wider
organisation. According to Ford, the company and its customers are
now splitting projects up into 'manageable chunks'. This is borne
of necessity due to the mission-critical nature of the exercise,
explained Ford.
"At the end of a successful part of a project, this leads to an
earlier demonstration of return on investment, whether that's in
demand planning or collaborative forecasting, whatever it may be,"
he added. "Failure is not an option."
Once part of the project is proven to work it can then be rolled
out to other functions or geographies, and ultimately each
mini-project will be linked together to form one entire supply
chain system. Accenture's SCM practice manager, Alan Day, explained
that in his experience, if senior management buy into a project it
is more likely to result in a successful implementation.
"Often, most of the initiative is created by a middle manager or
someone on the shop floor who doesn't realise the larger business
implications," he said. There are tools and technologies, such as
e-auction software, that can be used effectively to demonstrate the
value of an SCM system, but the downside of these can be that
people think the total business change is purely due to the
technology used, said Day.
"People are looking at the technology as a saviour and I'm looking
at it as an enabler. You've got to look at the business process
change and the technology as a means of achieving it," he said.
Chatterjee agrees. He said it is critical for board-level
management to understand that supply chain software is decision
support software and must be treated with the same rigour of
business process as they would their application software.
Too often, the SCM project becomes an IT project and insufficient
attention is paid to the business implications. In order for SCM
systems to be successfully implemented, senior management must
understand how they want to change their business processes, he
said, and to this end i2 now offers chief executives and
board-level directors a consultancy service and workshops.
Chatterjee said i2 has made "huge progress" in getting these
principles ingrained in the 560 implementations that are being
carried out. I2 has carried out around 9,000 supply chain projects
and has created a business release methodology that has been in use
for two years. In line with other companies, it advocates starting
with small projects first, obtaining the value from those and
proving each one at a time.
In the past, customers would commit to carrying out all four steps
of an SCM project at the outset, but now they want to pay for one
step at a time. "The right way to approach these projects is to
make sure the CEO and board members set improvement targets that
are included in the company financials, as well as a time-line for
these to happen," Chatterjee added.
Regarding Nike, all Chatterjee would say was that the general
principles discussed here can be applied to the Nike project, but
i2 would not clarify whether these are lessons learned from the
experience or whether these principles were applied to the Nike
project.
Day also said that the cultural change required by staff is
underestimated. A common mistake is that, although IT training is
usually carried out, training around the new business processes is
left off the agenda. Ensuring that the supplier is the right
cultural match for the customer is vital. As Platts pointed out, a
project is not going to work if there is a culture clash.
Even when supply chain software projects seem to be implemented
correctly, things can go wrong later. Cisco Systems' supply chain
software, which it claims saves the company around $100m (£70m)
annually, as well as providing gains in shorter time to market,
appears to have come adrift recently. Unable to meet demand fast
enough last year, Cisco ramped up production, but now that demand
is slowing the company has had to write off $2.2bn (£1.5bn) in
goods and materials it cannot use.
CEO John Chambers inferred that its business models were not built
to respond to such a sudden deceleration in market demand. A Cisco
spokesperson said the company's supply chain e-solutions work
effectively, do what they were designed to do, run on forecasted
demand which drives the supply chain, are effective and flexible,
but cannot predict the future.
Demand forecasts are entered into the systems, which determine the
inventory needs based on that forecast, she explained. Inventory
build-up, she said, was due to two factors: a strategic decision in
previous quarters to increase inventory to improve lead times and
meet demand; and honouring long-lead purchase commitments with
suppliers based on anticipated demand, which has since declined
significantly.
Cap Gemini Ernst & Young, however, has been working with Cisco
for about two years on developing an 'adaptive supply chain
approach'. The idea behind this is to improve the system's
responsiveness by having accurate timely data so that the supply
chain system can react to events happening in the outside world.
Cisco is claiming management decisions are behind its inability to
rein in supplies quickly. In which case, what is the point in
having a sophisticated supply chain system if management fails to
use it properly?
The spokeswoman added that Cisco is currently working on a pilot
program deploying an Internet-based supply chain network that links
Cisco with its contract manufacturers, distributors and suppliers
through one central repository. This system is designed to use the
Internet to enable deep process integration of all levels of the
extended supply chain.
It also provides a central point for all supply chain information.
The benefits to Cisco include end-to-end supply chain visibility, a
single demand signal and vastly improved partner
relationships.
Commit to comminication
1. Accenture helped British Airways implement the e-procurement
function of its supply chain with the aim of reducing purchase
costs by $260m (£183m) over two years. But while the communications
strategy was fine, wider business communications could have been
better conveyed.
2. IBM transformed its own supply chain to take advantage of
e-commerce and has saved $9.1bn (£6.4bn). The project has been
complex, but with a successful outcome. At the outset, IBM dealt
with 50,000 suppliers worldwide and approximately 300,000 separate
contracts. IBM's own procurement operations were fragmented so it
centralised these. CEO Lou Gerstner championed the project to
reshape its supply chain and procurement processes to improve
efficiency.