SCM: Close knit

Supply chain management needn't be a complicated process, but close relationships with business partners online are crucial. One...

Supply chain management needn't be a complicated process, but close relationships with business partners online are crucial. One slip-up can jeopordise the strength - and success - of the chain.

Like e-commerce itself, e-supply chain management is still in its infancy, and any software or Web exchange company that says otherwise is being opportunistic. For all the reports that have been published, the integrated, online supply chain remains, for the most part, a distant dream.

That's not to take away from its potential, or to suggest that companies are not investing heavily in this area, but organisations can relax if their only driver for investigating online supply chain management (SCM) is peer pressure and a fear of being left behind.

As Alan Lawson, research analyst at Butler Group, points out, the UK is actually at an advantage being behind the US in online SCM adoption, because it can learn from the mistakes made over the water. Some early projects were over-ambitious, resulting in a lack of perceived return on investment and mistakes being made through over-reliance on automated processes.

Lawson uses the debate about the relative merits of private and public exchanges as a good example of the lessons that can be learned from early US-based experiments. "The past year or so saw a huge spike in the belief that public exchanges would thrive and drive new value into trading relationships, but the exact opposite has proven to be the case," he says.

Market analyst firm AMR Research specialises in tracking the SCM market. Nigel Montgomery, research director for European e-business, defines the supply chain as "everything that moves" in the process of doing business, from how goods are bought and sold to how invoices are generated.

"You can't look at any of it in isolation," he says, arguing that it is unwise to invest in e-procurement, e-planning or online collaboration systems without making sure internal back-office systems such as ERP are appropriately enabled.

The implications and potential benefits of moving the supply chain online are multiple. The negative implications are that it could mean layers of the supply chain getting squeezed out as their lack of added value becomes more transparent.

It could also mean redundancies as processes become automated. Even more controversially, smaller companies at the bottom of the supply chain could feel bullied into investing substantial sums in new technology just for their larger customers' convenience, as was the case with EDI.

Then there's the impact of bidding wars on suppliers' margins, as e-procurement processes seek to drive prices down by making it easier to compare suppliers' costs. For those whose differentiators lie in value-added services rather than rock-bottom pricing, the Web can be a cruel trading environment.

On the plus side, a collapsed, automated supply chain could revolutionise business for all parties involved. As a result of automating its promotions planning activities, for example, Sainsbury's has reduced its stock piles from four to five weeks worth to just one week, and claims to be enjoying millions of pounds worth of savings.

"And that's just the win to Sainsbury's, not even mentioning our suppliers," says the company's central supply chain manager, Dave Simister, who admits that Sainbury's used to be very arrogant, holding back forecasting and planning information from suppliers, resulting in massive overstocking, poor promotional roll-outs, frustrated suppliers and dissatisfied customers

Political and cultural issues
Achieving an efficient online supply chain management system is a considerable undertaking, however. As well as overcoming the political and cultural issues, such as issues of ownership, getting other suppliers on board, and trust and competitive privacy issues as suppliers are called upon to share sensitive information, there is a host of standards issues that need to be tackled.

In addition to technology standards for exchanging information electronically - XML-based standards are making some headway here - there are the standards concerning the way business processes are handled in different companies.

"If standardisation is to take place at this level, you need the buy-in of business leaders," advises Charles Findlay, lead partner for the European supply chain management practice at consultancy Accenture, which has come up with a five-point plan for achieving an e-synchronised supply chain.

Without common standards for information exchange and process integration, smaller companies face substantial costs if they seek to comply with the online supply chain demands of each of their major business customers. If each company does things differently, the implications for suppliers lower down the supply chain may be worse than when large companies began imposing EDI requirements.

This is one of the reasons why online exchanges have risen in popularity. These seek to provide a single place where partner organisations in a supply chain can share information and place orders, without having to invest in multiple points of system integration.

Typically, these are industry-specific. Examples include consumer products network Transora, automotive industry network Covisint, petrochemical industry exchange Trade-Ranger, and chemicals industry exchange Envera. Some exchanges are public while others are closed, private trading networks.

The trouble with exchanges
The trouble with public exchanges is that they tend to focus on the e-procurement element of supply chain activities, encouraging companies in a particular industry to promote their wares in one place, with visible pricing, so that larger suppliers can then command the best deal.

For the likes of Shell, which wants to track all available goods and compare pricing, the benefits are clear. For the smaller supplier wanting to get in front of the likes of Shell, there are benefits too. The trouble is, the emphasis quickly becomes price, driving the smaller supplier's margins down.

To encourage smaller suppliers to join in, larger organisations are now helping their smaller partners publish their catalogues on these exchanges, offering them free tools and providing general help with getting online. Private exchanges, on the other hand, are designed more to encourage tighter integration between existing business partners and greater collaboration through the sharing of commercial information.

"Here, the technology is supplementing already trusted trading relationships rather than trying to create new ones," says Lawson, arguing that this is important for the success of an online SCM initiative. Again, the emphasis is visibility, but now in the interests of member suppliers being able to achieve greater efficiencies in their own businesses as they plan stock levels and production schedules.

If all suppliers in the chain are candid with each other about their sales forecasts, for example, and are prepared to share this information online and in real-time, each party can make advance provision for future orders, but without undue wastage.

The only real question hanging over private exchanges as the ideal medium for such information-sharing to take place is whether these add any value over and above the existing extranet and EDI facilities. For SMEs with less sophisticated IT infrastructures than large suppliers, the required investment to become part of an additional electronic exchange forum could be too much to bear.

As with public exchanges, the suppliers with the most to gain will need to provide substantial incentives to get smaller players on board, preferably positive ones rather than bullying tactics.

Get to the heart of success
However companies decide to share their commercial information, industry analysts now agree that visibility of information and collaboration lie at the heart of effective supply chain management.

While organisations are undergoing the necessary mindshift to make this happen from a business perspective, the IT industry has its work cut out, making sure collaboration is possible technologically. "In the software industry, 20 minutes after a new concept has emerged, everyone claims they can offer it," says Montgomery.

"This is what's happening now with supply chain software vendors; they're all claiming to offer collaboration, but they don't." In the meantime, AMR has defined an Enterprise Commerce Management framework which encourages organisations to prepare for greater collaboration internally by getting their own systems in order, while at the same time allowing for flexibility in the way that companies may collaborate in future.

The blueprint moves away from the idea that there will be one set way of collaborating and recommends an internally integrated architecture that has the flexibility to cope with new applications as they come along. Montgomery suggests that in future, for example, collaboration between suppliers may lead to the introduction of a commerce document - a universally recognised, central point of information relating to all aspects of a supply chain business transaction, negating the use of invoices, sales orders and advice notes.

Any plans for collaboration must be able to incorporate this type of innovation. The likes of SAP and i2 are also now investing heavily in helping organisations get a better handle on their internal activities, by promoting supply chain event management applications which help businesses focus on processes inside their own organisations to provide better visibility and control as they prepare for online collaboration.

Bringing in a third party
If all of this sounds unwieldy, an emerging option for companies anxious to improve their supply chain efficiencies is to outsource the technology - or even the entire supply chain management operation - to a third party.

A growing number of software vendors, including Microsoft as well as specialists such as Virtual Supplychain, are now providing ASP services to encourage smaller businesses to take advantage of applications such as ERP and SCM, without having to take on board all the technology issues.

Alternatively, why not hive off the entire supply chain operation to a third-party logistics (3PL) company, many of which are broadening their services to include full supply chain management services?

For example, Hays now runs the Kentucky Fried Chicken supply chain operation, and Unipart does the same for Jaguar, leaving those companies to concentrate on their core businesses.

Interestingly, several of the SCM software vendors are targeting their applications at these companies, reflecting the expected growth in these services.

The supply chain at Sainsbury's
When Sainsbury's got knocked off the number one spot a few years ago, the company had to ask itself some painful questions. A major problem area was in-store promotions. "We wouldn't talk to our suppliers about the details," says central supply chain manager Dave Simister.

As a result, when a promotion came around, the suppliers had to second-guess the supermarket chain about stock levels and where the displays were to be set up. "The impact was either overstocking, or that the customer couldn't get hold of the product because we'd run out, or it was in the wrong store."

Promotions are big business for Sainsbury's (the company does 500 promotions in any one week, with a large variety of suppliers), yet they need careful planning because of their relative unpredictability. Simister's team set up a pilot project with one of its suppliers, Nestle, to determine where the heart of the problem lay.

The idea was to map out the entire supply chain and be frank about any problem areas. The process lasted six months and involved no technology. "We found that communication was at the root of the problem," says Simister. So Sainsbury's piloted an application from Eqos which provides workflow management and data sharing online.

The initial pilot involved 100 suppliers; now the system has been rolled out to the company's 500 promotional partners, with impressive results. The improved communications have led to a reduced inventory pipeline of one week, compared with four to five weeks previously.

Because of the ability to perform 'What if' forecasting, which means Sainsbury's is now taking less of a risk on surplus stock, the company can also afford to be more ambitious in its promotions. It recently achieved a typical year's increase in beer sales in one 'buy one get one free' promo.

Without this move to online information sharing, as well as the cost of financing additional stock, at the rate Sainsbury's was going the company would have had to construct three additional depots at a cost of millions due to the rise in promotional stock it was carrying. Simister describes the overall savings as considerable.

Additional benefits are improved supplier and customer relations. Faster response times once promotions are live in-store mean that early forecast adjustments can be passed directly on to the chain's suppliers. "Because we now share all this information daily online, our suppliers can react too," Simister says.

Accenture's five steps to the e-synchronised supply chain

1. Operational excellence: make sure your own house is in order before trying to open up your systems to others in the supply chain, and make sure you support open standards.

2. The Web-based breakthrough: now add in the Web as a medium.

3. New relationships: use your new openness to court the best partners.

4. Managing complexity in real-time: take advantage of sophisticated tools and processes to share and respond to once complex scenarios in real-time.

5. Optimising around the unexpected: take advantage of your ability to be more responsive as the expected becomes the rarity.

Read more on Business applications