SCM: Watch your step

Having committed to spending $400m (£280m) on installing new supply chain management (SCM) software from i2, one of the leading...

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
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.

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