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Supply Chain Management
Supply chain management (SCM) is changing as companies continue to look for ways to respond faster, improve service for customers, and maximize sales while decreasing costs. SCM solutions must support highly configurable products, such as computers and automobiles, global markets with local specifications, and widely dispersed suppliers and partners. Yet most companies’ SCM solutions are linear, sequential, and designed for controlled conditions. They rely on accurate forecasting of demand, but are disconnected from the actual demand. Decisions are made centrally, and changes typically take days, weeks, or even months. However, companies increasingly need to respond to changes in hours and minutes. Supply chains in this century must be adaptive and provide greater visibility, velocity, flexibility, and responsiveness to enable enterprise value networks to adapt to changes in supply and demand in real time.
Management Shift
As supply chain networks extend across organizational and geographic boundaries, companies must find ways to manage the unmanageable. The future of supply chain management lies in the ability of the enterprise to respond instantaneously to shifts in global supply and demand, and to major events that occur across extended supply chain processes. The faster a supply network can adapt to these events, the more value that will be created. For example, with Walldorf, Germany-based SAP® mySAP™ Supply Chain Management (mySAP(tm) SCM), enterprise systems supplier SAP is delivering what it believes is the most adaptive supply chain management solution available on the market. In addition, SAP is developing adaptive-agent technology and repair-based optimization that is expected to enable the next generation of adaptive solutions and services.
Supply chain management is now the key to increasing and sustaining profitability. In fact, Stamford, Connecticut-based Gartner Group recently predicted that 91 percent of leading companies that fail to leverage supply chain management would forfeit their status as preferred vendors.
According to SAP, mySAP SCM has demonstrated bottom-line benefits for its users. For example, New York, N.Y.-based Colgate-Palmolive increased forecast accuracy to 98 percent, reduced inventory by 13 percent, and improved cash flow by 13 percent. The reason: mySAP SCM enables end-to-end integration of supply chain planning, execution, networking, and coordination.
The Profits of Adaptive
Proponents of adaptive supply chain networks say that by sharing information about customer demand with all partners simultaneously—rather than in the traditional, sequential fashion, with its inherent delays—network partners can act more like a single entity to stay in-sync with customer needs.
The adaptive supply chain network puts the customer at the center of all activities in the supply chain, which allows companies to improve overall costs and profits across the network, instead of just shifting costs to other parts of the supply chain. Given the dynamics of today’s markets, manufacturers need to rethink their business model on an almost continuous basis, keep redefining markets and pricing, serve ever-smaller customer niches, and provide increasingly customized products.
Internal integration helps enterprises break down functional silos and share actionable information. The adaptive supply chain network relies upon real-time integration of all supply chain systems, including networking, planning, execution, coordination, and performance-management systems. But, it also requires integration across systems that support a variety of functions beyond the traditional supply chain.
Customer relationship management (CRM) is about capturing customer requirements, building life-long customer relationships and brand value, and influencing demand through promotions. This information must be fed back into the supply chain network to improve planning. Although this flow of information generally does not occur now, it represents the key to customer-segmentation strategies and effective demand management, which will lead to increasing overall profitability. Customer feedback and trends must also drive product development to ensure that products are designed according to customer requirements.
In addition, integration between a product life-cycle management (PLM) system and an SCM solution reduces time-to-market for new products and ensures that engineering changes are seamlessly integrated back into manufacturing. Last but not least, aligning a company’s business model with operational capability requires engineering and sourcing products differently. To support mass customization and postponement strategies, products tend to be designed in a modular fashion and sourced from fewer strategic suppliers. Close collaboration with these suppliers on product design is essential to reduce time-to-market, increase product quality, and ensure that products are designed for supply.
With that kind of integration, a superior understanding of the customer drives everything—CRM, product design, supply chain operations, and even the value proposition of the entire network. In an adaptive supply chain network, SCM, CRM, and PLM must all work together. That is the hallmark of a truly customer-centric organization—and the key to profitability.
Competitive Advantage
Making adaptive supply chains a reality means fundamental changes in a company’s internal operations, starting with the integration of processes and systems across organizational boundaries. Then, companies can leverage the increased visibility within and across organizations to achieve change in their supply chain processes, including functionality for the following.
Adaptive Planning
Today, most supply chain planning and scheduling systems rely primarily upon historical data collected from enterprise resource planning (ERP) and legacy systems. However, as companies aim to create virtually “inventory-less” supply chains, they require the ability to realign demand and supply almost continuously to consider the latest demand situation and supply status. Adaptive planning replaces batch-oriented, period planning with an event-driven, real-time response to demand signals and changing supply situations.
Dynamic Collaboration
Traditional supply chains rely mostly upon inventory and assets, but the adaptive supply chain network is information-based—it uses shared data for planning and execution processes. By incorporating data garnered from collaborative processes (such as vendor-managed inventory [VMI]; collaborative planning, forecasting, and replenishment [CPFR]; collaborative supply management; and collaborative transportation management), these networks replace inventory and capacity buffers (long used to make up for a lack of supply chain visibility) with information.
Distributed Execution
Most execution systems are ill-prepared to support the emerging virtual supply network. Distributed execution considers the distributed nature of processes in a world of outsourcing, in which multiple partners in the extended network might manage a single process. Distributed execution allows the management of processes across different ERP systems by supporting cross-system integration and collaboration.
Event-Driven Coordination
Today, even small disruptions in supply chains initiate a wave of e-mails, faxes, and phone calls just to keep pace with the problem. Adaptive supply chain networks address the challenge of managing the virtual enterprise through up-to-the minute monitoring and control of business processes and the rapid, intelligent resolution of exceptions. Event-driven coordination complements adaptive planning by trying to solve supply chain exceptions locally to support existing, optimized plans. The result? Faster response to market changes and instantaneous adaptation to customer needs across the enterprise and the network.
Continuous Performance Management
Most executives would agree that consistent performance metrics are the key to steering the behavior of individuals and reconciling conflicting goals across functional areas. However, key performance indicators (KPIs) also play a major role in managing collaborative processes and in providing decision makers with actionable information to increase the quality and speed of decisions.
Continuous performance management enables closed-loop learning processes by allowing the company to measure the quality of processes constantly, and by feeding this information back into supply chain planning. Besides addressing the need for consistent performance metrics, companies are increasingly complementing supply chain KPIs with balanced scorecards to get a level view of the state of the organization, and to align operational targets with strategic objectives across functional silos.
Combined, these elements enable companies to implement closed-loop learning processes across the supply network. In business, the ability to adapt to change is increasingly important. For those who do it right, the adaptive supply chain network will be an important competitive weapon. Those who don’t may well become the dinosaurs of their industries
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The Manufacturing E-Commerce Bottom Line
The economic downturn in the United States has played havoc with the country’s manufacturing and engineering sectors for more than three years, leading to the longest continual month-over-month decline in industrial production since World War II. But, if there is a bright spot in what economists are predicting for manufacturers in 2004, it is a trend toward increasing e-commerce revenues and initiatives within the industrial sectors.
The Federal Reserve recently reported that production in American factories fell 3.3 percent. The September 11 terrorist attacks created additional uncertainty in all markets, but particularly in manufacturing, where inventory levels among retailers and suppliers were already high. Consumer spending for durable goods took a drop in the wake of the attacks and as a result of the developing war on terrorism. Analysts also say they do not expect an uptick in manufacturing production until consumers begin spending with confidence.
Still, companies like General Electric and General Motors were reporting increases in online sales and predicting gains in e-commerce by the end of 2003. Officials at GE indicate they expect to increase the amount of online revenue calendar-year-over-calendar-year from $9 billion to $24 billion.
Historically, online revenue figures in manufacturing, engineering, and supply sectors have been difficult to determine, because most companies in those sectors do not separate online revenue from other income. Economic statistics compiled by the U.S. Department of Commerce and others have consistently noted that although e-commerce activities have continued to grow despite unfavorable economic conditions, determining the exact portion of the national economy they represent is difficult.
A recent study by the National Association of Manufacturers (the leading industry group of industrial producers) saw dramatic increases in the number of companies developing Web-based activities to reach both new customers and suppliers. Despite the intense hype surrounding e-commerce, right now it’s still just a small fraction of most business and manufacturing operations. But, nearly three quarters of the companies surveyed reported they were developing e-commerce initiatives to grow their revenues, a harbinger of dramatic change down the road. As capital spending rebounds, there should be a significant increase in networking and business-to-business software investments.
In another recent study of e-business activities within the manufacturing sector (commissioned by Interbiz, a division of Computer Associates International), a significant increase in focus was shown on e-commerce activities in 2002 within manufacturing and related industrial areas. According to the survey, 56 percent of manufacturing concerns indicated they were actively involved in e-commerce, with 89 percent reporting effectiveness within their e-business strategies; 22 percent reported those activities as “highly effective.”