Smart Chains, Smarter Gains

How could Compaq buy out Digital? And why
did Digi-tal lose out on many of the golden market opportuni-ties that were presented to
it much before in time? Answer: Compaq could handle the pace of doing business much better
than Digital. Talk about Dell Computers and the famed Dell marketing model. How could
Michael Dell convert a loss of $ 36 million in 1993 into a profit of $ 149 million in less
than 12 months and then make it a nearly $ 8-billion company in 1997 with record profits?
Answer: Dell got the key to doing business fast.

The key to both these resounding miracles
in the computer business lies in smartening the ”supply chain”, a collection of business
entities or assets involved in the flow of products from raw material procurement, through
manufacturing and logistics, to delivery of finished goods to the customers.

To take a more holistic view of Supply
Chain Management (SCM) and its implications, consider the following statistics:

n In 1996, US investment in business
inventory was $ 1.27 trillion, the financial and operating cost of carrying that inventory
was $ 311 billion, and US companies spent an estimated $ 797 billion on logistics alone,
equal to over 10 percent of the GDP (source: The Yankee Group).

n There is the opportunity to drive $ 400
billion of excess inventories and cost from the retail supply chain, according to Randy
Mott, CIO, and Robert Bruce, Executive VP, Walmart.

n “By controlling our supply chain we
are generating $ 2 billion of incremental value at Dell,” says Tom Meredith, CFO,
Dell Computers.

IT-enabled Supply Chain

Creating A Responsive Supply Chain

SCM looks beyond the physical boundaries of
an organization and aims at leveraging capabilities of all entities. The supply chain of a
company, defined by its customers, suppliers, geographical spread, resources, technology,
and systems, is aligned to its goals.

Creating a responsive supply chain involves
a number of steps: goal setting, module analysis, model integration, and building
responsiveness.

GOAL SETTING: The first
step is to define precisely the goals that are to be achieved. Do you want to improve
service, reduce inventories, or increase time to market? The supply chain goal has to be
in harmony with the organizational goals. While setting goals, it is imperative to
consider customer requirements and expectations. Although, setting goals higher than
customer expectations may result in customer delight, but at the same time it may also put
enormous strain on the company”s resources. This trade-off has to be critically examined.
At some point in the process goal setting, numerical targets need to be made for the
short, medium and long term. Tangible performance measures will assist in monitoring
progress toward the goals.

MODULE ANALYSIS: The
second step is to split the supply chain into modules of procurement, manufacturing,
distribution, and sales. A supply chain is only as strong as its weakest link. Thus, it is
important to strengthen the reliability and efficiency of the individual modules. By
breaking the supply chain into its components it is possible to analyze each segment in
terms of physical and information flows as well as measure the reliability of each
component.

n In the area of procurement, the company
needs to classify vendors into critical and non-critical categories. The considerations
include uniqueness of service, criticality of product, and compatibility. The next step is
to work closely with critical vendors to improve reliability and derive win-win benefits.

n In manufacturing, building process
reliability, upgrading process capability, and introducing flexibility options are
required to be looked at. Capacity and technology considerations also need to be examined
and prioritized.

n Distribution practices and warehouse
management would need to be driven by the goals set out for the supply chain.

n Demand variations and volatility due to
inherent market fluctuations, trade promotions, and new product introductions cause
significant supply chain disruptions and have a major cost impact. Sales need to segregate
demand drivers and track forecast errors. Improving forecast fidelity would be the prime
concern in this step.

MODEL INTEGRATION: Having
improved reliability, the next step looks at synchronization across the modules. For
example, in cycle-time, synchronization of procurement lead-time with manufacturing
lead-time will decide the pipeline inventory to be held. Here, the impact of supply chain
drivers on business economics needs to be assessed. Emphasis needs to be placed on product
flow synchronization by leveraging information flows. The goals set out need to be
revisited and targets revised. The synchronization phase throws up areas of immediate
attention.

IT In Enabling The Supply Chain

Significant IT interventions have enabled
information availability and flows, continuous performance measurement, and feedback
mechanisms, all leading to optimal decision making. Greater sophistication is entering
tasks such as order processing, deand forecasting, and stock control.

The role of IT in supply chain is to assist
in sharing of forecasting, replenishment, planning, and scheduling data amongst different
constituents. Investment in IT across entities should ideally be made during the model
integration phase. Many organizations often try working around their problems by investing
in IT solutions. However, if investments in IT are made without a clear understanding of
physical and information flows and unique aspects of the organization, setbacks are bound
to occur.

ERPs are moving from client server to
distributed objects and from an emphasis on transactional data to workflow processes.
Standard interfaces are available in the marketplace which facilitates movement of data
between entities on standardized EDI formats. The use of Internet and intranets is making
it possible to have connectivity at reasonable costs.

Synchronization is, however, not an easy
task. According to a Coopers & Lybrand survey on European Regional Supply Chain
Integration from 1985-96, in 1985, just below-25 percent companies were aware of the
opportunities generated by integration along the supply chain. Twenty percent were
involved in strategic planning and less than 10 percent were implementing the process.
None had completed it. By 1996, 100 percent were aware of the opportunities, 80 percent
included integration considerations in their strategic planning, and nearly 70 percent
were implementing. Only 20 percent had actually completed implementation. The conclusions
drawn by the survey show that awareness of supply chain integration is easy to create,
strategy planning is straightforward, and start up of implementation can follow readily
but completing implementation is difficult.

BUILDING RESPONSIVENESS:
The final step is to build responsiveness into the supply chain. A responsive supply chain
is required to respond to the volatility of today”s customers and markets. This is done by
instituting feedback mechanisms throughout the chain and linking them to the reward
system. Integration is a prerequisite to bringing agility into the system. Shared
information, compatible measures and incentives, and a focused approach can give direction
to areas of new product introduction, production scheduling, inventory management, and
order management.

The entire process of creating and managing
a responsive supply chain requires a constant focus on the process. Organizations have
responded to this requirement in a number of ways. Some have created the post of a supply
chain manager, who is responsible for meeting the chain targets and seek continuous
improvement opportunities. In addition to creating such a post, key performance indicators
have been drawn. These indicators break up the chain targets into module targets, which
can be managed and tracked.

Ravi Bhamidipati,
Supply Chain Practice Area Leader, and
Clifford Patrao, Consultant, Coopers & Lybrand.

All US examples one would say. But sadly
enough such statistics are not available for India. However, the writing on the wall is
clear: SCM is going to be the key in doing business efficiently in India too. Says Dr
Rakesh Kumar Sinha, GM (Corporate Planning and Information Systems), Godrej Soaps,
“In a market like India which is diverse and fragmented, supply chain efficiency can
bring in marked benefits to an organization.” (see Box: Supply Chain In Indian
context) This is important from a strategic perspective too. According to Anil Malvankar,
Senior Manager, Marketing, SISL, which sells specific supply chain solutions from i2
Technologies, only very efficient Indian companies are able to turn over their working
capital 10-12 times a year, most others do it barely 3-4 times a year; while the standard
of a global company like Compaq is to turn over its working capital nearly 30 times a
year. And the company is aiming to achieve the figure of 40 by the year 2002.

Chicken Or Egg?
If SCM is so important, where should it figure in your automation plan? Says Narayan
Shekhar, Country Manager, SSA, “SCM is most important because it is closest to the
customer. And information should be closest to the person who is in contact with the
customer.” Organizations that are looking for integrated enterprise applications
might do well if they put more money into supply chain planning and management solutions.
Says Bruce Richardson, VP, Research, Advanced Manufacturing Research, “While it is
virtually impossible to justify the cost of ERP systems, the savings to be gained from
supply chain planning systems are unlimited. If a client comes to us and tells us that
they have budget for only one system, we suggest that they implement a supply chain
planning solution.” It, therefore, makes more sense to concentrate on supply chain to
derive the immediate benefits.

Supply Chain
Strategies In The Indian Context

Indian distribution system for FMCGs is
unique in terms of its structure, complexities, challenges, and the huge opportunities it
offers for many products. Large number of echelons in the distribution system does result
in excess inventory carried in the entire system. It also results in higher response time
to any change of demand in the marketplace. However, the challenge lies in building a
robust supply chain system that is constantly adjusting its input supplies based on the
information it receives on changes in the consumer off-take. We also have a highly
stratified system where companies need to sell to a large number of distributors across
the length and breadth of the country. This is in contrast to many developed countries
where a few large chains account for almost the entire sales of the company. The spread of
Indian demand across the entire geography is more challenging compared to many other
developing countries where a few large cities account for a large chunk of the demand.

In such a context, the two major objectives
for FMCG companies would be to keep high level of customer service and manage it with low
inventory in supply chain. This would ensure quick response to any demand changes at
minimum cost. Traditionally, these two objectives are seen conflicting with each other.
However, if one dwells deeper into the real issue, both point toward eliminating various
inefficiencies in the supply chain. In fact, inventories and delayed response are nothing
but a manifestation of such inefficiencies. Unless we systematically drive out these
inefficiencies from a system, a firm operating in the FMCG industry is likely to erode its
competitive edge.

Major elements of supply chain policies
relate to the areas of procurement, manufacturing, dispatching, transportation, inventory,
and indenting. The best practices in each of these areas are well known and well
documented. However, one still finds non-acceptance of these best practices by the
operating managers. “What works for Toyota or Kao would not work for me,”
“Indian conditions are different,” “Theoretical research cannot be applied
to the practical realities,” are the comments frequently heard from such managers.
Let me tell you that these comments are all true. We must remember that each company has
to finetune its own supply chain policies depending on its current practices, culture,
risk-taking ability, and the strength of its products in the market. What works for one
company may not work for another, if the practices are blindly copied without
understanding the underlying philosophy. At the same time, we should not forget that each
of these success stories from companies like Dell, Toyota, and Kao has a lesson for all of
us. When Toyota talks of its Lean Production System, it refers to reduction in batch sizes
and flexibility in production. When Kao describes its efficient distribution system and
fast response time, it is referring to a single set of demand numbers used by all the
operating managers.

What we learn from these success stories is
depends entirely on us. We are free to reject them as not applicable to the Indian system.
On the other hand, we can extract the essence from these stories and improvise our own
policies in highly creative ways to incorporate the best from everyone. The Choice Is
Ours!

Dr RK Sinha is GM,
Corporate Planning and Information Systems, Godrej Soaps.
(Note: Dr Sinha is the only person in India to get a doctorate in SCM.)

All the ERP products have integrated supply
chain functionality. But for getting to the actual benefits of SCM, more is needed.
Agrees, Arjun Erry, Country Manager, QAD Inc., “ERP products have a focus on the
transaction phase of SCM and in the Indian context in most cases where the supply chain is
being automated for the first time, it is more than enough.” The focus of an ERP
solution includes much more than just supply chain planning, whereas supply chain itself
is becoming such a specialized area that it demands special attention.

Many organizations consider ERP and SCM as
two phases of a project. But Beth Enslow, Gartner Group, advises against this: “ERP
projects should be managed as a separate part of the applications portfolio and viewed as
a parallel implementation. In most cases, enterprises should start on supply chain
projects immediately if they want to achieve the quick, incremental value that SCM can
deliver.”

Apples And Oranges?
There are still critical differences between an ERP and SCM-specific products/projects.
ERP projects traditionally seem to be longdrawn and extend over months or years possibly.
Whereas SCM usually takes shorter and the payback is also quicker. Responding to the
changes in market environment like demand, supply, available labor, available machine
capacity, and retail capacity makes an ERP solution look weaker. This is because an ERP is
more internally-oriented. ERP vendors do promise to deliver all the benefits of SCM. But
it is unrealistic to expect that from them. As the two are quite different in their
approach and each one doesn”t do well the job of the other. But from the standpoint of
having a process and transaction-oriented supply chain function within your organization,
an ERP software would do. “An ERP is more restricted to within the organization; true
supply chain planning should be called as customer-centric planning,” says Anwar
Baghdadi, GM, Information Management, Godrej GE Appliances. Furthermore, all the ERP
software have interfaces to specialized supply chain planning modules from third-party
vendors like i2 Technologies, Red Pepper, Paragon, Manugistics, and others.

The New Supply
Chain Model

Larry Chang is the bean counter-with a
difference. As the Financial Controller for HP”s Personal Systems Group, Chang oversees
the entire Wintel business in HP, and in the past several months, has been able to create
the spanking new supply chain model for HP, which, while reducing the inventory at
resellers, will also help Chang to be far more fleet-footed than what he is today.
“The only companies to worry about are Dell and Compaq,” says Chang, but then
adds, “my advantage over Dell is that my partners know the market a lot better than
Dell would ever know.” As a result of this, Chang has developed an ESP model that has
won rave reviews and plans to polish it up with newer offerings this fall. Simply put
Chang divides his entire customer needs into ”configuration flexibility and cost
efficiency”. Between these two axes, HP is able to offer CHiP bundling which is a low-cost
efficient and low flexible option right up to channel assembly, where the partner actually
assembles ”approved parts, and puts together a system as per the needs of his (partners”)
customer. At this level, just about everything is custom-made. Between the two, HP also
offers economy bundles, which are high-volume standard, most-in-demand

Operational Excellence-Supply Chain Progress
YearProgramChannel
Inventory
HP
Inventory
Returns
Rate (%)
1995Build-to
order
6 weeks6 weeks4-6
1996CHiP4 weeks4 weeks1-0
1997Extended
Solutions
Partnership (ESP)
2 weeks2weeks0-1

configurations that are needed by the
partner. This entire system is built on the relationship that the company enjoys with its
partners. So much so, even very large accounts, which come under ”Vendor Express”, are
those which are handled by HP directly, on behalf of the dealer. According to Computer
Reseller News (CRN), which is the largest channel magazine in the US, ”far from vendor
voodoo, ESP-which consists of build-to-order, channel assembly, and traditional
manufacturing-is the best response to the direct threat, channel executives said. Chang
claims that as a result of these initiatives, HP was able to reduce channel inventory from
six weeks to two weeks and more importantly, the inventory that HP was carrying came down
by like a timeframe. Added together, this gave Chang an average of eight weeks inventory,
which was then free. Chang has already set up these initiatives in China and Australia,
and is expanding the scope of these initiatives in Japan. India is next on line, says
Chang, without refusing to divulge any more details. However, this writer came to know of
the company”s imminent plans to set up a ”configure-to-order” plant in India. Chang is
resting on his laurels. In intend squeezing this further, he says. In order to spread the
backward integration of his logistics plan further, he says that most of his ”A” category
suppliers will have their warehouses close to his (HP) plant. If this is taken care of,
other costs will get controlled of their own. Asked as to why should any partner/reseller
participate in his program, Chang is business like, I can help him grow his business and
improve his rate of return by leveraging on his internal assets, and if his business
grows, my business grows. Conventional wisdom here, with a dash of common sense.

What an ERP does is create an
enterprise-wide transaction backbone for all the business management functions of an
organization. It brings in a sort of discipline within the organization. Since by design,
ERP tries to capture all the basic functions, if one needs specialization in an area, it
may need to take recourse to third-party offerings. So it works with supply chain.

The additional functionality that SCM
products like i2” s Rhythm brings to the table is supply planning, demand planning,
scheduling, and logistics management. Such products help companies to optimize their
resources, do better forecasting, and deliver better value by using near-accurate
information. According to Malvankar, “Products, like i2”s Rhythm, take care of causal
factors like price cuts, ad campaign, raw material non-availability etc., and derive an
optimum schedule for procurement, manufacture, and delivery process.” ERP”s main
value-combining financial control with multi-plant manufacturing coordination-does not
deliver on key supply and demand planning functions.

Reaping Fruits
SCM directly impacts the bottomline of an organization, as money saved is money earned.
Beyond that, SCM”s benefits are spread across most parameters of management or business
efficiency. Reduction in inventory levels, increased customer service, reduction of
operating expenses, increase in return on assets, and reduced cycle-times, to name a few.
At Godrej Soaps, an MFG Pro site, finished goods inventories have reduced by Rs 10 crore,
inventory levels have come down from 30 to 15 days and, there is scope for more, according
to Dr Sinha. There are absolutely no stock outs for raw material and no firefighting in
trying to manage the procurement, manufacturing, and delivery processes. In the case of
another well-known FMCG in India, improved customer service levels is the target. For
this, it has constituted a team that is ensuring 95 percent service level for Category I
products i.e. each retail outlet will stock the product for at least 49 weeks in a year
and 85 percent service level for Category II products.
Compaq has made a commitment of ”95/5”-delivering 95 percent predictability of the first
commit date within five days cycle-time from average order to delivery. One of the key
objectives for the company is to move from a ”build-to-forecast” mode to ”build-to-order”
mode. As a manufacturer, the # 1 PC maker is looking for reliable short-term planning and
scheduling, considering all material and capacity constraints, in order to enhance both
the predictability and performance of production schedules. With its new SCM in place,
Compaq will be able to detect and highlight critical material shortages. It will also be
able to generate and regenerate production schedules for the shopfloor as well as
material-pull signals for the warehouse control system. These capabilities will enable the
company to effectively manage the rapidly changing dynamics of shopfloor, including
material decommits, purges, product holds, and new product introductions.

“Supply chain is an evolution
and not a revolution.”

–Dr Peter Zencke, Member (Executive Board), SAP AG.

Dr Peter Zencke is a
highly respected expert in both technical development and business requirements of
enterprise applications. One of the main architects of SAP”s R/2 and R/3 family of
software, Dr Zencke is currently incharge of R/3 logistics applications development, R/3
basis components, development and implementation tools, and several industry solutions. A
visionary in IT-driven supply chain planning and management, he has been working for over
20 years in the area of operations research with special focus on optimization and
forecasting. Dr Zencke is a doctorate in mathematics from the University of Bonn. He
shares some of his thoughts on SCM in an interview with Easwaradas Satyan, Senior
Assistant Editor, DATAQUEST.Excerpts:

Could you explain the two different
perspectives of SCM as a standalone function and as a part of an overall ERP
implementation?

Businesses have processes that are internal and external. The internal processes have been
managed quite well because of integrated application solutions. When it comes to
communicating with the outside world for external business processes, the choice was
limited. EDI was thought to be the solution, but it has got its own problems in terms of
standardization and extending to the internal processes of the partners at the
manufacturing and the delivery end.

With Internet, that issue has been taken
care of because TCP/IP is the standard for both internal and external communication.
Therefore, the leanest form of a supply chain system would be an Internet-enabled sales
system. The focus of ERP is manufacturing, but many steps beyond an MRP which deals with
just materials requirement planning and manufacturing planning. An ERP is typically spread
across multiple sites in an organization and integrates all the functional areas of
business management. In this sense, ERP software have been dealing with the area of SCM at
an elementary level. Then comes cross-system ERP or a distributed ERP system which also
integrates the business partners and their internal processes. Such a system is definitely
more powerful as one gets the whole view of the entire supply chain.

What then are the objectives of
SCM?

The ultimate goal is to meet customers” demand more efficiently. This requires improving
process coordination across the company”s borders, enable an overall visibility of
worldwide chain of supply chain constituents, and creating a more responsive environment
for planning and execution. At best, I would say that supply chain is an evolution and not
a revolution.

What is the key criterion in
achieving excellence in SCM?

The procurement, manufacturing, and delivery processes need to be tied up in an efficient
way using the best available technologies. The processes themselves have to be efficient
and this, I would say, is the key criterion. To this efficiency one has to add
responsiveness to changes and constraints.

How does this responsiveness come
and what is the technology behind it?

Lack of responsiveness is a problem in traditional MRP and many ERP systems. One gets the
forecast data for a month and starts manufacturing. Any sudden development in that month
will put the entire system into jeopardy. So one has to get down to doing this on a weekly
basis, then on a daily basis, and perhaps on an hourly basis. When this is done, one is
able to defend and address market situations in the most effective way. This is
responsiveness. But getting down to this level of refinement requires radically new
technologies of optimization and object modeling. For this, one needs to integrate the
optimization module with the transactional data from ERP system. Essentially, what I mean
is that the optimization algorithms cannot be provided by external interfaces but have to
be embedded in the ERP system.

What is SAP”s initiative?
SAP is developing a new component called Advanced Planner and Optimizer (APO) to further
incorporate real-time collaborative decision support and advanced planning and
optimization into the SAP business framework. It is a memory resident object model
synchronized with the ERP data, which we call liveCache.

What constitutes the supply chain
solutions industry?

My view is that there are some so-called supply chain vendors who offer some of the
sophistication like constraints-based planning in supply chain. Then there are the
traditional MRP and ERP vendors who have the preliminary modules for SCM, while others
interface the two for additional refinement. But we believe that the best approach is to
provide embedded optimization and forecasting within ERP. Only this configuration can
offer the best decision support capability to the system. SAP is the only one to do that.
So how does it empower an organization?

It empowers the organization by giving
answers to questions that cannot be handled by traditional transaction-oriented ERPs. Some
of these questions would be: Like in the sales area which plant can fulfill my customer”s
order in the lowest cost in time? Or can I still change my customer”s order? Or I have
conflicting orders, how do I solve the conflict? In the planning area, I have a new market
forecast…. What load does it create for my suppliers and which manufacturing capacity
runs critical? In the manufacturing area, what is the order load for my next shift? Or if
I have limited resources, how can I reschedule without breaking commitments? Responses to
such questions are critical to achieve the best out of your supply chain.

Increasingly, companies no longer simply
compete against single or multiple rivals in the same business. It is not enough for a
firm to make better products or be more cost-effective than its competitors. More and more
organizations will compete on the basis of their total supply chains. Soon, if not already
in the case of some industries, the efficiency of a firm”s supply chain will determine
whether a company prospers and delivers value to its shareholders or whether it succumbs
to those competitors that operate within a better supply chain. Organizations will become
extended enterprises that encompass suppliers, manufacturers, service providers, and
customers, all acting in concert to create value and profit. This idea of the extended
enterprise, with its focus on supply chain excellence (not functional or corporate
excellence), will become the standard by which companies will be measured in the next
century.

EASWARADAS SATYAN,
in Mumbai and Singapore.

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