Management Guide: Supply Chain Management

What is a supply chain?

A supply chain is the link that moves products between suppliers, manufacturers, wholesalers, distributors, retailers and finally consumers.

For most of the last century, the supply was an inflexible series of events that somehow managed to get products out the door. A paper-heavy adventure, it often involved questionable inventory forecasts, iron-clad manufacturing plans and hypothetical shipping schedules.

What is supply chain management?

Supply chain management is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service, manufactures that product or service and delivers it to customers. The following are five basic components for supply chain management.

1. Plan-This is the strategic portion of supply chain management. You need a strategy for managing all the resources that go toward meeting customer demand for your product or service. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers.

2. Source-Choose the suppliers that will deliver the goods and services you need to create your product or service. Develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And put together processes for managing the inventory of goods and services you receive from suppliers, including receiving shipments, verifying them, transferring them to your manufacturing facilities and authorizing supplier payments.

3. Make-This is the manufacturing step. Schedule the activities necessary for production, testing, packaging and preparation for delivery. As the most metric-intensive portion of the supply chain, measure quality levels, production output and worker productivity.

4. Deliver-This is the part that many insiders refer to as "logistics." Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments.

5. Return-The problem part of the supply chain. Create a network for receiving defective and excess products back from customers and supporting customers who have problems with delivered products.

For a more detailed outline of these steps, check out the non-profit Supply-Chain Council's website at www.supply-chain.org

What can SCM do?

A good SCM initiative gives visibility to all the players in the supply chain so that they are able to react to the order. The moment a retailer receives an order, the retailer’s supplier also sees it. The supplier checks inventory. If inventory is low, a manufacturer — also with access to the system — produces more product and ships it to the supplier via a distributor that is also connected to the system.

Meanwhile the supplier has sent the product to the retail for shipment to the customer. The customer, in turn, can track the shipment of the order and perhaps even check inventory to make sure an item is in stock before ordering.

With Web technology, all the players in the chain simultaneously manage inventory, control manufacturing schedules and deliver an order on time to a customer.

Supply chain management projects should also rethink the chain. Most businesses establish their supply chains around product lines. But today, customer orders touch multiple product lines and multiple channels of distribution. Modern supply chains focus on the customer — and on delivering one order at a time rather than moving one product line at a time.

The focus has to be on filling, delivering and managing inventory for every order that a customer places. Every order should penetrate the same system that manages inventory and connects to suppliers and distributors.

W hat does supply chain management software do?

Supply chain management software is possibly the most fractured group of software applications on the planet. Each of the five major supply chain steps previously outlined composes dozens of specific tasks, many of which have their own specific software. There are some large vendors that have attempted to assemble many of these different chunks of software together under a single roof, but no one has a complete package. Integrating the different software pieces together can be a nightmare. Perhaps the best way to think about supply chain software is to separate it into software that helps you plan the supply chain and software that helps you execute the supply chain steps themselves.

Supply chain planning (SCP) software uses fancy math algorithms to help you improve the flow and efficiency of the supply chain and reduce inventory. SCP is entirely dependent upon information for its accuracy. If you're a manufacturer of consumer packaged goods for example, don't expect your planning applications to be very accurate if you can't feed them accurate, up-to-date information about customer orders from your retail customers, sales data from your retailer customers' stores, manufacturing capacity and delivery capability. There are planning applications available for all five of the major supply chain steps previously listed. Arguably the most valuable (and complex and prone to error) is demand planning, which determines how much product you will make to satisfy your different customers' demands.

Supply chain execution (SCE) software is intended to automate the different steps of the supply chain. This could be as simple as electronically routing orders from your manufacturing plants to your suppliers for the stuff you need to make your products.

Supply Chain Optimisation To-Do List

1. Migrate electronic data interchange (EDI) transactions to the Web. Many companies have been using EDI since the 1980s to automate purchasing of production materials. Third-party value-added network (VAN) providers charge a premium to connect organisations with different equipment. Using the Web for EDI can slash costs.

2. Use product data management (PDM) software to manage product development data from design through manufacturing and maintenance.

3. Engage in collaborative planning, forecasting and replenishment (CPFR), which involves sharing forecasts among suppliers to enable automatic product replenishment.

4. Take part in collaborative product design (CPD), the joint development of new products by supply chain members.

Automating your chain

Automating your chain is the most difficult software project you'll ever do. Get it right, and you'll save your company huge amounts of cash. Get it wrong, and it will break you.

Here are the 5 keys to supply chain success.

1. Make the Sale to Suppliers
First comes the hard part. Supply chain automation is uniquely difficult because its complexity extends beyond your company's walls. Your people will need to change the way they work and so will the people from each supplier that you add to your network.

2. Wean Your Employees off the Phone and Fax
If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people are accustomed to dealing with phone calls, faxes and hunches scrawled on paper and will most likely want to keep it that way. If you can't convince people that using the software will be worth their time, they will easily find ways to work around it. ERP at least erases the old ways of working by blotting out legacy software systems. Supply chain software is less militant. You cannot disconnect the telephones and fax machines just because you have supply chain software in place.

3. Prepare for Bad Information—At First
There is a diabolical twist to the quest for supply chain software acceptance among your employees. New supply chain systems process data as they are programmed to do, but the technology cannot absorb a company's history and processes in the first few months after an implementation. Forecasters and planners need to understand that the first bits of information they get from a system might need some tweaking. If they are not warned about the system's initial naiveté, they will think it is useless.

4. Fix the Supply Chain Connection to ERP
You have probably heard that installing supply chain software is the natural next step after finishing your ERP project. Indeed, the two serve each other well. ERP captures all the product, sales, finance and inventory information that supply chain applications need to predict demand and optimize the flow of material through the chain.

Unfortunately, that symbiotic relationship does not translate into an easy integration between the two different systems. In all likelihood, your new supply chain implementation will not interface cleanly with your current ERP system.

5. Defuse Functional Warfare
Supply chain software projects bring CIOs into direct conflict with the people who run the supply chain day to day—a contentious group with a lingering chip on their shoulders. Derided as a second-class function for years—logistics or procurement or however it is known in your company—has always been considered mundane, back-office territory everywhere but perhaps in retail.

What is supply chain collaboration?

Let's look at consumer packaged goods as an example of collaboration. If there are two companies that have made supply chain a household word, they are Wal-Mart and Procter & Gamble. Before these two companies started collaborating back in the '80s, retailers shared very little information with manufacturers. But then the two giants built a software system that hooked P&G up to Wal-Mart's distribution centres. When P&G's products run low at the distribution centres, the system sends an automatic alert to P&G to ship more products. In some cases, the system goes all the way to the individual Wal-Mart store. It lets P&G monitor the shelves through real-time satellite link-ups that send messages to the factory whenever a P&G item swoops past a scanner at the register.

With this kind of minute-to-minute information, P&G knows when to make, ship and display more products at the Wal-Mart stores. No need to keep products piled up in warehouses awaiting Wal-Mart's call. Invoicing and payments happen automatically too. The system saves P&G so much in time, reduced inventory and lower order-processing costs that it can afford to give Wal-Mart "low, everyday prices" without putting itself out of business.

Cisco Systems, which makes equipment to hook up to the Internet, is also famous for its supply chain collaboration. Cisco has a network of component suppliers, distributors and contract manufacturers that are linked through Cisco's extranet to form a virtual, just-in-time supply chain. When a customer orders a typical Cisco product-for example, a router that directs Internet traffic over a company network-through Cisco's website, the order triggers a flurry of messages to contract manufacturers of printed circuit board assemblies. Distributors, meanwhile, are alerted to supply the generic components of the router, such as a power supply. Cisco's contract manufacturers, some of whom make subassemblies like the router chassis and others who assemble the finished product, already know what's coming down the order pipe because they've logged on to Cisco's extranet and linked in to Cisco's own manufacturing execution systems.

Soon after the contract manufacturers reach into Cisco's extranet, the extranet starts poking around the contractor's assembly line to make sure everything is kosher. Factory assemblers slap a bar code on the router, scan it and plug in cables that simulate those of a typical corporate network. One of those cables is a fire hose for Cisco's automated testing software. It looks up the bar code, matches it to a customer's order and then probes the nascent router to see if it has all the ports and memory that the customer wanted. If everything checks out-and only then-Cisco's software releases the customer name and shipping information so that the subcontractor can get it off the shop floor.

And there you have it. No warehouses, no inventory, no paper invoices, just a very nosy software program that monitors Cisco's supply chain automatically, in real-time, everywhere, simultaneously. The chain runs itself until there's a problem, in which case the system alerts some poor human to get off his duff and fix something. Supply chain software junkies call this "management by exception." You don't need to do anything unless there is something wrong.

If there's a weakness to these collaborative systems, it's that they haven't been tested in tough times-until recently. Cisco's network was designed to handle the company's huge growth. Distributed decision making is great if the decisions have mostly to do with making and selling more things. But Cisco and its network were caught completely off guard by the recent tumble in the economy. It took awhile to turn all the spigots off in its complex network when demand for its products plummeted and Cisco and its supply chain partners got stuck with a lot of excess inventory-as did most other big manufacturers in high technology. Cisco was forced to take a hard look at its supply chain planning capability. SCP software is much better at managing growth than it is at monitoring a decline and correcting it.

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Updated on Sept 05, 2002