Control of the supply chain turns critical

By Stephen Pritchard
Published: September 19 2007 03:00 Financial Times UK

An efficient supply chain is a prize worth striving for. According to Accenture, the consultancy
firm, "supply chain leadership" can increase a company's market capitalisation by between 7 and
26 per cent above the industry average, but for a business, even competing for that prize
demands a significant investment in resources. In sectors such as consumer goods and retailing,
established companies have already achieved the easiest supply chain efficiencies.

"Things that are likely to move the dial have to make a significant difference, rather than be
technology experiments," says Stephen Proud, a partner in Accenture's supply chain practice.
None the less, an efficient supply chain is a must for a widening range of businesses. Fashion, hi-
tech and grocery retailers grasped early on the importance of ensuring the right stock reached the
right store at the right time. No one wants a warehouse full of summer dresses in October, or
indeed shelves of last season's mobile phones in the run-up to Christmas. But the supply chain is
now moving up the agenda in slower-moving sectors such as heavy manufacturing.

Effective supply chain management is the only way to make efficient use of global sourcing
strategies and especially, the huge manufacturing capacity of China and the Pacific Rim.
Although globalisation has reduced production costs in a wide range of sectors, the trend to
source components or even finished goods from China and elsewhere has made the supply chain
manager's task far harder.

"Our internal systems handle more than 700 suppliers," says Christian Verstraete, worldwide
supply chain expert at Hewlett-Packard. "We have to be able to ex-change messages not just
with them, but with their suppliers." Supply chain managers in many sectors are looking for
greater visibility of what is happening in their supply chains and faster access to more accurate
data.

This means that if there is an unexpected event, be it storms affecting shipping or a production
shortfall, companies can divert stocks or bring in alternative suppliers. "Companies are not just
asking suppliers why there is a problem with an order," says Sanjiv Sidu, president of supply
chain management software vendor i2. "They are asking: 'When did you first know, and why did
you surprise me?'"

In sectors such as retail, supply chain problems lead to "stock outs" or empty shelves, which send
customers elsewhere. In heavy or complex manufacturing, supply chain problems can lead to
cancelled orders running into billions of dollars, or severe penalties for late delivery. As
manufacturers move away from vertically integrated production, the supply chain suddenly
becomes critical.

"In aerospace and defence, we are 10 years behind the hi-tech or even automotive sectors and
how we improve the performance of our supply chain is quite a challenge," explains Bill Black,
chief quality officer at aerospace manufacturer EADS.

"The cost of running our supply chain logistics is minor, set against the $100m cost of an aircraft.
But the cost of failure is enormous." About 80 per cent of the cost of an aircraft is accounted for
by suppliers and partners, says Black, making EADS.
"I need to know if an event can affect our master schedule and that means that I need to know
what is happening, not just with my tier one, but with tier four, five or six suppliers." The
increasing demands of customers, as well as the drive to cut supply costs, are causing
manufacturing companies in particular to renew their investment in supply chain technologies. But
efficient supply chain technology can also open up business opportunities.

For Kautex-Unipart, an automotive component manufacturer based in Coventry, in the UK,

supplying BMW's Mini production line with fuel tanks came with an onerous condition attached.
The company had to achieve 100 per cent delivery accuracy, matched to BMW's JIS 5000
manufacturing process. Kautex-Unipart is BMW's sole tank supplier for the Mini plant at Cowley,
in Oxfordshire. It has to supply 250,000 tanks each year, in exactly the order specified by BMW,
for each of the 13 tanks used on the Mini car. The tanks even have to be stored the right way
round in the shipping containers. If they are not, BMW's production robots cannot fit them. The
company used a photographic identification system, Visidot, from Israeli vendor Image ID to
ensure that tanks can only leave Coventry if the order exactly matches BMW's requirements.
"Getting supply wrong is the cardinal sin in the automotive industry," says Jan Parylo, IT manager
at Kautex-Unipart. "But the BMW contract has also brought us benefits. We used to have 24 to 48
hours' visibility of orders. Now BMW can give us six days. As a result, we have more flexibility in
our manufacturing and supply processes."

Visidot is one of a number of new technologies that are helping businesses improve supply chain
visibility and the speed at which they collect supply chain data. Others include radio frequency
identity (RFID) tags as well as three-dimensional and even colour bar codes.

"In the past, for manufacturers [supply chain] visibility stopped at the batch or lot level," says
Krish Mantripragada, head of RFID and Auto-ID solutions at enterprise software vendor, SAP.
"But recalls and quality issues are putting a lot of pressure on companies to make their data more
granular, and to be able to track single items." The response to RFID, however, differs from
industry to industry. Mr Mantripragada says that interest is greatest in sectors such as
pharmaceuticals, aerospace and defence "where complete traceability and product integrity are
the priorities".

In other industries, some companies are looking to use RFID to make their supply chains more
efficient, but they are finding the costs to be higher than expected. The costs of RFID tags may
be heading downwards, but there is far more to a supply chain project than the tags alone. RFID,
for example, produces a unique serial number for each product, while conventional tracking
systems may be designed just to record a product's stock code, and assume that each product
with the same code is identical. "It is partly an infrastructure problem, with the need to deploy
sensors. But the second problem is serialised data management," says Mr Mantripragada. "Many
production processes batch supplies, so business processes need to adapt to handle
serialisation." Business processes that are already designed around items with individual serial
numbers often lend themselves best to technologies such as RFID; for others, bar codes or
similar scanning technologies might be good enough for some time to come. "We are certainly
not wedded to RFID as a technology. If the project is about better serialisation and that could be
done as well with coloured dots, that would not be an issue. And there are environments where
radio frequency technologies are not applicable," says Mr Proud at Accenture.

For businesses considering their supply chains, the most important step is to look at the business
process and how it could be improved, and then pick the technology that fits best. Nick Costides,
portfolio manager for UPS Supply Chain Solutions, based in Atlanta, says: "As an express
delivery company, barcodes meet our needs. But in the long term, there are opportunities. For
example, if every item in a warehouse had an RFID tag, it would make taking physical inventories
much easier."
Companies also need to consider how access to item-level data, or indeed more up-to-date
status information from the supply chain will support decision making. "Distribution centre
operators clearly have different needs from C-level executives," says Mr Costides. "We give them
the information they want to see, so they are not overwhelmed."

Fortunately, modern enterprise IT systems have the capacity to handle the increased data
coming in from systems such as RFID. But technologists caution against relying on a single
change to improve supply chain performance. "There is not one killer application but rather a
series of incremental steps before we see the ground shift," says SAP's Mr Mantripragada.
"Some customers have seen significant returns on investment from better data accuracy and
visibility, but no two customer scenarios are the same."

A business case for Supply Chain Performance Management

Supply Chain Performance Management (SCPM) has been a critical area for consumer packaged
goods (CPG) companies in efforts to develop an agile, lean and efficient customer-oriented supply
chain. A robust SCPM infrastructure is crucial to realize the benefits of various collaborative
initiatives. However, CPG companies need to resolve crucial questions before making
significant investments in SCPM initiatives. These include

Is there an enterprise-wide awareness and understanding of strategic and financial

objectives?

Is there an understanding of the financial impact of supply chain performance on

overall corporate performance?

Are all processes and roles in the supply chain mapped to key metrics to determine
performance?

Is there a mechanism to periodically review actual supply chain performance and

redefine performance measures in the changing business context?

Is there an integrated single view of supply chain performance across functions and
hierarchies?

Is senior management able to quickly determine the causes for supply chain failures?

This paper focuses on defining and building a “metrics framework” to effectively

leverage and drive supply chain performance management.

A balanced set of metrics, aligned to various supply chain functional areas - demand
planning, customer management, warehouse management, need to be identified to
address decision-making requirements. These metrics should be mapped to the
processes of each supply chain function, the overall business strategy and the roles
responsible for executing these processes.