Counting the cost of supply chain interaction

The ‘e’ revolution has been with manufacturing businesses for more than five years. In this time, the IT available to help firms streamline their own operations and work better with their supply chain partners has grown exponentially. Even so, the wholesale take-up of supply chain applications has largely been restricted to companies at the top of the food chain. In reality, many SMEs are still tracking their production schedules, inventory and shipping data using nothing more sophisticated then spreadsheets. They may be receiving information from their customers electronically but the information flow is still, in the main, downwards. Transactional data comes in from powerful, capable systems but, in many cases, moves into internal planning systems much like the average fax did. Commercial necessity is likely to force change. Analyst Gartner has predicted that by 2005, supply chain participants that fail to employ SCM (supply chain management) technologies will be 30% less likely to get preferred supplier status and at least 20% less competitive than those that do. Indeed in some sectors, notably automotive, the ability to participate electronically in supply chain activities is already a prerequisite of bidding. Today, the biggest problem for mid-tier manufacturers is sorting out exactly which of the available technologies is most likely to safeguard both their place in the chain and their bottom line. There are simply too many choices and too little money. Unsurprisingly, many are faced with a stark necessity: do what you absolutely have to, make sure it pays and don’t start anew when you can solve the problem by building on existing systems. So how do you sort out the strategic necessities from the ‘nice to haves’? Let’s take a non-exclusive list of what ‘building blocks’ are on offer. First of all, there are those ‘best of breed’ suppliers which specifically focus on optimising the running of the entire supply chain, including demand planning and forecasting, supply chain planning, production scheduling and transportation management. Typical of these are i2 Technologies, Manugistics and Manhattan Associates. Then there are those solutions which, although now wide in scope, have originally developed from an ERP focus. These include Oracle, SAP, PeopleSoft, JD Edwards, IFS, Geac, Intentia, Lilly, K3 and SSI. Their initial powerbase does not make them less competent in the newer disciplines. SAP offers a vast array of functionality (at a price) including network planning, execution and distribution and, through its mySAP portal, claims to open collaborative SCM to firms of all sizes. There are also various point solutions in areas like collaborative design, scheduling, distribution and warehouse management that – although only part of the supply chain ‘recipe’ – may be enough to overcome an individual firm’s barrier to supply chain efficiency. So, how do you start choosing? Simon Bragg, UK senior enterprise software consultant at analyst ARC, is adamant that technology is not the first port of call. “The real issue is actually working out where your problems lie,” he maintains. He says that firms need a tool to pinpoint the issues likely to give them the fastest payback, and advocates the SCOR (supply chain operations reference) model, developed by the Supply Chain Council (SCC). SCOR is a process model that acts as a cross-industry standard for supply-chain management. “If you are a mid-size manufacturer who doesn’t want the Big Six crawling all over you, then the SCC provides you with a tool to model your supply chain and see where the core problems are,” says Bragg. “You have got a set of metrics to start measuring the performance of sub-units like suppliers, warehouse management, transportation, forecasting etc, and you can use them to identify why the whole isn’t working. The SCOR model lets you do it yourself.” An alternative approach is the e-Business Assessment Toolkit provided by the UK Council for Electronic Business (UKCeB – see over). Forecasting first? Having established that companies’ pressure points will vary widely, Bragg detects common patterns in successful SCM strategies. “In the broad case, people tend to do best by starting with forecasting, distribution and replenishment planning. It depends on the scale of your organisation; if you have lots of distribution points, these are the priorities. If you just have a couple of key customers, it’s not so much of a challenge. After that, it probably pays best to start looking at collaborative planning, if your customers will support it.” ARC will shortly be publishing ‘The SCM guide: Costs, benefits and best practice.’ This report is based on interviews with manufacturers employing from 500 to 5,000 employees. All have bitten on the SCM bullet and give insights into the likely issues, costs and returns on IT investment. Unusually, ARC is one of the few analysts to attempt the real price of implementation by costing internal personnel at $700 per day. Facts like these provide a useful ‘scene-setter’ for any firm trying to prioritise its IT projects (see panel below). Don’t succumb to despair if these costs appear to rule the whole thing out of court. According to Paul Oakes, until recently head of delivery for Silverline Technologies and now managing consultant for Verdian Group Europe, there is a huge variety of small, incremental changes firms can make to their use of existing technology to open the way to better supply chain operations. Conversely, companies that have invested heavily in IT are not realising its full potential, often simply because of the way they have tackled organisational issues. “Many companies have put in Big ERP systems like SAP, e-procurement systems like Commerce One and SCM systems like i2 without linking them to the supplier network or getting them to buy into the benefits it is going to bring to the whole chain,” he explains. “It’s not the technology. People still aren’t getting to grips with working together, defining the rules of engagement and collaboration. Before they implement, they need to work out what they need to ask from their suppliers and to recognize their shared responsibilities.” Among the responsibilities he lists is the duty of firms at the head of the chain to help their suppliers, particularly those that could be at the receiving end of several SCM initiatives at once. “It should no longer be seen as a problem. If companies have half a grain of sense, they will know that other competitors are pursuing the same suppliers within their base and they should be making it easy for them. It can be done with new web technologies, intranet tools and standard communications formats.” Much simpler systems He is a firm believer in the pragmatic approach. Smaller suppliers don’t even necessarily need close integration with back office systems. “Many simply need to log on to input or export data. It doesn’t have to be over complicated. When you have many transactions going on that are interdependent, then full integration becomes more necessary, but people don’t want to get into the EDI trap where the messaging system merely allows the supplier to print it out at the other end and carry on in their old way.” He cites the automotive sector. “Someone in a niche market like Land Rover will still be working with small specialist suppliers as well as the major ones. With technology these days they don’t need to be imposed on – they can integrate to an extent using web tools. Using a browser they can upload information from their ERP – in a small supplier it may simply be a spreadsheet – for integration into the OEM’s system. XML and Biztalk and common business language tools are great – but people don’t even need to go that far to get the technology working to their benefit.” Take, for example, a small presswork manufacturer in the Midlands, probably still using manual methods for scheduling capacity. “They probably have a couple of PCs in the factory and they may run some of their collational reports on spreadsheets,” says Oakes. “That’s all they need. They have ‘phone lines! They can configure a web browser that lets them log in securely with a URL. They can upload their available capacity and download the demand schedule from their customer. “They can then put it straight into their production system without paper copies flying around and all the risks of misunderstanding and transcription. Mr Foreman can upload their new production schedule from their spreadsheets, and that means that the OEM is planning on real time data – not three weeks ahead – without people chasing around finding out when stuff is going to be delivered.” The pressworker gets major benefit through knowing the OEM’s forward plan so it can manage its own production machinery and resources. And the assembler can feed the big i2 system he has invested in with accurate data so it can do what it does best – plan for the real world and manage all the variables. Oakes says that simple pragmatism can make supply chain co-operation simple and incredibly cheap. “But it does need the big companies to abandon the view that if it only takes a couple of thousand pounds, it can’t be very robust. It can be – and the benefits of getting all your supply base involved are huge – you can strip out major cost and so can they.” The real world cost/benefits of supply chain implementations Demand planning: A project requires, on average, 10 months and costs from $346,000 to $548,000. The cost of internal and external services ranges from $178,000 to $365,000. Software costs from $100,00 to $300,000 and averages $179,000. Overall, average payback period was 22 months, although it varied from two months to four years. The source of the software does not significantly determine the payback period. User experience: one electronics company believes it is vital to start with a rough prototype, which demonstrates the functionality, and highlights major problems. Settings made at the beginning of the configuration can cause major problems if subsequently proved wrong. This firm employed only one consultant, preferring internal users. Their colleagues in the USA didn’t involve users to the same extent: as a result, there is strong resistance to using the tool. Replenishment planning: Projects typically take 15 months to implement and cost between $408,000 and $3.6 million, average $1.84 million. The average software cost was $490,000, but ranged from $18,000 to $1 million. Average payback period was 27 months, but varied from 12 to 36 months. User experience: there was an unexpected improvement in service level, and crisis management was also significantly improved. Beyond this, an accident which closed a major warehouse for four weeks, representing $30 million sales, didn’t stop the firm from maintaining service levels using an alternative warehouse through a simple change of the sourcing rules. The same company was later able to close another warehouse without incurring any obsolete stock costs. Production planning: Implementations typically take around 11 months. People costs varied from $155,000 to $1.4 million, average $489,000; and software costs averaged $233,000, although they varied from $7,000 to $583,000. In five out of nine cases the total cost was between $380,000 and $850,000. Average payback was 17 months, although it varied between “virtually instantaneous” to four years. User experience: a small, experienced group rolling out AspenTech’s MIMI across 40 sites advises: establish up-front goals, invest to gain senior management buy-in, design organisational changes and implement business process change and software simultaneously. Finally get good consultants, scope the project to under a year, and handle requests with “let’s leave this out, and see if you need it later.” UKCeB’s E-Business Assessment Toolkit EBAT was developed by the UKCeB, DTI and some well known manufacturing names. It is both a methodology and a software tool set that takes decision makers through a structured series of discussions and analyses to help them develop a coherent, relevant and deliverable e-business strategy. It kicks off with a workshop that is chaired by a trained EBAT facilitator (experienced in manufacturing IT project management) and can be delivered in a day. It follows a seven-step plan: - profiling the individual business and its direction - establishing consensus of the areas of the business most in need of improvement - identifying core competencies - best practice gap analysis - defining relevant e-business elements - case studies from similar companies - analysis and reports from the workshop session showing the audit trail, logic and conclusions. The team is asked to assign individuals to follow up on key tasks and e-business elements. The report will identify areas where ‘quick wins’ can be achieved, but also aims to provide a framework for a longer term policy.