SUPPLY CHAIN MANAGEMENT: Restructuring For Better Bottomlines

Till recently, a value product used to mean a decent product with good but

limited features at an acceptable price. Now customers demand more variety,

quicker response to their needs, faster delivery and more service. Companies

that continue to offer only traditional value measures will be overtaken by

those adopting a total value-add framework that goes beyond simple product

excellence.

CHANGING VALUE EQUATION



In this emerging competitive framework, adding value will be the measure of

success for trading partners. To efficiently reach their customers, companies

may need to redesign processes, treat their suppliers as partners, and form

strategic alliances to grow marketshare or enter new markets.

Changes

in the value equation caused by competitive pressures are driving force behind

strategic initiatives to adopt value-add frameworks in manufacturing,

distribution/transportation, and retailing enterprises. Logistics and supply

chain management (SCM) are emerging as the key enablers for delivering the value

customers demand.

EVOLUTION OF SUPPLY CHAIN



At its simplest, a supply chain traces the flow of goods from supplier to

manufacturer to wholesaler to retailer and ultimately to customers. This one-way

flow of goods is informed and controlled by a two-way flow of information.

SCM is the way an enterprise ties together the people, processes and related

information–internal and external– associated with its flow of goods. It

unites all steps in the cycle, from initial product design and procurement of

raw materials, through production, shipping, distribution and warehousing, until

a finished product is delivered to the customer.

CEOs across all industries are looking at SCM as means to maximize operating

efficiency and improve relationships with customers, thereby building profits

and marketshare.

Of course, the distribution and transportation networks in the middle,

whether captive or not, have to move goods faster and faster. The new,

customer-focused world demands smaller, more complex and faster shipments, with

less time in which to make decisions.

MAGNITUDE OF THE PROBLEM



A primary concern for many businesses across all industries is how to cope

with supply chain shortcomings. The problem is the difficulty in linking

suppliers, manufacturers, distributors and customers together, and effectively

managing the integrated supply chain.

A rule of thumb (that varies by industry) is that on an average seven to nine

percent of sales revenue and fully 15 percent of the value-add in any given

industry is eaten up by SCM.

With simple efficiency measures, such as better transportation service

selection and control, inventory reduction, and more strategic network design,

US industry could save 10 to 20 percent of that each year. By restructuring and

re-engineering the process to bring about fundamental changes, 35 to 50 percent

could be saved over a sustained period of time.

MAGNITUDE OF THE SOLUTION



IBM may be its own best-case example of the competitive and bottomline

advantages of superior SCM. However, a few years ago its supply chain created

serious problems–poor on-time delivery, responsiveness and cycle time and low

inventory turnover. Vendors and business partners found it difficult to work

with IBM. The company was losing sales opportunities to competitors.

In 1993, IBM began a complete re-engineering of its supply chain. The process

included business and IT transformations, resulting in an integrated supply

chain model that is responsible, in part, for IBM’s dramatic turnaround. The

model included advanced fulfillment, material acquisition and delivery network

initiatives.

This was a big job, and there still is work to do. However, the results to

date, compared with 1993 baseline data, are significant:



l Saved $3.6 billion in materials acquisition cost



l Cut overall SCM costs by 24 percent


l Reduced annual IT costs by 45 percent


l Improved on-time shipment to 90-98
percent



l Shortened delivery cycle time by 55
percent



l Improved inventory turn by 44 percent


l Put 80 percent of parts on consumptive
pull



l Shortened demand/supply planning cycle
from 60 to 20 days

SLASHING PRICES THROUGH SCM



Another good example of how supply chain improvements can slash costs is in

the grocery sector of retail, which is wrestling with an initiative called ‘Efficient

Consumer Response’. In some ways, Efficient Consumer Response is a reaction to

Sam Walton’s ground-breaking use of computers that helped Wal-Mart reap the

benefits of supply chain automation.

Through close attention to SCM, Wal-Mart has trimmed the average cost of

putting a case of goods in a store to about $0.86, far below the average grocery

retailer’s cost of about $1.46 per case. Wal-Mart is one of the first

retailers to invest significant resources to gain control of its supply chain.

Agile supply chain management increasingly separates winners and losers in

the marketplace. At the same time, it is redefining how companies work together.

Today, any company can benefit from the pipeline visibility, inventory control

and faster cycle times integrated SCM provides.

Look at IBM´s recovery from the early 1990´s. SCM played a big role in the

company´s resurgence. Look at Wal-Mart’s growth in the grocery sector. With

its integrated supply chain, it has been able to sustain growth and high profit

margins in an industry that struggles to attain 2 percent total profit margins.

Strategic solutions to the SCM problem involve gaining control of a fixed set

of critical functions–transportation, facilities, inventory, procurement,

customer service and information systems–and operationally integrating them to

provide an effective foundation for supply chain management. When these

interrelated functional elements are made more efficient and a variety of

networks are implemented, SCM becomes a major strategic enabler.

SUPPLY CHAINS AS NETWORKS



In reality, the supply chain is a set of enterprises that must share

information and cooperate in physical execution to ensure a smooth flow of goods

through the pipeline. Viewed schematically, a supply chain is a rather complex

network.

Nodes on the network may be parts of your business (manufacturing,

warehousing) or separate enterprises (raw materials supplier, delivery company,

long-distance carrier). To really understand supply chain dynamics requires

mapping the details of both the enterprise processes and the inter-enterprise

linkages.

A typical supply chain today is a push network–that is, goods get pushed

from one node to the next. The trend however is toward smaller, more complex and

precise orders that closely reflect consumer demand. Eventually, the signals

need to come as a pull, not a push, to quickly produce and deliver orders that

are exactly what customers need today.

Each enterprise in the supply chain responds to value-add pressures by

viewing itself as central to the flow across the network. Each enterprise must

accomplish two things: maximize its value-add to the whole network; maximize its

capture of the value-add.

ASHISH KUMAR is Country Manager,

IBM Global Services, IBM India Ltd