When All the Cogs Fit Perfectly (Part 1)

The concept of supply chain management, a term which was coined by Keith Oliver from business consultants Booz Allen Hamilton (BAH), has changed dramatically since its inception in the early 1980s. Initially, companies focussed on integrating and optimizing their internal processes along the value chain at the interfaces between areas such as sales, procurement, storage and production. Attention then shifted to their core processes and how they interfaced with the “outside world”, that is, to partners, vendors and customers.

Internationalization requires openness

In recent years, cooperation between companies in the supply chain has entered a new phase. Increasingly, companies are opening up their systems to enable integration between different areas of business. The technical basis for this is provided by interoperable, open-source and scalable integration and application platforms such as SAP NetWeaver. These platforms allow vendors to call up information about their customers’ current stock levels and identify when this stock is due for replenishment. Purchase orders are then triggered automatically. In other words, the demand-driven “pull approach” has been replaced by a supply-driven “push approach”, in which a company places its own orders. This demands a great deal of openness and mutual trust between all the companies in the supply chain.
This trend is taking place against a backdrop of increasing globalization and internationalization of all the processes in the value chain, which is seeing companies place greater emphasis on their core competences. They are outsourcing as many processes as possible, including purchasing, development, manufacture, production, sales and transport, and thus steadily decreasing the vertical range of production. A good example of this is the German automotive industry. In the study “Future Automotive Industry Structure 2015” (FAST), experts from Mercer Management Consultants concluded that the average vertical range of production of automotive manufacturers will fall from its current level of 35 percent to 22 percent by 2015. In actual figures, this means that a vehicle manufacturer that currently adds _3,815 value per vehicle will reduce this to _2,290 by 2015. The Mercer experts also predict that manufacturers will increasingly outsource development processes and component production to external, mostly midsize suppliers or service providers around the world (tier 1 to tier n). Actual figures provide clear evidence of the move towards value networks. Management consultant A.T. Kearney (“European Supply Chains 2004”) predicts that the share of suppliers from the Asia-Pacific region will triple from 5 percent at present to 15 percent. The share of suppliers from Eastern Europe will also rise considerably from 2.5 percent in 1998 to around 9 percent by 2008.
Business consultants Deloitte & Touche identified similar trends in its comprehensive study of 600 mostly midsize companies in the manufacturing industry. According to this study, the majority of companies have already aligned their development, procurement, production and sales to global requirements. More than 80 percent of the companies that took part in the study sell their products outside of their domestic markets. 53 percent have already outsourced production (for example, to China, Mexico or Eastern Europe), while 59 percent have even outsourced areas of their R&D operations. In the past few years, the industry has been redoubling its efforts to focus on its core business and outsource other added value components to external suppliers. However, this increases the complexity of the processes.

Full integration of complex supply chains

This has consequences, as Bernhard Rieder, Vice President at A.T. Kearney, explains: “The steadily increasing complexity of the supply chain is taking its toll and will reverse the trend of falling logistics costs experienced in the past few decades. Complexity is being driven by the high number of purchases from markets outside of Western Europe and customer expectations for error-free deliveries,” predicts the expert. “On the other hand, logistics has to contend with ever shorter throughput times, the steadily increasing number of stocked articles, and the demand for ever more complex services.”
Vendors and suppliers will have to adjust to rapidly changing market requirements and unpredictable product life cycles, and bring the increasing logistics costs under control. Full integration with customer systems will be a must for SMEs in the years ahead to enable collaborative commerce. The challenge facing companies in future will be to coordinate the different processes along the value chain – purchasing, development, manufacturing, production, sales and transport – so efficiently that they result in an effective whole.
“Fierce competition obliges companies to cut costs, expand into new markets and extend their product portfolio,” says Gerd Schwarz, head of Serviceline Performance Management at Deloitte & Touche, describing the trend. This increases the size and complexity of the supply chain. Yet this complexity is not detrimental to the supply chain. “Companies that manage the supply chain correctly will have a key competitive advantage.” According to Deloitte, efficient management of the complex global supply chain has a positive effect on business performance. Bernhard Rieder sums it up: “Flexibility and integration with customers and suppliers are the key factors in optimizing the supply chain.”

Process-based and integrated approach

Successful companies view their supply chains as processes rather than functions and organize them accordingly, by taking an integrated approach to supply chain management. “This approach enables them to optimize the supply chain process across different companies and thereby boost sales and profits considerably,” emphasizes Gerd Schwarz from Deloitte & Touche. “In these companies, important transactions are synchronized both within and between customer, product and supply chain processes. The focus is not only on optimizing distinct areas, but above all on generating a profit cycle.”

Integrated models nowadays are unthinkable without e-business concepts and web technologies that support coordination of all processes and transactions. It is vital that applications are equipped to meet future requirements, are easy to use, only have a few interfaces, and can be upgraded as and when required. This brings competitive advantages in terms of costs (reduced TCO, transparency), time (streamlined production, just-in-time delivery), quality and innovation in the vendor-manufacturer-customer alliance. An added benefit is the creation of value networks through close cooperation with other midsize companies. Companies can use these to increase their appeal for larger partners.

Integrated collaboration a key success factor

Synchronized management of value chains and increased information efficiency are critical for corporate success. They deliver precise information about product availability or lead times even when customers submit queries at short notice. These customer queries can be handled as orders and scheduled in real time. If they lead to an order, the planning data is transferred to the relevant transaction systems, stocks are allocated and capacities reserved. In this way, the vision of “adaptive supply networks” once formulated by SAP is gradually becoming reality. As Richard Howells wrote in the October 2005 issue of SAP INFO: “Vendors, manufacturers, retailers and customers call up the same information at the same time and can react in real time, so that all partners are working towards the same goal at the same time.”

Identifying the value of own information

For SMEs, the possibilities opened up by collaborative commerce offer great potential for success. Those companies that can provide improved services to their customers have clear competitive advantages. SMEs can harness new growth opportunities by integrating their IT into the processes of manufacturers, retailers or vendors flexibly using popular interfaces such as the VDA, Edifact or Odette norms. SCM projects rely to a great extent on complete, high-quality master and movement data, which they require to model the supply chain.
Nevertheless, many SMEs underestimate the value of their own information for vendors and customers and as a result do not make enough of their own data available. The second part of this article on January 23, 2006, shows, how integrated supply chain management (SCM) solutions, such as the SAP solution mySAP SCM, improve and accelerate supply chain processes.

For more information:

General: SCM Competence Center of the Fraunhofer IPA, Fraunhofer IML and the BWI ETH Zurich
www.scm-ctc.de and Supply Chain Management Review www.manufacturing.net/scm
Studies: www.atkearney.com, www.boozallen.com, www.deloitte.com, www.mercermc.com
SAP AG: www.sap.com/solutions/business-suite/scm

Dr. Andreas Schaffry
Dr. Andreas Schaffry