Always One Step Ahead of the Competition (Part 2)

Feature Article | January 23, 2006 by admin

Even though many SMEs fail to recognize the value of their own data for partnerships along the value chain, Supply Chain Management is seen as an important factor for business success, as the results of a study on 200 mainly midsize enterprises, conducted by the Swiss Federal Institute of Technology Zürich, show. These companies expect SCM to bring improvements primarily in operational processes, and those polled said IT support was extremely important.

Industry-specific features

However, the requirements that integrated SCM software need to fulfill can vary greatly from one industry to the next. Midsize production companies that have components prefabricated abroad or carry out final assembly must be able to call up all logistics data – material masters, inventory management, and purchasing in a number of different plants – centrally and access documents and drawings from the main and subsidiary plant. Here, it is important to harmonize the procurement and logistics processes within the supply chain, both those involving the subsidiary plants and those involving customers and suppliers. It goes without saying that the information exchanged between various partners – for example, the suppliers’ warehouse stocks, capacities, or production programs – must be complete and correct so that the supply chain can function smoothly.
On the other hand, enterprises in the consumer goods industry need to optimize their stock and transportation costs, which are their largest cost blocks. They also need to observe legal regulations such as EU directive 178/2002 on the traceability of batches of food and food components. This makes it necessary to control and monitor the flows of goods and information across all processes. In future, RFID technology will play an important role in this process. RFID tags provide immediate information on what has been sold, or which products have been shipped from the distribution warehouse and when. The tags therefore increase transparency for the rapid and efficient controlling of logistics processes – both in the company’s own warehouse and for the picking and delivery of goods to customers.
RFID technology can be used in a wide variety of ways. In the automotive industry, it is used both for the clear coding of body shells and in container management, but also for the temperature monitoring of food and drugs, for example. In industrial production, RFID can be used to manage large numbers of product variants, and in logistics it can be used to automate and thereby accelerate processes, for example by attaching tags to packages or pallets.

SCM, a challenge not yet overcome?

In the manufacture of a car, up to 50 percent of the total costs are affected by the supply chain, as revealed in a study by McKinsey Germany and the seminar for business planning and logistics at the University of Cologne. Even though a sophisticated SCM strategy enables plants to keep their warehouse stocks low, fulfill orders more quickly, and use the freed-up resources profitably, market researchers and analysts are undecided on the role that supply chain optimization plays in German enterprises. According to Steria Mummert Consulting (“IT Budget 2005”), potential savings go unexploited as a result. A mere 4.6 percent of the 500 experts and managers from the IT departments of German enterprises said they intended to invest more in SCM in the future.
Management and technology consultants Booz Allen Hamilton (BAH) also describe the optimization of the supply chain as a “challenge not yet overcome” in many enterprises. In many cases, Supply Chain Management is still not seen as a matter for senior management, merely as a matter for the operational units. The BAH consultants also complain that the companies place too much hope in the technology alone, but they can only expect a significant improvement in revenue if they restructure their supply, production, warehousing, and distribution processes when they implement an SCM system. However, midsize enterprises, in particular, seem to be gradually seeing the opportunities offered by an optimized supply chain. To improve communication with partners and suppliers, 35 percent of companies are planning to invest between 50,000 and 250,000 euros, states Helmut Wannenwetsch, Professor for Logistics at the Mannheim University of Cooperative Education, in his book “Vernetztes Supply Chain Management” [Networked Supply Chain Management]. 25 percent of companies are even intending to invest more than 250,000 euros.

Optimized supply chain, high potential for savings

The reasons are clear: SMEs who are able to optimize their supply chain can expect to reap the benefits in the form of efficient processes and considerable savings. According to the aforementioned BAH survey, enterprises can achieve up to a 50 percent increase in savings in purchasing and delivery costs per year. According to an independent benchmarking study conducted by the management consulting firm Pittiglio Rabin Todd & McGrath (PRTM) among SAP customers, companies with sophisticated supply chain processes achieve net profits that are 75 percent above the market average (14 percent compared with 8 percent).
The PRTM benchmark also reveals that companies that implement sophisticated supply chain management based on the planning functions in mySAP Supply Chain Management (mySAP SCM) can reduce their daily minimum stocks in the warehouse by around 40 percent, and warehousing costs can be reduced by up to 63 percent, which corresponds to an increase in revenue of around 1.7 percent. With a sophisticated logistics solution, old stocks in the warehouse can be reduced by up to 84 percent. Further calculations by the management consulting firm showed that planning mechanisms for new products help to reduce the warehousing costs for old stocks from 0.9 to 0.3 percent of sales.

Pragmatic approach

To simplify monitoring of the costs for an SCM project, it is common to split up into several smaller subprojects. This follows the recommendation by Christian Glas, consultant at Pierre Audoin Consultants (PAC), of making SCM projects less complex and therefore more cost-effective. “Today, ‘the more the better’ is no longer true,” he says. “Instead, it is important to weigh up the costs and benefits within a defined project schedule and budget.” According to PAC, the large number of vertical solutions on the market is an indication of this development, as are solutions tailored to the needs of their users.
A solution such as mySAP Supply Chain Management (mySAP SCM) meets the requirements: it supports planning, execution, collaboration and coordination, providing functions for materials management and production controlling as well as Collaborative Planning, Forecasting, and Replenishment (CPFR). The integrated Vendor Managed Inventory (VMI) features facilitate a smooth flow of materials and information between all the parties involved, and suppliers can use Supplier Managed Inventory (SMI) to monitor the manufacturer’s stocks. The SAP Inventory Collaboration Hub (SAP ICH) enable optimum replenishment processes in demand-driven supply networks. mySAP SCM also supports the wide variety of demand that sectors such as the automotive industry, the process and consumer goods industry, or retailers and logistics providers place on an SCM solution. A company is therefore able to set up a cross-enterprise logistics network that links the suppliers’ suppliers with the customers’ customers, for example, or synchronizes supply and demand across enterprise boundaries.

More flexibility with real-time information

RealWorldAwareness

RealWorldAwareness

In the supply networks of the future, real-time information from production and the value and supply chains and real-time data on current customer demand will become a central strategic competitive factor. Professor Claus E. Heinrich, member of the SAP executive board, has described and modeled this in detail in his current book “RFID and Beyond – Growing Your Business Through Real World Awareness”. New technologies such as RFID, smart cards, and sensors will be used to provide real-time information and set up adaptive supply networks. Companies that identify and exploit the potential of these technologies will be able to react quickly and flexibly to changes in supply chains and new market conditions and carry through business innovations. And as a result, they will always be that one step ahead of the competition.

Further information:

Studies:
www.bah.com,
www.mckinsey.com,
www.pac-online.de,
www.prtm.com
SAP AG:
www.sap.com/solutions/business-suite/scm,
www.sap.com/rfid

Dr. Andreas Schaffry

Dr. Andreas Schaffry

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