Together with any number of industry verticals, the supply chain sector came in for its fair share of hype during the dotcom era of smoke and mirrors. With some hefty investments – as well as the ongoing development of innovative new technologies – supply chain and logistics has remained hyped for rather longer than most. The new trends, however, see a return to basics as companies get back to examining their supply chains from the bottom up.
IT people tend to think about supply chain management in terms of IT solutions like e-procurement, supplier relationship management, just-in-time manufacturing or ERP – even specific technologies like barcoding or RFID (radio frequency identification).
In fact, each of these systems could be the solution to a particular point problem but, on their own, they won’t go far in helping companies do the right thing with their supply chains.
While the technology hype seems to be falling off, there is a renewed focus on the overall performance of the supply chain – and, by extension, its effective management.
And, according to Jaume Ferrer, director: EMEA supply chain group at Accenture, this has less to do with technology than many IT people might like to think.
Currently, the biggest challenge facing manufacturers in the first world, he points out, is competition from the emerging markets.
“Emerging market competitors are forcing manufacturers in Europe and the US to redefine their global operational footprint.
“They have got to re-align manufacturing, resources and processes to compete with cheaper competition. They have got to face the challenges of co-ordination, channel integration and new operating models.”
Conversely, these emerging markets also bring opportunities, and Ferrer says western companies have to bear in the mind the revenue opportunities they offer.
“Companies in the developed world need to think about how they can develop these markets.”
From both points of view, the supply chain assumes a critical role – both in meeting the challenges of cheaper emerging market imports, and in helping to develop new market opportunities.
“For instance, companies need to ensure they have the right product portfolio. Too often, we see western companies trying to replicate their operations and channels in a developing market.
“To be successful, companies have to have the right make or buy strategy – should they manufacture a product, or buy it from a competitor; if they are going to manufacture it, do they need to set up an assembly line or will they outsource it?”
Ferrer points out that companies need to consider whether they should make an investment, in skills or capital, to ensure their suppliers meet their own standards and deadlines.
A major challenge for manufacturers is to introduce innovation while reducing time to market – while keeping the landed cost of goods comparable to competitors.
“In the middle of all this, companies have got to stay ahead of the curve. To drive costs down, we have added a whole layer of complexity, but companies still need to stay ahead of the race in terms of product development and introduction.
“New product development has got to be market-centric, and companies need to ensure they have a supply chain that can deliver on that.”
Which comes back to supplier development – ensuring that suppliers can meet a company’s demands in terms of cost, compliance and quality.
“There is an investment cost associated to returns, which is associated in turn to acquiring a lower-cost supplier base. Companies have to make the investment in developing their suppliers.”
South Africa occupies an interesting place in the global market, says Ferrer, straddling the developed and developing worlds.
“South African suppliers want to play a role and capitalise on global opportunities.
“As a supplier, it is an intermediate country: it is not as cheap as India or China, but it is cheaper than Europe – and there is a high level of education and a technology-savvy executive.”
On another level, South African manufacturers could well grasp global opportunities and would thus need to invest in developing their own supplier base.
“South Africa’s window of opportunity won’t last long,” Ferrer believes. “The country needs to pump investment into infrastructure and attract investment.”
Any supply chain has a lot to do with service, he adds, since it is all about getting the right goods to the right location at the right time.
“In most markets, consumers and businesses have more sophisticated needs than previously and so there is a proliferation of market segments and sub-segments. This means a good-for-all supply chain is probably not a viable option.”
Ferrer points out that, while companies talk about global sourcing and opportunities, the end customer is only really interested in getting the product on time, and in the right place.
“When you start pushing your supply chain 3 000 miles away, there are some challenges,” he says.
One solution to the managing the extended supply chain, says Ferrer, is to capture and integrate demand signals as early as possible so that planning can take place.
“There is a tremendous need to have a supply chain collaboration agenda,” says Ferrer.
But how can companies achieve these aims? “They need a vision and an operating model in their heads before they can do anything,” he explains. “Then they can define what the supply chains need to do in reality.”
And the enablers that companies can use to turn the vision into reality are technology, process and organisation.
For instance, technology has a role in delivering functionality to a supply chain, but Ferrer believes it is a useful tool rather than the solution itself.
He adds that technology breakthroughs seldom address the real issues. “Often they are breakthroughs because people say they are.
“For instance, RFID is a technology breakthrough and will deliver value sooner or later.”
Companies need to visualise the operational models first, and then use the enablers to make them happen.
“Too often, companies start with the enablers and then try to match processes.”
The fact that reality is fast replacing hype in the supply chain arena is borne out by the fact that IT vendors are also advocating a more structured planning process before companies simply let fly with technology.
“The reality is that there is no yesterday, today and tomorrow view of the supply chain,” says Derek Kudsee, Microsoft Dynamics business group manager at Microsoft SA.
“The fact is, companies with eco-systems of buyers and suppliers need to focus on profitability.
“And most of the organisations with that supply chain have an opportunity to use technology to drive profitability – but they need to identify the areas within the supply chain where that makes sense.”
RFID is a case in point, he adds, which has been punted as the great white hope of the supply chain market.
“My view is that South African companies are cost-inhibited at the moment and are therefore spending a lot more on things like barcoding solutions.
“RFID can potentially reduce costs where there are multi-company interactions – but only if applied in an already-lean supply chain where there is little further opportunity for savings.”
Kudsee believes there are many other areas organisations should look at first.
“The biggest game in town right now is arguably in basic software rollout. We would like to see a lot more organisations talking.”
While inter-company collaboration is one of the dreams of supply chain planners, Kudsee says that a lot can be done within organisations themselves to improve communication.
“For instance, how about getting the dispatch people to use technology instead of a clipboard?
“I believe this is where most South African companies are at the moment. The digital divide is very apparent in the supply chain – people are technology are not coming together to allow companies to reap the rewards in a significant way.
“Technology needs to get on to the factory floor and into the warehouse.”
Only by extending technology throughout the organisation will companies reap the real benefits of their ERP investments, says Kudsee.
“The value of ERP lies in its ability to bring all the systems involved in a process together in one place. If you can do that, and people can use the information, then we’ve reached beyond the hype.”
By providing an integrated view of technology and processes, company will enable many more points of visibility, he adds, and this should be the aim of organisations considering their supply chains today.
“The supply chain is all about reducing costs, and profitability is the result of cost reduction – you can only be profitable if you are managing your costs. And technology is only useful if people can actually use it.”
Addressing supply chain management has to be a piece-by-piece operation, Kudsee adds. “You can’t eat the elephant; you need to do it piece-by-piece and focus on various areas of operation within the supply chain.”
One of the more pressing needs is to instigate proper forecasting and planning, he adds.
“Most of the time, manufacturers don’t have enough analytical information – they don’t know what’s in demand and, therefore, where to focus their resources.
“This is where software can play an important role. If you make it easy for people at the front-end to interact with the system, the software can automate a lot of the processes needed to fulfil demand.”
It’s a sad fact of South African manufacturing that frequently imported goods can be landed here at less than the cost of making them locally, says Kudsee.
“The challenge is for companies to think about their business operations and come up with a new way or working, where the information and the business support each other through software.
“With information, the company can make the right business decisions – not guesswork.”
As an example, Kudsee points out that the salesman on the retail floor gets information from customers as to what is in demand. If he could feed this information into the system, it could result in changes on the factory floor – and, subsequently, down the supply chain – that will see more relevant products being manufactured.
Supply chain management solutions are designed quite specifically to function best in a collaborative environment, and have limited value if applied piecemeal either inside a single business or within the larger supply chain.
SAP Africa’s supply chain management solution manager, Doug Hunter, says supply chain management is geared to level the playing field for everyone in the supply chain – because it provides visibility and value right across the chain.
“It enables you to see demand coming upstream and inventory or supply going downstream – and, as a result, it enables reduction of cost and improvement of efficiencies throughout the supply chain,” he says.
“By signalling demand early, it enables you to put the right mix of products into the supply chain at the right time. That enables everyone in the chain to hold the minimum pipeline inventory – reducing capital costs and therefore cost of sales throughout.”
However, this only works if all the members of the supply chain work as a team of enterprises servicing the same end customer, Hunter warns.
“Anyone who acts independently of the team obscures the visibility – and negates the value of the supply chain management technology that’s in use even in his own organisation.”
Developing a business mentality focused on sharing information – much less sharing a vision and costs and benefits – is proving difficult from both a practical and a conceptual perspective.
“Businesses are not good, yet, at working out what the costs are in the supply chain because companies within the chain do things differently,” Hunter says.
“One may be outsourcing certain activities that others are doing inhouse, and so their cost structures are different. Margins are often calculated in different ways, based on the size and distribution of the organisations. It’s not easy to compare apples with apples.
“But these are issues that can all be resolved through dependable relationships. And that’s where the conceptual shift has to come in supply chain management.
“You need a level of executive maturity that recognises that open societies function better and are more prosperous than closed societies.”
Ashley Ellington, MD of Softline Enterprise, agrees that the the lack of an integrated supply chain is to blame for many manufacturing challenges.
These supply chains could be underpinned by disparate systems, crating “points of failure” in the flow of information. Worse, failures could show up in the form of unfulfilled customer orders, plant floor employees working on expensive overtime or even standing idle, and an excess or insufficient inventory in warehouses.
The solution, say analysts at IT market research company AMR Research, is an integrated supply chain driven by customer demand, or a demand-driven supply network (DDSN).
In the DDSN, customer data is fed into an integrated supply chain system and drives planning and ordering operations, so that the three elements (forecasting demand, planning operations and ordering supplies) all complement each other.
In a DDSN, AMR Research says a forecast error is a given, but the company is constantly working through account performance, demographic, and point-of-sale data to anticipate, shape, and influence demand.
As a result, the organisation is aligned in discovering the true needs of the customer and how to use its delivery channel to gain market share.
For many manufacturers, that degree of integration is still a distant vision. However, many are moving towards more united systems by deploying integrated software that can seamlessly exchange information about orders, operations and supplies.
This ensures that they can deliver the right product to the right customer at the right time and price.
For many manufacturing companies, that will – or should – involve implementing supply chain applications. According to AMR Research, the market for such products grew 4% in 2004 to reach $5,5-billion.
But, it will also involve ensuring that supply chain processes are tightly integrated with other, related applications, including those for financial accounting processes.
Integrating supply chain systems with front-end customer relationship management (CRM) systems and back-end financial systems, avoids the need for people to input the same data more than once, thereby maximising data accuracy across the system. More importantly, it gives a single, company-wide view of operations across the business.
End-to-end supply chain visibility makes a significant difference to companywide profitability, Ellington adds.
Whether tracking costs on a works order or defining items on a bill of materials, having an integrated supply chain enables companies to link all of their manufacturing, planning and finance operations to gain an all-important competitive edge.