CEOs
A supply chain comprises all the activities needed to procure materials or parts, transform them into finished goods, and push them out to the distribution channel. SCM aims to co-ordinate and integrate these activities into a single process. It often includes the process of forecasting demand although there is much debate about how useful demand planning systems really are. To paraphrase Dwight Eisenhower: "Plans are useless, but planning is indispensable".
The rapid growth of the SCM software industry coincided with the internet boom and internet technologies have made it easier to implement SCM systems. However, it is important to grasp that supply chain management is not a technology, but a management discipline that has been around since long before the internet. Supposedly it was a Booz Allen consultant who first publicly used the term "supply chain management", in an article published in the Financial Times 21 years ago. The coming of age of SCM should, perhaps, be cause for celebration. But SCM continues to fall short of its promise and technology appears to be a cause of much of the discontent.
Get it right and a business can become as successful as a Dell or Wal-Mart, consistently outperforming competitors. Get it wrong and it's not just your company that suffers. You risk incurring the wrath of customers, suppliers and shareholders. You may even get fired. In 2002, ICI, the UK chemicals giant, had to write off £20m because of serious problems with a supply chain system at its Quest flavourings business. The system, based on SAP software, was meant to optimise the supply chain and produce big cost savings. Instead, it produced a big backlog of orders and customers went elsewhere. Quest's chief executive resigned soon afterwards. Nike and Hershey Foods have also suffered from big supply chain problems which they blamed on new SCM systems. In extreme cases, supply chain failings can lead to business failures. The downfall of KMart, the US discount retailer, has been blamed on outdated SCM systems that caused it to fall far behind rivals such as Wal-Mart.
So SCM is too important to delegate. "At board level, SCM used to be seen as something that was purely an operational issue, but if you get it wrong, it becomes a board-level issue as it may threaten the company," says Martin Smith of PA Consulting. Experts encourage top management to get more closely involved, not so much in the details of supply chains but the design and guidance of the SCM function. Without this guidance from the top, supply chains are more likely to under-perform. A recent Booz Allen survey says that in cases where responsibility for SCM resides below senior management, annual savings in the cost to serve customers are only 55 per cent of what they are when senior executives do take an interest in SCM.
Users
From the point of view of individuals, product innovation counts for little unless the products can be distributed quickly and efficiently. The most respected companies, to the eyes of consumers, are not the cheapest or the most innovative, but the firms that deliver - literally.
Dell's PCs are little different from those of IBM and Hewlett-Packard. Yet Dell's business model has revolutionised the industry and made Dell the PC leader. "Dell just seems to excel," says Bruce Richardson of AMR Research.
In the fashion sector, Zara, the Spanish clothes retailer, has grown to be an international phenomenon. Zara sources much of its production locally. While that may cost more on a unit basis, it gives Zara a more responsive supply chain, enabling it to bring out new lines as fashions change.
Good SCM also means lower prices. Sanjiv Sidhu, chief executive of i2 Technologies, gives the example of Payless Shoes, the US footwear retailer which has 5,000 stores and maintains an average of 800 different styles and colours. "Payless can get a pair of shoes all the way from China to the US and sell it for just $15," he says.
CIOs
One of the biggest problems for CIOs is selecting a supply chain software vendor - there are hundreds of them. Obvious candidates for consideration are i2 Technologies and Manugistics, the best known vendors of planning software. These companies have unrivalled experience in planning systems, but they lost focus in the internet boom and have since paid the price - i2 has suffered the ignominy of an SEC investigation into its accounting practices.
I2's crown may be a bit tarnished, but it is still king of planning software. Coming up fast is Germany's SAP, which has overtaken Manugistics and is now challenging i2 in SCP. Other ERP vendors with sizeable SCP businesses include PeopleSoft, JD Edwards (now part of PeopleSoft) and Oracle. Adexa and Aspen Technology are also among the top 10, although Aspen sells only to process industries. There are also several interesting new vendors, such as WorldChain, Demantra, SmartOps and Optiant, but their small size bring obvious risks.
A further question for CIOs is whether supply chain planning (SCP) software is necessary if they already have an ERP system and it works OK. It depends. Many businesses have found ERP systems more than adequate to run their supply chains. Additionally, all the leading ERP suite vendors now offer APS (advanced planning and scheduling) modules so it is a relatively painless upgrade to add APS functions to an existing ERP system. ERP vendors trumpet the savings on integration costs over best-of-breed SCP software from the likes of i2. Nevertheless, the sophisticated forecasting capabilities of the best-of-breed products still find buyers.
For example, Freightliner, the US truck maker, runs SAP's ERP software and so it looked at using SAP's APS software for a new forecasting system for its dealers. But i2 finally won the deal because SAP's software would have taken just too long to crunch the numbers, according to Freightliner.
CIOs who find their SCP project is behind schedule and over budget may have to decide whether to rip it out. It wouldn't be the first time that has happened. Consultants at Booz Allen recommended the US Navy effectively do just that. Like many large organisations, the navy had installed sophisticated planning systems with the aim of optimising stock levels for every part. Booz Allen consultants went in and effectively told the navy that the project was a waste of time and money. "We looked at the demand patterns for spare parts, for things like fighter aircraft, and discovered that for some parts it was pretty stable," says Dermot Shorten at Booz Allen.
For these parts, consultants told the navy to turn off its forecasting algorithms and instead budget for a regular order of, say, 10 spare parts a month. Of course, many businesses argue the demand patterns they face are far from stable. But in such cases it might make more sense to spend money on supply chain execution (SCE) technologies to make the supply chain more responsive, rather than on software that produces optimal but unfeasible plans.
