Supply Chain Enterprise Systems: The Silver Bullet?Published: September 06, 2006 in Knowledge@Wharton
Contemporary supply chains stretch around the globe -- a complicated matrix that reflects the easing of international trade barriers, an increase in global trade, and dramatic growth in business outsourcing and offshoring to low-cost suppliers. Needless to say, the trends toward globalization have significantly increased the number of players involved in bringing a product to a consumer.
"If you were looking down on planet Earth, you would see a lot of ships moving from China to India, from Europe to the United States, along with a huge set of domestic activity with truck and rail and also internationally with air and cargo to support the sheer volume of international trade," said Paul R Kleindorfer, professor of operations and information management at Wharton.
But, Kleindorfer acknowledges, there is something "going on simultaneously with this huge set of activity that you may not see." Namely, an equally dramatic, "absolute revolution" in information, communication and management technologies that support supply chain functions and are known as supply chain enterprise systems. "The fabric beneath this increased trade is a fantastic ability to manage large volumes of data."
Virtually nonexistent a decade and a half ago, supply chain enterprise systems affect numerous processes, ranging from scheduling orders, managing production, controlling inventory and purchasing to sales support and customer relations management. These systems are represented by a seemingly endless alphabet soup of technology acronyms, such as ERP, SCM, CRM, and RFID. Supply chain enterprise application vendors such as SAP, Oracle, Sage Group and Microsoft, along with supply chain support vendors like i2 Technologies, 4R Systems, Manugistics and MCA Solutions, have worked to create technological and software solutions that are designed to help improve not only supply chain performance but also corporate financial returns and customer satisfaction. According to AMR Research, corporate investments in enterprise systems totaled more than $38 billion in 2001, with an expected increase of 9% by the end of 2004.
While there's no doubt that technology has moved front-and-center in today's supply chain, the application of technology has emerged as a leading "pain point" in the field of supply chain management. According to supply chain experts from the Boston Consulting Group (BCG) and Wharton, applying enterprise systems technology to supply chains is often a difficult undertaking with an uncertain outcome; in reports and cases cited by both BCG and Wharton, companies that have implemented supply chain technologies often fail to leverage the new systems for a competitive advantage. A recent study from the Georgia Institute of Technology analyzed the impact on corporate performance of three commonly used technological enterprise systems: Enterprise Resource Planning (ERP) systems, which integrate data required to manage a business and automate all of the transactions needed to support an entire enterprise; Supply Chain Management (SCM) systems, implemented as "add-ons" to existing systems that "look beyond enterprise transactions and out into the supply chain to provide supply-chain-wide planning and execution support;" and Customer Relationship Management (CRM) systems, which "help track and manage customer information and relationships with the goal of increasing customer loyalty and retention." The authors found that with the exception of SCM systems, the enterprise systems simply do not "positively affect shareholder value and operating performance."
For application of supply chain technology to be successful, the experts agree that certain elements need to be in place: namely, a clearly defined need based on supply chain strategy, as well as clear expectations about what such technologies can and cannot do for a company. When facing the typically high cost of these systems, in many cases the question is not which system to purchase, but whether or not a company will benefit from investing in one.
Though the questions are often clear, the answers are not. "Once you get into technology," admitted Steve Matthesen, a vice president in BCG's Los Angeles office and a supply chain expert, "it is a ridiculously huge space."
Support for the '3Bs'
As international trade tops $8 trillion in imports and exports, effective and efficient supply chain management translates into improved return on assets and a distinct competitive advantage. In a chapter on global supply chains in a recently published book called The Wharton-INSEAD Alliance on Globalizing: Strategies for Building Successful Global Businesses, by Cambridge University Press, Kleindorfer identifies technology as one of the three main pillars that support the burgeoning supply chain.
"A supply chain is essentially a network consisting of suppliers, manufacturers, distributors, retailers and customers," wrote Kleindorfer. "The network supports three types of flows that require careful design and close coordination: 1) material flows, which represent physical product flows from suppliers to customers as well as reverse flows for product returns, servicing and recycling; 2) information flows, which represent order transmission and order tracking, and which coordinate the physical flows; and 3) financial flows, which represent credit terms, payment schedules and consignment arrangements. These flows are sometimes referred to as the '3Bs' of supply chain management; boxes, bytes and bucks."
The coordination of these three flows within the supply chain, Kleindorfer argues, is supported by three pillars: processes, organizational structures, and "enabling technologies, encompassing both process and information technologies." When applied correctly, technology has helped businesses conquer what Kleindorfer calls "arguably the central problem in supply chain management" -- efficient coordination of supply and demand.
And companies seem to recognize the potential of technological tools in managing their supply chains: According to AMR Research, the enterprise applications market (especially ERP and SCM systems) will continue to expand, from $20.7 billion in 1999 for both ERP and SCM markets to nearly $42 billion in 2004. And what do these systems promise to deliver? A lot, judging by the following three examples:
- SAP, a leading supply chain management vendor, allows that its supply chain management system called "mySAP SCM" helps companies build "adaptive supply chain networks" through planning, execution, coordination, and collaboration. The collaboration function alone promises to enable companies to "share information and set and achieve common supply chain goals through collaborative planning, forecasting, and replenishment (CPFR), support for vendor-managed inventory (VMI), and support for supplier-managed inventory (SMI)."
- MCA Solutions, founded by Wharton operations and information management professor Morris A. Cohen, promotes its Service Planning and Optimization (SPO) software as a product that helps companies "determine the most profitable and efficient supply chain design," forecasting "parts demand and determination of optimal stocking lists and stocking levels" and providing parts tactical planning "to meet service level objectives at lowest possible order cost."
- And then there's 4R Systems, Inc., an analytical software company designed to improve supply and demand forecasts and help companies make better decisions about their inventory dollars, particularly for short life-cycle products. Created by Marshall L. Fisher, Wharton professor of operations and information management, 4R promises that its products "take the guesswork out of product forecasting, replenishment and allocation."
Technology in the Future
When it comes to emerging supply chain technologies, experts point to advanced technologies for retailers, including hand-held scanners; products that manage inventory and forecast demand while communicating this information to the supply chain; vendor-managed inventory or VMI, where a vendor or supplier manages inventory for a retailer (one successful example is Procter & Gamble, which manages its inventory in Wal-Mart stores); and improved technology for CPFR.
But perhaps the technology that's getting the biggest buzz along the supply chain right now is RFID (Radio Frequency Identification), a method of remotely storing and retrieving data using devices called RFID tags. The new technology is being touted as the ultimate positioning device (is the item on the shelf or in the back room? On a truck or inside a ship?), and one poised to replace bar codes to measure the flow and location of goods.
To date, RFID has proved useful in tagging and tracking large containers of goods. But so far, the expense of the individual tags prohibits their use on individual stock items, "and that's where the benefits and savings are, from knowing where the item is on the shelf," said Serguei Nettissine, Wharton professor of operations and information management. Wharton colleague Fisher agreed: "The quality of data that retailers have on inventory levels in their stores is far from perfect. And that's where RFID could come in."
However, RFID illustrates a problem that is at the crux of adopting such technology: BCG and Wharton experts note that one of the real challenges associated with RFID -- in addition to the cost -- is actually using the information it produces, and turning that information into a business advantage. "The people promoting the technology are talking about how valuable it is to know all of this information and have it in real time," Wharton's Cohen said. Just having better information is worth something, he adds, but "figuring out what to do with it should be worth even more."
Garbage In, Garbage Out
For those companies that do know what they want from their data, BCG's Matthesen as well as Boston-based BCG vice president Massimo Russo both cautioned that every technology system is only as good as the data it has access to. "There is the issue of garbage in, and garbage out," said Russo.
Matthesen outlined this example, using a retail supply chain that has access to forecasting and demand planning technology. "Let's say I have 800 stores and point-of-sales systems, so in theory I have quite a bit of data to use, and I need IT help to use that data and forecast with lead times of up to six months out. But IT needs more input than just raw data. I may look at the data for the prior season and see that there is a big spike in a certain week of sales. Is that due to the fact that I ran a sale? Or due to the fact that we had a snowstorm and we sold more snow shovels? Is that a normal seasonability spike, or a Mother's Day sale?
"You need a lot of human intervention for the forecasting technology to work," Matthesen continued. "My experience is that companies put a lot of money into IT systems and then need help figuring out how to use them better. For instance, how do you feed good data into the system? How do you update the information, so the system can recalculate the real math that is in there? A lot of these systems are set up and not tuned up on a regular basis, yet the software doesn't know that. Where you get into real problems is when it has been years [since you updated the data], or if several functions have since merged."
And data intervention, he said, is dictated in part by the operation. Pharmaceutical supply chains -- which exhibit "extremely high margins, and people will die if you don't deliver the product" -- are managed "differently, with second sourcing and buffers. If you have a business with a vendor base that is quite stable, it's pretty simple. If you have a business that specializes in fashion items where vendor bases move around and there is a lot of change in off-shore production, you may need to be on this much more -- maybe monthly would be required. Otherwise, all hell breaks loose."
Russo agreed that when it comes to data configurations, it is important to "constantly refocus, but not reconfigure. The more you get to real-time plans, the more you have to update."
Matthesen also notes that there are common "mistakes people make in the IT space when managing their supply chain. On one extreme, they do everything manually with Excel spread sheets, and it's hard to have good, reliable data delivery that way. The other extreme is that they put in too much technology -- and expect it to do too much. In some cases, people have added layers of systems -- sometimes connected, sometimes not. If you have 15 systems and they have to talk to each other at once, the systems can get a little crazy."
Even worse, he adds, "people don't like to believe the machine. Even when the system tells them to buy 10 units, they say, 'I don't think I'm going to sell 10 units,' and they over-ride the system with higher or lower numbers. Even if you can see that the math is right, people aren't willing to listen to it. I'm not sure of a single company who lets the system do its thing. They are always tweaking."
This tweaking can wreck havoc, particularly in systems where the architecture doesn't give you the visibility to the math inside the proprietary model. "You don't know exactly what the software is doing, what settings work better than others," said Matthesen, "so changing the variables can make matters worse. If the outputs don't seem right, it's important to identify why, and fix it, rather than just changing the answer. If you set up the system right, hopefully it is giving you better answers than you can get on your own. Otherwise, why have it?"
Touchstone to Technology Success: Know your Supply Chain and more
In answer to Matthesen's question, Russo says the first step in choosing the right supply chain technology is to fully understand your own supply chain and strategy.
"It should be the business that drives you to get one of these tools; otherwise you could end up with a stranded asset that you cannot use. Let's say you have a dependent demand supply chain: I order a car and all the parts that go into that car, and I can define all the demand that I need in that supply chain. Then there is a service supply chain for an airline, and I have to put inventories in the field to use to service my airlines. Those are two very different supply chains that require different algorithms. How do I set my supply chain strategy? Where should I have a warehouse? It's less a tool and more of a model that you need to understand."
And before investing in new technology systems, BCG and Wharton experts suggest that companies review IT systems that are already in place. "If it turns out that there is a big need, we always start from looking at the data, and understanding how we want to function," said Matthesen. "If a lack of IT is getting in the way, we look at how to address that. It's not rocket science, generally, but the standard process of looking at what is in the market, the size of the company and what IT they already have."
Russo adds: "Rather than buying new technology and new tools, I suggest that clients make better use of the technology and the tools that they already have, to digest and really build on the supply chain network. There is a lot of discussion now about 'shelf-ware,' where companies only use a little of the functionality that is available to them. I think there is a lot of pent-up capability that needs to be tapped."
For those in the market for new supply chain technologies, Wharton's Nettissine cautions that despite vendor claims, it is "very hard to calculate how much a particular technology helps."
Consider ERP software, which a large company would use to centralize its data management: "This software offers an accounting system, financial system, operational systems, some supply chain management and production management modules. It is expensive, and implementation takes years. No one knows if they pay off or not."
Implementation time for supply chain technology is key, Nettissine notes. "As far as I know, supply chain management software provides some benefits because the software is much smaller, more narrowly focused [than ERP systems], and the implementation schedule is much shorter. With SCM systems, it typically takes you about nine months to a year to implement a system. After a year, you can start to track benefits. But ERP may take two, three, five years to implement. So it becomes much harder not only to implement but to track any benefits."
Some experts have suggested that as supply chain technological applications get more complicated, failing to deliver improved performance will result in firms cutting back on technology and IT spending. But Matthesen disagrees.
"I don't see people cutting back on IT spending," he said. "They still look for the silver bullet. It's part IT, part supply chain. To do this right, you have to get a lot of pieces to work cross-functionally. Let's say I spend a lot of money on IT in the shipping department; that's not fixing the IT problem in other areas. But if you adjust all processes with IT in mind, it is a beautiful thing. If you just buy something off the shelf and expect it to fix all your problems, you will be disappointed."