Supply-chain Management: Growing Global Complexity Drives Companies into the 'Cloud'Published: January 12, 2011 in Knowledge@Wharton
When the global economy nearly collapsed in late 2008, some multinational companies reacted by quickly cutting their head counts and technology budgets. As cash flow dried up, some pundits warned that providers of on-demand global trade and logistics technology would face hard times retaining old customers and winning over new ones. It hasn't turned out that way. A growing number of manufacturers and retailers have decided, instead, to streamline their worldwide supply chains for the long haul by signing up for pay-as-you-go logistics services available through the Internet "cloud." These services reduce supply-chain costs by making it faster and easier to share information about shipments with suppliers, transportation providers and end users, and then processing that information with the latest, most powerful software tools.
Experts say that this ongoing boom in transportation and trade-related services -- spearheaded by such independent vendors as GT Nexus, Descartes Systems Group and Management Dynamics -- makes sense for multinationals, which face the challenge of managing increased complexity and variability in their worldwide supply chains. By turning to services available "on demand" over the Internet -- like other cloud-based business software, such as customer relationship management (CRM), e-business and accounting tools from Salesforce.com, NetSuite, BMC Software and others -- these companies gain access to a logistics platform they could never afford to build or maintain by themselves. They also acquire a strategic advantage over those old-fashioned competitors who still rely on inefficient tools like Microsoft Excel spreadsheets, e-mail and Electronic Data Interchange (EDI) formats to manage their trade compliance, transportation and logistics processes.
That kind of advantage can be crucial these days. "We don't compete as individual businesses any more; we compete as supply chains," says Martin Christopher, emeritus professor of marketing and logistics at the Cranfield School of Management in Cranfield, England. The winners, he says, aren't necessarily the companies that have the best products and services, but the ones that have the most efficient supply chains.
Thanks to the cloud, Christopher notes, even companies that operate on a modest technology budget can collaborate with their suppliers to make more accurate delivery forecasts, minimize excess inventory build-ups and avoid nasty last-minute surprises for their end users. "In the old days, companies kept their suppliers at arm's length and even had adversarial relationships with them," he says. "Nowadays, retailers are sharing point-of-sale data with their suppliers," something that was "unthinkable" until cloud-based technology made it possible. Christopher describe the changes as a win-win solution for everyone involved. "We are going to have to re-write the textbooks as we see a significant acceleration in this mode."
To its proponents, the cloud approach is a no-brainer. "The cloud gives you access to a multibillion-dollar technology infrastructure," says Greg Kefer, director of business development at Oakland, Calif.-based GT Nexus, which runs the largest cloud-based collaborative platform for logistics, trade and transportation managers. "All of the computing power is maintained by a third party, the IT director doesn't have to install it [and] the cost is amortized across the network by other users."
Indeed, Kefer, like other proponents, is hopeful that cloud-based logistics management will soon become the norm, not just for Fortune 500 companies but for many smaller companies that continue to rely on more traditional technologies like e-mail, phone and fax to exchange information with their suppliers and end users.
Kefer and others say that the global recession has helped to raise the profile of supply-chain executives in leading global companies. "The supply-chain people are coming out of the basement -- they are no longer pushing the 'down' button on the elevator, but are pushing the 'up' button into the boardroom," Kefer says. Many companies have created senior supply-chain positions that "are right up there with the COO, the CFO and the CEO." They are realizing that a broad strategic vision applies to how you run your operation, Kefer adds, and that they "have paid a price by not looking at this function strategically."
However, even the biggest fans of the supply-chain cloud acknowledge that many companies -- especially smaller ones -- have not yet developed the right mindset for jumping on the bandwagon. Says Christopher: "Some organizations still have an old-school purchasing-management style, in which the idea that we should be more open and transparent is alien." In that kind of company, people tend to think, "If we can switch costs out of our organization to our customers' [organizations], then who cares?" Why worry about your customers when you count most? But that old approach "is not going to work" in the new world of global complexity, warns Christopher, a world in which collaboration is the only strategic solution.
From Vertical to Virtual
The path to the cloud has been two decades in the making. Over that time, global corporations gradually changed the way that they view their supply chains, says Christopher. The biggest change has been to turn away from the vertical supply chain -- based on serving the needs of the vertically integrated corporation -- to the new "virtual supply chain," which enables corporate managers to focus on their core competencies and outsource other capabilities to lower-cost suppliers, no matter where they are located. The challenge of this new approach, notes Christopher, is that since these new global supply chains are fragmented, they must depend on many outside partners in many different locations around the world. "This approach demands an entirely new way of working. There is a much higher level of complexity -- many more nodes and links."
The good side of this complexity, he notes, is that it makes it easier for manufacturers to differentiate themselves by using those partnerships to design and build unique products and services. The bad side is that companies need new kinds of technological processes to manage that complexity -- so they can collaborate and synchronize data about their products with far-flung partners and respond quickly to changes in market demand.
"The increased complexity of global supply chains has led to longer lead times and more pipeline inventory," write Bob Heaney and Viktoriya Sadlovska in a recent report by the Boston-based Aberdeen Group, which studies IT companies and products. "This, in turn, has contributed to increased supply-chain management costs. Reducing costs by driving down excessive inventory and avoiding or quickly responding to disruptions has become critical for companies in today's economy. But before a company can reduce pipeline inventory or landed cost, it needs to have visibility into them."
Not that long ago, according to Kefer of GT Nexus, the "chain of custody" for a typical manufactured product in the United States would last only about three days and would involve only one mode of transportation -- trucks on a domestic route. But with so much production coming out of Asia, that chain of custody is often about 45 days long. When the chain was only three days long, its variability was about one day; a shipment could be delayed by about only that long because of an equipment breakdown, snowstorm or other unexpected event. However, the variability of today's longer supply chains is far greater -- and far more challenging.
A 45-day chain that starts in Asia often involves about 14 days on a freighter and then time on possibly both truck and train. "You could lose three to five to 10 days because of things you never counted on," says Kefer. "But when you're a just-in-time manufacturer, you can't afford delays of five to 10 days." Retailers who need to have the latest hot Asian-made apparel or toy on their shelves in time for a major event such as Christmas cannot afford to fall behind on their delivery schedules. Protecting against variability comes at a very high price -- typically, either by expediting the delayed product via costly express services such as UPS or FedEx or by setting aside large amounts of "safety stock" (excess inventory) in warehouses.
Though few companies have the financial resources to set up their own technology platforms for collaborating with suppliers and transportation providers, even companies on a modest budget can afford the cloud and should consider signing up, says Christopher. The only exceptions to that rule are the dwindling number of companies that deal with a limited number of suppliers and logistics partners in a limited number of geographical locations. "We can't go back to the old vertical supply chain but we need to manage information, and the best way is shared information."
Keeping Complexity at Bay
"Complexity is really the core challenge of our business," says Henning Husmann, director of business development at Hermes-OTTO International, a firm based in Germany and Hong Kong that provides retail sourcing services. "The complexity of our business processes is growing exponentially, and cloud-based technology helps us keep that complexity on the same level" rather than let it get out of hand.
According to Christian Verstraete, chief technology officer for worldwide manufacturing and distribution industries at Hewlett-Packard Company, cloud-based supply-chain management is a next logical step after "lean manufacturing," which removes wasted steps and processes from the factory floor so that managers can easily see just where things are. The problem with supply-chain management is that "you can't just walk through your supply chain and see where your waste is. That's very hard to do with EDI when you have 600 or 700 players in your supply chain."
Cloud-based services make it possible for companies to do just that. "Cloud technology has proved to be a superior way to get technology," says Kefer. "You get more for less -- less risk because you are not buying the technology. It's a quicker path to value." Users come from every industrial and retail sector. For example, GT Nexus's customer list includes such familiar names as American Eagle Outfitters, Del Monte Foods, Home Depot and Restoration Hardware. Leading firms on Management Dynamics's Global Trade Management Platform include Dell Computer, Fairchild Semiconductor, Honeywell and Pfizer.
A decade or so ago, a few manufacturers began to create hubs that linked them with all of their suppliers. At the peak of that trend, during the dot-com boom, there were several hundred such hubs, but today only a half dozen are left, notes Verstraete. The problem with the hub approach, he says, was that all of the costs for creating the hubs were borne by the manufacturers who ran them. That changed after high-speed, low-cost Internet access made it possible for suppliers, manufacturers and other supply-chain partners to share all of that data on the Internet as a pay-as-you-go service. Verstraete says the best analogy for these services is the public electricity grid. "You just plug in your lamp, and you get what you need. You don't know where it comes from, and you don't care."
According to the study by Aberdeen Group, leading companies are 1.87 times more likely than average companies to automate their logistics processes in collaboration with their suppliers, and they are "expanding their reach." Adds the report: "Visibility must extend across the enterprise to embrace suppliers, 3PLs [third-party logistics providers], and customers" if companies are to maximize their opportunities.
For all that, Marshall Fisher, professor of operations & information management at Wharton, warns against overselling the virtues of cloud computing for supply chain management. Some vendors of this software service have latched onto the hot label of "cloud computing" to make it seem fresher than it really is. "Cloud computing doesn't suddenly make possible things that weren't possible before," Fisher says. Delivering via the cloud just makes many of those things easier and less expensive to deliver. "Cloud computing is a hugely important development" that enables companies to access third-party software "in a much more convenient way. You can run software, and it looks like it's on your computer," Fisher adds. "It [cloud computing] is an incremental step, but not necessarily a revolutionary one, although it could be revolutionary in certain kinds of software," yet to be determined.
The idea of closer collaboration with supply chain partners, according to Fisher, "has been going on for a long time" in some sectors, such as the auto industry. Many companies have found that e-mail and Excel are adequate tools for "the robust sharing of retail sales data," he notes. "Certainly, more computing power [via the cloud] won't hurt" the further progress of such trends as closer relationships with supply chain partners and upward mobility of supply chain executives into the executive boardroom. The key is not sharing more and more data but learning how to "make sense of the data." With that goal in mind, some cloud-based vendors provide integrated business intelligence software that makes sense of the data shared on their platforms. Among other things, this software analyzes the performance of their customers' supply chains, slices and dices customers' key performance indicators (KPIs) and metrics by various dimensions, and creates customized reports for distribution to customer's various corporate departments.
The Convergence of Consumer and Business Markets
What lies ahead for cloud-based supply-chain management? Chris Jones, director of product development at Montreal-based Descartes Systems, says there is a growing "convergence of consumer and commercial markets" for cloud-based tools, as production volumes of mobile devices like iPhones grow and prices for such products continue to drop. "These devices are very cheap and powerful, and people are saying, 'Why can't I use that in my commercial world?'"
Descartes' Global Logistics Network, one of the world's most extensive multimodal business software networks, enables customers to manage their international shipments by sea and air, comply with customs requirements around the world and use their mobile devices to track vast amounts of information that are exchanged as shipments pass from one trucking dispatch center to another across North America. Regarding the latter software, Frank Hamerlinck, vice president of R&D for Descartes, says, "This is a complex process to plan because there are so many vehicle breakdowns, traffic jams, missing shipments" and other unpredictable events. In planning the ideal route for truck shipments, the Descartes software considers such variables as the lowest fuel consumption, the fewest stops and the lowest number of drivers.
Early this year, Descartes will be adding technology to its cloud-based platform that will allow several thousand sales and merchandising employees of Kraft Foods to track products over their mobile devices. "Five years ago, you could never do this -- the cost would be too high," says Jones. Now, you'll be able to use any mobile phone with a data plan -- not just iPhones and Android phones, but even Java-based phones. With this kind of software, "I don't just collect data from the field; I make decisions using that real-time data" so that, for example, "I can optimize my routes or not send any more pick-ups to specific locations."
Other powerful cloud-based applications will increasingly move toward mobile platforms, says Hamerlinck: "Mobile devices are not only becoming more mainstream, but more powerful. They have more storage, more computing power and more graphics possibilities." "The cloud will get more and more important" for business users, he adds, as more and more applications are developed for highly specific business-to-business uses. "We are inviting our partners to build some extra features."
According to Hamerlinck, cloud-based logistics providers will also be turning to the model of Facebook and other web-based social communities. Beginning in 2011, Descartes customers will be able to maintain their own profiles and subscribe to services by themselves. "It will be quicker and more automatic to maintain your own profile and allow others to see what you are doing," he says. Members of the network will "discover each other without us always being in the middle."
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