StrategyBy CIOinsight | Posted 03-06-2006
Global Supply-Chain Management
Supply chains are going global, yet most firms' systems are designed solely for domestic orders.
It's been a difficult time for Larry Merritt, director of global logistics at Lexington Home Brands, in Lexington, N.C. In less than three years, the $167 million home furnishings company has completely changed its business model. "We've gone from being a manufacturer to being an importer," Merritt says. The reason? Globalization. "A lot of new companies have entered the furniture industry, and they source overseas." To keep up, the company shuttered 14 manufacturing plants and support operations in North Carolinathe last cased-goods plant closed in December shaving nearly 4,000 people from its workforce of 5,000. Profits have increased, but "it's been tough," Merritt says. "It's not what we wanted to do. But at the end of the day, it's a matter of survival."
International trade has always been big business for big companies. But in the age of globalization, it's become a must for midsize and smaller firms, too. (See "Think Big," page 52.) Part of the blame rests on the "Wal-Mart effect," which has trained consumers to be more concerned about price than brandand forced many companies to follow suit. But there are plenty of other factors, including the growth of outsourcing, expansion of membership in the World Trade Organization, and the spread of regional trade treaties such as the North American Free Trade Agreement. According to Hau Lee, a professor at the Stanford Graduate School of Business and codirector of its global supply-chain-management forum, these factors have led U.S. companies to realize that "the world is their factory." And they have taken action: Roughly 55 percent of all raw materials for U.S. manufacturing is now imported. In fact, while U.S. exports increased by a mere 4 percent between 1999 and 2003, imports shot up 23 percent.
Yet most companies' current supply-chain management systems aren't properly equipped to deal with global anythinga fact that's costing midsize firms as much as $134 billion each year in missed savings, according to the Aberdeen Group. Sure, international orders can be logged and tracked the old-fashioned waywith spreadsheetsbut the manual process of entering data and figuring tariffs, exchange rates, delivery times, profit margins and logistics is a daunting task, especially when evaluating multiple bids from suppliers in multiple countries. And having a separate system for international orders doesn't provide the systemwide visibility that's critical in creating a more flexible, leaner supply networkthe key to survival in a global marketplace.
New software products that help companies manage global logistics, evaluate sourcing options, and share data between trading partners are a step in the right direction, but as usual they aren't a panacea. To compete in a global marketplace, CIOs need to rethink the entire supply chain, reevaluating policies, processes and even the architecture of the supply chain itself. The first step is to gain greater visibility into supply chains from end to end, and then to share that insight with all the stakeholders along the value chain.
Turn your internally designed supply chain into an outwardly focused global network.
Traditional supply chains rely on a company's own historical data to do demand forecasting and inventory planningand they often miss the mark. To create an effective global supply chain, companies must be willing to share sometimes sensitive business data that will lead to smarter, more realistic decision-making. That's easier said than done. "Companies don't want to share critical, internal business data," says Chuck Poirier, a partner at CSC Consulting, an El Segundo, Calif.-based firm that helps companies plan global systems. But it's critical, Poirier says, to making global supply chains work. "Look at Wal-Mart," he says. "It sends cash register receipts directly to its top suppliers so they know exactly what's being consumed and what needs to be replenished." Stanford's Lee agrees that supply chains cannot operate in a vacuum. "You have to set up information systems that are outward looking," he says. "It's not your company's supply chain. It's your company's supply-chain network."
Few companies understand this principle better than Procter & Gamble Co., the $57 billion consumer-goods manufacturer and operator of one of the world's largest supply-chain networks, with operations in 86 countries. To better connect with global suppliers, P&G created a Web portal that lets suppliers collaborate with P&G through every step of the procurement process. "We can review materials specifications, and suppliers see our production schedules so they can plan logistics in advance," says Alfonso Cos, vice president in charge of P&G's supply network.
Because P&G operates worldwide on a single ERP platform from SAP, supply-chain executives can easily aggregate data across divisions and "make it visible in ways that are more helpful for us," Cos says. For example, P&G creates digital dashboards and alerts for employees that provide end-to-end visibility into the supply chainincluding the ability to track SKUs and see where a product is in any phase of its design. "When something goes out of whack, it can be dealt with quickly," Cos says. That makes it much more likely that Charmin will always be available at your local supermarket.
But most companies don't operate on just one platform, and that can make sharing data across the network even more daunting. At Ametek Inc., a $1.2 billion, Paoli, Pa.-based manufacturer of high-end scientific instruments and electric motors that operates 18 business units and 65 manufacturing plants around the globe, divisions aren't forced to migrate to a single platform. "Our company serves a wide variety of markets," says William Lawson, Ametek vice president and CIO. "To disrupt those businesses and force them to process orders in a way that doesn't help them directly wouldn't make sense." As a result, the company has no single technology standard, operates in a dozen languages, and has more than 30 separate ERP systems.
So how does Ametek maintain visibility into its supply chain, and share that insight with suppliers? The simple answer, Lawson says, is data cleanlinessan absolute must for any company that operates on multiple platforms.
Each quarter, Ametek gathers all the spending data from its operations, updates new data with the proper codes, and compares purchases from different units to get a clear picture of the company's total expenditure. The data is then translated into a common language so that a special team of procurement and technology executives can identify abnormalitiesand opportunities. This information is then shared strategically with Ametek's suppliers.
Having that cross-system view of the supply chain allows Ametek to manage two very important variables: price and flexibility. It's a tough line to tread, says Mark Hillman, a senior analyst with AMR Research. "It makes sense to source parts where you can get them cheaper, but don't forget about logistics," he says. "An apparel company might source trousers from China because it's less expensive. But it might also want to keep some inventory in the U.S., so if a particular style becomes popular, the company can increase output to meet demand. If a hot item is stuck on a boat for 45 days, you're out of luck."
Global supply-chain systems can help shorten cycle times and make inventories leaner.
At Ocean State Job Lot, a privately held North Kingstown, R.I.-based retail chain, globalization has hit home. Ocean State sells discounted products from excess merchandise and closeouts, and according to CIO Hisham Aharon, roughly a quarter of these items come from overseas. In the past, bids to sell Ocean State merchandise would come in by fax or e-mail. "Someone had to go through all the offers by hand and decide which ones were good," he says. Once the orders were set, the company would send shipping instructions to the vendor, "and from then on all the interaction we had was through the delivery service," Aharon says. Not the best way to do inventory planning, especially when goods could take weeks to arrive.
Using software from supply-chain vendor TradeStone Software Inc., Ocean State automated the entire process last June. Now, everything is done over the Web. "We get multiple offers from vendors all over the world, and the system compares them side-by-side. Once we place an order, the system does all the conversion for us, figures out the shipping schedule and tracks the order all the way to our doorstep," he says. The company not only benefits from better decisions on sourcing, but the ordering process is shortened as wellfrom three weeks to three days, on average. This has broadened product diversity and led to increased sales throughout Ocean State's more than 70 locations across New England, says Aharon.
Obviously, the primary goal of global sourcing is to lower manufacturing costs, but putting the necessary systems in place to enable that creates other benefitssuch as streamlining logistics, says Ametek's Lawson. "We were using a shipper that was pushing for price increases, but when we started aggregating the data and realized the amount of business we did with that company, we were able to renegotiate prices." The company cut more than $250,000 from logistics costs, which nearly covered its entire global IT supply-chain investment.
But the ultimate goal for any supply chain is just-in-time deliverymeeting demand with virtually no overstocks. At P&G, the goal is to create a supply chain that produces on demand. "We plan to cut our current supply-chain cycle by one-third" in three years, says Cos, saving P&G tens of millions of dollars each year.
It's not an unattainable goal, says CSC's Poirier. In fact, he says, successful global supply-chain management can lead to profit increases of as much as 8 percent. "The first points come from better sourcing and logistics, the next from improved order management and warehousing. The last 3 require you to use technology to take advantage of improved supply-chain visibility to shorten cycle times and build new revenues."
Supply-chain nirvana is an adaptive network that responds to demandsand new markets.
Just-in-time delivery is great, but even better is a supply chain that reacts quickly to changes in demand and can customize products for end users with no hiccups in the process. This concept is known as postponement. Instead of sourcing product components from various locations, bringing them to a plant to be assembled, and then shipping them to various distribution centers, products are assembled at the last minute, based on demand. "For example," says AMR's Hillman, "it's difficult to forecast how many units of 12-ounce versus 16-ounce ketchup will be consumed in a particular region in one week, so you forecast the aggregate demand across all the retail locations but postpone the final packaging until the last minute, based on real-time demand." Postponement is particularly well suited for products such as computers and automobiles.
To take advantage of postponement, companies may need to physically re-architect their supply chains, moving manufacturing plants and reorganizing business processes. AMR's Hillman suspects that companies will begin reevaluating their supply-chain infrastructures within the next few years.
And with the eventual spread of RFID to help track shipments, companies will have even greater insight. "It's gotten a lot of hype, but it's actually working," says CSC's Poirier. Wal-Mart, for example, cites a 16 percent reduction in out-of-stocks on items that have been tagged because the company can alert suppliers when stocks dip below a certain threshold.
Global supply chains will also make entering new emerging markets less painful. "Everyone knows that consumption is increasing around the world," says Poirier. "If you aren't thinking about selling into those new markets, you're missing the bet of the century."
That may be, but it'll still be a culture shift for many firms, as Lexington's Merritt can attest. "It's been hard for us," he admits. "Everyone is signing on with the WTO, and if you want to be a part of that 300-pound gorilla, you have to compete on that level. Companies don't see how badly they are going to get burned if they think they aren't going to play in the global market."