Supply Chain Management Becomes a Larger Priority
Industries with extensive and complex manufacturing environments, such as consumer products, high-tech and automotive, know that failing to collaborate with suppliers will result in deep monetary losses. As a result, companies' attention and budgets are returning to supply chain management (SCM), and area that received much attention in the early '90s, before the Web boom. SCM is typically defined as the components, products and services that work together to break down barriers between a company's functions, processes, departments and trading partners. We will continue to see increasing adoption rates of technologies that streamline supply chains, specifically through properly managed planning and execution practices.
The Internet's development over the last five years has helped push the adoption needle by making it easier for companies to electronically communicate with their supplier networks, for instance, connecting warehousing and transportation -- a process that was nearly impossible previously, since those operations were siloed functions. In fact, SCM has grown so much as a priority that Aberdeen Group's December 2002 study, "The Supplier Performance Measurement Benchmarking Report," stated that 70 percent of enterprises view measurement of supplier performance as critical to their companies' overall operations.
As the realization for needing cutting-edge SCM sinks in, companies will struggle with linking together all parts of their networks. The fact that SCM is probably the most fragmented group of software applications doesn't help to diffuse frustration levels, even among analysts.
The components of SCM tools
Vendors and analysts tend to break SCM networking applications into five components:
- Planning: The strategy
- Make: Manufacturing steps
- Source: Procurement and capacity allocation
- Deliver: Warehousing, inventory and invoicing
- Return: Merchandise returns
The underlying problem, says Andrew White, research director at Gartner, Inc., is that no single SCM vendor integrates with a company's CRM offering and none offer a complete solution with all five elements. SCM technologies are broken into two subcategories: Planning and Execution. Manugistics and i2 Technologies typically cover planning, while SAP, J.D. Edwards, Oracle and PeopleSoft are execution vendors.
Yankee Group senior analyst Michael Dominy says that companies using execution software generally need a planning solution, as well, which optimizes the flow and efficiency of the supply chain by using algorithms to predict sales and manufacturing capacity. Planning solutions include demand planning and forecasting, supply planning and sourcing and manufacturing planning and scheduling. An execution program automates the steps of the chain and should offer components that manage the warehouse, transportation, labor and supply-chain events.
As best-of-breed vendors try to differentiate themselves through more sophisticated promotion planning, pricing optimization and causal forecasting, they should offer assistance with integrating SCM technologies with companies' CRM and ERP applications. "We're seeing this [gap] in end-user deployments. They've implemented CRM and they've implemented SCM and they've realized there are gaps between the two systems," Dominy says. White says vendors are trying to fill that space by offering "demand chain management" technology that links the systems together.
White also notes that the data required by some SCM applications is not always readily available. "Some of these calculations require complicated or deep data sets," White says. "[Pricing] constraints, product descriptions, storage capacitiesÉthat data is not normally lying around in an ERP system because there was no need to create it in the past. So supply-chain systems need to gather new data. The more complex the supply chain, the more complex that problem will become."
When companies sort through the intricacies involved with developing an efficient network of suppliers, they will reap the benefits. Operational improvements, including reduction and inventory, which free up working capital, reduce cycle time and increase customer service, stand among the most obvious returns on investments, says White. Dominy adds that order fulfillment also will improve. "The key things companies are looking at improving are faster supply chains and faster and shorter order-cycle times," he says.
Industries, including automotive and high-tech, have been enjoying these benefits for the past few years. Dominy says Procter & Gamble and Wal-Mart are also prototypes of companies that have excelled from their supply-chain performances.
Finally, companies are realizing that they can reduce inventory and improve service by sharing customer information with suppliers. As a result, Dominy says that, over the next year, companies will scale up these relationships. "You can only squeeze out internal efficiencies so far before you need to start looking elsewhere to get incremental efficiencies, function improvements and cost reduction," he says. "The biggest opportunities lie in between businesses, not within businesses."
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