Preparation is key to supply chain management

The course of true love never did run smooth. Providers of supply chain management (SCM) systems have been mean, selfish lovers to big business. Yet big business keeps going back for more. Don't they know what's good for them?

Gold-digging software companies and their services sidekicks were charging phenomenal amounts of money for systems at the end of the 1990s.

They then turned out to be high-maintenance lovers, to boot. By the turn of the millennium, some businesses had had enough and kicked them out.

The consequences have been unfortunate for suppliers as prospective customers became suspicious, and existing ones started blaming them for making a hash of things.

Nike, Whirlpool and Hershey's all suffered from bodged supply chain system implementations, which left commentators debating whether the responsibility for a project's success lies with the buyer or the supplier.

So 2002, when the effects of the economic slowdown were entrenched, was a time of reflection and stocktaking for supply chain experts.

Researcher IDC, which tracks spending on supply chain systems, believes that software sales have since fallen by about 20 per cent.

IDC analyst Jennifer Kemmeter explained that SCM projects implemented by large multinationals prior to 2002 were costing between $10m (£6.2m) and $50m (£31m) for the software alone, and five times that amount for the services to make the software work.

Short-term goals
The difficulties experienced by the global supply chain pioneers prompted most to shun gargantuan projects, instead opting for staged implementations with short-term aims and payments.

Yet IDC predicts a recovery in the SCM market next year, suggesting that the measured approach has caught on.

Nigel Montgomery, a supply chain consultant with AMR Research, pointed out that important lessons were learned in the late 1990s.

First, projects that were too ambitious in their scope were more likely to fail. Second, companies implementing supply chain systems needed to prepare their infrastructure and fundamental business systems like a wall before papering.

If SCM is to deliver what it promises, business process change should also be managed properly. Companies which failed to prepare properly in the 1990s faced rocketing implementation and integration costs.

The advice now being offered to IT directors is common sense, and should be championed by all suppliers. But the late 1990s were heady days when a lot of sense was lost to excitement and sophisticated SCM systems, although green, were all part of the rage.

Today, companies implementing SCM have the advantage to learn from others. For example, by November, Woolworths will have completed 80 per cent of its SCM rollout, using software from Manugistics.

Gerry Callenan, head of supply chain development at the retail giant, had about nine systems managing its supply chain at different points.

Woolworths is either scrapping or subsuming these into the Manugistics system, with a nod to companies that previously failed to unify their infrastructure before implementing SCM, in a way that ensures all inventory data is bona fide.

In the past, ambitious SCM implementations often failed because companies worked with unreliable data.

Callenan realised that there was a problem with conflicting data when it was drawn from different areas of its piecemeal legacy systems. The Manugistics implementation was intended, in part, to correct this.

However, the main reason was to improve demand planning and inventory management, with which the retailer has reported some success.

Woolworths' supply chain system became a headline feature of its interim financial statement. Shrinkage, a measure of lost and stolen inventory, contributed to a 30-point increase in gross margins. On-shelf availability, a crucial measure of supply chain efficiency, also increased.

The company has also improved the way it manages inventory between its depots and stores. Supply chain communications with suppliers will continue through good old-fashioned word of mouth and spreadsheet.

Next year, it will be looking at how it can integrate its systems with its 1,000 suppliers.

Shared intelligence
Integration of SCM systems up the supply chain is a concept that had software punters and credulous commentators excited during the dotcom boom.

It was thought that everyone's systems would be able to talk to each other and share intelligence about demand, inventory and quotas in a way that would allow entire industries to operate more efficiently.

The reality is that the costs associated with SCM, and the business transformation it requires, have limited its advance to the larger producers and sellers.

Some of the best examples of supply chain integration are, therefore, within a closed loop: within one organisation, from depot to store, or subsidiary to parent.

This does not detract from the success with which supply chain systems are now being implemented. It just means that the vision of a nimble industry, able to respond instantly throughout the length of its supply chain to fluctuations in demand, is further off than some have imagined.

The encroachment of supply chain systems throughout industries will happen gradually.

New Balance, a sports shoe manufacturer, has just completed an 18-month implementation of a GEAC Enterprise Solutions supply chain system, and is just another example of a company that realised the benefits SCM could offer within the business.

The company has been rolling out a system across its European sales centres to improve its inventory management, and get a better handle on its finances.

By allocating stock across its European depots more efficiently, and being able to more easily ship direct to customers, it claims that the system will almost double stock turns and halve its stocking costs, saving about £500,000.

Modest gains from a modest approach, and a pragmatism many SCM vendors and consultants now shamelessly endorse.

Slow and steady wins the race
Tortoises might not be very exciting, but they get there in the end - and that's what counts.

Supply chain integration is likely to proceed so slowly in most sectors that it could slip by unnoticed.

Four years ago, rational experts were anticipating the imminent transformation of industry and economy through e-business. Today, they are too engrossed in trying to stretch budgetary and organisational limitations across the gap between existing systems and the e-business nirvana they had imagined.

Back in the real world, supply chain integration is plodding on with some success. The first stage is, typically, the integration of supply chain systems across subsidiaries of the few large organisations that can afford it.

The most common extensions of these systems are being reached at a realistically tempered pace up and down the supply chain, through extranets and web links.

Vinten Broadcast, a manufacturer of equipment for the film industry, has been rolling out an IFS supply chain system out to distribution firms owned by its parent company.

Chris Stanghan, business systems manager at Vinten, and chairman of the IFS user group, explained that it plans to use XML to talk to other companies in its supply chain.

But even though only modern systems can understand the language, there is a way round this problem.

Vinten is trialling web links that give suppliers a view of its inventory. This is a far cry from the automated supply chain lauded by vendors and pundits, where a fluctuation of demand sensed at the bottom of the supply chain is sent shooting up to the top through a software nervous system.

But it is one that most firms can, and do, use. Stanghan maintained that 80 per cent of its partners will use its web system.

Minky, a Rochdale-based manufacturer of homecare products, has access to similar systems operated by a variety of retailers.

The one it finds most useful, provided by Argos, has reduced end-of-season returns on some product lines from five to 10 container loads to just a few palettes.

Its production can be matched more closely to demand, and deliveries can be sent, in defiance of blind refresh targets, to the customer depots that most need the goods.

"When you get an order from a customer, you don't know how urgently they need it. But if they are losing sales through losing stock that's a disaster for us because we're losing sales too," said production control manager Keith Nelliste.

This level of communication suites Minky, for now. Its goods are not perishable and its production is simple compared with, say, an automotive manufacturer where thousands of components go to make a single vehicle.

Minky typically uses about 30 components in a product and relies on just a few hundred suppliers. It doesn't, therefore, have a need for up-to-the-minute supply chain data.

There is even less need for demand data to be shared up Minky's supply chain because of the way its suppliers operate.

It is happy with the production schedules and forecasts they get. Its systems are adequate and, while developments such as those at Argos and Vinten add oil to the cogs of commerce, they are not examples that need to be followed everywhere.