Discount computer supply

SLUMPING capital markets. Fears of a double-dip recession. September 11. These are reasons enough for companies to start taking more slack out of their supply chains. But new technologies, the continuing evolution of Internet-based commerce, and a much-hyped concept--the "real-time enterprise"--are also spurring managers to make their supply chains as cost-effective, transparent, and responsive as possible. The rewards of doing so can be great: leaner inventories and lower working capital, higher profits and productivity, better customer service, and competitive advantage. Companies like Wal-Mart, FedEx, Dell, IBM, and Procter & Gamble have shown how superior supply chain management (SCM) contributes not just to a healthier bottom line, but also to industry dominance. Their example has even rubbed off on the military: the United States Marine Corps has launched a major campaign to streamline its supply chain operations, based on civilian models (see "In the Air, on Land and Sea," page 88).

Meanwhile, the penalties for supply chain malfunctions can also be great, as demonstrated by the inventory glut of 2000-2001, which cost high-tech and telecom businesses billions of dollars in excess supply. Or by the stumbles in recent years of companies like Nike and Hershey Foods, whose flawed roll-outs of SCM systems cost them dearly. Or by Kmart, whose inability to solve its supply chain problems was a major cause of its slide into bankruptcy last January, say analysts.

SCM systems have been at the core of many reengineering projects, making them one of the hottest software categories during the past few years. But in 2002, corporate spending on technology has slowed. Recent surveys of CIOs by Morgan Stanley, Meta Group, and Gartner/Goldman Sachs all show that companies have tightened their IT budgets. Boston-based AMR Research reports that the overall SCM market grew 12 percent in 2001, to $5.6 billion; AMR expects 13 percent growth in 2002.

A slow-down in spending doesn't mean companies have stopped implementing or improving SCM systems. Some are installing "shelfware"--software they bought as part of a bundled offering but hadn't got around to installing yet. Others are trying to clean up specific problem areas of the supply chain with niche applications. Meanwhile, many applications remain to be integrated with each other and with enterprise resource planning (ERP) systems. As always, ROI is king.

"We're seeing a push for quicker time to benefit from an investment; we're seeing a push for investments that build on top of past investments," says Andrew Macey, director of supply chain for Sapient Corp., a Cambridge, Massachusetts-based consultancy. "Companies that put in large, enterprisewide supply chain software tools, like an i2 or a Manugistics or an SAP, obviously don't want to throw away that investment. But in many cases they haven't got what they hoped for, and they are trying to ameliorate that with smaller, incremental investments focused around a particular point issue."

Supply chain applications come in many varieties from hundreds of vendors, all promising to deliver greater control over some part of the supply chain as defined by the nonprofit Supply-Chain Council's Supply-Chain Operations Reference (SCOR) model: plan, source, make, deliver, and return. Broadly speaking, applications maybe said to fall into one of two types: planning and execution. The latter includes increasingly sophisticated systems for warehouse management, logistics, and event management. Last year, overall sales of supply chain execution software surpassed sales for planning apps, says AMR Research, indicating that companies are increasingly focused on business tactics and cost control.

But software isn't the whole story. Although SCM systems can work wonders, experienced managers know that projects will fail if process and people issues are ignored. Supply chain consultants insist that companies rethink old assumptions, replace inefficient processes, and prepare for change management before they embark on an expensive software implementation.

FIRST, COLLABORATE

One ambitious effort by retailers and manufacturers to implement supply chain best practices is called collaborative planning, forecasting, and replenishment (CPFR). A set of process and technology models that build on vendor-managed inventory programs, CPFR promises to optimize information sharing between buyers and suppliers. But although numerous pilot projects are under way, CPFR's time will be slow to arrive, as it requires extensive process and technology reengineering. (For more information, see www.cpfr.org.)

Best-practice collaborative forecasting can be done in the here and now, says Kevin O'Marah, vice president for supply chain strategies at AMR. He argues that collaborative forecasting isn't technology-dependent, but relies instead on process rigor, relationships, and trust. The goal is to get everybody on the same page, from a company's internal departments to its outside trading partners. (The goal is not to achieve a perfect forecast or even 90 percent accuracy; suppliers understand that demand uncertainty is inevitable, says O'Marah.)

Successful collaborative forecasting rests on a rigorous sales and operations planning process, says O'Marah. That amounts to convening formal, regular meetings between sales managers, who know what customers will pay for, and operations managers, who can match that demand with sourcing, production, and logistics requirements. Does this sound too simple? "A lot of best practices end up being really simple, like collaborative forecasting," he responds. Too obvious? "It doesn't go on as much as you think."

And if collaborative forecasting doesn't happen that much within the four walls of a company, it's not all that frequent between companies either, say consultants. John Leffler, global head of collaborative value chain solutions at PwC Consulting, recalls a recent meeting between managers of two companies in the entertainment industry: a large, multimedia concern and one of its major suppliers. "The supplier was outlining in detail the major supply chain issues they had that hurt their profitability"--issues the larger company didn't have visibility into, says Leffler. As a result of the powwow, the managers agreed that instead of giving the supplier the usual range of forecasts, the company would start from a baseline amount and provide timely updates as it received better demand signals from its customers.

The specific technology used to collaborate with suppliers doesn't matter, says O'Marah, as long as it's simple and fast; EDI or E-mail may serve as well as collaborative supply chain applications. The quality of information does matter, though. That might mean, for example, an end to forecast padding, a practice especially rampant in high tech, where companies have routinely overstated their need for electronics parts (see "The Great Inventory Correction," September 2001). Instead, a new level of trust is required. Ideally, suppliers could pass on savings from collaboration without fear of being squeezed or replaced.

Judging by a recent AMR survey, suppliers and their OEM (original equipment manufacturer) customers have a ways to go to achieve that level of trust. When asked what cost discount would cause them to change suppliers, the average OEM response was 7 percent; suppliers thought 10 percent. The suppliers, says O'Marah, have less breathing room than they think.

FROM SUPPLY CHAIN TO KEYCHAIN

When it comes to getting detailed forecasts out to scores of suppliers, technology can make a difference. In high tech, where supply chains have been disaggregated through outsourcing and contract manufacturing, some companies are experimenting with Internet hubs, or trading exchanges, to forge tighter links with trading partners.

One of the more successful experiments is Hewlett-Packard Co.'s procurement and supply chain exchange, dubbed KeyChain. For the sprawling computer multinational, newly merged with Compaq, with thousands of suppliers and more than 100 operating sites, the trading exchange is the answer to a conundrum: how to bring common processes and companywide visibility to widely distributed supply chain operations.