Extended Supply Chain Management: A Network Perspective - Part 1

Few firms remain even moderately vertically integrated, and few now control all but a fraction of their respective supply chains. This fact is too often lost in the "ERP versus best-of-breed" supply chain management (SCM) application debate, where integration is positioned as superior to all other evaluation criteria. Companies can no longer afford a myopic internal focus, but must begin to take a networked view of their SCM world.

META Trend: During 2004/05, external pressures to leverage new technologies (e.g., RFID, UCCnet), provide customized services, and improve visibility will drive companies to upgrade supply chain execution applications (e.g., warehousing, transportation, manufacturing). Concurrently, international trade, security, and compliance pressures will motivate companies to upgrade global trade, health/safety, and contingency planning solutions. Through 2008, companies will merge information processes among CRM, SCM, and PLM applications to holistically scrutinize demand/revenue flows across customer and product life cycles.

Companies are faced with a vexing challenge as they design their next-generation SCM portfolio strategies. Historically, SCM investments were primarily focused inside the four walls of the enterprise and were justified in terms of addressing internal process problems. During the past decade, most of the “real” SCM investment has gone to four-wall applications like warehousing, order management, manufacturing, transportation, and planning. Common business drivers were reducing on-hand inventories, increasing factory throughput, improving shipping-date performance, etc. Now the virtual nature of the modern supply chain demands new strategies that recognize the importance of externalizing supply chain processes and systems. There have been several fads during the past several years, such as collaboration, exchanges, and even the overarching e-business world, each of which promised to revolutionize SCM by externalizing some supply chain activities. Regrettably, there are few success stories. As with most new ideas, there are some achievements to suggest that the problems were with execution rather than concept, but even the few successful companies have struggled to take externalization beyond a handful of trading partners.

We believe the outsourcing trend demands that companies re-evaluate their SCM portfolios. Enterprises must redesign their portfolios around a virtual network model where they focus more attention on the externalization of processes and information flows (see Figure 1). Future business cases must be developed around end-to-end process improvement (e.g., order-to-cash cycle time, total pipeline inventory reduction, improved delivery on promise date), which - in a virtual network - will span multiple enterprises and systems. For example, improving order-to-cash and deliver-on-promise dates touches multiple organizations (e.g., manufacturer, third-party logistics, carriers, customers) with pieces of the process controlled by different organizations at different points in the process. Information flows between systems and pieces of the process will be owned and executed by different systems at different points. For example, an order transaction might be taken in a company’s ERP system, handed off to a third-party logistics provider’s warehouse management system for fulfillment, and handed off again to a carrier for delivery - and then payment authorization comes from the customer’s receiving and accounting systems. As evidenced by this example, focusing inside the enterprise (i.e., ERP) would address only a small fraction of the process, and the greater value would come by looking across the extended supply chain.

The extended supply chain application architecture must be designed around the interdependencies of the numerous constituencies that participate in the supply chain (e.g., customers, suppliers, partners, organization). As SCM networks become increasingly complex, there are, by definition, more participants in the SCM process, both within and outside the organization, and each of these constituencies plays a role in the flow of product across the supply chain. How each participant interacts, the decision-making process, and influence on the supply chain must be understood and be used to define the needs in the application portfolio. In addition to understanding the roles, responsibilities, and influence of the various constituencies involved in the supply chain, enterprises must map against these “end to end” process and information flows. Companies must recognize that the virtual nature of the modern supply chain, by its very nature, will be composed of a heterogeneous set of applications (i.e., each player having its core applications and technologies). The extended portfolio of systems will each own one facet of SCM processes (e.g., make, source, deliver), but the complete end-to-end process (e.g., order-to-cash, procure-to-pay) will more often than not span multiple applications and enterprises, and the portfolio design must address strategies for connecting and managing the dots.

Forget SCM Fad Diets
As previously stated, numerous fad technologies failed to deliver on the vision of extended SCM. The fundamental problem with these early initiatives was that these solutions were positioned as magic bullets whereby this technology alone would help the company lose 30 pounds in 30 days. There is no single, easy, or quick fix to extended SCM, and we contend that technology alone is certainly not the answer. In fact, some of the best examples of extended SCM use little or relatively rudimentary technologies (e.g., Toyota Production System), while other initiatives (e.g., CPFR) became mired in the cost and complexity of their technology centricity, eventually limiting adoption to only the most sophisticated trading partners.

Before focusing on technologies, we believe that companies must understand and document their networked SCM processes. We find that many Global 2000 organizations have reasonable process models for their four-wall activities but stop at the enterprise boundaries. For example, if a company outsources warehousing to a third-party logistics provider, it might stop its process model at “pass orders to warehouse” or “receive shipment notification from warehouse.” This is not good enough for managing a networked supply chain. Not having visibility to the activities controlled by the partner creates a hole in a company’s knowledge of what is going on and how to improve process performance. Likewise, identifying and fixing problems becomes impossible if a company has no understanding of the process beyond its immediate control.

Not to be overlooked is the added impact of mandates like the Sarbanes-Oxley Act (SOX), Section 404. SOX requires firms to provide visibility/transparency, control, communication, risk management, and fraud prevention for all processes that generate financial transactions, and these processes must be documented back to the source of these transactions. SCM represents one of, if not the largest, percentage of cost in manufacturing, logistics, and retail organizations, and it is the source of, or affects, numerous financial transactions, so SCM must support SOX initiatives. Because documenting processes that generate financial transactions is central to SOX and that SCM processes span multiple organizations, companies must extend the reach of their modeling activities to include all the constituencies that touch those transactions.

In previous research, we examined the importance of process modeling on the success of SCM application implementations. For example, we find that 60% of the cost and effort of a successful supply chain planning implementation is invested in modeling. Consequently, we feel the first step to extended SCM is to get the process models right and then companies can move on to the supporting technologies. In Part 2 of this series, we will begin to investigate specific technologies that should be considered as part of an extended SCM application portfolio.

Bottom Line: Given vertical dis-integration of supply chains, companies must develop supply chain portfolio strategies that support the management of processes across a virtual network of specialized participants and that address the heterogeneous nature of the extended SCM application portfolio. Although technology will be necessary for building the supporting infrastructure for extended SCM, it should not be the first consideration, and it must not dominate the thought processes of companies. Companies must take a holistic approach to externalization, building portfolio strategies around people, processes, and technologies.

Business Impact: By better understanding its extended supply chain, companies will gain greater improvements in SCM process performance.

META Group originally published this article on 27 May 2004.