The benefits of flexibility

Technological advances are beginning to give companies leverage over their supply chains - bringing huge returns for companies bold enough to make the investment...as in the case of Taylormade-Adidas.
Written by Mike Cleary, Contributor
Taylormade-Adidas golf is trying to hit a long drive by investing $10 million in an Internet-based supply chain project. And if it sinks the putt, the Carlsbad, Calif., company believes it will be able to achieve more than $50 million in cost savings and new sales next year through the streamlined supply chain.

The project, in the works for three years, involves a sophisticated integration of QAD's Mfg Pro software, Provia Software's ViaWare and other products, all coordinated by a 10-module supply chain management suite by i2 Technologies. Still, it took a lot more than technology to tee up the golf company's drive to the green, says Mark Leposky, TaylorMade's vice president of global operations.

"Although a lot are talking about supply chain being a competitive weapon, they never change the internal processes," Leposky says.

While the economic downturn is causing some companies to rethink the speed at which they deploy supply chain projects, they are more important now than ever before, analysts say. With bloated inventories, fat delivery cycles and excess employees to trim, streamlining supply chains can add 5 percent to 20 percent to the bottom line, they contend.

According to AMR Research analyst John Fontinella, one high-tech company expects to get a one-time savings of $100 million as a result of the supply chain program, which will take two years to carry out. It expects to save $10 million per year thereafter.

Taming the Bullwhip

In particular, high-tech companies want to tame the "bullwhip effect," which occurs when they build up piles of expensive, unwanted inventory and prevents suppliers from fulfilling customer needs. That happens when suppliers order more raw materials and parts than needed to fulfill a customer order, because they want a safety margin in case the customer has unexpected demand. It's a smart move between a supplier and a customer, but it's positively dangerous when a whole chain of suppliers adds a safety margin.

"Safety stock is a material expense," says Corey Billington, Hewlett-Packard's vice president of supply chain services. "They don't devalue, they rot. Moore's law [predicting a doubling of computer memory capacity every 18 months] means parts lose 1 percent a week."

The trouble is that supply chains are complex, sprawling systems of trading connections that defy attempts to pin them down. Now, technological advances are beginning to give companies leverage over their supply chains. New software and agreements are giving companies visibility through the Internet into customer orders downstream and supplier inventory upstream. Other systems are making it possible to use this data spontaneously — something that rigid enterprise applications have frequently prevented, Fontinella says.

"The central idea is aggregation — of business logic, of views, of information," he adds.

It's already paying off for Taylor Made. Production cycle time is down to a range of six to 10 weeks, compared with previous cycle times of 12 to 16 weeks. Taylor Made now fills custom club orders in one to seven days, down from six weeks, and this business has doubled from last year.

Aggregation of data will also help TaylorMade stock the pro shops next year, and give it a competitive edge, Leposky says. "I'll be able to put a better mix of products into that outlet," he says. "Demand variability is a big problem in our industry. You don't recognize stuff until about two months later. We'll recognize shifts in two to three weeks."

Technology has less to do with implementing a successful system than setting a strategy, and aligning processes and technology with that strategy, Leposky adds. "It's a very deliberate act," he says.

Taming the bullwhip effect is one of IBM's five main corporate initiatives, and the work begins at home, according to Stuart Reed, IBM's vice president of integrated supply chain development and deployment.

IBM wants to develop a way to take a final product order and "explode" it into all the parts, subassemblies and raw materials required by suppliers at every tier of the chain. "We want to do the math once," Reed says. But before the company passes the information on to its partners, it needs "meaningful data."

"People drink the Kool-Aid about visibility. The focus needs to be about relevant data," Reed says.

Even within its own walls, IBM needs to integrate operations — use the same definitions, map data on the same formats, update at the same time — and that doesn't include all the communications integration.

"You have to get under the nitty-gritty. Those issues don't necessarily get fixed" by dropping data into an enterprise software program that companies normally use, Reed says.

It's more than difficult, he adds. "My superiors hate when I say this, but integration work is spiritual." His point is that just one executive who disbelieves the effort can subvert it, but if the faith is shared, it becomes far easier to connect with partners.

The task is harder still, because suppliers and customers don't always share a manufacturer's point of view.

Managing the Risk

Others think they don't need such tight integration, as long as a business can adjust to changes easily. HP takes a risk management approach.

Using the Converge trading platform and its own channels, HP buys and sells goods through a portfolio of approaches — structured contracts for fixed amounts, unstructured contracts for variable amounts and spot market transactions for fast, unplanned trades. The mix of these trades for any given product varies depending on the risk, HP's Billington says.

Since November, HP has used GetSupply, an Atlas Commerce system, to manage transactions among its suppliers. HP uses this private exchange to manage trading among its partners in plastic resins, HP logos and memory chips. It will be extended to cables, fans, motors and power cords, Billington says.

Usually, HP simply monitors the trades. The real value is that the company knows when to step in to fix problems. If deliveries or payment terms are falling out of compliance, HP can underwrite a cash-strapped supplier or set purchase limits during a parts shortage.

The key is managing uncertainty. Things go wrong — that won't change. The question is how to manage the risk.

"Which one of us will pay for uncertainties in a supply chain? Right now, it's an ad hoc thing. It will be more like a trading function," Billington says. And it helps all parties in the supply chain.

It's a different sort of transaction than the public e-marketplaces sought to provide. As private supply chains pick up the work they were intended to do, it suggests some areas in which public e-markets went wrong.

"This has to be a win-win-win. A lot of these exchange things were a lose-lose-win or a lose-win-lose," Billington says, meaning that in some cases suppliers were getting squeezed or buyers had to pay transaction fees that they weren't required to pay in the past.

How HP manages risk in its supply chain

  • Hewlett-Packard has many business partners that buy parts and supplies that go into components that eventually find their way into HP products.
  • Until now, HP had little way to know when there were problems in the supply chain between those partners.
  • Now, by having its partners conduct trades over a private Net exchange called Get Supply, it can monitor trades to ensure delivery and keep track of changes in pricing.
  • Normally, HP just monitors transactions. But, if a problem arises — a company can't pay on time, deliveries are late or parts run short — HP can step in and take action.
  • HP may underwrite deals, place limits on orders or direct that a supplier be changed; the end effect is to limit risk.
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