BUILDING AN AGILE SUPPLY CHAIN

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1 BUILDING AN AGILE SUPPLY CHAIN Tim Waddington, MIOM, Forward Vision International INTRODUCTION The effect of the Internet on manufacturing and on the supply chain (as in most other areas of commerce) is a hot topic for articles and conferences. Companies are having to react to customers who expect immediate replies and 48hr deliveries anywhere on the globe. This report focuses on the likely effects of technology and the Internet on the supply chain and the need for systems improvement to improve responsiveness. NET POWER Dell Computer is the US s number one computer supplier and is reckoned to be the fastest growing such company in the world. Customers can specify hardware and software requirements that Dell then assemble and deliver. Their popularity has caused traditional players, such as IBM, to react and adapt or risk extinction. Dell s supply chain involves so-called virtual integration ; communicating and coordinating with suppliers via an extranet as if they were part of the same company, a so-called extended enterprise. It s direct customer contact gives Dell undiluted feedback that they use to improve their methods. [1]. An HBR article [2] on The Future of Commerce, proposes that Choiceboards, such as Dell s, will become the areas where most web sales shall take place, anticipating that 30% of US commercial activity will be done on them by the end of the decade. The battle will be whether customers prefer Choiceboards of the manufacturers such as Sony and Dell or those of the independent intermediaries such as CarsDirect.com where product comparisons force manufacturers to compete head to head on price and features. Product-configuring websites, such as Dell s, dramatically increase the options for customisation. There is no doubt that a certain level of make to order (MTO), such as specifying options for a car, will become normal practice. However, with certain products MTO will revolutionise the industry. A current B2B example is the bespoke printed circuit board market. Through specialist PCB trading portals, customers type in their specification and suppliers return with sealed-bid prices. The request for quotation response time has dropped from days to hours and the average PCB prices have dropped by around 60%. IT capability for product configuration and CAD is essential for such fast response and reductions in manning levels. Additional cost reductions come through increased economies of scale for the suppliers that are still able to compete. [3]. 1

2 B2B is the largest growing area of Internet trading. Worldwide B2C sales are set to grow to 800bn dollars p.a. in the next three years, but more significantly B2B sales are set to grow to one trillion dollars in the same period. Internet purchasing cuts transaction costs from 50 to 5, according to British Telecom. It has been estimated that Britain alone could save 27bn 3% of national income through SCM over the Internet. Another key area for B2B trading will be trading exchanges. [4],[5]. On 25 th Febuary Ford, GM and Daimler Chrysler established their Internet based trading exchange to reduce transaction costs, enable economies of scale from common sourcing and post on-line auctions for supplier contracts. Considering that GM s extended supply chain involves $500bn and Ford s $300bn, this site will dwarf other B2B sites. Some large first tier suppliers have voiced strong reservations about being tied into these systems with its resulting transparencies and potential tensions from being involved with both companies sites. However Harold Kutner, GM s purchasing chief has declared this will be a requirement for our supply base this is the only way we are going to do business. The trend is growing, with Pepsi-Cola, BP Amoco and the Aerospace industry also setting up trading exchanges. [6], [7]. For B2B connectivity the Internet has been titled son of EDI. It is able to deliver a much broader range of information at a fraction of the cost to set up and run. This lowers the barriers to entry for new suppliers and allows buyers to change suppliers more easily. T he trading exchange process will put increasing pressure on smaller suppliers. AT. Kearney estimate that almost one in four suppliers worldwide will be cut or merged because of the effects of Internet purchasing. [8]. SYSTEMS IMPROVEMENT The Internet both solves and creates problems. The cost of holding large stocks to enable rapid response hurts profits yet companies that miss deliveries, such as E-Toys over Christmas, have quickly tarnished reputations. Orders come in at anytime from anywhere and logistics have to handle batches that are much smaller, greater in number and right first time. Behind the glamour of web trading there has to be an even more effective sales, operations, supply chain and delivery system in support. [6],[9]. Demand amplification - the so-called Forrester effect - distorts responses along the supply chain, as illustrated below. It can lead to excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation and missed production schedules. 2

3 Demand Amplification Retail sales Product orders Norm To cope with the radically more disruptive demand patterns created by e-commerce, the supply chain of the future must be ever more responsive and minimise this effect. The key is to tackle the root causes, the leads and lags in the system. No single technique can achieve this; a combination of technology and more traditional methods is necessary. These include: Lead time compression Synchronised material scheduling Throughput efficiency. Lag time compression (increased responsiveness) Inventory reduction Agile manufacturing Internet ordering and automatic ERP execution. [10],[11],[12]. Centralised/synchronised material scheduling Initiatives such as EDI and ECR in the grocery supply chain have lead to improvements as Wal-Mart and Procter and Gamble are a classic example. Real time demand information, direct from EPOS or web sales, can be made widely available throughout the supply chain. This allows suppliers to receive significantly earlier warning of demand, as in the information iceberg below: 3

4 The Information Iceberg Respond to demand Respond to forecast The Internet provides the potential for the ideal world where everything is demanddriven i.e. with none of the iceberg submerged. Tesco and pioneering automotive after-sales companies are introducing systems to achieve this objective. This should allow control of manufacture in real time. Suppliers can then make and send in quantities that they see will meet demand and deliver without having to wait for an official order. IBM have given up trying to forecast demand for a new product. Instead it now matches supply to demand on a day-to-day basis. [7],[11],[13],[14]. Throughput efficiency Across a range of industries the order to delivery process commonly has only 1% of the time adding value and the rest adding cost. Value Stream Mapping is one collection of tools that identify non-value added activities and then organise their elimination through both radical and incremental methods. Cox writes that the length of the supply chain pipeline is inversely proportional to its responsiveness and directly proportional to the amount of working capital tied up in inventory. Improvements to pipeline management will be an essential enabler for supply chains in the 21st century. [11],[14],[15]. Inventory reduction methods As previously noted, demand visibility throughout the supply chain and improvements to throughput efficiency are vital for inventory reduction. Also the responsiveness of the system (ie. reduced lag times) must be improved. Potentially, with sufficiently responsive systems and centralised control, only one stocking point is needed as a buffer within the distribution system. This is a next step on from Vendor Managed Inventory (VMI). 4

5 Increasingly, the Internet is being used as a low cost means of supplying the information to achieve this, substituting information for inventory. Dell place a high priority on this, as they term it, increasing inventory velocity'. IBM have also improved dramatically, reducing their inventories from $1bn in the early 90s to $110m today. [1],[7],[11],[14],[16]. Agile manufacturing systems Operations need to be made responsive through increased flexibility and shorter resupply lead times, not large stocks. The operational disciplines of JIT and agile manufacturing are more vital than ever. Process reliability is also vital, as Dell found out when the Fun Love virus stopped their assembly plant for five days. Where inventories are at a minimum, process reliability must be maximised. In terms of IT system reliability, the talk is now of 5 nines or % uptime. In addition to Muda or waste elimination, the Japanese also seek to eliminate Mura or variability. This is as important in the supply chain as in operations. Variability can substantially reduce the reliability of delivery, create waste and reduce throughput efficiency. IBM began to improve its responsiveness in PC production through a project started in 1996 with efforts to reduce complexity, increase manufacturing flexibility and shorten product lead-times. Already their delivery cycle time has reduced by 55% and on-time delivery performance improved to 95%. They know, however, that Dell and others are not going to stand still. [7],[17]. Internet ordering and Automatic ERP execution Web based product configurators and ordering systems allow customer orders to be taken immediately, with no delays or lags. There are also additional benefits of reduced errors and personnel requirements. It is vital to ensure integration with the existing back-office systems to avoid delays, duplication of effort and errors. Less than 10% of companies in e-business have yet connected their websites and enterprise systems (ES). Lack of systems integration is seen to be the biggest barrier to achieving world-class supply chain performance. Of the Fortune 1000 companies, only 20 believe they have achieved effective integration. This is the challenge that ES suppliers are working hard to address. Many companies are turning to specialised bolt-on products such as Customer Relationship Management (CRM), Advanced Planning and Scheduling (APS) systems and those, such as IBM using i2 alongside SAP, for supply chain integration. [7],[18]. CONCLUSION Supply chains are becoming increasingly demand driven'. The Internet is both accelerating this process and providing part of the solution. Michael Dell comments, I m only half joking when I say that the only thing better than the Internet would be mental telepathy. It provides a clear opportunity to supply new markets as well as a new source of challenges, such as 48 hour global deliveries and opportunities for 5

6 competitors to appear suddenly from any part of the globe. A key to beating the competition will be excellence in the supply chain. As Peter Drucker (1999) summarises, under e-commerce delivery will become the one area in which a business can truly distinguish itself. [19]. Between businesses there is the potential for vast cost savings from bulk-buying networks and trade auctions. It will provide large OEMs with substantial power to force down prices from their suppliers and to rapidly change those which do not perform. The Internet will allow virtual partnerships to be used, with extensive exchanges of information, further reducing costs from stock-outs and inventory. These benefits can be easily transferred to alternative suppliers. Despite all the virtual talk, products will still have to be manufactured somewhere! Agile manufacturing will become increasingly important, enabling suppliers to react ever more quickly. Such ability cannot be developed overnight, and from IBM to the smallest factory unit, developing such a competence will become an essential defence against global competition and a cost-ruthless market place. REFERENCES 1. Magretta J., The Power of Virtual Integration: An Interview with Dell Computer s Michael Dell, Harvard Business Review, March/April, Slywotzky A.J., The Age of the Choiceboard, Harvard Business Review, January/February, Mainwaring J., Product Configurators The Key to Mass Customisation, Manufacturing Connections, wwwmcsolutions.co.uk,, Crooks E., Arguments Start Over Net Effect of E-commerce, Financial Times, 21 February, Bhattacharyya K., Internet Strategies for Manufacturing Conference, London, November, Edgecliffe-Johnson A., Shares in etoys Tumble 20% to a New Low, Financial Times, 28 January, Nairn G., E-business Wave Yet to Have Full Impact, Financial Times, 1 December, Daniel C., Keeping the Wheels of E-commerce Turning Smoothly, Financial Times, 6 January, Batchelor C., Logistics Aspires to Worldly Wisdom, Financial Times, 17 June, Forrester J., Industrial Dynamics: A Major Breakthrough for Decision Makers, Harvard Business Review, July-August,

7 11. Hines P., Lamming R., Jones D., Cousins P. and Rich N., Value Stream Management, Prentice Hall, Hemel Hempstead, Elliot R., Internet Strategies for Manufacturing Conference, London, November, Lee H.L., Padmanabhan V. and Seungjin W., The Bullwhip Effect in Supply Chains, Sloan Management Review, Spring, Cox A., Innovations in Procurement Management, Earlsgate Press, Boston Lincs, Womack J.P., Jones D.T., Lean Thinking, Simon and Schuster, London, Andrews P. and Hahn J., Transforming Supply Chains into Value Webs, Strategy and Leadership, July/August, Ross A., Internet Strategies for Manufacturing Conference, London, November, Deloitte Consulting, Energising the Supply Chain Survey, Drucker P., Can E-commerce Deliver?', The World in 2000, The Economist Publications, London, About the author Tim Waddington, MIOM, is a Partner with Forward Vision International, based in Newcastle upon Tyne. He specialises in coaching manufacturing companies to introduce lean/agile approaches in their Operations and Supply Chains. He has made numerous public presentations in the UK, particularly on Genba Kanri, the disciplines essential for robust Operations and Kaizen. Tim joined Forward Vision in 1993 from Philips Electronics. 7