How times have changed
Best-of-breed supply chain management vendors must adapt to changing paradigms, or get left behind
By Malcolm Wheatley, senior contributing editor -- Manufacturing Business Technology, 10/1/2005 6:00:00 AM
When Spühl—a manufacturer of printing machines based in St. Gallen, Switzerland—embarked on a business reengineering project, the company quickly saw it needed appropriate enterprise applications to support its new production and supply chain processes, says IT Manager Paul Krämer.
A subsidiary of Carthage, Mo.-based diversified manufacturer Leggett & Platt, Spühl had ambitious goals: boosting profitability through sharply increased machine and worker productivity; and streamlined administration, machining, and assembly processes.
Spühl executives reviewed 13 prospective ERP vendors, with a final shortlist of four receiving special scrutiny. The eventual choice: iScala from Epicor.
"iScala has very strong MRP [material requirements planning] functionality, as well as supply chain planning and a product configurator," says Krämer. "It also provides a common system for departments such as finance, sales, purchasing, production, and marketing."
The impact has been significant. Customer orders are specified by means of the product configurator, and then passed to a 3D CAD/CAM application that outputs machining data. Component bill-of-material (BOM) information is generated by a product life-cycle management (PLM) system and passed to iScala for incorporation with manufacturing and financial information. Finished operations are reported, using bar-code readers, to iScala in real time. Finally, at order completion, an individual spare-parts catalog is created, with exploded drawings and a structured BOM.
Manufacturing operating costs have come down by 30 percent, says Krämer, while productivity has grown by the same amount. The average time elapsed from order receipt to delivery has been cut 50 percent.
Spühl says the results aren't solely attributable to iScala, and reengineered business processes now automated by the enterprise system were key. Nevertheless, he reports, the sought-for return on the $800,000-plus iScala investment "has been significantly exceeded." Work is under way to build electronic trading links with customers and suppliers to generate further savings and efficiencies.
A changing market
Some say the results Spühl achieved with its ERP implementation call into question the foundations upon which supply chain planning applications were built.
Supply chain planning involves use of memory-based models to plan production based on multiple constraints simultaneously. It was once thought that the systems, which can be run more quickly than traditional manufacturing resources planning, would eventually be used to model every SKU in a supply chain.
At issue isn't the fundamental need for supply chain planning—many ERP systems today incorporate the technology—but whether the issues that supply chain planning was intended to resolve a decade ago are still the same today. Even as vendors develop clever algorithms and optimization techniques, the ground is shifting under their feet.
David Kraemer, a VP with supply chain execution and EDI vendor GXS, points out that globalization, for example, alters the supply chain paradigm. Where manufacturers were once concerned about shrinking lead times and cutting inventories using techniques such as memory-based supply chain models, the cost advantage of sourcing from China, for example, has rewritten the rulebook.
Companies now cheerfully buy whole container-loads of parts at a time, points out Kraemer, whereas once they would have dribbled them into production lines as required, relying on software applications to optimize the process.
These days, the focus is instead on orchestrating the flow of materials. With lower-cost parts and materials coming from overseas, it's not so necessary to pare inventories down to the bone. Today, says Kraemer, the emphasis is on "time to react"—winnowing, as Spühl did, administrative processes, such as forecasting and order entry—so that when demand is recognized, it can be transmitted to suppliers as quickly as possible.
Others see a paradigm shift as well—a vendor such as E2open, for example, has a solution used by, among others, Seagate Technology,Scotts Valley, Calif.; and Agere Systems,Allenstown, Pa. These companies use the solution to create "hubs" where supply chain partners share inventory, forecast, order, and other data.
Lorenzo Martinelli, an E2open VP, acknowledges the shift. "The capability we offer simply wasn't foreseen as a requirement. It wasn't what the future looked like," he says.
Instead of manufacturers creating elaborate planning processes underpinned by the sometimes-questionable assumptions that suppliers will be able to comply, the thrust today is on real-time collaborative planning, basing schedules on what is genuinely achievable, rather than what is hoped for.
In other words, why do you need a model, if everything is known in near-real time, thanks to the Internet?
Another example of changed supply chain imperatives comes from the Nottingham, U.K.-based solenoid and coil manufacturing facility of automotive component manufacturer Pontiac Coil, Clarkston, Mich. As with Spühl, supply chain functionality from an ERP system is credited with delivering impressive ROI. In this case, the ERP vendor is IFS.
"Customers had been asking us to offer a consignment-stock facility, and we had to turn them down because we had no way of administering it," says Managing Director Kevin Springthorpe. IFS, however, does have a consignment stock module.
"It gives us an advantage, and we've won business from competitors as a result," says Springthorpe. Indeed, he reports, the ability to offer consignment stock has led to a 15-percent increase in the plant's revenues this fiscal year—significant in anyone's book.
Dead in the water?
So are "traditional" supply chain planning vendors the likes of i2 Technologies and Manugistics dead in the water?
No, even though the issues they once addressed have changed. Globalization and low-cost country sourcing have altered the inventory imperative. But the underlying challenges of supply chain management have morphed rather than disappeared, argues John Cummings, chief marketing officer, i2. "Managing a distributed global supply chain and controlling material flow, contract manufacturing, and outsourced distribution are becoming more complex," he says.
It's easy—but it would be mistaken—to see the three challenges as similar. For if supply chain management's roots lie in the first—control of material flow—then its future probably lies in the second and third: contract manufacturing and outsourced distribution. Comparatively rare just five years ago, these now are "business as usual" for a growing number of manufacturers.
IBM, Armonk, N.Y., for example, has sharply increased its reliance on third-party manufacturers to build—and even design—IBM-branded product. "Where we might have had one or two suppliers in a particular geography a few years back, we now might have 10 or even 20 such suppliers," says Joe DiPrima, manager of supply chain optimization for IBM's recently established Integrated Supply Chain organization, which provides a common $45-billion supply chain for the company's divisions.
Increasingly, he notes, those contract manufacturers must ship direct to IBM customers. "It's one thing to have them build in bulk and ship to us—but quite another to have them ship direct," says DiPrima.
It's a challenge that brings in its wake a whole new set of complexities in terms of capacity planning, order-
status monitoring, dispatch notification, and billing. IBM may take the customer's order, but almost everything in the fulfillment process is the responsibility of the contract manufacturer.
It's a challenge further complicated by distance, time zones, language, and culture. Take International Systems Technology, Shenzhen, China, a joint venture between IBM and China's Great Wall Ltd. International Systems makes a range of IBM hardware products, from xSeries servers to retail-store systems, pushing out as many as 6,000 servers per day and shipping them to 100 countries.
At IBM, an SAP R/3 ERP system acts as the transaction backbone, releasing orders to suppliers, capturing incoming acknowledgments, and eventually issuing invoices and initiating electronic payment. But high-level management is supported by i2's demand-fulfillment and demand-manager products, in what DiPrima characterizes as "an automated, hands-off process that helps us keep the supplier—and its supply chain—in the loop in terms of our forecast demand, identifying any potential shortfall in supply."
Nissan North America, Gardena, Calif., is another case-in-point, with i2 solutions being deployed at the company's Decherd, Tenn. power-train plant. The mission: to schedule engine manufacture so engines can be shipped to vehicle assembly plants in Canton, Miss., and Smyrna, Tenn., in the sequence in which vehicles will be built. It's a deceptively complex task, says Mike Reiner, an i2 solutions consultant. Problem is, engines must be loaded on trucks in the reverse order in which they will be off-loaded and shipped to the production line.
While engine assembly is relatively straightforward, feeder operations such as crankshaft and engine block machining are usually batch-based, buffered from engine assembly by inventory. Sequencing engine assembly helps synchronize the manufacture of cranks and blocks, says Reiner, resulting in lower levels of work-in-progress and interstage inventory buffer.
New imperatives and competitors
Yet even as i2 transforms its offerings to respond to a changed business landscape and competitive imperatives, new entrants are snapping at the vendor's heels—and banking on the impact of another paradigm shift: board-level reluctance to fork over eye-popping amounts of money for big-ticket supply chain applications.
When Detroit-based Mitsui Steel, a supplier to the Big Thre automotive OEMs, switched to an SAP environment, managers were assured it handled consignment stock, says Mia Kania, marketing manager, Mitsui Steel. While that was true, the module in question proved too costly to license—bad news for Kania, who wanted to leverage consignment stock-based sales to boost revenues.
What's worse, even if the module had proved affordable, there were questions about its functional fit. Mitsui's business involves exporting steel coils from Japan to Mexico, but it manages the process from Detroit. There were 69 pieces of paper involved in each shipment, and Mitsui wanted to eliminate many of these and capture other benefits, such as tracking shipments based on railcar numbers.
Ed Lewis, a contractor working for Mitsui's Los Angeles office, saw an opportunity and drew up plans for a software application that met most of the company's requirements. Eventually, Lewis was named president and CEO of Irvine, Calif.-based Mitrix, a wholly owned Mitsui subsidiary. His mission: develop the application, roll it out to Mitsui subsidiaries, and sell it to third parties.
"We're not an i2," admits Lewis, citing Salesforce.com as a role model for Mitrix's on-demand application. "We've only got 80 percent of the functionality—but the cost to users is between one-tenth and one-fifth of what they would pay for a 'big-ticket' application."
Lewis sees his customers as small and midsize businesses presently relying on spreadsheets and small databases for supply chain management.
Almost certainly, i2 won't be losing too much sleep over the threat posed by Mitrix. But the moral—for i2 and many others—is clear. Supply chain vendors have focused on, well, the supply chain. Maybe now it's time to start thinking a little more about the interface between that supply chain and manufacturing. With both ERP vendors and a new wave of start-ups eyeing their lunch, the next paradigm change may be a shift too far.
The North American supply chain moves overseas
| Current presence (%) | Future presence (%) | |
| Source: Deloitte Research |
||
| Sourcing | ||
| China | 59 | 68 |
| Mexico | 49 | 53 |
| Other Southeast Asia | 36 | 42 |
| Eastern Europe | 31 | 39 |
| Manufacturing | ||
| China | 37 | 47 |
| Mexico | 42 | 47 |
| Western Europe | 39 | 41 |
| Other Southeast Asia | 21 | 23 |
| Eastern Europe | 20 | 23 |
