Replenishment remade
Manufacturers turn to Web-hosted supply chains and private hubs for direct-materials fulfillment efficiency
By Alex Anderson, Contributing Editor -- Manufacturing Business Technology, 1/1/2002 12:00:00 AM
When one of his largest customers came to Jim Essad, president of Port Huron, Mich.-based Modern Plastics Technologies (MPT)—a Tier 2 injection molding supplier for the automotive industry—and told him it was going to provide MPT with on-line inventory information so that MPT could perform vendor managed inventory (VMI), his reaction was less than exuberant.
"There was no way we were going to be responsible for someone else's inventory," says Essad. "I said, 'No way. You're going to make me—the small guy—responsible for how much inventory you have in-house.' That didn't impress us from the very beginning. If we misread the inventory levels, then we could be responsible for shutting down an automotive plant."
A lot has changed since then. Today MPT does indeed manage the inventory for this customer, and Essad's attitude toward VMI has changed to the point that he is actively trying to get his other customers to adopt the same system.
"I was one of the biggest skeptics and now I don't see how I could run our business without it," Essad admits. "Now we've come full circle. There's no reason not to do it."
The catalyst for this dramatic about-face was an education session with Santa Barbara, Calif.-based SupplySolution, the vendor the Tier 1 customer had selected for VMI-related functionality. The session led to a number of ideas on how MPT—which until that time managed material flow via phone, fax, and e-mail—could better manage its business and, more important, allayed Essad's fears about being left holding the bag if something went wrong.
SupplySolution is part of a new phenomenon in replenishment: the hosted supply chain. Its offering—i-Supply—is a Web-hosted application service that supports collaborative direct materials fulfillment and VMI. Through an alliance with Southfield, Mich.-based Covisint—the Internet trade exchange for the automotive industry—i-Supply also is distributed via the exchange under the brand Covisint Fulfillment. Other players in the hosted supply chain space include Fremont, Calif.-based WorldChain; San Francisco-based PipeChain; Coventry, U.K.-based WeSupply; Newport Beach, Calif.-based webplan; and RockySoft, Fort Collins, Colo.
These vendors typically provide a two- to six-week implementation cycle, and promise compelling return-on-investment (ROI). An April 2001 study from Boston-based analyst firm AMR Research found that early adopters of these applications were reporting inventory reductions of 30 percent to 50 percent, along with significant reduction in administrative costs and increased efficiency throughout the fulfillment process. AMR predicts that the hosted supply chain market will grow from $73 million in 2001 to $1.4 billion in 2004.
The solutions landscape
Hosted supply chains are Internet-based platforms on which multiple suppliers or trading partners engage in cross-enterprise supply chain management processes—including workflow, event management, planning, replenishment, and visibility. For many manufacturers, involvement in a hosted supply chain is a first step toward participating in Internet-based private trade exchanges or other Web-based collaborative replenishment programs. Like a tentative bather dipping his toe in the water to check the temperature, companies can experience the benefits of Web-based collaboration without committing to the software licensing, time-consuming implementations, and business process reengineering associated with private exchanges and electronic data interchange (EDI).
But this new breed of vendors shouldn't feel too comfortable, as the mid-market landscape for collaborative inventory replenishment is getting crowded. The big supply chain management software vendors—such as Dallas-based i2 Technologies and Rockville, Md.-based Manugistics—have come downmarket with their solutions. Additionally, procurement and strategic sourcing vendors—including Sunnyvale, Calif.-based Ariba, Pleasanton, Calif.-based Commerce One, and Pittsburgh-based FreeMarkets—are hoping to support broader and more sophisticated electronic direct procurement processes. Finally, extended enterprise system giants such as SAP, Newtown Square, Pa., and Redwood Shores, Calif.-based Oracle Corp., also are players in Web-based solutions for private exchanges and supply chain collaboration.
AMR Research analyst Bob Ferrari says the companies that have really been hurt in this current economy are those without the capability for extended supply chain visibility. "Semiconductor and high-tech industries have been hit the worst and are ripe for collaborative inventory execution platforms like SupplySolution.
"More and more manufacturers are jumping on the Internet for replenishment, whether it be through exchanges, hosted offerings, or other means," Ferrari continues. "With the new economy, no matter how it evolves, things move a lot quicker. The way things used to move in the supply chain is being replaced with Web-based methods. If companies don't adopt [these methods] they are going to be at a competitive disadvantage."
Ferrari points out that many companies are implementing programs that synchronize demand and supply via the Web. "There are a number of programs that companies would talk about beyond CPFR [collaborative planning, forecasting, and replenishment]. We see a lot of work in VMI. Suppliers and customers share the risk in the supply chain. Both get the benefit. That's a natural motivation to do Web-based collaboration.
"If you look at high-tech, more and more of the supply chain is splintering," Ferrari continues. "The OEM is turning over the supply chain to contract manufacturers. This means turning over logistics to third-party providers. The situation there is that they had built software applications with the principle that they would be able to manage everything within the four walls. Now that the supply chain is being outsourced, a lot of these companies are having to look at these Web-based applications to manage coordinated demand, coordinated sourcing of products, and collaboration on design."
According to Al Salerno, a SupplySolution senior vice president, a hosted supply chain solution boils down to better communication, and complements the investments companies have made in advanced planning & scheduling (APS) software. "The companies we're talking to have put a lot of value on making APS-type changes in real time," he says. "We solve the problem of not being able to communicate accurately, quickly.
"The deeper into the supply chain you go, the longer it takes to get updated information," Salerno continues. "With the Internet, companies can quickly view changes in demand, and so are better able to make decisions that support their organizations. Now we can notify someone when a shipment is going to be late—before it's late—so they can plan around it."
Hosted and focused
SupplySolution has seen rapid adoption: nearly 1,000 companies have been attracted by its simple "Reduce costs quickly and easily" message—most of them through the Covisint offering in the automotive industry.
"To date there has been a dichotomy," Salerno. "If it was good for the OEM, it wasn't good for the supplier, and vice versa," says Salerno, adding that collaboration over the Internet replaces the adversarial nature of relationships between suppliers and customers. "The supply chain works like an enterprise unto itself—it just involves a lot of companies."
Salerno believes a hosted model works well to get companies involved in collaboration now. "The Internet is new still, and people are still wondering how to use it," he says. "Companies want to get to a more interactive environment, but it doesn't happen overnight. We've created a solution that supports what they're doing now—adding efficiency to current methods—while enabling new replenishment strategies."
Salerno acknowledges the stiff competition for collaborative supply chain solutions, but notes that the hosted supply chain model can become an ingrained way of doing business for multiple parties. "It's a land grab for companies," Salerno says. "Two or three years from now, if we're doing our job, a competitor will have to unseat an entire supply chain [rather than just one participant in it.]"
The exchange approach
As for private trade exchanges, although they have been slow to take off, there are some high-profile cases that are generating results. One example of this is Cisco Systems' eHub initiative, which is based on technology from Manugistics.
eHub provides a central point for planning and executing tasks across the company's extended manufacturing supply chain, promising to deliver a host of benefits that include end-to-end visibility, event alerts, and cost and inventory reductions. When completely rolled out, more than 2,000 of Cisco's supply chain partners will participate in the on-line community.
The impetus behind eHub came following a worldwide high-tech component shortage in 2000, which significantly affected Cisco and its manufacturing suppliers and customers, and exposed a number of operational issues in the linear supply and replenishment processes being used at the time.
These issues included:
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Information delays and distortion between levels in the supply chain;
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Planning activities that were not synchronized or "closed-loop";
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High levels of forecast variability;
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Lack of visibility to exception conditions; and
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Lack of inter-enterprise process optimization.
These issues led to operational challenges including parts shortages, long lead times, lower than acceptable on-time shipment percentages, and frequent expediting. Historically known as a leader in supply chain management, Cisco launched the eHub initiative with the objective of significantly increasing visibility for all its supply chain partners.
eHub is being rolled out in three phases. Phase One incorporates the core information infrastructure, exchange, alerting, and performance management capabilities. Phase Two will add constraint-based planning, optimization, joint capacity planning, and some focused e-procurement capabilities. Finally, Phase Three will extend eHub's capabilities to design collaboration, engineering change order (ECO) management, life-cycle management, and product data management.
One of the key drivers behind initiatives like eHub is relationship management, says Jeff McKinney, a senior vice president with Manugistics.
"Companies want the right infrastructure in place to maintain control over their strategic, long-term relationships. We see four components to this kind of marketplace collaboration. First there is customer collaboration: using the model of a retail store, it becomes critical that you understand available-to-promise, alerts monitoring, and price optimization. This is critical to managing the downstream. Internal collaboration involves promotion management and in many cases, co-manufacturing collaboration. Service provider collaboration requires capacity planning and route planning—areas Manugistics has traditionally been strong. Finally, supplier collaboration—which delivers visibility both up and down the supply chain—has seen increased importance for supplier relationship management."
Initially, Manugistics began by Web-enabling its solutions set, but soon found that this path failed to embrace the efficiencies that the Internet promised. So the vendor took a step back and reengineered its software, thereby creating a Web-native platform that is Web-architected from the ground up.
"Our initial path allowed us to get to market quicker, but it's not scalable," says McKinney. "When you talk about scaling for performance, Web-enablement doesn't get you where you need to go."
Which indicates that Manugistics has "got religion" about the Internet, something industry analysts like Bob Ferrari have been preaching about for several years now. But what about the end user?
VMI more viable
The case for MPT exemplifies how the adoption of Web-based processes now is becoming more feasible for mid-market and smaller companies. MPT supplies nine Tier 1 companies with stock, and currently is using SupplySolution collaboratively with only one. MPT uses i-Supply throughout its own internal processes, and is trying to convince the others to get onboard collaboratively.
"We've got a lot of [our other customers] looking into it," says Essad, who has become a real booster for Supply Solution and collaborative VMI. "Our outlook on the system has changed so much. It gave us the ability to better manage our internal inventory and procurement. We're able to produce and ship on a daily basis—keeping virtually zero inventory in-house. We used to keep five or six days worth of stock. Now we're down to two, and in some cases, one."
The solution gives MPT's managers a window into the Tier 1 customer's inventory base, enabling accurate daily replenishment decisions. "On a daily basis, we can ship the maximum allowable inventory they can have on-hand at any time," says Essad. "We can make that decision at eight o'clock in the morning. The truck leaves at 11 o'clock, and the Tier 1 is ready to ship to the OEM the following morning."
The end result, says Essad, is that the solution "makes us more competitive, and in the automotive market today, that's everything."
| FOR MORE INFO: | ||
| Ariba: www.ariba.com | Commerce One: www.commerceone.com | Covisint: www.covisint.com |
| Free Markets: www.freemarkets.com | i2 Technologies: www.i2.com | Manugistics: www.manugistics.com |
| Oracle: www.oracle.com | PipeChain: www.pipechain.net | RockySoft: www.rockysoft.com |
| SAP: www.sap.com | SupplySolution: www.supplysolution.com | webplan: www.webplan.com |
| WeSupply: www.wesupply.net | WorldChain: www.worldchain.com | |
