SUPPLY CHAIN MANAGEMENT: WHAT IT IS The practice of managing the flow of goods, services and information along a supply chain-from suppliers, manufacturers, wholesalers, distributors, stores, on down to consumers and end users. SCM's ambit includes business strategy, information flow and system compatibility. By Anjan Mukherji A striking change is occurring in the complex calculus that every customer goes through when making a buying decision. Mere product excellence and an acceptable price no longer provide sufficient value to keep customers. They also want more variety, quicker response to their needs, faster delivery and better service. Companies that continue to offer only traditional value measures will be overtaken by those adopting a total value-add framework that goes beyond simple product excellence. In this emerging competitive framework, value-add for trading partners will be the measure of success. Companies are being challenged to shorten cycle times, improve order volume/mix flexibility, institute flow-through replenishment, and capture more accurate information. To efficiently reach their customers, they may need to redesign processes, treat their suppliers as partners and form strategic alliances to grow market share or enter new markets. Thus, logistics and supply chain management (SCM) are emerging as the key enablers for delivering the value customers demand. STAGES OF EVOLUTION At its simplest, a supply chain traces the flow of goods from supplier to manufacturer to wholesaler to retailer and ultimately to customers. This one-way flow of goods is informed and controlled by a two-way flow of information. Supply chain management is the way a firm ties together the people, processes and related information-internal and external-associated with its flow of goods. It unites all steps in the cycle, from initial product design and the procurement of raw materials, through production, shipping, distribution and warehousing, until a finished product is delivered to a customer. CEOs across all industries are looking to SCM as a way to maximise operating efficiency, heighten competitive differentiation and improve relationships with customers to build profits and market share, thus expanding shareholder value. Line managers see the supply chain as a way to achieve better customer service and profitability by improving the accuracy of product demand forecasting and expediting inventory movement and replenishment, thus shortening time-to-market and improving use of resources. Of course, the distribution and transportation networks in the middle, whether captive or not, have to move goods faster and faster. The new, customer-focused world demands smaller, more complex and faster shipments, with less time in which to make decisions. A primary concern for many businesses across all industries is how to cope with supply chain shortcomings. The problem is the difficulty in linking suppliers, manufacturing, distribution and customers together, and effectively managing the integrated supply chain. MAGNITUDE OF THE PROBLEM A rule of thumb (that varies by industry) is that an average seven to nine per cent of sales revenue and fully 15 per cent of the value-add in any given industry is eaten up by SCM. One study puts the current cost of SCM in the US at about $800 billion (around Rs 38 lakh crore) a year. Simple efficiency measures like better transportation service selection and control, inventory reduction, and more strategic network design could save 10 to 20 per cent of that. By restructuring and reengineering the process to bring about fundamental changes, 35 per cent to 50 per cent-a whopping $280 billion (Rs 13 lakh crore) to $400 billion (Rs 19 lakh crore) a yearcooul be saved over a sustained period of time. According to a study by Pittiglio Rabin Todd & McGrath, a management consultancy, companies that practice best-in-class supply chain management techniques achieve a 40 to 50 per cent advantage in cash-to-cash cycle time and a seven per cent cost advantage over average companies. They also typically hold 50 to 80 per cent less inventory than their competitors. MAGNITUDE OF THE SOLUTION A superior supply chain management increasingly separates winners and losers in the marketplace. At the same time, it redefines how firms work together. Today, any firm can benefit from the pipeline visibility, inventory control and faster cycle times integrated supply chain management provides. Look at IBM's recovery from the early 1990s. Supply chain management played a big part in the company's resurgence. And look at Wal-Mart's growth in the grocery sector. With its integrated supply chain, it has been able to sustain growth and high profit margins in an industry that struggles to attain two per cent total profit margins. The scenario varies somewhat by industry. In paper, chemicals, grocery, apparel and retail consumer goods, SCM is an enormous part of cost. On the other hand, in industries with higher value products-hardware and pharmaceuticals, for example-SCM takes a proportionally smaller bite. But even in those cases, the direct cost of SCM may be very high if product losses are high because of an inefficient system. Strategic solutions to the SCM problem involve gaining control of a set of critical functionstranspoortation facilities, inventory, procurement, customer service and information systems-and operationally integrating them to provide an effective foundation for SCM. When these interrelated functional elements are made more efficient and a variety of networks are implemented, SCM becomes a major strategic enabler. SUPPLY CHAINS AS NETWORKS In reality, the supply chain is a set of enterprises that must share information and cooperate in physical execution to ensure a smooth flow of goods through the pipeline. Viewed schematically, a supply chain is a rather complex network. Nodes on the network may be parts of your business (manufacturing, warehousing) or separate enterprises (raw materials supplier, delivery company, long-distance carrier). To really understand supply chain dynamics requires mapping the details of both the enterprise processes and the inter-enterprise linkages. A typical supply chain today is a push network-that is, goods get pushed from one node to the next. Its action is like a Slinky toy-the front is pushed forward, and then the next section moves quickly to catch up, and so on. It looks rather unsynchronised. What get pushed are these large, bulky orders. The trend is toward smaller, more complex and precise orders that closely reflect consumer demand. Eventually, the signals need to come as a pull, not a push, to quickly produce and deliver orders that are exactly what customers need today. Each firm in the supply chain responds to value-add pressures by viewing itself as central to the flow across the network. Each must maximise two things: its value-add to the network; and its capture of the value-add. Anjan Mukherji is country leader, IBM Business Consulting Services. The views expressed in this article may not necessarily be those of the organisation 5 KEYS TO SUPPLY CHAIN SUCCESS 1. Make the sale to suppliers: Supply chain automation is uniquely difficult because its complexity extends beyond your company's walls. Your people will need to change the way they work and so will the people from each supplier in your network. 2. Wean employees off the phone and fax: Operations people are used to dealing with phone calls, faxes and hunches scrawled on paper and will most likely want to keep it that way. If you can't convince people that using the software will be worth their time, they will easily find ways to work around it. You cannot disconnect the telephones and fax machines just because you have supply chain software in place. 3. Prepare for bad information-at first: New supply chain systems process data as they are programmed to do, but the technology cannot absorb a company's history and processes in the first few months after an implementation. Forecasters and planners need to understand that the first bits of information they get from a system might need some tweaking. If they are not warned about the system's initial naivet‚, they will think it is useless. 4. Fix the supply chain connection to ERP: Supply chain software and ERP serve each other well. ERP captures all the product, sales, finance and inventory information that supply chain applications need to predict demand and optimise the flow of material through the chain. Unfortunately, this symbiotic relationship does not translate into an easy integration between the two different systems. In all likelihood, your new supply chain implementation will not interface cleanly with your current ERP system. 5. Defuse functional warfare: Supply chain software projects bring CIOs into direct conflict with the people who run the supply chain day to day. Derided as a second-class function for years, logistics (or procurement or however it is known in your company) has always been considered mundane back-office territory everywhere except perhaps in retail. -Atanu Roy