Mastering the Supply Chain
September 1 2002 by Jennifer Pellet
Once upon a time, supply-chain management was a way to stand out from the competition by boosting efficiency. Now it’s a strategic imperative. Yet while CEOs are more aware than ever of the need to effectively and profitably manage supply networks to drive bottom-line success, the struggle to turn theory into practice goes on.
As supply chains grow increasingly complex, distribution channels expand and multi-tier supplier bases develop, the challenge of collaborating in real time with partners, customers and suppliers becomes ever more difficult. At the same time, failure to manage complex relationships with geographically dispersed suppliers, contract manufacturers and third-party distributors can be devastating to growth-or even survival.
CEOs who gathered for a roundtable sponsored by Manugistics and Chief Executive explored best practices in planning and implementing supply-chain initiatives-as well as what can be done to guard against failure. Several participants noted that delegating supply-chain initiatives to junior executives is a common mistake many firms make. “When you get the combination of the seasoned executive and significant visibility at the CEO level, you have success,” noted Harvey Seegers, president and CEO of GE Global Exchange Services. “When it’s delegated down to someone with five years experience and one good job under his or her belt, it flounders.”
Getting the formula right
Greg Owens (Manugistics): Aligning supply and demand is something you’ve got to get right. How do you get the right products on the shelves so that your customers are always able to purchase them? You can’t afford to carry inventory that becomes obsolete. So demand planning is hugely important. And that must be aligned with manufacturing, production and scheduling.
I was with a manufacturing CEO recently who said, “We’re short on this particular product, yet we’ve got over $500 million dollars of inventory. Why?” His senior VP of supply chain said, “Because we’re making the wrong stuff.” He said, “Why are we doing that?” The VP said, “Well, that’s why we’re here talking, right?”
It doesn’t sound difficult, but a lot of times you don’t have good demand-feed of information and end up making the wrong stuff. It’s not about keeping your manufacturing plants running; it’s about running them with the right products.
Another area is strategic sourcing. How do you make sure that you’re putting the dollars where you should? Then there’s transportation-not something any of us perceive as a core competency. Yet any of you who are buying goods from overseas-raw materials, component parts, etc.-can optimize transportation and take those costs out.
Finally, we are also starting to see a lot of interest in price optimization and being able to maximize margin contribution. You can optimize around pricing and whatever will bring in the greatest margin contribution rather than the most sales, but then how do you tie that back into the supply chain? Because you can go in and optimize around pricing, but you may affect your supply chain. It may increase another manufacturing production line, necessitate more trucks or more forward inventory in warehouses. All these things have to be looked at holistically.
Arthur Mirante (Cushman & Wakefield): To me, there’s clearly a relationship between location and efficiency. Clearly, real estate can be an enabler of a supply-chain strategy.
Owens: If you’re on the manufacturing side, real estate is not a driver. Labor is a driver. But in distribution, real estate is the driver. It’s no accident that Wal-Mart put up distribution centers prior to building out the stores around them. That is because they’ve looked at the transportation trade-offs. So real estate is a principal driver from the distribution point.
Robert Prieto (Parsons Brinckerhoff): The point Arthur hits on is that you have different time frames through the supply chain. So, for example, you can turn the machine on, run it faster, and crank out another widget, and you can do that on a four-minute interval of knowing you need another widget. But the building might take nine to 12 months to put up and, depending on what state you’re in, the transportation infrastructure to support the distribution warehouse might take one to 10 years. So you’ve got these three different cycles, and a different set of time frames exist through that whole supply-chain. How do you handle that?
Owens: You can outsource your transportation needs. If you were moving either raw materials or finished goods back and forth, at what cost will you do that? Wal-Mart can-if this is a centralized distribution center and they’re servicing 200 stores out of it-easily add another 15 stores. They may not be optimized, but they can service those stores until they get a distribution facility that does optimize that. All these factors play in as you try to optimize your own network, but at any point in time, you can clearly make things happen through transportation or distribution, it just might be [sub-optimal].
Prieto: My fastest growth business on the industrial side is in China; U.S. and European companies are going there because they can build there faster. For a large medical-device manufacturer building a new plant for a new product, for example, time to market was of the essence. They had a choice. They could build it using some fairly sophisticated manufacturing equipment here in the U.S., where it would take time to manufacture the equipment. Or they could go to China and hire jade cutters, who do very fine work, and put them in a “clean room.” They chose China because the real-estate decision is quicker. We’re seeing a lot more of this.
Owens: All this throws in more complexity. Everybody remembers the old campus setting, where you had the corporate office, the manufacturing plan, the distribution center all sitting next to each other. Now we’re all managing companies where that’s not the case. The manufacturing plant is in China. You have distribution centers in the West Coast, maybe in the South and the Northeast, and suppliers all over the place. You have to manage this through software now.
James Keyes (7-Eleven): My challenge is being a public company. I’m rebuilding a supply chain with a 10-year plan, and Wall Street doesn’t want to hear about 10-year plans. It’s a 10-year plan because it starts with real estate. We’re trying now to build stores in metropolitan areas where I can have a minimum of 100 to support a supply chain. But it takes me two years to get a permit, build and open a store and then to build the infrastructure to support it with daily delivery takes another year or two. And I’m butting up against existing infrastructure of direct-store delivery. The Frito-Lay’s and the Pepsi’s of the world have wonderful direct-store deliveries. But they can only come to my store once a week, and I need once daily or twice daily delivery.
Leigh Abrams (Drew Industries): You have to be very flexible and ready to make trade-offs. For instance, we have more than 40 factories. At what level do you let your factories buy locally-particularly if they’re out in the boonies? We find computerization helps us there, but sometimes your plant managers are best able to determine what you should buy locally vs. centrally. The second trade-off we look at it is whether it’s cheaper to build another small factory near a customer so we can service that customer daily.
Owens: Harvey, you get a chance to look at a lot of supply chains at a lot of companies. What are you seeing?
Harvey Seegers (GE Global eXchange Services): There’s a remarkable resurgence in the build-out of private marketplaces or digitizing well-established analog trading relationships. Companies are changing communications with established suppliers from fax machines, telephones and the post office to communicating through browsers over the Internet. For example, GE, our parent company, now has more than 40,000 of its suppliers online in a private marketplace. In the past 12 months, GE has purchased about $20 billion of goods and services using these private exchanges, and is publicly saying that the prices are about 5 to 6 percent better. I see this across a variety of industries. The move toward digitization of the supply chain has some unintended benefits that seem like Economics 101, but are actually hard for companies to do. For example, once you start networking all your different organizations, aggregating your buy becomes much easier. You’re then making larger runs available for some suppliers, so they can offer better prices.
Harold Smethills (Menasha): We realized that we were actually better at helping our customers solve their supply-chain issues than we were [at helping] ourselves. So we put the CIO who had driven our customer solutions in charge of building our supply chain throughout our businesses, and we had very good success. And we found our IT people, who are used to flow management, to have an excellent discipline for mapping out our supply-chain problems. It was only then that we started to make some progress.
Rick Roscitt (ADC Telecom): We’ve done a series of 20 acquisitions-product, software and services companies-many of which came with their own manufacturing supply-chain capabilities. So we inherited both a mixture of the core company that was vertically integrated and a contract manufacturing outsourcing nightmare, because we had nine different contract manufacturers operating in three different countries. The trick has been to boil that down to a fewer number of suppliers and decide what to do on-shore versus what to do off-shore.
While we haven’t got supply-chain management optimized by any means, we’ve made a big step toward rationalizing it. Now the next step is launching an effort to try and make sure that we can take costs out of the system. The pricing optimizing issue is a big piece of that. If you just take costs down in this industry, eventually we turn off lights.
Harry Gould (Gould Paper): Our experience with the supply chain is all about taking costs out of the system. The products have to be there, but the customer wants them at the last possible moment. The foreign suppliers found out to their chagrin that just coming into the U.S. market with the lowest price wasn’t necessarily what would get them continuing business. Eventually they had to put up distribution points to reduce that six-, eight- or 10-week lag time of the manufacturing cycle, getting them on the boat and over here, and then getting to the port and redistributed. So the just-in-time concept applies to foreign suppliers as well.
Owens: Price is always going to be an issue, but it’s not the issue. Because all of your companies have unique qualities-response times, on-time deliveries, global supply-that you can bundle together to allow you to price your products so as to get greater margins for yourselves. If you can service companies on a timely basis, keep them full, and make their lives easier, you can command your price. There are actually opportunities to price up and not down.
James Hagedorn (The Scotts Co.): We’re under a bit of pressure from retailers to take inventory out, deliver faster, do it on their terms instead of our terms. So we basically hired a lot of the smartest SAP consultants to work on the manufacturing side. There are always heroes in a business. Our supply-chain group members are absolutely the heroes in our business right now, in large part because even as we were saying, “We’ve got to take costs out of the system,” they were willing to make investments. None of this stuff is cheap-especially installing it.
While SAP has done great things for us, we put in Advanced Planner and Optimizer, an add-on software package that has been a complete failure. But overall, the change has been healthy and positive. As CEO, I’m more of a cheerleader. My job is basically to encourage the marketers, the guys who create the demand, and say: “Look at what these guys are doing. I know you guys are just as smart and can get out ahead of this.” So it’s been a very healthy thing and extremely profitable for us.
Stephen Marcus (Marcus): The biggest problem with CEO leadership in this area is inertia. There’s this tendency to feel there’s nothing you can do about whatever problem you have unless you’re a Wal-Mart, a 10,000-pound gorilla. But most of us are not. Increasingly, one of the big issues is in the area of technology. It’s cool and I’m into all of it, but how much can you afford to spend? How much savings does it bring?
Jim Williams (Gold Toe Brands): It’s easy for us to look at the productivity of machinery and the two-year payback. Where we’re failing is in identifying the cost savings. Years ago, some people brought to me a Star Wars-type information systems department. I looked at it and at what they wanted us to pay for it, and said, “I can’t afford to do this and deliver the profitability that our stockholders and our owners want us to deliver.” It can’t be a 10-year payback. That’s unacceptable. There’s a three-year max with everything we invest in for our companies.
Abrams: Systems are very important, but first you’ve got to decide what you want to be, particularly on the supply side. Do you want vertical integration? Or do you want to specialize in your own product? We decided to specialize. We felt we could better control costs by having people outside compete for our business, so we stayed away from being a vertical manufacturer. We do just what we do best. Before you get the systems, you’ve really got to decide how simple you want your business to be.
Joel Bickell (Poly-Gel): We’ve asked ourselves whether to concentrate or diversify suppliers, and we’ve run into problems with both approaches. My question is, where is the trend going? Is it going toward concentration of supplies? Is it going to diversification of supplies? What are the pros and cons of each?
Ara Hovnanian (Hovnanian Enterprises): We’re trying to concentrate suppliers to make the overall supply chain more efficient. Then we can give them more volume in exchange for better pricing and develop more of a partnership than we would be able to working with many suppliers.
Ed Kopko (Butler International): With three suppliers you have enough competition so that you keep your suppliers fundamentally honest on pricing mechanisms. A lot of industries end up having a concentration around two or three leaders for that reason. I don’t think it’s a new trend, but a consistent business philosophy that you end up with two or three key leaders serving a market. That helps provide the competition you need and makes it easier for consumers to deal with the management.
John Shalam (Audiovox): I agree. But when you’re dealing with one or two major suppliers on an exclusive basis who depend on you, situations develop that have nothing to do with supply and demand, but have to do with the obligation to support that manufacturer. You don’t always buy because you need the merchandise. That’s what happens when you’re only dealing with one or two manufacturers. On the other hand, if you deal with too many, you lose control of the quality of the products. You don’t have enough concentrated volume to control that manufacturer.
Smethills: We’re seeing not only fewer vendors per customer, but the level of sophistication in the relationship is fundamentally changing. For example, more and more of our customers are putting our people on their shop floor, designing the packaging and integrating through our data systems so we have visibility both ways. We have visibility in their inventory, so we can flat-load our plants. And they have visibility to our inventory, so they can schedule their ordering. The entire relationship is changing to more of a true relationship as opposed to a vendor relationship. It’s very efficient. It’s obviously more expensive than buying, just our purchasing agent with reverse options. But the total system cost is much lower.
Upping the ante
Owens: A lot of companies are viewing supply-chain management as a strategic advantage. But this is a survival game; it’s the ante of the poker game that you now have to be in to have that information. Some of the systems we’ve put in will have faster return on investments, maybe a year or two years. But, more important, is it critical for you to run your business going forward? That’s where management teams have to make strategic decisions now.
Williams: You’re exactly right. It is an advantage, because our goal is to be the category manager of socks in department stores in general. Just turn it over to us and let us manage it. Because we’ve done a lot of research on who the consumers are, how they buy, the price points, the quality, and all we need is their information to close the gap.
Bickell: But you have some retailers who don’t necessarily want to disclose all the information. You’ve got some significant issues about who owns that information and who gets access to it.
Williams: Of our top 25 customers, I would say 18 are open to it. We are 98 percent EDI anyway, so it’s only a matter of getting the entire department, and now the chains are starting to give it to us, because we’re telling them more about their business than they’ve ever known.
Lars Nyberg (NCR): Personal information will be a big fight. Retailers collect data about the individual consumer but won’t give that information to suppliers because by the end of the day, that can be translated into money. And that raises another issue-privacy. It’s going to be a huge issue for the retailers, as well as for the suppliers.
Williams: I remember the old story about the outgoing CEO who says to his successor, “Here are three letters. At the end of each bad year, open one.” So the first year, he opens the first letter and it says, “Blame me.” At the end of the next year, he opens the second and it says, “Blame the economy.” Then the third year, he opens up the last letter and it says, “Write three letters€¦” [Laughter]
I’ve made a mistake. At the end of a poor year, I’ve said, “We’ve still got to make our earnings.” So we start going down the budget and we take this project out because it’s a pretty big number and it’s easy to take out, because not everybody understood why it was in there. Well, it’s my job to sell the board on why it’s in there-how it will impact on inventory, raw materials and the delivery system. As CEO, I’ve got to be the leader in understanding all facets of it. And I’ve got to take it forward.
Abrams: We need another year 2000. Because every board would invest.
Seegers: In every case, the distinguishing factor between successful implementations and unsuccessful implementations is the involvement of the CEO. That doesn’t necessarily mean the CEO is getting weekly briefs, but rather weighing in on which one or two executives will be responsible for supply-chain productivity. And these tend to be seasoned executives, folks who have battle scars, understand the business and can roll up their sleeves and make things happen.
Nyberg: We did exactly that. We put in a seasoned executive, and he has seemed even more motivated than he’s been in the past two years doing this stuff. And we’ve saved some significant amount of money. In doing this we discovered that the real opportunity for us was in engineering the product. We are No. 1 in the world in ATMs, and we have 500 different keyboards. Why? As a manufacturer, the real opportunity for us is in reducing the number of combinations because then we can reduce inventory dramatically.
Prieto: As you roll out these supply-chain systems, the real issue is not the technology. That’s hard enough. The real issue is that you’ve got to lead all the rest of the process change, which may be a culture change, an organizational change and probably even some people changes along the way. You can’t give that to the purchasing manager or the IT manager to do.
Nyberg: You’re right. Why did we have those 500 keyboards? Because we have very proud engineers. They want to develop the best ATM in the world, and every country’s a bit different, so we needed a different keyboard for each country, and sometimes we need five. That’s the cultural issue, and this whole project about saving or procuring really has nothing to do with procuring. It has to do with engineering, culture and mindset, and that’s hard.
Prieto: In lower Manhattan, we’re rebuilding the 1/9 subway. We’re building it the same way it was built in 1900, so the guys who do the maintenance know exactly what they’re going to face instead of something different three miles down. That was a conscious decision. Could we have built something better today? Yes, from an engineering standpoint. But from an overall systems perspective, that standardization was very important.
Seegers: We’re all wrestling with the problem of how to put supply and demand into equilibrium. The leadership challenge for all of us is that historically supply and demand equilibrium has been achieved through labor, capital and land. And what we’re trying to do now is to optimize those factors of production with realtime, consolidated information and decision-support systems.
Prieto: We’ve spent a lot of time talking about how to achieve success. There’s a second dimension there and that’s how to survive. As we’re witnessing today on Wall Street, lots of companies are focused on success, but they aren’t going to survive as a result. As CEOs, we bring three things to the supply chain. First, the vision of where we want to go, to help the organization get past what I call “cognitive lock,” or “We always did it this way. It’s always done that way.” Second, to bring the focus on the problem, because the focus isn’t just in the purview of one manager. It probably cuts across your entire organization. And third, the drive. That’s really the key: vision, focus and drive by the CEO.