The New Supply Chain Agenda Blog

Apr 20 2010

Supply Chain Technology

 Supply chain technology stands as one of the primary pillars of a supply chain excellence strategy. However, improperly understood or implemented, it can cause severe damage rather than improvement. You must be careful in how technology is selected and applied.  

Technology Can Be the Foundation of Competitive Advantage

Many firms have found that they can make major reductions in cost by leveraging their warehouse and transportation management systems, and using bar codes, advanced picking and even RFID technologies. Other firms have dramatically reduced inventory and improved customer service by using advanced planning and scheduling systems. Still others have saved millions by performing an in-depth facility network optimization analysis. Many companies have balanced the pain versus the gain of new technology and achieved huge benefits. Properly applied, technology can be a major part of turning your supply chain into a generator of economic profit, enabling companies to cut cost and inventory as well as enhance customer service.

For example, in 2005, Coca-Cola Bottling Company Consolidated drastically upgraded their demand planning and collaboration capabilities with a new inventory management processes supported by software from JDA. Coca-Cola Bottling reduced inventory levels by 50 percent, while still improving fill rates by 15 percent, and won Sam’s Club supplier of the year in 2006. In addition, they simultaneously absorbed a staggering 300 percent increase in product offerings. This certainly drove an economic profit surge by greatly reducing assets, while supporting growth in revenue due to the enhanced product availability. 

Black and Decker implemented a demand and master planning technology and saw a major improvement in forecast accuracy.  But more importantly that translated into a huge reduction in production cycle time, from two weeks to four hours. As a result they improved order fill rates to major customers like Home Depot and Lowes, while being able to hold less inventory than their competitors. Again, this stoked the economic profit engine as fill rates supported revenue growth, while inventory was being reduced.

Pain versus Gain

A wide array of supply chain technology exists, and the benefits can be huge as illustrated above. Yet serious risks lurk near by. For example, a supply chain professional from a retailer specializing in children’s toys told of trying to implement a new fulfillment system that went far over schedule and budget.  The Christmas spike exploded before the fulfillment system was complete, resulting in an inability to process orders. People throughout the company worked 50 days straight, including Sundays to try to stay ahead, yet the firm was forced to send thousands of letters saying, “Sorry your toy order will not arrive before Christmas.”

In another alarming example, a candy maker spent over $100 million installing a new supply chain decision support system. The “go-live” for this project slipped from April to September. As the Halloween spike approached, the firm pushed the system into operation before it was ready, and subsequently missed $150 million of sales.  The stock dropped 45 percent.  In yet another situation, a shoe manufacturer installed a complex new system to run its supply chain. Again, there were major delays. The company’s CEO announced that there would be a $100 million sales shortfall due to this new software, causing the stock to fall 20 percent.

Is there a fundamental cause at the root of these problems? One theory holds that supply chain projects fail due to a lack of internal collaboration, discussed in detail in Chapter Five. In some firms the supply chain organization simply doesn’t have a broad enough span of control to drive the improvements needed, with supply chain functions fragmented throughout the organization. In a home appliance manufacturer for example, manufacturing, procurement, logistics, and planning all report to totally different functional VPs.  On the other hand, in firms like Cummins Parts and Service, the leader of the global supply chain organization has broad authority for manufacturing, procurement, logistics, and planning. Clearly this facilitates project success; although it’s only one variable in the mix.

Another hypothesis endorses the idea that failure results from an over-focus on the technology, not the underlying process changes.  Projects often fall short due to change management deficiencies, not technical or process problems. Some firms have a culture of driving so relentlessly to meet schedule and budget, that they often skip the soft, but ironically more important, change management tasks. “On time, on budget, but not used” does not equal success.

This chapter leaves the details of that technology to other sources and will instead focus on the keys to managing supply chain technology. And Chapter Seven covers the topic of “getting things done” with practical advice on how to implement supply chain projects. With the relentless advance in technology, supply chain professions have no choice but to leverage new technology to avoid competitive disadvantage. The landscape of new supply chain technology can be intimidating. As indicated in the examples above, firms face the real danger of a failed application which could severely cripple their company to say nothing of the career of supply chain and other executives. Before discussing how to avoid the pitfalls, a high level review of the supply chain technology landscape is in order.

Supply Chain Technology: What’s New?

It is useful to think of technology in the four buckets of software, e-business technologies, visibility and productivity, and process advances as outlined in Chapter Two, and summarized in the Table 4-1 below:

Technology  Category Description
Software Includes IT systems for activities such as forecasting, transportation, warehousing, inventory management, collaboration, et cetera.
e-business technologies Includes such technologies as automatic ship notices, EDI, web portals, electronic invoicing and payment tied to shipping, et cetera
Visibility and productivity Consists of technologies such as advanced bar codes, RFID, voice and light picking systems, event management, et cetera
Process advances Includes process advances applied to the entire end to end supply chain, such as Lean, Six Sigma, collaborative planning forecasting and replenishment, et cetera

Table 4-1: Summary of supply chain technology categories

 

The inclusion of process advances in the above table is not meant to lump them together with pure technology plays. In fact, we feel that processes should be addressed first, and then enabled later with software and other technology

Firms vary widely in applying such technologies. For example, in our experience, over half of all warehouses still run on paper based, manual systems; but many others have adopted the most advanced warehouse management software and product location and tracking technologies. Generally larger firms implement more sophisticated technologies, but not always.  For example, a one billion dollar automotive parts manufacturer still warehouses thousands of SKUs without even using bar codes. Yet a technology surge is waiting to explode. As indicated earlier, AMR Research forecasts a major increase in spending on supply chain management applications. 

What is the next big thing that will shape supply chain technology? We believe it will be technology that clearly drives economic profit, both short term and long term, and it will be heavily influenced by the external environment. For example, if transportation costs in the long run increase much faster than overall inflation, companies will need to apply increasingly powerful technology which can answer questions such as these:

  • What are the best locations for my warehouses?
  • How should I place inventory in the network?
  • How can I plan transportation to minimize cost, and maximize service?

 

If customers of the future require more choice and customization, it is safe to say that firms will need to handle and react to increasingly large volumes of data, and customize supply chain service and product solutions for individual markets.

As software capability continues to advance, availability of leading software solutions will become more convenient with concepts such as “software as a service” (SaaS). Optimization technology will also become more prevalent, allowing firms to maximize economic profit while simultaneously considering constraints such as customer product availability requirements.

Kevin O’Marah, Chief Strategy Officer of AMR Research says, “The most important emerging technology is the enormously powerful data processing capability available today. Very complex problems can be solved in minutes, not hours or days. Huge simulation and optimization engines can be built practically today.”[i] The assumptions of executives about what is possible can become obsolete almost overnight. Therefore, staying abreast of the rapidly changing technology environment is a must.


[i]  Kevin O’Marah, Executive, AMR Research

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