Oct 30, 2006
In this concluding review of the report titled – Creating the Optimal Supply Chain published by experts from Wharton and BCG, I take a look at the section titled – Supply Chain Enterprise Systems: The Silver Bullet?. In earlier posts, I had reviewed the first three sections namely, You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value, Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management and Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption. The report – Creating the Optimal Supply Chain is available online as well.
There can be little doubt in the minds of supply chain professionals and practitioners that managing the supply chain is no easy task no matter how simplified the meta level process diagram looks like that neatly shows product flows in one direction and information flows in the other. It is precisely because supply chain management is such a complicated issue that Supply Chain Enterprise systems have appeared on the scene from a variety of vendors – SAP, Oracle, i2, Manhattan etc. However, since supply chain management is a rather complex task in itself, systems deployed to facilitate supply chain management are also complex such that a practitioner now has to deal with supply chain complexity through a complex system. And thus go I to say – “Have you really solved a problem when your solution creates two new problems?” This task is not made any easier when you have to wade through not only a complicated solution set but oodles of marketing gimmicks, ploys (and well meaning marketing professionals as well), endless half promises with inflated verbiage and out and out term misuse.
According to supply chain experts from the Boston Consulting Group (BCG) and Wharton, applying enterprise systems technology to supply chains is often a difficult undertaking with an uncertain outcome; in reports and cases cited by both BCG and Wharton, companies that have implemented supply chain technologies often fail to leverage the new systems for a competitive advantage.
That is by itself not surprising at all. The success of a supply chain system implementation (or for that matter any type of implementation) is limited by the capability of the people deploying and using the system. Furthermore, in order to use such technology to create competitive advantage is a task of an order well above the capability that some firms possess or are even in the process of acquisition.
So what do the experts say?
For application of supply chain technology to be successful, the experts agree that certain elements need to be in place: namely, a clearly defined need
based on supply chain strategy, as well as clear expectations about what such technologies can and cannot do for a company. When facing the typically high cost of these systems, in many cases the question is not which system to purchase, but whether or not a company will benefit from investing in one.
And further more,
Though the questions are often clear, the answers are not. “Once you get into technology,” admitted Steve Matthesen, a vice president in BCG’s Los Angeles office and a supply chain expert, “it is a ridiculously huge space.”
Paul Kleindorfer outlines what he consider the meta-level process structure of a supply chain in the following way:
“A supply chain is essentially a network consisting of suppliers, manufacturers, distributors, retailers and customers,” wrote Kleindorfer. “The network supports three types of flows that require careful design and close coordination: 1) material flows, which represent physical product flows from suppliers to customers as well as reverse flows for product returns, servicing and recycling; 2) information flows, which represent order transmission and order tracking, and which coordinate the physical flows; and 3) financial flows, which represent credit terms, payment schedules and consignment arrangements. These flows are sometimes referred to as the ‘3Bs’ of supply chain management; boxes, bytes and bucks.”
Considering the history of how these flows – material, information and financial have been addressed in the business world might give us an idea of how supply chain enterprise systems would integrate themselves into a legacy of system software that firms have purchased in chasing the dream of competitive advantage. The progression of enterprise software began with material flow (the era of MRP based systems) and subsquently progressed towards information and financial flows (the era of ERP systems). And it is into this progression that supply chain management systems have entered either as systems that integrate on top of ERP systems (Eg: i2, Manugistics) or as ERP vendors who have acquired SCM software (Eg: SAP, Oracle, Infor). However, the time is ripe to ask what is precisely the value that SCM systems bring as stand alone systems and as systems that integrate on top of ERP systems? As stand-alone systems, SCM systems clearly would integrate disaparate sources of information about material, events and financials into its SCM system along with a suite of optimization/heuristic functions that address needs in a particular supply chain area such as inventory management, transportation management, supply chain planning etc. However, as a system that is integrated on top of ERP systems, the value proposition is not as clear. True enough that SCM systems bring along a suite of optimization/heuristic functions that address inventory optimization, transportation management and the like but the ERP system has already brought together various sources of information (however imperfectly). A critical element that is missing from ERP and SCM systems (which i2 has begun to incorporate in its product portfolio) is continuous improvement in all the flows that take place not only within a supply chain but also within the enterprise. (Read my earlier post on ERP system desiderata and specifically the article linked there in – Lies your ERP system tells you)
Next, the authors refer to some upcoming technology driven changes that might come to a supply chain near you:
But perhaps the technology that’s getting the biggest buzz along the supply chain right now is RFID (Radio Frequency Identification), a method of remotely storing and retrieving data using devices called RFID tags.
There’s strange humor in the air whenever someone blithely states that RFID is going to solve x,y,z issues in my supply chain. But why think so? Firstly, if ERP systems are not keeping accurate track of the inventory within your supply chain then integrating RFID into your supply chain will only solve your inventory tracking problem if and only if you find a way to streamline and control effectively the massive data that is going to suddenly become available from all those RFID tags floating out there. Like, I said before – “Have you really solved a problem when your solution creates two new problems?” The question is – Where is the real problem with inventory tracking and the risk of obsolescense etc. Simply put, its with inventory itself, the way it is built into the system, producing inventory according to forecasts, the way it has to be accounted for for a long long time.
For those envisioning other sorts of technologies to integrate into their firm’s operations, the following caveat ought to be kept in mind,
For those companies that do know what they want from their data, BCG’s Matthesen as well as Boston based BCG vice president Massimo Russo both cautioned that every technology system is only as good as the data it has access to. “There is the issue of garbage in, and garbage out,” said Russo.
Or in other words, there is no substitute for knowing the ins and outs of one’s business, what problems actually exist that need to be solved and what problems are created by yet another solution and so on. Or to distill that succintly, there is no substitute for wisdom. However, tweaking and tinkering is no substitute for wisdom as the following observations wrly make:
Even worse, he adds, “people don’t like to believe the machine. Even when the system tells them to buy 10 units, they say, ‘I don’t think I’m going to sell 10 units,’ and they over-ride the system with higher or lower numbers. Even if you can see that the math is right, people aren’t willing to listen to it. I’m not sure of a single company who lets the system do its thing. They are always tweaking.”
This tweaking can wreck havoc, particularly in systems where the architecture doesn’t give you the visibility to the math inside the proprietary model.
“You don’t know exactly what the software is doing, what settings work better than others,” said Matthesen, “so changing the variables can make
matters worse. If the outputs don’t seem right, it’s important to identify why, and fix it, rather than just changing the answer. If you set up the system right,
hopefully it is giving you better answers than you can get on your own. Otherwise, why have it?”
And thus the “Bullwhip effect” renews itself all over again.
In conclusion, the following is really good advice that is littered all over my blog in one form or the other:
It should be the business that drives you to get one of these tools; otherwise you could end up with a stranded asset that you cannot use.
Or in other words, let the business strategy drive your supply chain strategy and consequently the acquisition of tools that allow for the visualization and execution of supply chain processes.
And before investing in new technology systems, BCG and Wharton experts suggest that companies review IT systems that are already in place.
Before looking at greener pastures, estimate the greenness of your own pasture. Who knows, with a little bit of irrigation and fertilizer, one might be able to derive something internally than fit your firm into how the COTS (Commercial off the shelf software) works.
For those in the market for new supply chain technologies, Wharton’s Nettissine cautions that despite vendor claims, it is “very hard to calculate how much a particular technology helps.”
Or in other words, sales people sell, marketing people market but on no account should you believe what is advertised. Besides, you’ve got to have the knowledge to know the difference.
Some experts have suggested that as supply chain technological applications get more complicated, failing to deliver improved performance will result in firms cutting back on technology and IT spending.
As long as there is a buck to be made, there are always silver bullets to load, aim and fire.
Going through this review of the report “Creating the Optimal Supply Chain” has been an arduous process but as I have always found, the accumulation of observation about the way the world is, even the supply chain world, is the surest way to step up to the plate of how to solve real problems. And there are problems out there waiting to be turned into a competitive advantage.
- Creating the Optimal Supply Chain – Review (Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption)
- Creating the Optimal Supply Chain – Review (You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value)
- Creating the Optimal Supply Chain
- Creating the Optimal Supply Chain – Review (Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management)
- RFID Reshapes Supply Chain Management