July 11, 2007
Supply Chain IT Confusion
By Tom Ryan
While creating a seamless view of enterprise information for suppliers and trading partners is often cited as the ultimate vision for supply chain technologies, a survey shows that most companies primarily want cost savings.
According to a supply chain survey of 800 companies conducted by Manufacturing Insights, an IDC Company, almost half (48 percent) of respondents cited reducing material, manufacturing, and/or logistics costs as their top supply chain strategy. The second and third supply strategies cited, respectively, were more responsive and timely decision-making across the global supply chain (39 percent), and more responsiveness to changes in the marketplace (36 percent).
“As a whole, it does appear that manufacturing firms surveyed are still looking at a cost strategy in their supply chains, as opposed to speed, flexibility, or service-enhanced supply chain strategies,” said Kimberly Knickle, program director on the survey.
Critically, according to Manufacturing Insights, the survey revealed a disconnect between supply chain goals (wringing out costs) and primary business objectives. According to findings, the majority of respondents (71 percent) cited increased quality and customer satisfaction as their top business objective, followed by reducing overall cost and improving productivity (66 percent), and increasing revenues and exploiting new markets (62 percent).
“Ideally, companies should map their business objectives with supply chain priorities to make the most effective IT investments,” Ms. Knickle adds. “The survey results indicate that many companies have a gap between their overall objectives and how they execute in the supply chain.”
Ms. Knickle told Managing Automation that IT managers understand what supply chain technologies can accomplish. However, if the CFO doesn’t have the same understanding, he or she might not be so quick to sign the check to pay for the technology.
“Our results may indicate that manufacturers in mature regions are still struggling in winning the global competitive match, and therefore many of them are still prioritizing cost-cutting initiatives versus funding product innovation,” the study also pointed out. “We expect more regions to recognize that supply chain performance can and should be tightly interwoven with innovation priorities.”
The survey of manufacturing and retail companies worldwide was conducted in January and February 2007. Roughly 20 percent of respondents held titles indicating they are part of the IT organization, while more than 80 percent represented lines of business in their organizations, such as supply chain operations, materials management or procurement.
Discussion Questions: Do you see a disconnect between business and supply chain strategies? Is this a natural search for cost savings to drive short-term ROI? Or are companies not fully committed to or believers in the full promise of supply chain technologies?
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I think these results were a bit artificial/manufactured. Meaning the questions were, to some extent, asked in such a way to generate the response.
The link between supply chain and cost is clear. The link between supply chain and the other business goals is less clear, or has a different level of impact at different life cycles of a company or product.
Right now, there is extreme pressure on most supply chains to reduce costs. Supply chain can and does support growth and customer satisfaction, but it’s no surprise that 48% say cost reduction is the number 1 supply chain goal. I think that percentage is actually understated.
Improving supply chain efficiency is dirty work. It is not the glamorous new idea, leveraged by the global virtual network that carries information services such as MySpace or Facebook to millions of users instantly. It involves carrying physical goods and seeing that their integrity is maintained across a variety of hostile environments. And if the goods don’t meet user expectations, they can’t just be ignored. Someone has to get rid of the unwanted or expired products that end up being returned or sent to landfills.
As many companies who have become converts to the new “Green” perspective have learned, it makes sense to focus on saving energy and reducing waste (i.e. costs). Getting physical goods from one place to another is probably the largest non-product cost associated with getting product to the final consumer. Improving forecasts and better managing inventory to reduce overstocks and ensuring the right products are where they should be must benefit everyone.
Understanding how IT can contribute to these objectives is the role of the business managers. More managers familiar with quantitative methods and able to apply them to business decisions will increase the value gained from IT. I agree with a lot of the concerns that business managers have expressed over costs associated with RFID and some of the futuristic views of IT solutions. But there are a lot of opportunities that exist for applying simple forecasting and replenishment tools in order to reduce costs.
This is a complete disconnect. The data is telling a sad tale.
Rule of thumb #1: No enterprise of ANY kind has ever cost-cut its way to any kind of long-term profitability. The goal of the supply chain should be to efficiently deliver goods and services to the buyer. When the buyer is an end consumer, the most important thing is that the products are interesting.
Of course there are opportunities for cost reduction, and channel masters like Wal-Mart have set the standard on eking every penny out of the supply chain.
But, what good is an efficient supply chain if it is delivering the wrong product to the wrong place? As a dear boss of mine used to say “The good news is, we’re making good time. The bad news is, we’re lost.” The consumer votes with her wallet…boring products and inconsistent store execution will send her elsewhere. The retailers who solve THAT Holy Grail, providing a consistent experience of nice merchandise with helpful sales associates will be the long term winners. And that’s where technology can really help.
Supply chain masters are rapidly losing relevance. The customer is king again.
Without an easy to prove return on investment, supply chain innovation, like all innovation, is unlikely to be face quick adoption. RFID is the poster child for the disconnect between brilliant innovation and provable return on investment. So far, RFID has only been able to prove return on investment in very specific situations, not situations that are broadly universal for all. In other words, it’s exceptional when RFID can prove itself to be a profit lever, it’s not the general experience. Additionally, it’s unfortunate that cost reduction often seems to be the only serious focus, instead of sales and margin increases.
There is absolutely a disconnect. Supply chain is a cost center, not a profit center, so it focuses on one thing: reducing cost. But to be a strategic enabler of the business, supply chain needs to balance efficiency and flexibility–cost vs. speed. Focusing on “supply chain costs” as opposed to total product costs leads to sub-optimization–your customers might be willing to pay more to get it faster, which would offset the higher cost of flexibility. Or there’s the value of getting new products to market faster, or carrying less inventory if you can replenish faster. If you just focus on cost, you miss the big picture.
Funny, you can say the exact same thing about IT departments.
If it is the case that manufacturers are more concerned with cost savings and productivity enhancements in their supply chains, then the real disconnect is with the retailer who is most concerned with having the products the consumer wants to buy in-stock and on the shelf. Not that retailers are ignoring cost savings and productivity enhancements in their supply chains, but the clear focus is product replenishment.
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I think these results were a bit artificial/manufactured. Meaning the questions were, to some extent, asked in such a way to generate the response.
The link between supply chain and cost is clear. The link between supply chain and the other business goals is less clear, or has a different level of impact at different life cycles of a company or product.
Right now, there is extreme pressure on most supply chains to reduce costs. Supply chain can and does support growth and customer satisfaction, but it’s no surprise that 48% say cost reduction is the number 1 supply chain goal. I think that percentage is actually understated.
Improving supply chain efficiency is dirty work. It is not the glamorous new idea, leveraged by the global virtual network that carries information services such as MySpace or Facebook to millions of users instantly. It involves carrying physical goods and seeing that their integrity is maintained across a variety of hostile environments. And if the goods don’t meet user expectations, they can’t just be ignored. Someone has to get rid of the unwanted or expired products that end up being returned or sent to landfills.
As many companies who have become converts to the new “Green” perspective have learned, it makes sense to focus on saving energy and reducing waste (i.e. costs). Getting physical goods from one place to another is probably the largest non-product cost associated with getting product to the final consumer. Improving forecasts and better managing inventory to reduce overstocks and ensuring the right products are where they should be must benefit everyone.
Understanding how IT can contribute to these objectives is the role of the business managers. More managers familiar with quantitative methods and able to apply them to business decisions will increase the value gained from IT. I agree with a lot of the concerns that business managers have expressed over costs associated with RFID and some of the futuristic views of IT solutions. But there are a lot of opportunities that exist for applying simple forecasting and replenishment tools in order to reduce costs.
This is a complete disconnect. The data is telling a sad tale.
Rule of thumb #1: No enterprise of ANY kind has ever cost-cut its way to any kind of long-term profitability. The goal of the supply chain should be to efficiently deliver goods and services to the buyer. When the buyer is an end consumer, the most important thing is that the products are interesting.
Of course there are opportunities for cost reduction, and channel masters like Wal-Mart have set the standard on eking every penny out of the supply chain.
But, what good is an efficient supply chain if it is delivering the wrong product to the wrong place? As a dear boss of mine used to say “The good news is, we’re making good time. The bad news is, we’re lost.” The consumer votes with her wallet…boring products and inconsistent store execution will send her elsewhere. The retailers who solve THAT Holy Grail, providing a consistent experience of nice merchandise with helpful sales associates will be the long term winners. And that’s where technology can really help.
Supply chain masters are rapidly losing relevance. The customer is king again.
Without an easy to prove return on investment, supply chain innovation, like all innovation, is unlikely to be face quick adoption. RFID is the poster child for the disconnect between brilliant innovation and provable return on investment. So far, RFID has only been able to prove return on investment in very specific situations, not situations that are broadly universal for all. In other words, it’s exceptional when RFID can prove itself to be a profit lever, it’s not the general experience. Additionally, it’s unfortunate that cost reduction often seems to be the only serious focus, instead of sales and margin increases.
There is absolutely a disconnect. Supply chain is a cost center, not a profit center, so it focuses on one thing: reducing cost. But to be a strategic enabler of the business, supply chain needs to balance efficiency and flexibility–cost vs. speed. Focusing on “supply chain costs” as opposed to total product costs leads to sub-optimization–your customers might be willing to pay more to get it faster, which would offset the higher cost of flexibility. Or there’s the value of getting new products to market faster, or carrying less inventory if you can replenish faster. If you just focus on cost, you miss the big picture.
Funny, you can say the exact same thing about IT departments.
If it is the case that manufacturers are more concerned with cost savings and productivity enhancements in their supply chains, then the real disconnect is with the retailer who is most concerned with having the products the consumer wants to buy in-stock and on the shelf. Not that retailers are ignoring cost savings and productivity enhancements in their supply chains, but the clear focus is product replenishment.