Friday, May 20, 2005

Is it time to look at organizations from a Supply Chain rather than a ERP perspective?

I have just returned from visiting several potential clients and I am still surprised how despite the discussions by consultants, analysts and the media about the need of companies to manage their business as an integrated enterprise demand/supply chain most still view their environment from a “within the four-walls” perspective.

While controlling activities within the four walls is essential, and indeed the foundation, for managing the company - purchasing, manufacturing, resource planning, sales, distribution and financial management are only several of the critical elements needed to insure success. I believe it can be argued that by focusing the vast majority of resources on these functions, organizations are ultimately short-changing themselves and indeed jeopardizing their competitive positions.

During my visits I met several companies that are just beginning or are in the midst of a major ERP implementation with the leading ERP vendor. These are large multi-billion dollar companies that are leaders in their industry. They are spending tens and hundreds of millions of dollars for the ERP software and the attendant implementation services. They are spending tens of millions more on their own resources required to support the implementation. More importantly for the next several years the companies ability to move forward with other IT initiatives is frozen so that they cannot even look at improving their externally facing environments.

These are not unique situations. This situation has been repeated time and time again and the results while meaningful have generally been less than expected.

This view is not meant to diminish the need for companies to strive to achieve excellence in their resource planning, manufacturing, distribution and finance capabilities. However, by focusing enormous amounts of both financial and human resources on ERP solutions instead of a comprehensive supply chain strategy companies limit their strategic options. This has never been truer than in our current globalized economies where outsourcing of manufacturing and logistics has become a competitive necessity for most companies.

I think that there is little room to argue that resource planning in support of manufacturing and distribution is essential. But I think that a greater argument can be made for a complete supply chain strategy of which resource planning and manufacturing play a more balance role in terms of insuring that the right product gets to market efficiently and effectively.

Several factors have dramatically altered the business landscape in the past 5 years. Firstly, globalization has created a powerful incentive for companies to look for raw materials, semi processed and finished goods from anywhere in the world that is price sensitive (and what products are not price sensitive today) and where the quality is acceptable. Secondly, outsourcing of many strategically critical activities, including manufacturing, have changed the way business must be managed. Most large and medium sized “manufacturers” are now hybrids of owned and contract manufacturing and logistics. Even in the “owned” manufacturing instance, companies have off-shore plants that require different planning, execution, monitoring and logistics tools to insure that products flow through the supply chain to meet the distribution requirements of the organization.

A complete supply chain view of the world requires that companies look at what their markets demand in the way of products and services and then create the appropriate infrastructure to insure that all activities required to support customer/consumer satisfaction is achieved while the company makes the required profit to sustain viability and adequate or superior returns for its stakeholders.

In my travels to clients and prospective clients issues that constantly come up are related to insuring that the right product is delivered to the right location at the right time and at the right price. The problems are more about resource execution than resource planning. Forecasting and planning is an essential part of the supply process and constant monitoring of the demand environment to drive better forecasts and planning is essential. Although forecasting has its own considerable challenges, companies must still manage their supply to meet the constantly changing demand environment regardless of the veracity of the forecast. From an execution perspective the ability to match supply with demand requires an inclusive view of where product sits across the entire supply chain. The ability to react, as changes in the velocity of demand occur, requires parallel changes in the supply of product to meet the “new” real demand requirements.

I believe that today’s conventional wisdom that ERP is the foundation on which information solutions must be built in order to insure integration of information is too narrow and therefore misplaced and outdated. The foundation for true success in either demand or product driven businesses is the ability to build and maintain highly integrated and adaptable supply/demand capabilities – supply chains that deliver the right product, to the right place, at the right time and price. One needs only look at those companies that have dramatically surpassed their competition in highly competitive businesses; Wal-Mart in retail, DELL in computers, UPS in 3rd party logistics, Zara in fashion retailing. While in highly diverse industries, each is highly customer focused and each has built the best supply chains in their business that allow them to dominate their competitors.

Is this a coincidence? I don’t believe so. I think that these companies are examples of organizations that understand that the entire supply chain must be the focus of their competitive strategy and they must excel across all functional areas within the supply chain. They realize that their ability to excel is only as good as their weakest capability.

Companies that have taken an ERP centric view of their business were initially focused more on execution within their four walls than on their entire supply chain. Today they are finding that this view has been too limiting and results often less than satisfactory. That is why the major ERP solutions providers; SAP and Oracle are scrambling to create supply chain capabilities as adjuncts of their suites. That is why I2, Manugistics, WebPlan and other supply chain solutions are seen as required enhancements to mid-tier ERP solutions.

However, by not having the supply chain as the fundamental strategy of their IT solution most companies have still not achieved the dramatic success that they hoped they would attain when they embarked on their huge investments in ERP.

Which brings me back to the feedback from my travels. Inevitably the issues I hear from virtually all members of a cross functional team is that their ability to control and execute across their supply chains is compromised because they don’t have visibility into points across the entire supply chain. With their current ERP and supply chain solutions they have achieved better control over what goes on within their immediate manufacturing facility and they have been able to optimize what inventory is required at the manufacturing facility or distribution center. They have achieved greater visibility and execution capability over their financial execution and visibility with their ERP solutions than the pre-ERP implementation state. However, most companies lack the ability to manage and gain visibility into inventory supply availability and execution at remote or 3rd party contract manufacturing facilities across their diverse supply chain networks.

The bottom line is that in order to truly optimize the value proposition for the organization inventory must be controlled and optimized across the entire global supply chain while meeting the demand requirements of the customer. Whether the organization model is fundamentally manufacturing or distribution the ability to minimize inventory while insuring maximum fulfillment across the global supply chain is critical to drive value.

Today’s ERP approach just doesn’t do it.

So what is required to achieve an optimal level of global commerce management?

The answer lies in building a highly flexible, adaptable supply chain environment that can respond quickly to demand requirements and minimize resource requirements in the process. It requires a fully integrated information environment that provides the organization with a 360-degree view of their environment. There is a blueprint for achieving this highly integrated, synchronized global supply chain environment at
Creating Value from Global Commerce Management.

Thursday, May 05, 2005

Global Supply Chain Blog

I have created the Global Supply Chain blog. I created this blog because there is a need for a venue where professionals and practitioners (read operations, finance and IT) people can come and freely exchange ideas on Global Supply Chain issues.

People who are actively involved in Global Supply Chain management have always understood that their business is different from other aspects of the organization. The global supply chain is complex. It requires a cross-disciplinary approach to business. It involves planning and forecasting, purchasing, global logistics, compliance (regulatory, product, supplier, and service provider), inventory management, sales, customer service and finance. All of these areas are siloes of work within the four walls of the organization. All of them require information that is the fundamental responsibility of another department within the organization. More than almost any other area global supply chain control requires collaboration between more partners than any other area of the business.

Most people within North American business organizations don’t understand what managing the global supply chain requires. Senior executives are virtually clueless of the complexities and risks surrounding the global supply chain but are being driven to global practices because competitiveness demands it. They realize the potential benefits but don’t understand what is needed to achieve a “best-in-class” organization.

I am looking for people dedicated to this area who are willing to engage with me and other professionals, share their challenges and solutions, discuss goals and objectives and how they might be reached, provide metrics and benchmarks that they have found useful.

I am looking for participants who want to achieve excellence in managing their global supply chain,

My ideas may be of interest, they may prove mainstream or unconventional. Hopefully, they will create interest and dialogue.

I have sent this message with the link to the blog because I believe you are interested in this area and it may be an opportunity for you to share information with others and benefit from their knowledge and experiences. I have several articles posted that will give you a flavor of what will appear on these pages. Most importantly I am very interested in your feedback on topics that you would like to have discussed in the area of global supply chain management and control.

If you wish to be removed from my list please send me an email and I will do so immediately.

Kind Regards
Ned Blinick
Blinco Systems Inc./3rdwave

Wednesday, May 04, 2005

Aligning Finance and Operations – The key to long-term business success. (Part 1)

There is a huge rift in understanding and language between operations and finance people within an organization. Although both appear to deal with similar information the ability to communicate with each other is limited by common vocabulary, perspective, responsibility, and experience. This lack of commonality between these 2 groups leaves a very large gap in aligning corporate objectives. It leaves a major gap when it comes to evaluating and selecting IT solutions to help the organization achieve their objectives.

This problem exists in most companies, large and small. Best in class organizations have overcome this problem.

In my previous blog I talked about why clients often are disappointed with the results of their application solutions. Most companies still lack a cohesive solution architecture that provides integrated information flow, synchronized activity across the organization and collaboration with external partners. The IT solutions often mimic the siloed architecture of the organization making the integration and synchronization of the information network virtually impossible to maintain if it was ever a deliverable.

Compounding the situation is the inability of finance to meaningfully communicate with operations on the strategic goals of the organization and the inability of operations to explain the functions they are mandated to execute. Aggravating the communications is that operations operate at a functional level and most often don’t understand how their activity fits into the greater whole and its impact on the financial well being of the organization.

Is it realistic to expect that finance that views the organization through dollars and cents can communicate with operations that relates to organization through physical units?

A real (and repeatable) vignette sheds light on this reality. Outside of plant and equipment the 2 factors that make up the vast majority of the companies assets and expenses are inventory and people. Indeed whenever a company hits upon hard times the finance types immediately look to reduce inventory and head count. The solution to their immediate financial problem is obvious. There is almost an immediate improvement in the balance sheet and liquidity by converting inventory to cash. Head count reduction also improves the company’s income statement in the short term.

However, as important as these goals are in a crisis, they are always reactive, invoked by finance and are rarely strategic. Operations rarely have planned input and the resulting actions rarely provide long-term benefit to the organization.

In fact the decisions are almost always implemented to protect share value. This is true for both public and private companies. In the short-term these activities do deliver the expected results but rarely do they provide sustainable benefit.

If finance feels that reduction of inventory and headcount are so critical and important in a financial crisis and necessary to protect shareholder value why are these goals not strategic actionable objectives, day, after day, after day? Certainly it is not for lack of stating that optimal inventory levels and operational efficiencies are strategic goals.

In a financial crisis the lower levels of inventory and head count provide the necessary short-term cash results but are achieved at the risk of the long-term market interests of the organization. Finance’s objectives are the preservation of capital in the financial crisis not the strategic market positioning of the organization.

In best in class organizations the finance and operational groups have found ways to work together by constantly aligning the financial and operational goals to maximize the company’s long-term market and financial strength.

The critical element in aligning finance and operations is their ability to communicate and understand one another on each other’s specific goals and objectives. This ability to communicate and understand is equally critical between operational silos. The ability to communicate is based on a commonality in the language between the parties. This commonality of language within the business is based on intelligent information. Intelligent information is the enhancement of raw data into information that can be shared and understood and effectively acted upon. In order for the information to be supportive of intelligent decision-making it must be accurate, timely, and intelligible from the perspective of the person using the information.

IT solutions that don’t facilitate the communications between finance and operations fail to deliver the results that they are often expected to provide. Without proper communications between finance and operations it is virtually impossible for companies to align their short-term tactics with long-term strategy. IT solutions that are aligned provide useable information to all users in a manner that they can use to make informed decisions. However, too often this alignment in IT solutions fails because IT decisions are not made holistically. IT decisions are often driven by operational and financial silos without concern or thought on how the results may impact overall objectives. IT decisions made this way will almost inevitably lead to IT misalignment which in turn delivers misaligned information which in turn results in suboptimal communication and results.

Keeping process and information aligned is a serious problem. Business realities ultimately dictate business process. IT solutions that require companies to fit their business process to the software architecture compromise the ability of the business respond to their business realities. Maintaining alignment over time between disparate IT software and hardware solutions is probably the greatest challenge and cost to IT organizations as they constantly fight to align their IT infrastructure with the needs of the organization. (See Joshua Greenbaum’s article Software as Disservice, Managing Automation, April 2005)

Constantly aligning the business IT solutions to meet the changing business process requirements is vital to improving communications between operations and finance.