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.

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