Has Supply Chain Innovation Stagnated?

Stephen DeAngelis

November 8, 2010

Supply chain analyst Lora Cecere reports that over the past year supply chain executives have indicated to her that the importance of supply chains is increasing but that spending on improving supply chains isn’t. She wonders why. [“If I Had a Magic Wand,” Supply Chain Shaman, 5 November 2010] She writes:

“The reasons are many. One is that companies are digesting past implementations of Enterprise Resource Planning (ERP) and Advanced Planning Systems (APS). They need time to reflect and drive ROI. A second reason is that post-recession spending on technology is tight. Funds are just hard to come by. However, I have another thought. Could it be that technology innovation has stalled; and due to the lack of innovation, there is no compelling reason for investment? This is my belief.”

The culprits, Cecere believes, are the purveyors of ERP and APS software who are stuck in 1990s thinking. She states, “We are experiencing the morning after the ‘ERP Hangover’.” She continues:

“The design of Enterprise Resource Planning (ERP) and Advanced Planning Systems (APS) reflect 1990’s thinking. They focus was on inside out not outside in. It was about supply. It was about the enterprise, not the network. The goal was to enable the efficient supply chain. The secondary goal was to minimize disruptions by recognizing planning constraints. In these systems, supply chain execution is defined as order execution, and the transactional systems focus on improving order to cash, procure to pay and revenue recognition processes. This was a step forward; but as leaders are learning, 1990’s thinking is not sufficient to meet today’s requirements.”

Cecere goes on to describe what constitutes some of the requirements and characteristics of a 21st century supply chain, beginning with the right design:

 

  • The efficient supply chain is not the most effective supply chain. … Supply chains need to be designed. There are three primary designs: agile (adaptive for demand and supply variability), responsive (short cycles), and efficient (lowest cost per case). Current deployments of technology enable the efficient supply chain that may not be the right response. The gap happens when there is a need for an agile or responsive supply chain. They are not enabled by current definitions for ERP and APS. (In fact, I think that it is an unreasonable expectation to ever think that ERP could or should be adaptive or drive an agile response. Transactional systems are rigid for good reasons. They need to be exacting.) It requires a different design from the outside-in or from the channel-back into enterprise applications.”

 

Dan Gilmore, editor-in-chief of Supply Chain Digest, appears to agree with Cecere on this point [“Engineering the Supply Chain,” 22 October 2010]. He writes:

“The first place to find the right supply chain answers is to ask the right supply chain questions. … One of the core truths that sometimes supply chain professionals conveniently pretend isn’t there is the fact that there is a fundamental trade-off between speed and cost. A company that seeks to maximize supply chain ‘responsiveness’ will generally incur higher operating costs than a competitor that primarily looks to optimize supply chain cost over speed. ‘One important challenge is that although seasoned operations and supply chain executives understand the differences between efficiency and responsiveness, many are confused about when to apply each strategy,’ [Dr. David Simchi-Levi of MIT] writes. ‘Worse still, senior managers typically spend a considerable amount of time and energy on customer value, but they may be ignorant about the connection between the consumer value proposition and operations strategies.’ The core question becomes: ‘What should really drive operations and supply chain strategies, given the inevitable trade-offs that exist for different paths?’ I am not sure that many companies specifically ask or answer that question.”

The next characteristic of the 21st century supply chain identified by Cecere is multiplicity. She writes:

 

  • Companies have multiple supply chains. As supply chain practices mature, they become VERY industry-specific. It is often tough for one supply chain application to meet the need of the entire organization. The average company has five distinct supply chains.”

 

One reason that multiple supply chains have emerged is that multi-channel commerce has become a reality on the retail end of the supply chain. Many retailers still haven’t come to grips with multi-channel commerce according to Guneet Paintal [“Fulfilling the Promise of Multi-Channel Commerce,” Supply Chain Management, 26 July 2010]. He reports:

“In the last decade, those of us in the retail domain have seen a wide proliferation of new channels for selling and fulfilling products. When viewed from the retailer perspective, it has translated into managing new channels such as print, mobile, email, online, catalog, store as well coordinating the fulfillment from drop ship vendors, wholesalers, warehouses, stores etc. On the customer side, they are more aware of all these opportunities to find, research and buy their products. Being exposed to a multitude of channels, they also expect these cross channel experiences to be more seamless. Retailers have to not only develop strategies to efficiently manage these channels but also ensure they stay tuned to and meet customer expectations. This strategy of multi channel commerce (MCC) has at best remained a leap of faith so far.”

The next 21st century supply chain characteristic described by Cecere involves connectivity. She continues:

 

  • Effective supply chains build strong relationships. We have automated transactions, but have not enabled relationships. Customer Relationship Management (CRM) and Supplier Relationship Management (SRM) do not meet the need. The supply chain needs collaborative applications to define, enrich and grow network relationships. CRM and SRM are not the right adaptors (connectors) for the end-to-end supply chain. To build multi-enterprise capabilities –effectively connect trading partners– needs value chain adaptors that do not exist.”

 

Strong relations lead to supply chain integration. According to studies conducted nearly a decade ago, the better a company is integrated with suppliers and customers in an “arc of integration” the better it performs [“Supply Chain Integration as major Value Driver,” by Daniel Stengel, Supply Chain Risk Management, 11 October 2010]. Stengel writes:

“‘Arcs of integration’ is a concept developed by Frohlich and Westrook ([“Arcs of integration: an international study of supply chain strategies, Journal of Operations Management, 19 (2), 185-200 DOI: 10.1016/S0272-6963(00)00055-3], 2001) which describes the degree of integration of suppliers and customers within a Supply Chain. … The authors distilled five different strategies from the answers from the survey:

  • Inward-facing — for companies without much up- or downstream integration
  • Periphery-facing — only little integration in both directions (compared with other companies from the sample)
  • Supplier-facing — higher integration on the supply side, low integration on the customer side
  • Customer-facing — [vice]-versa to 3
  • Outward-facing — strong integration on the supply and customer side

“The results show that those companies applying an outward-facing strategy clearly recorded greater rates of performance compared to all other strategies.”

Cecere’s next identifies the need to balance growth with efficiency. She writes:

 

  • Need to balance growth with efficiency. To accomplish this goal, demand capabilities grow in importance. There is an increased need to better sense, shape and translate demand. These processes need to extend bi-directionally from the customers’ customer to the supplier’s supplier to enable demand orchestration (the trade off of volume and profitability in go-to-market strategies while considering the volatility in direct material sourcing strategies).”

 

For anyone who has followed Cecere’s thoughts on the supply chain, you know that she is a strong proponent of demand driven supply chains. One of the technologies that is going to permit demand driven supply chains is cloud computing. Greg Johnsen, executive vice president of marketing and co-founder of GT Nexus, believes the tools are already in place [“Control Towers for Everyone? Yes – in the Cloud.” Supply Chain Digest, 14 October 2010]. He writes:

“One day we’ll all look back and wonder how we ever managed without ‘on demand’ supply chain control towers, and their ability to give us instant and accurate monitoring of trade and logistics flows across our global supply chains. We’re in a technology inflection point right now, maybe the biggest of our lifetimes. It’s called Cloud. … Today, software applications and data networks and business-to-business infrastructure are all being delivered ‘in the cloud’. Instead of installing and managing complex IT yourself, within your own company, you ‘rent’ it over the Internet. This model is not a fringe idea. It isn’t risky. It’s proven. It works. And the economics are truly breakthrough. Now even the smallest companies can subscribe to cloud technology platform services that enable advanced global supply chain control towers capabilities at a fraction of the cost of traditional IT deployments. There’s no longer any need to dream of real-time monitoring and visibility of orders, shipments, inventory and landed cost. It’s a reality. The new technology gives you a clear view from order point to final delivery, from and to any point on the globe. Control towers are not just for ultra-fortified Fortune 100 companies. They’re for everyone.”

Johnsen makes it sound like putting together a demand driven supply chain is a simple matter. It isn’t. That’s Cecere’s final point. She writes:

 

  • Supply chain excellence requires industry-specific data models. I know that we have all heard it before, but the industries really ARE different. The requirements to map industries to value chains will further segment the market. This is an inherent barrier to the growth of the SCM technology market. The market dynamics make it impossible to have a solution that has the breadth and depth required for all industries.”

 

This is where Cecere’s “magic wand” comes in. She goes on to describe supply chain applications she would like to see if she had seven wishes. Her first wish:

 

  • We rebuild from the outside-in. When we map processes from the customer’s customer to the enterprise, there is usually an AH-HA moment. Conventional enterprise applications have no place for customer supply chain data. Therefore to build a demand sensing layer, we have to define supply chain applications that cross revenue-generating teams of marketing and sales to sense and shape demand and monitor ever-changing customer supply chain policies. Customer data is then translated through a demand visibility layer for the functional requirements. This demand visibility layer is VERY different than traditional forecast consumption, and is evolving in concept in several supply chain leaders’ minds. There is no clear definition yet.”

 

Does this mean that forecasting will become a thing of the past? Not necessarily. Companies will still need to do long-range planning and conduct “what if” exercises. When it comes to execution, however, sense-and-respond supply chains appear to be where most companies are heading. Cecere later admits that even in these advanced supply models predictive analytics will be important. Her second wish involved data:

 

  • Master data projects go away. By definition, supply chain data is dirty. I am convinced that conventional master data techniques will never get us to where we need to be. I would like to see us deploy the powerful Search Engine Optimization (SEO) techniques that have been defined over the last ten years – like Endeca is doing in Automotive – to dynamically configure data.”

 

Fortunately, lots of companies are working the challenge of search engine optimization. That’s because there are a lot of newcomers who would like to dethrone Google and get rich. Even if they don’t, they may find a niche business (like Endeca) supporting the supply chain. Cecere’s third wish:

 

  • Supply chains start and end with a collaborative layer. The connection of the end to end supply chain vision: this is where I believe the true power of social technologies come to life. Today’s enterprise applications are faceless. The ability to deploy techniques like micro-blogging (think Twitter), video, collaborative communities (think Facebook), and education (think Wikipedia) horizontally from the customer’s customer to the supplier’s supplier excites me. Collaborative technologies are an opportunity to better anticipate needs and enrich relationships. It could enable true collaboration beyond the sales person/purchasing agent relationship to better serve true needs.”

 

Aatish Goel agrees with Cecere that social media is going to have dramatic impact on supply chains [“Impact of Social Media on Supply Chain,” Supply Chain Management, 25 October 2010]. He writes:

“Unlike other traditional media such as print and television, social media is one of the channels where people can freely express their opinions about the various products and services used. The consumers become brand ambassadors and companies are left with no option but to manage perception created due to all this. Social media acts as a strong medium to influence consumer behavior and thereby company’s sales. … Marketing professionals spend dollars on research and promotions to understand and influence consumer behavior to create pull and increase company’s topline. As more consumers move to social media and start using networking sites to influence their decision making, I think, marketers have an opportunity (and of course the associated challenges) to sense changes in demand more quickly and capture this new trend in their demand shaping process. Demand planners need to design this additional feed of information from marketing team in the overall demand planning process in order to capture the latest consumer behavior and feed it back to supply side. … Issues like Data quality, loads of data, more noise in data, etc etc need to be managed … I am sure there are many other facets of [the] supply chain where businesses will see the impact happening; definitely areas where a company works with other trading partners such as suppliers, logistics providers etc. It is just a beginning of a new supply chain world and this will definitely result in addition of a new chapter to most of supply chain text books.”

Cecere’s fourth wish also concerns data:

 

  • We free the data to answer the questions that we do not know to ask. Data sources are proliferating. Disparate data sources, the mining of unstructured text, and the need for deeper ad-hoc analysis to drive insights are transforming business intelligence (BI). The beat of the supply chain — frequency of data sent and used – is getting faster. I believe that the company not only needs a demand-data repository (DSR), but also an enterprise-data repository and a supplier-data repository. Predictive analytics can then access the data directly – as opposed to waiting for the data to be rendered through a transactional data model – as the information comes in to sense and respond to changes. I like the work that I am seeing in this area with five Fortune 500 companies. In this area, I find the work by Teradata on data reuse and governance/architecture, the work by SAS on unstructured text management and the work by Qlikview on ad-hoc analysis encouraging.”

 

I agree with Cecere that predictive analytics are going to play an important role in both demand driven and sense-and-respond supply chains. Cecere’s fifth wish is, for obvious reasons, one I agree with even more:

 

  • Intelligence from more than optimization. We need more math and adaptive rule engines. Supply chains are unruly, and they do not follow historic patterns. We have tried to make them more predictive through the use of if-then rules, business process automation and algorithms; but, we have not gone far enough. Supply chains need better math that is easier to use. In this area, I like the work that is being done by Enterra Solutions, Mu Sigma, Revolution Computing, SmartOps, and Terra Technology.”

 

It is always gratifying to read that your company’s work is appreciated. Cecere’s sixth wish focuses on redefining supply chain execution.

 

  • Supply chain execution is redefined. I struggle to understand how we ever defined supply chain execution so narrowly as order fulfillment. In the future, I believe that supply chain execution will wrap and connect sell, deliver, make, source in a holistic way. Manufacturing line go down? There is an automatic connection to order allocation and fulfillment. Inbound shipment delayed? There is a connection for rethinking outbound distribution. The supply chain becomes more connected and intelligent through new rules engines to drive an adaptive response.”

 

This wish ties back to Cecere’s earlier assertion that supply chains need to be redesigned. Her final wish is for an app store that makes everybody’s life a lot easier. She writes:

 

  • Supply chain apps store. I got an email … from a client that is buying supply chain applications. He asked a great question, ‘Why can I not get supply chain applications in an on-demand model through an i-store like application?’ I agree. For predictive analytics, the time has come to shorten the sales cycle and make deployment easier.”

 

Even though Cecere began her post with the assertion that “technology innovation has stalled; and due to the lack of innovation” companies aren’t investing in supply chain updates, it was encouraging to note the number of companies she highlighted that are providing innovative supply chain solutions. Most supply chain analysts I have read seem to believe that supply chains are in a state of transition or transformation. Although they are not certain about what this transformation will eventually end up looking like, they seem to believe that it will result in better supply chain solutions than we have today. Flexibility and adaptability are two words you hear a lot during supply chain discussions. I suspect they will be two of the most prominent characteristics of 21st century supply chains. And as Cecere asserts, flexibility and adaptability require good data and end-to-end collaboration.