14 Characteristics of New-Generation Processes
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Service-oriented architectures, master data management systems and business content libraries enable greater capabilities and competitiveness in supply chain management.
Supply chain management (SCM) has been transformed over the last 40 years through successive generations of process and technology advances, from material resource planning to enterprise resource planning to advanced planning systems. i2 believes we are on the threshold of a new generation of capability today. Just as with previous generations, those companies that are the leaders of this new generation will achieve competitive advantages over those that lag behind. Here, we'll explore the opportunities presented by this new generation.
It is enabled by the new, enterprise, service-oriented architecture (see article, page 15) and other business process-management technologies that are used to create a business process platform of considerable power—the power to handle the complexity and other characteristics of globalization. In fact, the i2 Agile Business Process Platform is the only platform designed specifically for new-generation supply chain management—a paradigm shift from current supply chain management processes. The way supply chains can be managed using this platform is very different from how they have been managed previously. The following 14 characteristics of this new generation have been identified from early successes with leading companies.
Focus on enabling sales and revenue growth
In past generations, supply chain management was primarily focused on cost reduction and supply management. New-generation SCM still manages supply and costs, but it has sales and revenue growth as its fundamental goal. It is geared toward operating the supply chain as a unified entity to deliver efficient customer response. This new focus delivers strategic value beyond that of previous generations.
How so? The emphasis shifts from efficiently using capacity to achieving the greatest profit and revenue from capacity. Companies are redesigning their processes to explicitly optimize profit. They're building supply chains to react to constantly changing customer demand with the objective of never losing a sale based on insufficient supply. They achieve this without investing more in inventory or capacity, but investing in agile, responsive supply chain capability.
Integration across functions
Traditional applications and the supply chain management processes of previous generations optimized functional areas such as factory planning and transportation planning. The processes of the new generation extend supply chain management across functions, while building on functional systems and processes.
An example of this is a sales and operations planning (S&OP) process (see article, page 27). S&OP requires inventory, production, supply and demand information to adjust manufacturing plans to fit changing conditions. Under previous generations, S&OP was typically a monthly, meeting-based process, where managers of different functional areas combined their information to determine adjustments to manufacturing plans. In some cases, this information was collected into related spreadsheets that served as the basis for discussion.
New-generation SCM processes automatically combine this cross-functional information, analyze it, identify exceptions, recommend changes and then rapidly communicate these changes to supply chain partners and customers. Companies are changing S&OP from a monthly meeting to a continuous process that can react quickly to changing market and production conditions.
New-generation SCM still manages supply and costs, but it has sales and revenue growth as its fundamental goal.
Demand-driven supply chains
One of the most important characteristics within end-to-end supply chain management is the ability to drive the supply chain from actual customer demand instead of from sales forecasts. Traditionally, companies use sales forecasts or plans to determine manufacturing and purchasing requirements. But rarely does actual demand for each product conform to the forecast, leaving the company with excess inventory and unmet sales opportunities. This problem has worsened over the last decade. Shorter product life cycles give companies less time to react to market acceptance, while offshore manufacturing increases the lead time required to react to changes.
The ability to integrate actual customer demand, and even demand from a customer's customer or point-of-sale (POS) data, enables a company to continually adjust its supply chain. Instead of driving its supply chain from planned sales, the company uses its initial plan as a baseline plan and continually adjusts it to actual sales. The ability of new-generation solutions to efficiently blend forecasts with actual customer demand, such as POS data, is a leading characteristic that will be the dominant design for supply chain management in the future. This will require redefining supply chain practices, as well as supply chain management processes and systems, but the benefits and competitive advantages can be enormous.
Demand shaping
Going further, new-generation supply chains can actually shape demand. Demand shaping uses supply chain availability information, such as inventory and production capacity, to shape demand to increase revenue and improve profit. Dell shapes its demand by continually changing the price of its products and options to match its availability of product to ship to customers. Demand shaping uses the capabilities of new-generation supply chain management, especially the integration of supply information, to trigger pricing and discounts.
Furthermore, demand shaping has the potential to increase revenue and profits in almost every industry— if it's part of an integrated pricing and product mix strategy and if it's integrated with the extended enterprise. Such integration removes a major obstacle from SCM performance. In previous generations, the “buy side� was disconnected from the “sell side� of business; this is no longer the case with the new generation.
Consider the retail example, where discounts are used to increase sales of products when there is more inventory than planned. But discounts are expensive. Demand shaping can enable retailers to adjust discounts by product within each store, avoiding higher discounts when they are not necessary. Similarly, they can adjust promotional programs based on what is in their supply chain to avoid promoting products they can't deliver. In capacity-based manufacturing businesses, such as the steel industry, demand shaping can be used to optimize profits by balancing capacity and material availability to potential contract bids to get the optimal mix of orders to achieve the highest profits (see article, page 46).
Integration of planning and execution
Until now, supply chain planning and execution were separate. Manufacturing, supply and transportation plans were developed inside a company, and then it set about to execute against those plans. The necessary assumption was that execution would exactly follow the plan, but, of course, it rarely did. Many problems occurred along the way, adjustments needed to be made, and frequently an adjustment in one area made a problem worse in others.
In new-generation supply chain management, planning and execution are increasingly integrated. A company can quickly see the difference in a supply plan for key materials and the suppliers' ability to meet that plan. More important, it can see the impact of this difference on specific customer orders and react quickly—in a day or even minutes, instead of weeks or months. This responsiveness can have an enormous effect on revenue, profit and customer satisfaction.
Closed-loop capabilities
Because planning and execution were not integrated in the previous generation, it was difficult to close the loop on many supply chain management functions. Demand forecasts were made without continuous feedback on the accuracy of forecasts from actual sales data. Supply plans were made without continuous feedback on the ability of suppliers to meet those plans. Although capacity planning was done, there was no feedback on actual utilization. Inventory was optimized by setting inventory policies, but there was no feedback on the use of those policies.
Everyone knows supply chains continuously change, yet older generations of supply chain management systems and processes were deployed as if supply chains were static and never-changing. The new generation enables dynamic response to evolving physical and information supply chains by continuously adjusting process and information parameters to enhance plan accuracy and overall performance.
Plan-do-check-act (PDCA) is a well-proven management and quality-control technique that applies to supply chain management as well. PDCA is enabled in the new generation. For example, a company can plan to sell a certain quantity of products and then evaluate sales daily, understanding why it is selling more or less than planned. With this feedback, it can then act by adjusting the supply plan or shaping demand to achieve the original plan.
In the new generation, IT will move from managing complexity to promoting business process innovation.
Collaboration
Most companies have tried different approaches to collaboration, enabled by new systems and expanding markets. But most of the intended objectives of collaboration have remained unrealized. One of the primary reasons for this is the extent of integration required to connect partners' systems. In the new generation, we see collaboration evolving from the slow and linear collaborative planning, forecasting and replenishment (CPFR) model to a rapid-response, synchronous approach that proliferates multi-enterprise supply chain information to all partners in near real time. Reducing latency and managing multi-enterprise workflows are the keys to new-generation collaboration and drive tremendous value across all partners.
Major advances in collaboration are occurring in the new generation as partners are able to integrate their systems (see VF interview, page 4). A company can now achieve visibility into POS data from its customers, as well as planning, order and inventory information, so it can truly perform collaborative replenishment. A company can also closely collaborate with its suppliers by sharing inventory, order and capacity information.
Systems customization
Supply chain management systems are now custom-fit to every company.With the traditional systems of previous generations, standard applications established common practices for companies to choose from. By definition, these applications drove generic functionality and process models that were undifferentiated on process excellence. The acknowledged top-performing supply chain company in the world, Dell, leveraged technology to drive process excellence and created an entirely new business model that never would have evolved if the company had taken a generic ERP approach to supply chain management.
In the new generation, supply chain management is more expansive and highly integrated, and, at this broader level, all supply chains are unique. This requires customized systems. Fortunately, the technology that enables this new generation also enables easier customization. Process workflows can be modified or developed to meet unique process needs without changing the underlying software.
Process innovation
While supply chain professionals have always had good ideas for improving supply chain management, they have typically been stifled by limitations in the underlying systems. A supply chain manager could conceive of how to better manage a particular supply chain problem, but his IT organization would typically naysay the initiative, because changing the underlying systems would be expensive and take years. In other words, supply chain professionals conceived of SCM processes that could never be built because of these limitations. In the new generation, SCM systems can be quickly and easily modified to support process innovation, encouraging new practices.
One customer called the new-generation SCM platform “the platform for SCM innovation.� In this new generation, IT will move from managing complexity to promoting business process innovation.With the advent of the new generation, supply chain management is increasing innovation, and companies that are creating new innovative practices and processes are gaining a competitive advantage.
Integration of legacy applications
Most supply chain systems rely on legacy applications to some extent, and too frequently these applications get in the way of process and system improvements. Companies that are moving into the new generation of SCM are also finding interesting solutions for dealing with legacy applications. Instead of continually being modified, legacy applications can be stabilized and integrated into the new-generation platform as services. New functionality can be added to the platform instead of to the legacy application for maximum impact.
The new generation allows companies to leverage past investments in supply chain management technology while elevating them to a new level of performance. Using this approach, in just two weeks one company was able to replace the user interface from a 25-year-old legacy application with a new one integrated with newgeneration solutions.
Focus on business processes, not software applications
Until now, companies had to choose to either use packaged applications or do custom development. Yet, the choice was problematic: packaged applications are frequently restrictive because they do not fit the unique needs of a customer. And custom development was expensive. The new generation provides a better alternative: buy and extend. Companies are buying business process platforms, with standard process workflows from a workflow library, and then modifying and extending these workflows to create unique business processes.
This list of new-generation characteristics will certainly grow as leading companies invent and innovate beyond them. But many companies are lagging in their understanding and adoption of new-generation systems and processes.While they may fall behind, we expect that the companies that take first advantage of the new capabilities will achieve competitive advantage and superior performance.
— by Michael E. McGrath
