© Spend Matters. All rights reserved. 1 Putting the “Supply” in Supply Networks 2 Part 2: Tackling the Multi-Tier Information Problem in the Inbound Supply Chain 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 In Part 1 of this two-part research report, we examined the complexity of managing supply in a multi-tier supply network. We also discussed a framework to help supply management professionals put a new form of “supply management” at the heart of the supply chain, with a particular focus on advanced supply planning and execution of raw materials (rather than just provisioning any type of enterprise resource). The idea is not to rename (or advocate on behalf of) the direct procurement organization, but rather to look at multi-tier supply management as an end-to-end process that requires cross-functional and cross-enterprise collaboration – and the tools needed to support that process. Most firms are thinking too linearly about the role of procurement, as a silo, to find low-cost sources of supply without really explaining that all suppliers could provide better part-level performance on a broader/balanced supply scorecard – if the supply chain were managed more holistically and orchestrated better. Suppliers don’t enjoy expediting any more than brand owners do. They don’t make more money reinspecting things as specifications change. They certainly don’t make more money working a third shift. Procurement knows all of this, but doesn’t have the mandate to orchestrate the end-to-end supply chain – and firms historically haven’t had the tools. The real issue here is that jobs must change from functional, single-tier, hierarchical, transactional, symptombased process management to horizontal, multi-tier, collaborative and outcome-based process views focused on profitably serving the customer. We need fewer clerks and planners and more procurement supply managers who own the end-to-end flow of supply from negotiation of the supplier’s technology road map to the product shipment out of the factory. That includes the price, delivery, use, quality and continuity of supply. We also need fewer silo specialists and more customer-focused generalists who have the full panoramic view of the process and the authority to make real-time decisions. In this second installment, we will dive into the details of this multi-tier information problem that needs to be solved to deliver the above – and we’ll evaluate the pros and cons of various approaches to solve it. 1 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 © Spend Matters. All rights reserved. Multi-Tier Supply Management Is the Biggest Differentiator of Supply Management Performance When Spend Matters conducted a research study last year on the extent to which direct procurement organizations were driving broader supply management impact across the supply chain, we found that there were sizeable gaps between the capabilities of the top performers (measured across a “balanced scorecard” of supply performance metrics) across the board. But the biggest gaps were in areas that were multi-tier in nature (see Figure 1). Figure 1: Supply Management 2.0 Capabilities Drive Increased Supply Performance Top"Supply"Performers" Peers" % Gap Supply"base"segmentaIon"to"drive"category" management,"supplier"management,"risk/regulatory," InnovaIon"support"(e.g.,"early"supplier"involvement;" make"vs."buy;"crowdsourcing;"etc.)" 53% 31% Integrated"supply"performance"management"" 46% VMI"support"(e.g.,"JIT"Warehouses,"inventory"visibility," etc.)" MulI+Ier"raw"material"inventory"posiIoning"(including" at"suppliers)" 52% MulI+Ier"cost"modeling,"forecasIng,"and"intelligence" 61% Dynamic"supply"allocaIons"based"on"supplier"rebates," penalIes,"capacity,"lead"Imes,"etc." TranslaIon"of"S&OP"to"a"mulI+Ier"collaboraIve"supply" plan" Supply"risk"modeling"/"monitoring"(e.g.,"“heat"maps”," external"intelligence"integraIon)" Performing"“buy+sell”"to"buy"on"behalf"of"smaller" suppliers" 56% Tax+advantaged’"supply"strategies" 46% 51% 48% 85% 62% 0" 1" 2" 3" 4" 5" Weak/ Ad Hoc Fair Good Very Good Excellent Source: “Direct Procurement Excellence Study,” Institute for Supply Management and Spend Matters, 2013 For example, supply risk monitoring, which tends to be multi-tier in scope for critical suppliers, showed the largest gap at 85 percent (i.e., top performers had an 85 percent greater capability score than their peers). The gap was 62 percent (the second greatest gap) for multi-tier sourcing/supplier relationship management (SRM) programs called “Buy-Sell.” For multi-tier cost management, the gap was 61 percent (the third largest gap). Multi-tier inventory positioning had a 51 percent gap. You get the idea. These multi-tier processes are challenging in terms of process and multi-firm collaboration, but it’s even more challenging from an information management perspective. Basically, an information model that 2 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 © Spend Matters. All rights reserved. captures the complex, multi-tier, “many-to-many” relationships in the physical supply network is required. The information architecture for the supply chain is as strategic as the “business architecture” (i.e., your operating model in terms of process/organization/governance), especially given the convergence happening with “The Internet of Things.” The bottom line is that your supply network is not a commodity. So, don’t treat your procurement and supply chain information platforms like commodities (e.g., like ERP). You need a set of core information platforms that will provide an information capability that is as robust and agile as the supply network you are trying to run and improve. The word “platform” is overused; what we mean is not any one single technology application, but rather a sophisticated data model (and supporting data stores – whether in the cloud or behind the firewall) that supports the complex process models inherent in a multi-tier supply network. So, how are manufacturers building this capability? There are essentially two choices: • • The first approach subscribes to the sunk cost fallacy and aims to “use what you got.” This is a preference for myopic CIOs who hope to use the data model and data stores from a single-tier ERP/SCM/procurement application already in place. The hope is to wait for an ERP provider to retool its fundamental product architectures (i.e., the data models themselves, not the type of database they run on) at a cadence as fast as their supply chains. The second approach is to use a network-based data model suited to the complexity of the multifirm processes in question. As the supply chain-centric public marketplaces morphed a decade ago to private “supply chain business [information] networks,”1 the “system of process” (or “system of engagement”) moved into the cloud and began to offer up collaboration functionality previously locked up inside the single-tier applications, but all the while integrating to and persisting both master data and core workflow data behind the firewall as needed. This mix of public and private cloud is called a “hybrid cloud deployment model.” You can probably guess which option the more progressive firms with complex multi-tier supply chains are taking. The "Multi- Multi" World of a Supply Chain Business Network Let’s get this out of the way: Traditional enterprise applications and application architectures are dying. Management of a factory-centric supply chain has given way to orchestration of a trading network, which operates very differently. Weekly materials requirements planning (MRP) runs, and associated batches of PO lines, won’t cut it. Neither will weekly payment runs. The former bloats lead times and inventories while the latter hampers on-time payments and early payment discounts. Proliferating spreadsheets are a clear analog to proliferating inventory you can’t optimize. Data duplication/replication across partner systems is akin to excess and obsolete (E&O) inventory – immediately stale and a drag on performance. If you believe that “inventory = waste,” then such proliferated data is toxic waste. More strategically, those who have quicker access to better information deeper in their upstream supply network will be able to commit with confidence to customers, stakeholders and investors. They will outsell you, they will out-profit you, and they will see where their 5 Cs (cost, capacity, constraints, capabilities and contracts) need shoring up in order to gain and preserve competitive advantage. The visibility brings control in execution to “keep your promises” (which is ultimately what supply chain is all about). It also brings insight into new and better potential promises you can make that nobody else can. Even just within a basic S&OP process, demand must be received and translated rapidly. It must be matched with granular, constrained supply, for inventory, capacity and logistics – and that view of supply must be extended seamlessly into the upstream supply tiers. 1 In Part 1 of this two-part series, we mentioned that we would adopt the popular term “supply chain business network” to mean a supply information network that supports the physical supply network (i.e., the “information” aspect is implicit). A supply chain business network is merely a supply chain-specific business network that is different from B2C social networks, B2C/B2B commerce networks like Amazon/AmazonSupply, or B2B commerce networks like Ariba. 3 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 © Spend Matters. All rights reserved. This information advantage brings us to the “multi-multi” discussion of how your information architecture will need to accommodate the following “multis” in the supply network. Multi-Tier: What You Can’t See Will Hurt You Multi-tier is not a new concept. Many companies conduct multi-tier network mapping analysis such as supplier risk analysis on critical tier n suppliers. Others manage key supplier tooling (and related capacity planning processed as their own). Some larger firms in the high-tech sector do some form of “buy-sell” program to buy goods from tier 2 suppliers to supply their tier 1 suppliers such as contract manufacturers (also popular for large metals buyers in the automotive and aerospace and defense industries). Others do multi-tier order management with purchased finished goods into a retail channel. A rarified few might even do multistage inventory positioning and optimization of raw materials into just-in-time (JIT) warehouses and other supplier locations. But for many firms, these strategies need to be performed in unison (as was shown in our direct procurement research and shown in figure 2). Unfortunately, these requirements are often supported using homegrown, customized, and/or one-off applications that don’t integrate well to each other, to supplier systems, and to existing ERP/SCM applications. Figure 2: The “Multi- Multi” Problem: There Are Multiple Types of Multi-Tier Concerns Type(of(mul$%$er(problem(concern(( (%*of*responses*–*mul8ple*responses*allowed)* • Procurement*is*more* concerned*with*cost*visibility* and*risk*visibility* Other( 7%( Mul$%$er( order( management( and(visibility( 18%( Mul$%$er( supply( planning( 18%( Mul$%$er(cost( visibility( 25%( Mul$%$er(risk(( 32%( • Supply*chain*is*more* concerned*with*mul898er* supply*planning*and*execu8on* (e.g.*High*Tech*industry)* • This*problem*was*cited*by*the* more*advanced*firms*(i.e.,* “you*don’t*know*what*you* don’t*know”)* Multi-demand: Scenarios, Signals, and Variability Terms like supply chain “resiliency,” “agility” and “flexibility” are certainly popular. But they can mean different things. On the supply side, these terms usually relate to the systematic ability to manage supply risk for critical parts and suppliers up through a few tiers – via better prediction (e.g., earlier) and better (e.g., faster) recovery. For others, these terms are associated with mitigating commodity purchase price risk through hedging or smoothing strategies. For the truly advanced, these terms apply to translating strategic business scenarios (e.g., mergers and acquisitions [M&A], re-shoring, outsourcing) and supply scenarios via what-if analyses on top of extended supply network models. But let’s start simple. Assume a fixed supply network, with scenarios only having an impact on demand volumes. How should you best manage the demand volatility? You can try to shape it as best you can (and cut down supply lead times of course), but you’ll only get forecast accuracy to improve so far – it’s like pushing a boulder uphill. However, just lumping all the fine-grained forecasts using advanced tools in the “omni-channels” to a point forecast that is then translating to upstream supply planning via S&OP creates information loss around those signals. Rather, passing back the consensus demand plan and the demand 4 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 © Spend Matters. All rights reserved. variability allows you to collaborate with upstream internal/external suppliers to manage this variability (e.g., better rough-cut capacity/inventory planning, flexible upside contracts, use of party with lowest risk treatment costs). It varies in the product life cycle, so you have to dynamically reconfigure the same network (e.g., point of postponement, transportation mode) as variability changes. This art and science of translation is not just a single-step one-size-fits-all approach. Rather, it requires ongoing segmentation with different variables, and they must all integrate both vertically through organizational hierarchies/matrices as well as horizontally across the network tiers. Multi-Segment … Interleaved and Concurrent (Think “Omni-Channel Supply”) Experienced supply chain practitioners know that segmentation is by no means a new idea, but it’s never been more important, or more complex. From a supply perspective, you can start at the consumer level and think of segments as natural clusters of customer choices based on their “balanced scorecard of supply” (i.e., quality versus cost versus availability and so on). These segmentations generally work their way up the supply network through segmented transportation modes, warehouse zone, manufacturing cells, purchasing categories and supplier types up through multiple tiers. However, rather than just single or simplistic segmentations inherited from downstream demand channels, advanced firms are using concurrent granular multivariate segmentations to mass customize their material flows and information flows by interrelated supply-side attributes such as commodity type, risk type, supplier type, buyer/seller dependency, regulations in force, availability of substitutes, profit-at-risk, and many others. Such complex “omni-channel supply” reduces one-size-fits-all process design, but also requires IT systems that can orchestrate (not just analyze) such workflows. Segmentation is not just an analytic exercise. If you can standardize some of your data, KPI categories, processes, and roles, then you have the ability to translate not just a planning/performance management view from a customer/channel view to supply network view back to a supply/spend category view, and then down to supplier/part/location level in a business unit supply chain, but you can actually cross the planning/execution domains and the previously fragmented topology of legacy applications in each of those areas. This is heady stuff I know, but you’re starting to see early hints of it coming together, but only with multi-tier native functionality built into platforms/networks. What it allows is the automation or rapid demand and supply translation compression and making the feedback loops immediately visible. It also allows you to see the effect of a decision before and during its implementation, not afterwards through an analytical autopsy. Seamless Multi-Period and Multidirectional Into the Frozen Zone – It’s All About the Commitment Just as demand signals are translated to supply across tiers, the same can be said about the translation across time. As the planning horizon moves from years and months down to weeks, going from unconstrained supply scenarios to constrained plans (and the feedback loop to reshape demand if needed), and from promised to committed (including both contractual commitments in strategic sourcing and actual tactical “commits” as we enter the “frozen zones”), the linkages between contracts and supply plans must be tight. “Strategic sourcing” for indirect spending is often a misnomer, and after the contract is signed, the matching of invoices against price/terms/SLAs is about the extent of the integration (which itself is by no means guaranteed – especially in complex spend such as transportation contracts). In the supply chain, the stakes are much higher. Like the adage about the farm where “the cow is involved, but the pig is committed,” indirect spend can be milked for savings, but direct spend is where you can get truly slaughtered – especially if there are contract penalties (for volume commitments and for on-time deliveries to dock doors at retailer DCs) and rewards (i.e., discounts and rebates). Commitments matter! For example: • The “commits” serve as the dynamically confirmed contracts – and they should be determined by an intelligent and dynamic sourcing process that performs supplier quantity allocations and reserves critical upside capacity. HP’s well-known “Procurement Risk Management” methodology lives here in the contract realm between pricing, volumes/variability, and capacity. Firms don’t have to apply this level of rigor, but there should at least be a process here to ensure rough-cut flex 5 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 © Spend Matters. All rights reserved. • • • capacity exists at a supplier – or set of suppliers. Allocating volume between suppliers shouldn’t rely on some fixed allocation percentage or crude heuristic, but should be made on multiple criteria based on supplier performance, hedging criteria (e.g., currency – not just commodity volatility), price versus lead-time/lot-size, and other criteria. Allocations in supply planning must get smarter! The commit process is the hinge between planning and execution where downstream POs, acknowledgements, ASNs, and more can take over without incident. The ability not only to superconduct the demand signals up the network, but also do the same with supply commitments back down, allows firms to gain resiliency through proactive identification of issues (early enough to do something about it) rather than just focusing on recovery (e.g., firefighting, expediting). While “commits” seem to just focus on perfect order fulfillment of materials, commitments must also be made by third-party logistics (3PL) providers and other process participants who provision any type of critical resources. For example, consider the spend category and business process known as transportation (e.g., truckload). Complex bid optimization in strategic sourcing must dovetail into the transportation management systems (TMS) where execution occurs. If they don’t, contract compliance rates can easily plummet to under 50 percent. Other resources include work crews of contingent laborers, shipping ports, critical equipment, and even money itself in the area of trade finance (see SpendMatters/tfmatters for more information on this broad topic). “Commits” have commercial implications, but also are fundamental to performance management and relationship management. The whole notion of translating, propagating, and matching supply/demand from planning to commitment/execution is very powerful because you are in essence turning “strategy deployment” (often called hoshin planning) 90 degrees from a top-down cascading of scorecards to an organizational hierarchy to a horizontal translation across the tiers. This aligns the metrics of the process participants (e.g., EVP SCM; CPO; commodity managers, supplier managers, supply planners, contract managers, suppliers) and is what we call “supply performance management”. Get it right and you inherently tear down the silos and your network will hum. Get it wrong and the friction will start to build. “Multi- Multi” Information Infrastructure for a Many-to-Many Supply Network If you want to get the above right, there’s obviously a lot of orchestration required. You definitely will need solid technology to help. Real “collaborative commerce” in the supply chain requires rich and dynamic highspeed orchestration. Batch MRP runs, acting on stale data, and augmented by spreadsheets, provides little help in dynamic supply-demand matching. But the complexity to orchestrate activities (and the risks that threaten those activities) though a “many-to-many” data model that captures the complex interrelationships of facilities, products, partners, lanes, equipment, people, plans, time periods, contracts, geospatial information and more is “non-trivial.” So, in this final section, we will highlight the following technology “multis” to consider beyond the usual requirements of multicurrency, multilingual, multi-organization, and so on. Multi-Role: A User-Friendly CIA The acronym “CIA” in information security parlance means confidentiality, integrity and availability. Role-based permissions, transparent rule management, and fail-safe infrastructure deployed in a hybrid cloud deployment model are going to become standard fare. Multi-device user interfaces should be tuned to the task: tabular planning; color-coded dashboards; graphical network models (and business process models for documents orchestration); and composite workbenches must augment traditional web forms. This isn’t just a technical issue for, say, masking price data from the wrong users, however. It can be used as a weapon. For example, can you show an individual customer their upstream supply chain that is being managed by you and your partners? Can you filter your entire inbound supply chain information that is pegged to a customer? That capability would inspire confidence in customers, no? Multi-Partner Integration: Mass Customizing the Information and Interfaces B2B integration is complicated enough, so it shouldn’t be needlessly overburdened with point-to-point handbuilt adapters, nor burdened by ill-fitting commercial models (e.g., supplier networks that charge suppliers a 6 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 © Spend Matters. All rights reserved. percentage of the value of the goods). More sophisticated networks not only offer a choice of integrations to trading partners via web forms, spreadsheets or machine-to-machine B2B connectivity, they also provide “mass customized mappings” (e.g., e2Open’s “map factories” that help trading partners map their preferred protocols to the OAGIS standard is a good example). Increasingly, we expect to see more integration to third-party content/apps/devices while also employing rules-based orchestration and even machine learning to help automatically resolve problems rather than just being alerted to them. Multi-Analytics: Big Analyses to Go Along With Big Data Increasingly, information networks are generating network-derived insights to inform process participants of potential threats (e.g., supply chain risk analytics) and rewards (e.g., aggregated cost/price benchmarking or recommended supply network changes). With the increasing telemetry data from sensors across the supply chain, and the power of predictive analytics and prescriptive analytics (e.g., optimization), the opportunities are boundless2. Looking Forward: From Information Networks to Platforms Advanced information networks that provide a “single source of truth,” rather than just being simple document exchange between two parties, is clearly the future in the supply chain. We believe strongly that information networks also will evolve to Platforms as a Service (PaaS) similar to Salesforce’s Salesforce1 platform in the customer relationship management (CRM) world. A PaaS of this type in the procurement and supply chain would allow an ecosystem of partners to develop complementary apps and other services that would extend and enhance the network. As supply chain process participants become increasingly sophisticated “prosumers” of information, they’re going to need to fundamentally upgrade their capabilities to move from an enterprise-class application approach focused on the internal supply chain to a network-based architecture focused on orchestrating the end-to-end demand-driven supply network. To be clear, the choices between traditional enterprise-class cloud applications (i.e., multi-tenant but designed for a single-tier enterprise scope) and network-based cloud applications and services (i.e., support multi-tier value networks) are not mutually exclusive. There is plenty of work to perform selective upgrades, to standardize data, to consolidate application instances, and more. But this is only rearranging and polishing the deck chairs on a leaky boat not suited for the increasingly stormy seas in the global economy. Manufacturers should definitely begin to explore some of the advantages that supply chain business networks have to offer. There are great case studies from many firms, and the good news is that you can start incrementally within your supply chain to deliver quick-hit successes and start the cycles of self-funded scope expansion. Firms that start this journey now can find ample reward in the more advanced scenarios we’ve spelled out in this research report. Firms that forego the rewards by not making a choice are in fact still choosing – and that choice likely will lead to those organization being increasingly noncompetitive. In this case, “postponement” is not a best practice. 2 For more information on supply analytics, see “Supply Analytics: an Overlooked Opportunity,” Supply Chain Management Review, July 2012. 7