February 2003
SUPPLY CHAIN MANAGEMENT
A Portfolio Approach to SCM
Seamless collaboration with complete information sharing between all supply chain
participants is still in the future. But there are strategies to deal with the current
transitional state to help you come out on top today.
BY JACOB VARGHESE
THE VISION OF supply chain management (SCM) evolved with the aim of integrating
disparate functions like forecasting, purchasing, manufacturing, distribution, sales and
marketing into a harmonious ecosystem that would envelop the company's suppliers and
customers. SCM promised to align all participants to act in unison to serve the end
customer. Add to that promise the Internet, which has reduced the costs of integrating,
coordinating and transacting across organizations. It was hoped that collaboration would
enable managers to stop optimizing their individual silos to work together with
partners—both internal and external—to achieve efficiency and effectiveness across the
value chain. However, in the absence of collaboration, the supply chain is plagued with
buffer inventories, which managers build up as protection against uncertainties and risks
in the supply chain. An extreme manifestation of this problem is the "bullwhip effect,"
when supply chain participants have limited visibility into true customer demand, further
distorted by gaming behaviors leading to exaggerated perception of uncertainties in
supply conditions.
A truly collaborative partnership would go much further than rudimentary, two-way
communication. Dialectical intersects could be formed up and down the supply chain,
encompassing multiple customers and suppliers. OEMs would regularly communicate
product availability, supply plans and product content changes to distributors and other
channel partners. Based on upstream forecasts and product changes, the channel partners
would communicate demand requirements to manufacturing service providers. In this
fashion, members of the outsourced supply chain would be assured of accurate, up-todate information to help them make decisions that elicit common, supply chain-wide
benefits.
Although over the last decade this vision of collaboration has seemed closer to reality, it
has also led to massive disillusionment as managers do not have a roadmap to translate
these visions into strategic imperatives, and practical and implementable tactics. There is
neither perfect information nor a real time economy, and significant information
asymmetries still exist. There are still significant roadblocks across the Internet like
competing and evolving standards (Web Services, Business Process Management etc.),
and legacy systems impede interoperability, while security issues foster distrust.
All this means that the rules of operating in this transition state between "hierarchical
silos of value" and "market driven dynamic value Web" are totally different from those
that would be applicable to either of the extremes. Seamless collaboration with complete
information sharing between all supply chain participants as touted by proponents of
"global value Webs" today conflicts with managers' fundamental aims of maximizing
value at minimal costs.
Competition is no longer between big and small companies. It is between agile, flexible
and adaptable organizations that can survive in an environment of rapid change, constant
uncertainty and disruptive technologies. Competition is increasingly becoming time
based, which means that companies' supply chains must get the right product to the right
place faster than competition. In other words, efficient and effective supply chains
depend on having the right information available to the right person. Organizations need
to take advantage of the Internet to transform their supply chains and enable
collaboration, but how?
A Framework For Collaboration
Transforming supply chains while sticking to the time tested rules of operational
excellence and optimized processes, will have to look beyond existing business models
and organizational structures to truly leverage the growing thrust towards collaboration
using IT.
However, before running off to the market to buy the next offering from a vendor that
touts collaboration, managers have to look deep within their own supply chain
ecosystems and nature of competition, understand what exactly collaboration would
mean for their enterprise and how the technological advances could be applied.
Implementing B2B is as much as a political phenomenon as it is a technological one.
Two factors that play a role in determining the nature of collaboration that will exist
across a supply chain are:

Competitive Overlap: the amount of commonality of suppliers or buyers that
competitive enterprises share between their respective supply chains. This can be
further broken down into Completely Disconnected Supply Chains, Completely
Overlapping Supply Chains (such as Compaq vs. Dell) and Partially Overlapping
Supply Chains (such as PCs—IBM, Compaq, Dell—vs. Apple's Mac).

Power: Wal-Mart, Procter & Gamble and Dell are examples of companies that
wield significant power within their supply chains and determine the nature of
interaction that happens. Power within a supply chain can either be a driver or a
barrier to collaboration.
Collaboration Strategy: A Portfolio Approach
In order to maximize value both in the short and long term, a company should adopt a
portfolio approach to collaboration, choosing the set of tools most relevant to its supply
chain ecosystem. The key is to look at these as strategies in what they aim to do, and not
in the technologies they will employ.
Based on the two factors above, enterprises can choose their collaboration strategies from
a portfolio of plans: Public e-Marketplace, Private Trading Hub, Joint Family or Big
Brother.
It is important to understand that a single company could, in fact should, adopt different
and appropriate strategies for the inbound supply chain (buy side) and a separate strategy
for outbound supply chain (sell side). Within the same enterprise, strategies could also
vary depending on the category of products, suppliers and customers.
Public e-Marketplace
Until very recently, online public marketplaces promised to streamline whole industries
and slash billions of dollars in costs. Today, most of them are buried under the dot-com
dustbin. Companies have blamed public trading exchanges failure on flawed revenue
strategy, lack of overall integration and value-added services, technology choices, and
lack of liquidity. While all these are real, they are only symptoms. The root cause of
failure of such exchanges is a fundamental misalignment of the nature of the industry
structure and its ability to deliver value to all its participants through a public
marketplace.
Public marketplaces are relevant only for commodity-like products or services where
there is significant overlap among supply chains and the power they hold on buyers is
minimal. The advantages gained are through automation, improved workflow, access to a
wide pool of suppliers and price-driven mechanisms like auctions.
The only benefit for suppliers is access to a wider customer base. Beyond this, there is
very little incentive for suppliers to participate in public marketplaces since, very often,
price becomes the only basis of comparison. Brand, superior customer service, reliability,
financial stability and investments in R&D for longer-term benefits cannot be
communicated effectively through public markets. Suppliers may decide that the benefits
are not worth the amount spent, as their own websites may already be attracting more
customers. If a particular supplier already has a major market share and significantly
better trading terms, then it might not want to share this information across the
marketplace.
Private Trading Hub
Players that have significantly higher power may decide to form private trading hubs and
thus keep competition out. This approach gives the benefits of increased efficiencies. In
addition, the investment in building such a trading infrastructure, liquidity, supplier base
and smooth workflow act as entry barriers for competition. While the technologies that
go into a private trading house are similar to those used in public e-marketplaces,
additional capabilities can be built to support collaboration.
Private trading houses also provide greater security and confidentiality; thus enabling
companies to keep intimate business intelligence—such as sources of supplies, volumes,
timing of transactions and trading terms—private and hidden from competition. HewlettPackard, IBM and Wal-Mart operate substantial private exchanges.
A hybrid between public and private trading exchanges are the consortium-driven trading
exchanges, which could be a strategy for fragmented players to club together to achieve
better terms with suppliers. Consortium e-marketplaces help buyers who lack the ability
to attract sellers on their own, and vice versa for sellers. The largest exchange of this
nature is Covisint, which includes Ford, GM, DaimlerChrysler, Renault and Nissan,
connecting these buyers with more than 30,000 suppliers.
While there are anti-trust issues which have to be tackled on a case-to-case basis
depending on the industry, it is clear the aim of players coming together is to increase
their market power, which may or may not lead to monopolistic practices.
Joint Family
Public e-marketplaces and private trading hubs have serious limitations when building
complex collaborative capabilities like joint planning, synchronized production processes
and connectivity to back-office systems, especially when there are significant competitive
overlaps in supply chains. All these require direct connections. Given the diversity of
systems and interfaces, e-marketplaces and trading hubs limit the ability to scale deep
collaborative initiatives. Any enterprise of a reasonable size has a large number of
suppliers and customers, and it is not possible or desirable to enter into deep collaborative
initiatives with each one of them.
However, an enterprise should identify a subset of partners as part of its "strategic supply
network" or joint family. Under the joint family approach, the enterprise aims to build
irreplaceable and meaningful relationships that involve sharing proprietary information
and making joint decisions to better coordinate and synchronize demand fulfillment to the
customer.
Companies that do not have any competitive overlap in the supply chains could build
direct connections to maximize collaborative opportunities. Such collaborative
opportunities exist in inventory management and planning, product design, shipping,
production planning and scheduling. Collaboration in the form of information sharing—
such things as forecasts and real-time sales activity—go a long way to reducing
anomalies like the bullwhip effect.
Such partnerships through collaboration can result in building unique offerings and value
differentiators that combine capabilities in ways that cannot be easily replicated by
competition. The primary benefit of a joint family approach is gaining vertical integration
without the downside of financial ownership. The resulting strategic alliance brings
together the best of vertical integration and outsourcing while minimizing their
disadvantages.
Big Brother
Companies like Wal-Mart and Dell are examples of "Big Brothers" because of the power
they wield and the nature of their relationship with customers and trading terms within
the supply chain. Big Brothers use this influence to ensure maximize efficiency across the
supply chain in order to undertake collaborative initiatives that are designed to ensure
that a disproportionate piece of value generated accrues to them. The exercise of power
fundamentally defines the industry structure and is only a reflection of the organization's
sustainable competitive advantage.
For a Big Brother strategy to succeed, enterprises that have the power in the supply chain
need to take the initiative and make investments that not only build value differentiation
with respect to competition, but also ensure that significant barriers are in place for
competition to enter. While Big Brothers benefit from building deep collaboration with
their suppliers similar to Joint Families, they can also ensure that enough safeguards are
built in, such as having benefits accrue to them and not diffused to competition.
Information Architecture
A best IT solution for an optimal supply chain as laid out in the preceding paragraphs has
to integrate decision-making processes as well as collaborative opportunities with
existing business processes and systems. Various technology trends are enabling
companies to realize this vision of a real-time, responsive and collaborative supply chain.
Such trends and tools include the maturity of middleware solutions, emergence and
acceptance of XML, Web services and J2EE/.NET that make integration easier.
This chart lays out a high-level architecture for IT infrastructure supporting optimal
supply chains. To truly build competitive advantage, companies will have to look at their
unique needs and use technology innovatively to build differentiators.
Plain vanilla implementations of products available in the market rarely provide any
long-term competitive edge. True long-term advantage comes only from thinking
creatively about the needs of your end users and/or customers, and understanding the
ecosystem in which the supply chain operates.
Jacob Varghese is a consultant with Software Engineering and Technology Labs
(SETLabs) in Infosys Technologies Ltd. His work has focused on enterprise IT issues,
technology management,and supply chain management. He is can be reached at
jacob_varghese@infosys.com.