November 9, 1998
http://www.informationweek.com/708/08iukil.htm
Killer Supply Chains
Six companies are using supply chains to transform the way they do
business
By Tom Stein and Jeff Sweat
nce a tactical matter of moving goods from point A to point B, supply-chain
management has become a modern IT challenge that cuts across business
relationships, application infrastructures, and corporate cultures. Companies as
diverse as Boeing, Thomson Consumer Electronics, Dayton Hudson, Dell
Computer, Eastman Chemical, and Home Depot have implemented supply-chain
initiatives that are transforming the way they deal with suppliers, partners, and
even customers. Their efforts are partly about improving efficiency and the
bottom line--but they're even more about creating new opportunities for everyone
involved.
For these companies, the supply chain is a powerful set of tools and
philosophies. By exchanging information, such as inventory levels, forecasting
data, and sales trends, these companies are reducing their cycle times, fulfilling
orders more quickly, cutting out millions of dollars in excess inventory, and
improving customer service. Retailers are leading the charge, but other
businesses are right behind.
"Supply-chain management is all about having the right product in the right place,
at the right price, at the right time, and in the right condition," says Roger
Blackwell, a business professor at Ohio State University and the author of
several best-selling books on the subject.
Many critical elements make up any successful supply chain. First, companies
must learn to trust their business partners--an enormous psychological hurdle.
There is a very real--and sometimes justified--fear that information sharing can
turn into a competitive disadvantage. But supply-chain partners that exchange
information on a regular basis are able to work as a single entity. Together, they
have a greater understanding of the end consumer and are better able to
respond to changes in the marketplace.
These companies also realize they must harness the power of technology to
collaborate with their business partners as never before. That means using a
new breed of supply-chain management applications--and the Internet and other
networking links--to look at past performance and historical trends to determine
how much product should be made, as well as the best and most cost-effective
methods for warehousing it or shipping it to retailers.
Still, a real cultural transformation must occur inside and outside a company for
any supply chain to succeed. Roles change, jobs change, and information must
be shared, not hoarded. Implementing supply-chain management systems is
costly, complex, and labor-intensive. The process isn't for the faint of heart--but
the payoff can be lucrative.
The six companies described here have embraced the change. They say their
future success relies on the strength of their supply chains, and they're building
innovative systems that promise to radically improve the way they and their
partners do business.
Boeing
Boeing Co.'s legendary production problems finally came to a head last year: In
the face of unprecedented demand for its airplanes, the company's supply chain
was grounded almost instantly.
Why? Boeing relies on hundreds of internal and external suppliers for the 5
million to 6 million components needed to build a large twin-aisle airplane. The
goal is to put the right parts in the right airplane in the right sequence. But many
of the parts often arrived late, throwing the whole process out of whack and idling
half-built airplanes on the assembly line. As a result, in 1997 Boeing was forced
to shut down two of its major assembly lines for a month and took a $1.6 billion
charge against earnings.
Today, Boeing is radically restructuring its supply chain and production systems
to make sure such problems never happen again. The company is finally phasing
out its World War II-era technologies and investing heavily in new systems for
enterprise resource planning (Baan), factory floor (CimLink), product data
management (Structural Dynamics Research), forecasting (i2 Technologies), and
product configuration (Trilogy). It's also building Internet applications to better
communicate with its suppliers and customers.
The goal, says Martin Ritchie, director of Boeing's ERP
Competence Center, is to start building planes the way Ford
builds cars. "We need to make planes more quickly and more
inexpensively, but we can't do that if each plane is produced as if
it were a custom-made Rolls-Royce," he says. Instead, Boeing is moving toward
a common production environment in which it starts building planes even before
customers order them.
The benefits of the new system are enormous. For starters, Boeing will be able to
rapidly increase the number of planes it produces. The company expects to build
620 planes next year, up from 228 in 1992. That means customers will no longer
have to wait 36 months from the time they order a plane to the time it's finally
delivered: Boeing Commercial Airplanes is aiming to deliver them in eight to 12
months.
That's easier said than done, especially since each customer has thousands of
configurations to choose from. The trick is to do all the customization in the last
stage of production, rather than from the beginning.
With the use of Baan's ERP package and i2 Technologies' forecasting software,
Boeing will be able to model the assembly of aircraft for each link in the supply
chain and communicate to each supplier what parts are needed and when.
"Airplanes need to have parts strategically delivered to where they are on the
assembly line," says Jim Webster, a senior ERP consultant at Boeing. "As soon
as our ERP system determines we don't have enough of a certain part in the
assembly line to satisfy an airplane, we can identify which supplier we need and
where that supplier's part needs to be delivered."
This communication is being done quickly and seamlessly through EDI links and,
in the case of internal suppliers, directly from one database to another. The early
results are dramatic: In one parts fabrication plant where the new systems are in
production, Boeing Commercial Airplanes has cut its cycle times in half and
reduced parts defects by 56%.
Boeing is also using Web technology to boost customer satisfaction after a sale
has been completed. A year ago, Boeing launched the PART (Part Analysis and
Requirements Tracking) Page, a secure Web site that its customers can use to
order spare parts. The site is aimed at the 600 or so airlines that don't use
electronic data interchange to order parts from Boeing. The company estimates
that the site, which processes 4,000 transactions a day, has eliminated 25% of
order-processing costs in the form of faxing, phone calls, and data entry. The
service helps customers locate hard-to-find or obscure parts. And it has
shortened parts delivery cycles usually to next-day, or same-day for
emergencies.
Duane Berdahl, an inventory controller/buyer at Northwest Airlines in
Minneapolis, has been using the PART Page since its inception two years ago. "I
use it for everything--pricing, availability, lead times, placing and expediting
orders," he says. "I don't have to keep as much inventory on hand, because I can
always see what Boeing has in stock. And it has cut down dramatically on time."
Thomson Consumer Electronics
A well-oiled supply chain is a matter of life and death to Thomson Consumer
Electronics Inc. Just ask Jim Meyer, the company's chief operating officer. "Our
careers hang in the balance," he says. "If we are not successful here, it will be
the end for Thomson."
The company, which makes TVs, VCRs, and other consumer electronic products
under such brand names as RCA, GE, and Proscan, knows firsthand what can
befall a company that doesn't master the art of supply-chain management. A little
over a year ago, Thomson conducted a survey with about 70 of its top retailing
partners, including Circuit City and Kmart. The results were eye-opening.
The No. 1 problem was product availability. A Kmart shopper hoping to buy an
RCA product often could not because the item was likely to be out of stock.
Retailers were also dissatisfied with Thomson's on-time shipping performance
and its ability--or lack thereof--to fill orders exactly as requested.
"We were losing substantial amounts of money," says Terry
Reuland, manager of supply-chain integration at Thomson. So in
September 1997, Thomson launched its Chain Reaction program
as part of a concerted effort to turn things around. The goal was
to increase forecast accuracy, decrease planning cycles and
lead times, and better manage relationships with suppliers and
retailers.
To make it happen, Thomson invested in a supply-chain management system
from i2 Technologies, as well as a host of Internet and EDI tools. "This project
represents a huge cultural shift in our organization," says Reuland. "In the past,
information technology was thought of as an expense and not an investment. But
we now look at IT as a critical investment in our future." All told, Thomson will put
around $35 million toward the project.
The first area of concern for Thomson is building better forecasts so that
retailers--and end customers--get the right products at the right time. Thomson is
using i2's demand-planning software to gather statistical data such as past sales
patterns and inventory levels, then turn the raw information into highly accurate
forecasting models. Thomson is also collaborating with 55 of its top retail
partners. The customers log on to a secure extranet site and feed their own
forecast information and point-of-sale data directly into the system. From there,
the information is automatically routed into Thomson's data warehouse, then into
the i2 planning software.
Thomson and its partners will be able to share, compare, and modify their
forecasts in real time, making them even more accurate. "We used to do it with
calculators and napkins," quips Reuland, adding that retailers don't need
convincing to participate in the program.
"I'm excited about the improvements we have made with Thomson, especially in
terms of on-time, right-quantity product shipments," says Robert Willey, director
of procurement reengineering at retailer Best Buy Inc., in Eden Prairie, Minn. "By
sharing projections with Thomson, we are able to receive products on a weekly
basis, as opposed to a monthly basis."
With the program in place, Thomson expects to achieve forecast accuracy of
about 95%, a substantial increase from last year, says Reuland. Thomson will be
able to make products only when they're needed, and retailers can cut down on
buffer or safety stocks because they know products will arrive in a timely fashion.
"The more we can reduce extra inventory for our customers, the better level of
service we are providing," says Reuland. In some cases, he says, retailers have
been able to cut their safety stocks in half. Another benefit: The company has
decreased out-of-stock scenarios to less than 1%.
Thomson is also entering a new collaborative era with its 400-odd component
suppliers. In the old world, Thomson's relationship with suppliers was based
strictly on how inexpensively they could provide parts, and not necessarily on
how quickly or how efficiently those parts would arrive. "Now we are talking to
them about manufacturing flexibility," says Reuland. "We're still focused on price,
but we are also focused on reducing lead times."
To smooth the process, global suppliers will soon post their shipping information
and order status on the Thomson extranet site. Thomson, for its part, is giving
suppliers access to forecast information, inventory levels, and customer orders.
That way, when Thomson is running low on, say, a component for its VCRs, the
supplier will realize that immediately and replenish the stock without having to be
notified first. As a result, lead times and planning cycles are coming down from
as long as four weeks to as little as one week.
"The adversarial relationship between retailers, manufacturers, and suppliers is
going away," says Reuland. "Instead, we are forming partnerships and working
toward a shared goal of reducing inventory. That's the future."
Dayton Hudson
Some retailers pride themselves on having great forecasting software, or a great
data warehouse, or a great logistics system. Dayton Hudson Corp. wants to be
the best in all three areas--and more. The company claims that its electronic
supply chain is one of the most complete in the business.
Dayton Hudson's Global Merchandising System
(GMS), five years in the making, is a homegrown
supply-chain system that includes more than 60
applications, including forecasting, commitment
management, logistics, replenishment, ordering,
response analysis, and trend analysis. "It covers
every aspect of buying, selling, and
merchandising," says Paul Singer, VP of systems
development for the Minneapolis retailer. "I don't
know of anyone else who has as comprehensive a
system."
Moreover, the components of the system, which
was implemented first in the company's Target
retail chain and is now being rolled out by the Mervyn's and Dayton Hudson
chains, are integrated closely--critical when data has to travel from the storefront
to suppliers. A supply chain runs the risk of breaking down if data must be
rekeyed at any step along the way.
Here's how it works: A Dayton Hudson buyer analyzes store data with a decisionsupport tool to determine store trends, for example, and uses the results to
revamp unit goals. Point-of-sale data could also indicate that a store is running
low on specific items. The change triggers motion in other applications. GMS
updates financial systems to account for both additional expenses and revenue,
and notifies replenishment systems, which automatically generate purchase
orders that go to suppliers.
When the suppliers fill the order, the data passes back to Dayton Hudson's
distribution system so the distribution center knows how to deal with the incoming
goods and to pass them to other stores if the originating store's demands have
changed.
The system also monitors relationships between Dayton Hudson and its
hundreds of suppliers. One of those applications is the commitment-management
application, which tracks the amount of product a supplier will furnish and its
specifications, which evolve over time.
Target, for example, may agree that an earthenware manufacturer will supply a
certain number of Italian-style bowls, without specifying anything more about the
style. As Target draws nearer to the delivery date, it analyzes trends for colors
and patterns that are likely to sell. Based on those numbers, the manufacturer
makes trial lots of, for example, blue and burgundy bowls, and Target begins to
sell them. If customers buy more burgundy bowls, Target can simply skew the
order in that direction.
The evolving specifications and the constant dialog benefit the supplier, too: Its
goods are more likely to sell, and its warehouse and production capacity aren't
full of unwanted product.
Sara Lee Branded Apparel, a Winston-Salem, N.C., division of Sara Lee Corp.
that sells clothing brands such as Hanes, L'eggs, Bally, and Playtex, says that
Dayton Hudson's willingness to share information separates the company from
its rivals. Dayton Hudson holds training sessions to teach Sara Lee employees
how the Target supply chain works; in turn, Sara Lee brings Dayton Hudson's
financial and vendor operations groups to its facilities to show how its process
works. The result: Sara Lee has been able to help Dayton Hudson streamline its
operation. "Other people would essentially say, 'Here's what I want' but would
never listen to what it is you might have to improve their processes," says
Wallace Balwah, Sara Lee's director of logistics.
Jane Windmeier, director of supply development for Dayton Hudson, says the
company encourages innovation in its suppliers, simply because two heads are
better than one. "You want to take advantage of everyone's best tools," she says.
To foster innovation, the company rewards its best suppliers every year, and it
penalizes suppliers if they fail to deliver their goods in the way Dayton Hudson
has specified.
Singer says he'll stack up his supply chain against anyone's. Certainly, the
system has delivered tangible results for Dayton Hudson: In-stock goods are up,
markdowns are down, and inventory turns are at an all-time low. In retail, that's a
sign that you're doing something right.
Dell Computer
Excess inventory is like a leech that slowly sucks resources and money out of a
business. To kill the creature, Dell Computer is steadily replacing inventory with
information. "Inventory is a security blanket," says Lance Van Hooser, director of
E-commerce at Dell. "The only reason companies build up inventory is because
they don't know about events that are going to happen. The more you know, the
less inventory you will have to carry."
Right now, Dell carries about seven days of finished product. The goal is to count
that already low figure in minutes. The company is turning to the Internet to
collaborate and conduct business with suppliers and customers at
unprecedented levels.
Dell recently created customized Web pages for its top 30 suppliers, whose
employees can log on to a secure, personalized site to view demand forecasts
and other customer-sensitive information--such as who Dell's customers are and
how much equipment each is ordering--to help them better gauge demand. As a
result, suppliers can more easily match their production schedules to Dell's-making only what is needed, when it's needed.
Dell is also passing on data about its defect rates, engineering changes, and
product enhancements to these suppliers. Since both Dell and its suppliers are in
constant communication, the margin for error is reduced. Also, partners are now
able to collaborate in real time on product designs and enhancements.
Suppliers are also required to share sensitive information with Dell, such as their
own quality problems. Van Hooser says it's easy to get its suppliers to follow
Dell's lead because they also reap the benefits of faster cycle times, reduced
inventory, and improved forecasts. And ultimately, the customer gets a higherquality product at a lower price.
Dell is also using the Internet to create a community around its supply chain. The
Web sites all have links to bulletin boards where partners from around the world
can exchange information about their experiences with Dell and its value chain.
"The Internet is the core of everything we are doing," says Kevin Rollins, vice
chairman of Dell. "It provides the capacity to improve the flow of information,
eliminate paper-based functions, and link global organizations."
Dell is also using the Internet to form tighter links with customers. For many of its
business users, the company has created Premier Pages containing approved
configurations, prenegotiated prices, and new workflow capabilities, so when an
employee requests a new computer, the order is automatically routed to the
appropriate person within the buying organization for approval.
Rollins says Ford Motor Co. saved about $2 million in initial procurement costs
by using its Premier Page. "With information technology, the value of inventory is
quickly being replaced by the value of information," he says.
Eastman Chemical
To hear software vendors talk, supply chains are all about technology. But
Eastman Chemical Co. says that managing the relationships between itself and
its suppliers is just as important as the software that ties the relationships
together.
Eastman, a Kingsport, Tenn., manufacturer of plastics, fibers, and chemicals for
other manufacturers, has the technology--such as the Voyager forecasting
engine from supply-chain vendor Logility Inc., which pulls sales data from
Eastman's SAP R/3 system, then generates forecasts showing seasonal and
general trends by product, customer, and the entire company. That helps
Eastman determine demand for its products, which has a ripple effect on the
organization--including manufacturing, logistics, and procurement.
"The truer the picture you have of the demand, the better the decisions you can
make about what it takes to best serve your customer," says Matt Stevens,
Eastman Chemical director of demand fulfillment.
But for the forecasting to benefit other parts of the business, the pieces of
technology must talk to each other. "You can do forecasting and not gain one
cent of value," says John Hewson, manager of forecasting. "It's when you tie it
into other systems that you start to reap the benefits."
Eastman's demand forecasts are fed into R/3. All the sales and forecast data is
stored in a central database, so users in one part of the supply chain can see
information from other areas. Eastman has also set up an intranet that lets
salespeople access the supply chain from the road and update forecasts with
new information.
At the back end, most of Eastman's connections with its suppliers are via EDI,
but the company is evaluating E-commerce options. Eastman says it would like
to use Internet connections to let some of its suppliers look at Eastman's
production schedules and replenish according to the production plan, and go to
suppliers' Web sites and trace logistics movements.
While that technology isn't yet in place, Eastman has already laid the groundwork
for the working relationships with its suppliers. For instance, its suppliers are
involved in developing the company's supply chain, and they share final product
data, schedules, forecast information, and production campaigns--all information
that was once jealously guarded.
Rayonier Inc., a Stamford, Conn., provider of chemical cellulose for acetate, has
been an Eastman supplier for 60 years. But Rayonier's relationship with its
biggest customer has changed radically in the past few years as the two
companies have broken down communications barriers and started sharing
supply-chain information such as forecast data and production schedules. That
lets both companies react better to changes. "Accurate forecasting from
customers such as Eastman is really key to smooth performance of our
production schedule," says Charlie Spell, Rayonier's director of marketing. It also
lets the partners work around planned downtime or unplanned outages.
The openness makes the supply chain a sharing of interests, not just a schedule
of demands. "We don't want this to be one way, to have this be just 'gimme,
gimme, gimme,'" says Michael Berry, Eastman's manager of chemical
procurement. To motivate its suppliers to streamline their processes, Eastman
offers annual excellence awards for on-time shipment and specifications
conformance, improvement, and innovation. The notion is that the suppliers, not
just Eastman, can offer innovative ideas for the supply chain.
One of Eastman's own innovations is to organize its procurement efforts, and
corresponding suppliers, into distinct channels: A items, which are strategic and
require the most urgency to procure; B items, which are important but can wait a
little longer; and C items, which are sold by the smallest companies and which
Eastman runs through a distributor channel. The channels help Eastman focus
its resources on the most strategic things first.
Eastman concedes that there's much more to do to bolster its supply chain. But
even now, the company illustrates a fundamental rule of supply-chain
management systems: Before you put the software in place, make sure the
principles underpinning it are sound.
The Home Depot
For most retailers, one of the trickiest links in the supply chain is moving goods
from the supplier to the warehouse, then on to the store. The Home Depot Inc.
has found a simple way around that problem: Remove it.
The Atlanta-based building supplies retailer now moves 85% of its merchandise-nearly all of its domestic goods--directly from the manufacturer to the storefront.
Product no longer languishes in warehouses, saving both suppliers and Home
Depot money. "We're treating each of our stores as if it were a distribution
center," says CIO Ron Griffin. Because of Home Depot's high volume--its stores
average $44 million in sales and 5-1/2 full inventory turns a year--the products
frequently ship in full truckloads, making the system even more cost-effective.
The store-distributor setup is part of Home Depot's broad effort to put decisions
into local hands, a key factor in the company's successful supply chain. "We're
empowering people on the floor," says Griffin. "They feel as if they have
ownership, and having that ownership is what makes it work."
Associates walk store aisles, watching for goods that need replenishment. As
they enter orders directly into mobile computing devices, called the Mobile
Ordering Platform, the request can go almost instantly via EDI connections to
more than 80% of Home Depot's manufacturers, which can respond immediately.
Home Depot offers its partners recognition incentives to get them on board.
Short-term forecasting is handled locally, with up to 65 weeks of data at the store
level, and store managers are given latitude to adjust for demand based on
merchandising programs. Home Depot prepares long-range forecasts of three to
five years on a national level for its suppliers; they contain product-volume data,
of course, as well as where growth is expected and where Home Depot plans to
build new stores.
That helps suppliers decide where to build new plants and distribution centers,
and it puts Home Depot in the position of helping determine facility location
instead of simply working around it. "Rather than assume fixed capacity, we help
shape it," Griffin says.
Home Depot opens up even more data to its biggest partners. Electric-tool
manufacturer Black & Decker is Home Depot's largest supplier, and Home Depot
is its largest customer. So it benefits both companies to share information. Home
Depot passes point-of-sale data to Black & Decker, which helps the Baltimore
company analyze sales and determine future manufacturing volume.
But the two companies' relationship is still "an arms-length transaction," says
Mark Dailey, Black & Decker's VP of supply chain for North American power
tools--in part because of limited technology. While the EDI connection between
the two companies allows for the speedy transfer of information, Dailey says, it
doesn't necessarily mean that the information is of high quality. Black & Decker is
looking at technology that would tie its Manugistics supply-chain software to
Home Depot's systems so the companies are linked at a business-process level.
"The key is really getting good data quickly through both the planning and
execution cycle," Dailey says.
Supply chains can also make the business more efficient by squeezing out costs,
but Griffin values effectiveness. For example, he says, it would be more efficient
for the company to centralize all its merchandisers at company headquarters. But
the company wouldn't be as responsive to local conditions, such as snow in
Denver or a construction boom in Oregon. So regionally based merchandisers
are more effective--which is ultimately better for the bottom line, too.
Because as far as Griffin is concerned, when it comes to having a super supply
chain, the human links are the most critical of all.
Photo of Martin Ritchie by Kevin Ray Smith
Photo of Terry Reuland by Greg Whittaker
Photo of Windmeier and Singer by Doug Knutson
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