Solutions for Supply Chain Woes

Does your supply chain performance need a shot of adrenaline? Business performance management software can be a big help.

If you get the feeling your supply chain processes present a major challenge for performance improvement initiatives, you're not alone. Even companies that approach this challenge armed with business performance management (BPM) software often fail to make much headway.

Part of the problem is the complexity of the supply chain management (SCM) function, which encompasses highly diverse activities including, for example, sourcing, inventory management, distribution and returns processing. Information exchange between SCM's various domains tends to be minimal, and the function's goals are often isolated from overarching corporate objectives. In addition, large companies have to manage multiple supply chains.

For BPM tools to make a difference, companies must first break some old habits.

Doing It Backwards

The most common mistake organizations make when they try to improve supply chain performance is to go about it backwards. Instead of beginning with the demand side, they focus on the supply side.

Demand translates into customer preferences. "It's easier for companies to focus on the supply side first and not address customer relationship management [CRM] issues, and that needs to be turned around," asserts Jeanne Baker, vice president of technology at Sterling Commerce, an SCM software provider in Dublin, Ohio. "Without customer-based practices, your internal customer database may be flawed. Companies need a 360-degree view of their customers. If you're a capacity-driven company, you'll have higher supply chain costs because you never end up figuring out what the customer wants."

The development of demand-driven planning can improve supply chain performance by helping operations managers anticipate customers' future buying behavior. Wild Planet Toys Inc., a toy manufacturer with headquarters in San Francisco, has greatly improved its demand planning since it implemented business performance management software in 2000.

"We purchased our BPM solution from Epicor at a time when we were growing rapidly, which heightened our need for tighter inventory and more alignment between SCM and the rest of the company, as well as more standardized reporting," says Steve Revere, Wild Planet Toys' vice president of IT. "We've achieved those goals, and we have better information for demand planning decisions because the BPM solution gives us better, more reliable data to base those decisions on.

"Before BPM, we'd have returns and we wouldn't know about them for a few days," Revere adds. "Now we know when and why we're getting any returns. We're more sure of what we're shipping and how it was shipped."

Revere's company sells to retail giants such as Toys R Us, Target and Wal-Mart, which are eager to increase communications with their suppliers because doing so benefits both parties. "For instance, Wal-Mart has a Web-based package they call Retail Link, which we can use to see where our product stands in terms of sales and inventory in every one of their stores. They can even give us a plan of how our products are likely to sell in each store, and we can use it to find out where we're coming up short on inventory," Revere says.

A focus on customer needs has increased SCM effectiveness at Wild Planet Toys. However, that success is atypical.

"Companies concentrate on what they believe they're capable of producing and on their capacity constraints, but they fall down when it comes to demand planning," says John Hagerty, vice president and analyst at AMR Research in Boston. "They don't really have any sort of demand forecasting methodology in place, so they end up wasting money because they make poor decisions based on poor or nonexistent forecasts."

For demand forecasting to work, supply chain managers need to adopt a flexible budget and link their function's plans and forecasts with those of the finance department. That connection is nonexistent in most companies.

They also need to standardize forecasting methods, which often vary among functions and produce more accurate data and insights in some departments than others. For example, the most current sales planning data may exist in sales, finance or the supply chain area.

"How does one department inform the other about changes in their plans, and how do all these plans line up with the company's overall revenue plans?" asks Colin Snow, vice president and research director, operational performance management, at Ventana Research in San Mateo, Calif. "The key is alignment of finance and operations. That's where SCM and BPM cross paths. BPM provides all of these constituents with the latest views, targets and goals."

Supply chain managers sometimes try to enhance ongoing, possibly broken, processes without evaluating them against the organization's overall goals. The results have been less than stellar.

"Historically, there's been an emphasis on trying to improve the efficiency of SCM metrics such as cycle time and inventory levels with tools like Six Sigma, lean manufacturing, or outsourcing; however, greater efficiency doesn't necessarily translate into greater effectiveness," says Snow. SCM managers that seek out the cheapest vendor to reduce costs, for example, might be jeopardizing returns rates and customer-service measures.

"An SCM manager can have a metric for the number of widgets that were shipped today, but how well does that metric link with the company's high-level performance metrics?" he adds. "No one's drawing that picture for them, so they tend to be myopic in their view of what's necessary to fix their performance problems. If [the metrics are] not aligned, the best BPM tools in the world won't help."

Where BPM Fits In

Once demand planning is in place and metrics are aligned, BPM software has the potential to improve supply chain management. Currently, however, its presence is largely unfelt; few providers are touting specialized functionality in this field. "Only a few BPM vendors really understand SCM problems associated with SCM performance," says Snow.

Hagerty agrees. "BPM vendors focus on tools, not on the demand planning side," he says. "SCM vendors, on the other hand, are better at understanding SCM processes."

Prepackaged business performance management software that is designed specifically for supply chain management is nonexistent. "The BPM products can typically handle supply chain-related issues, but significant customization is required, and there is limited, if any, supply chain functionality included in existing products," says John Colbert, vice president at BPM Partners in Stamford, Conn. "The ability to create this value is largely dependent upon the experience of the systems integrator. ERP [enterprise resource planning] players with a BPM focus such as SAP and Oracle would have stronger integration capability due to the fact that SCM is a core part of their other offerings. In those cases, there may be customization required, but data would be better integrated."

Companies that have been successful in using BPM tools to improve supply chain performance tend to be long-time BPM users. Take GAF Materials Corp., a manufacturer of roofing and building materials that implemented a business performance management system more than 12 years ago in its finance group. By 2000, when the company applied its BPM tool to supply chain management, it had already developed a deep performance-based culture.

"We're a pretty simple business, but we have a complex distribution network, so our initial goals for improving SCM performance focused around one basic measurement -- reliability," says Rick Stevenson, director, supply chain planning and business intelligence, in Wayne, N.J. "The BPM solution we implemented from Applix helps us determine how reliable we're being -- and what's driving that [reliability] -- using metrics such as product availability."

GAF Materials' supply chain, sales, distribution and finance departments all work from the same forecast, according to Stevenson. "Once we've determined our sales forecast, the BPM solution can give us all the SCM information required to meet that forecast, including capacity, raw materials, expenses, costs to deliver and budgeting needs. All of it is done within the BPM solution," he explains. "Our company has 30 sites, and every one of them is using the same numbers. All the SCM calculations roll up into the financial application of BPM to guide our P&Ls."

Even so, Stevenson admits it's not a perfect system. He says what SCM managers really want to see is relational data -- for example, information about why and how many customers didn't get what they were supposed to receive. To provide those answers, the company needs an analytic application that can interpret the transactional data in its ERP system. But according to Stevenson, that level of linkage is not readily available.

SCM performance would also benefit from greater integration of business process management and business performance management tools. "Historically, business process management has had closer interaction with SCM than business performance management. Leading vendors and service providers are focusing more and more on the integration of these two BPMs, and as that progresses, there will be more product improvements to support SCM performance initiatives," says Colbert.

Software vendors that have carved out niches as integration solution providers that can deliver these two BPMs as well as CRM capabilities may be among those best positioned to serve companies' supply chain management needs. However, business performance management systems will always play a pivotal role in linking operational functions to companies' overall strategies. That linkage is the most important driver of performance improvement within any organization.

A Hierarchy of Supply Chain Measures

Too often, supply chain management (SCM) relies on metrics that are poorly aligned with the company's overall strategies. What, then, are the most important measures for improving performance in the supply chain and companywide?

According to a March 2005 report by AMR Research entitled "How To Best Measure Your Supply Chain Today," demand forecast accuracy is the metric from which all others flow. Note that in the pyramid illustration below, perfect order on the second tier represents the percentage of orders that meet the six criteria that perfect order detail on the bottom tier represents: the finished goods are of high quality; the manufacturing, shipping and delivery deadlines have been met; the shipments are accurate; and the products were undamaged in transit. Analysis of the subcomponents gives clues about where the issues reside in the supply chain.

Collectively, these measures form the basis of a successful performance improvement project for supply chain management, according to John Hagerty, analyst and vice president at AMR Research in Boston. "While the chief operating officer and the vice president of supply chain planning need the measurements at the top of the hierarchy pyramid, managers and directors need different pieces of data at the lower levels," says Hagerty. "In addition, based on the company's operational requirements, the measurements on the bottom row of the hierarchy may change. So software systems need to be flexible to map new metrics to users as the operation changes."

Hagerty adds that different categories of software match up with different types of supply chain measurement. "Supply chain planning systems revolve around measures such as forecast accuracy, total inventory, plant utilization and production plan variance. Supplier relationship management systems focus on supplier quality, purchase costs, direct mail costs and supplier on-time performance. ERP systems align with perfect order, supply chain costs, accounts payable, accounts receivable, cash-to-cash cycle times, cost detail and order time cycle," he explains.