36 May/June 2009 APICS magazine

Once Upon

APICS magazine May/June 2009 37

T he phrase “integrated supply chain” is used so frequently that most professionals assume it must be a reality. However, the notion of supply chain integration actually is a myth. While it is easy to see how the activi-

ties within a supply chain—the global network of collaborating companies used to deliver products and services that bring value to the marketplace—are connected, being integrated implies much more.

True integration requires a high degree of synchronization and alignment, which is virtually impossible in trading exchanges. Synchronization refers to information sharing; alignment, the most complex factor, reflects the collective behavior and motives of each partner within an ecosystem. It is at this level that technological challenges and market competition undermine our best efforts to integrate extended networks.

Technology as a fundamental imperative in the integration scheme always has been a part of the picture. Business leaders at companies with international operations typically have the financial resources to orchestrate the activities of many of their suppliers. Thus, they can access high-end business systems, which give manufacturers the ability to digitally share demand requirements with their supply base. However, software usage does not amount to integration.

Supply chain integration myths and truths

Myth: Businesspeople share essential information with their supply chain part-ners. Supply chain participants do whatever is necessary to improve the func-tioning of the overall network. They freely share information with their supply chain partners, and this makes it possible to optimize the entire order-fulfillment process. Furthermore, finished product manufacturers refrain from inflating fore-casts, and their suppliers produce only the quantities the end customer wants and not a single piece more. Tier 1 suppliers never inflate component or raw material requirements to tier 2 suppliers—no way, doesn’t happen.

Searching for truth in the integration fairytale

SUPPLY CHAIN

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BY DARREN PITTS,

CPIM, CSCP, C.P.M. , PMP

38 May/June 2009 APICS magazine

Truth: Competition always will be a barrier to trust. Relationships among manufacturers and suppliers are based upon competitive behaviors within and across markets. Each connection constitutes membership in the proverbial supply chain. That any single company supplies parts or components to hundreds, if not thousands, of customers implies that the business-people involved trust the other links in those chains.

Information across any single chain is not shared for multiple reasons: It is proprietary, it is too valu-able a competitive advantage to be disclosed, it could be used against the business in the future, and so on. Unfortunately, a single partner within countless supply chains generally is not all that concerned with how well his fellow partners are doing—so long as their activities take place downstream and do not hurt his efforts or impede his revenues.

Myth: Connectivity exists across the supply chain. Supply chain leaders recog-nize that sharing essential demand information ensures all key business systems are integrated with one another, especially with regard to demand manage-ment. Finished product manufacturers encourage suppliers across all tiers to integrate or otherwise estab-lish electronic links to their demand-management applica-tions. In order to shorten lead times and respond to orders faster, manufacturers provide the technical and financial resources to accomplish the work. This is especially true at small suppliers, many of which do not have the financial wherewithal to support complex information technology (IT) endeavors.

Truth: Most suppliers resist electronic interfaces with manufacturers. Cost is the big driver in determining if connecting to multiple business systems makes sense. Conceivably, each relationship constitutes membership in some form of a supply chain. The dynamics are such that only those partners with sufficient volumes to offset installation and maintenance costs will enable a digital interface to occur—even for something as standard as electronic data interchange (EDI). Many leaders of small

firms believe these interfaces counter the ability to remain flexible and agile. The outlay of cash on IT resources coupled with short technology life cycles make it financially impractical to pursue a strategy in which electronic integration between a manufacturer and its supplier is desirable.

Myth: Integration is relatively easy, as enterprise resources planning (ERP) and EDI are bringing about true supply chain integration. Many years ago, connecting supply chain participants was a diffi-cult proposition. Thank goodness for

software. The next version of what-ever ERP you’re using will fix the

remaining issues associated with late deliveries, missed shipments,

and more. Since the marvelous invention of the Internet, suppliers have been able to take advantage of

ERP—and the world of open collabo-ration brings them closer to reality.

Data in business systems gener-ally are accurate, believable, and

refreshed frequently. As changes happen within the marketplace, new requirements are instan-taneously passed throughout the supply chain for action. Even tier 2 suppliers are digi-tally interfaced with all of their partners.

Truth: Despite the avail-ability of ERP systems and EDI, numerous supply chain activities remain offline.

Many processes used to feed transformation activities are

not computerized. The resulting output of work is measured,

captured, “Microsoft Excelled,” and often uploaded into legacy systems.

Systems are designed to serve narrow interests—namely, the optimization of

internal processes. Nevertheless, there is a lack of integration within the four walls of a corporation. Many manufacturers aren’t even integrated with themselves, let alone with their suppliers and their suppliers’ suppliers. The dynamic result of such behavior is that supply chain partners are forced to carry excessive inventory and operate in a suboptimized fashion—and they know it.

The companies and interactions involved in the collec-tive supply chain comprise a mosaic far too complex for most to comprehend. Enterprise systems are expensive. The time and cost associated with implementing and deploying systems—even for midsized companies—are

Manymanufacturers

aren’t even integrated with

themselves, let alone with their

suppliers and their suppliers’

suppliers.

APICS magazine May/June 2009 39

prohibitive to realizing the technologies’ benefits. Plus, even if all suppliers had access to ERP and EDI, there would be the issues of transparency and trust. Competition, variability, and uncertainty still cause company decision makers to fear passing along accurate data directly to their supply base. Furthermore, many suppliers would rather not have these inputs entered directly into their digital bloodstream.

Collaboration realities

With all these misconceptions, can supply chain integra-tion be achieved? Yes—but the promise of true integration is somewhat distant. The good news is that we are on the right track. Smart businesspeople now are creating company processes with the supply base in mind. Others have re-engineered existing channels to leverage the benefits of active collaboration. This forethought establishes relation-ships with partners for the long term and minimizes risks associated with volatility.

Companies building manufacturing plants should do so with appropriate consideration given to the availability of labor, technology, and component suppliers. Relative to the market served, some degree of integration should be explicit in formal arrangements with key suppliers. The critical nature of a particular component may be the key to determining the total lowest cost in delivering a product to market. Noncritical components may be procured at lower-than-market-cost based upon negotiation.

There are hundreds of examples of manufacturers establishing the means to share essential data with their suppliers in near real time. One example comes from Hewlett-Packard (HP). HP executives set up a computer system to share information among their suppliers and posted the demand forecast and revisions for all tier 1 suppliers to use when developing individual forecasts. Tier 1 suppliers soon began to post their plans so that their own suppliers had visibility of what was likely to happen from a production-planning perspective.

Cisco Systems, on the other hand, illustrates how integration differs from collaboration. Cisco profes-sionals developed Manufacturing Connection Online (MCO), a business-to-business portal for use by the company’s contract manufacturers, distributors, and suppliers. It was designed to provide central access to inventory information, purchase orders, forecasts, and other essential data needed for real-time plan-ning. Cisco’s supply chain partners don’t have to rely on faxes, e-mails, or telephone calls. This enables tier 1 suppliers to interact with Cisco as if they are part of the company, creating what Cisco professionals dub a “single enterprise.”

What’s yet to come

So, what does the future hold? In the near term, we will see increased connectivity and discipline across the network. It is vital that the pursuit of integrating one’s supply chain starts with sharing accurate and complete data. Integration

is indeed possible; however, the journey must include an integrated master schedule that is reasonably stable and, most importantly, shared with other links in the mythical chain.

Although far from perfect, globalization and our collec-tive system of competition and cooperation are marvelously productive. Moreover, the brilliance of technology is that supply chain professionals can do today that which they could not yesterday.

Supply chains are complex entities with components and products continually traversing the globe. It only makes sense for us to try to simplify, schedule, and align supply chain processes. The variability associated with sources of supply can be breathtaking—and must be prop-erly orchestrated.

Darren Pitts, CPIM, CSCP, C.P.M., PMP, is a six sigma master black belt for Cummins Inc. He has taught lean and six sigma at Purdue University’s College of Technology. He may be contacted at matrixsigma@me.com or (317) 370-4979.

To comment on this article, send a message to feedback@apics.org.

For additional information on supply chain integration, read “Mission Critical” on page 32.

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