B U S I N E S S P E R F O R M A N C E M A N A G E M E N T
C R E D I T S
T I T L E
This statement was approved for issuance as aStatement on Management Accounting by theManagement Accounting Committee (MAC) of theInstitute of Management Accountants (IMA®). IMAappreciates the collaborative efforts of the FinanceBusiness Solutions Group at Arthur Andersen LLP andthe work of Dr. C.J. McNair, CMA, of Babson College,who drafted the manuscript.
Special thanks go to Randolf Holst, CMA (Canadian),Manager of Knowledge Creation at Arthur Andersen, forhis continuing oversight during the development of theStatement. IMA thanks the Consortium for AdvancedManufacturing-International (CAM-I) for their support inthe development of this SMA. IMA is also grateful tothe members of the Management AccountingCommittee for their contributions to this effort.
Implementing Integrated Supply Chain
Management forCompetitive Advantage
Published byInstitute of Management Accountants10 Paragon DriveMontvale, NJ 07645www.imanet.org
I . RAT IONALEIncreasingly, many organizations have begun toembrace the concept of integrated supply chainmanagement. Studies in various industries haveshown that supply chain performance couldimprove if trading partners were able to mutuallyassess expected consumer demand and plansupply correspondingly.
For example, the 1993 Efficient ConsumerResponse (ECR) study sponsored by the groceryindustry showed that there were excessive inven-tories in the grocery supply chain. The study esti-mated that the industry could save $30 billionannually—about 11 percent of supply chaincosts—if suppliers, distributors, and grocerscould use technology to work closely to deliverproducts more efficiently to consumers. It wasestimated that in the dry-goods segment of theindustry, inventories were at 104 days of supplyand could be reduced by 41 percent, to 61 daysof supply.
Rather than merely serving as one part of theoperational strategy, as has been the traditionalview, integrated supply chain management givesorganizations the ability to alter the flow ofresources and value throughout the entire supplychain. The integration of disparate supply chainpartners into one smoothly operating, seamlesswhole results in an agile competitive system—one that can rapidly, effectively, and efficientlyprovide unique product/service bundles to eachcustomer on demand.
I I . SCOPEThis Statement on Management Accounting (SMA)is addressed to financial professionals and otherswho may lead or participate in efforts to implementintegrated supply chain management (ISCM). ThisSMA provides practical operating principles andrecommends approaches for implementing ISCM.
It also provides a rational for implementing ISCMand describes a framework for improving an orga-nization’s supply chain performance.
This SMA has been prepared to apply to anyorganization regardless of its type or size. Thisguideline will help financial professionals:l understand all areas of supply chain manage-
ment and its impact on the business and theorganization;
l identify ways to take supply chain manage-ment to a more strategic level within theorganization;
l develop a framework for planning and manag-ing the implementation of ISCM;
l understand the roles and responsibilities offinancial professionals in ISCM; and
l create a cost and performance system thatprovides management with the informationneeded to effectively deploy, coordinate, andcontrol the activities of the supply chain.
I I I . DEF IN ING INTEGRATED SUPPLY CHAIN MANAGEMENTThe broadest visions of integrated supply chainmanagement are usually expressed in terms ofmeeting the final customer’s product needs. Atits core, ISCM involves coordinating the flow ofphysical goods from material sourcing, throughmanufacturing, to the points of consumption. Asdepicted in Exhibit 1, this entails the efficientmanagement of information and funds flowsassociated with goods as they move along theiroverall value chain.1
At one level, ISCM is concerned with strategicissues such as the integration of internal andexternal business processes, the developmentof close linkages between channel partners, and
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1 Value chain is a term that denotes a process consisting ofa number of related steps, with each step adding a certainvalue to the total outcome.
the management of products and information asthey move across organizational and enterpriseboundaries.
On another level, ISCM can also be a tactical toolapplied to the management of ongoing opera-tional activities. These activities may includecustomer service, control of inbound and out-bound flows of materials and information, andelimination of channel inefficiencies, costs, andredundancies extending from raw materialsacquisition through manufacturing, distribution,consumption, and final return through the chan-nel by way of recycling or disposal.
To a great extent, there is still a high degree ofvariability of personal opinion about what, exact-ly, ISCM means. These differing opinions oftencarry through to the extent that key people in thesame organization are not talking about thesame things when they discuss the concept of
ISCM. Yet, to be competitive and to better servethe customer, companies know that they mustimprove their supply chain operations.
With an eye toward finding a common language,or at least some common ground, an array ofmanufacturers, software developers, and trans-portation companies collaborated to create theSupply Chain Operations Reference model(SCOR) illustrated in Exhibit 2.2 The SCOR modelattempts to develop an objective framework forlooking at an organization’s entire procurementand distribution network from the supplier’s sup-plier to the customer’s customer.
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EXHIBIT 1. THE FLOW OF GOODS, INFORMATION,AND FUNDS IN A SUPPLY CHAIN
Source: Supply Chain Council.
2 The SCOR model is the standard reference of all possiblesupply chain metrics, best practices, and supporting tech-nologies. It was developed by the Supply Chain Council, a con-sortium meant to bring manufacturers from many differentindustries together to tackle documents of the baseline supply-chain processes shared by all. Information on thisorganization and the SCOR model can be found on theCouncil’s website: http://www.supply-chain.com.
The goal of SCOR is to provide organizations withcommon terminology, perspective, and bench-marks, first to describe and then to configuretheir supply chains. The SCOR model breaksdown the supply chain into four key managementprocesses: Plan, Source, Make, and Deliver.l Plan encompasses processes that balance
aggregate demand and supply to develop acourse of action that meets a company’s pre-ferred business rules. Plan activities includeall aspects of demand/supply planning.Specific issues covered by Plan includeassessing supply resources; aggregating andprioritizing demand requirements; planninginventory and distribution requirements; andassessing production, materials, and capacity
for all products and all channels. Plan alsoinvolves managing the planning infrastructure,make-buy decisions, long-term capacity andresource planning, and business planning.
l Source encompasses processes that procuregoods and services to meet planned and actu-al demand. It includes managing the sourcinginfrastructure—i.e., vendor certification andfeedback, component engineering, vendor con-tracts, and vendor payments.
l Make covers all processes that transformgoods to a finished state to meet planned oractual demand. It includes managing the pro-duction execution activities, resources, andinfrastructure.
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EXHIBIT 2. THE SCOR MODEL
Source: Supply Chain Council.
l Deliver incorporates all processes that providefinished goods and services to meet plannedor actual demand. It includes order manage-ment, warehouse management, transporta-tion, and installation management. Deliverinvolves managing the deliver infrastructure,channel business rules, order rules, deliverinventories, and deliver quality.
Exhibit 3 illustrates the core activities that fallunder each of these four processes.
The four SCOR process categories are a veryeffective means, or common language, in whichto document the intra- and interorganization sup-ply chain. For example, by using the processicons, the relationships between functions, keysuppliers, and major customers can be modeledand ultimately improved. Looking at Exhibit 4,the supply chain of a fictitious semi-conductormanufacturer, it is easy to see that there aremany planning processes; some of them couldpotentially be eliminated by passing demand
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EXHIBIT 3. SCOR CORE ACTIVITIES
Source: Supply Chain Council.
information through the supply chain from point-of-sale (POS) data collection points.
Leading ISCM practitioners display certain com-mon characteristics. For one, they focus intense-ly on actual customer demand. Instead of forcingproduct into the market that may or may not sellquickly (and thereby inviting high warehousingcosts), they react to actual customer demand.And by doing so, these supply chain leaders min-imize the flow of raw materials, finished product,and packaging materials at every point in thepipeline.
IV. STAGES OF SUPPLY CHAINMANAGEMENTOnly a small percentage of manufacturers are onthe leading edge of mainstream ISCM. Mostcompanies range between implementing supplychain fundamentals and serious enterprise inte-gration. Different industries and differentorganizations within each industry developdiverse supply chain management integrationstrategies, based on the customer segments tobe served, the products and services offered,and the geographic locations involved. Exhibit 5identifies a continuum of increasingly sophisti-cated stages of supply chain management.
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EXHIBIT 4. USING SCOR TO DOCUMENT A SUPPLY CHAIN
Source: Supply Chain Council.
The stages of Supply Chain managementinclude:l The fundamentals. Basic tools such as spread-
sheets are used to help ensure delivery ofquality goods at a reasonable, predictablecost. Management focus is internal, builtaround independent departments, with a pre-mium placed on achieving repeatable resultsthrough standard operating procedures andautomation. Companies see their manage-ment mission in supply chain managementonly as controlling finished goods, transporta-tion, and warehousing. They emphasize expe-diting today’s workload above all.
l Cross-functional teams. Management focus ison consolidation at the operational level, bring-ing together people from manufacturing, logis-tics, and customer service to solve problems.
l Integrated enterprise. Management focusmoves from consolidated operations to anintegrated supply chain, at least internally. Allenterprise functions, ranging from finance tologistics, as well as related business unitscomposing the internal supply chain, are inte-grated to form the foundation of a unified busi-ness system. Achieving this objective requiresnot only the close synchronization of all dailyoperational and planning processes, but alsothe removal of departmental biases and theestablishment of strategic congruence andconsensus.
l Extended supply chain. Companies recognizethe competitive advantage and the potentialfor profitable growth in extending integration totrading partners. As much as possible, func-tions throughout the supply chain are integrat-ed to form the foundation of a unified valuechain. In addition, mass customization ofgoods and services and finer segmentation ofcustomer groups becomes the norm. To makethis possible, there is interoperability withincustomer and supplier systems, even though
they may involve different computing architec-tures, operating systems, applications, datadefinitions, and performance metrics.
The extended supply chain stage requiresorganizations to develop mutual, well-definedobjectives, advanced negotiating skills, knowl-edge of critical business processes, and theability to work and make decisions that spanthe operations of multiple channel partners. Inaddition, this stage requires organizations tocreate and empower effective intra-channeland inter-channel process teams. Theseprocess teams assume fundamental agree-ment of operational objectives both within indi-vidual organizations and between channelmembers.
l Supply chain communities. The capabilitiesand capacity for innovation found among indi-vidual organizations included in a supply chainare fused into a single competitive entity.Networks of preferred suppliers are created inthis stage. When this occurs, a synchronizedplanning solution is in place along with a col-laborative capability to connect operationswith ever-changing sets of trading partners.
Implementing supply chain communities requiresa significantly larger effort than that required inthe four previous stages of supply chain manage-ment. Whereas previous stages focus on theoperations side of supply chain management(order management, warehousing, and trans-portation), implementation of supply chain com-munities requires companies to search continu-ously for opportunities to create strategic initia-tives with business partners. These strategic ini-tiatives encourage co-evolution of radically newmethods of providing customers with value. Theymerge complementary channel capabilities, jointdevelopment of whole new business processesand technologies, new forms of vertical integra-
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tion and economies of scale, and leverage corecompetencies found within or among associatedenterprises. This final stage requires a high levelof cooperation among management and theworkforce, a concise definition of objectives andprocess performance, a strong commitment of allorganizations involved, and a superlative informa-tion network.
V. WHY IMPLEMENT ISCM?Though there is general agreement that coordi-nating and integrating the flow of goods and ser-vices to market customers makes eminent busi-ness sense, most organizations have a difficulttime assigning a quantitative payback figure tothis exercise. This is really one of the biggest
challenges facing supply chain professionalstoday. And yet, they need this kind of quantifica-tion to get management to invest in the develop-ment of ISCM. The most commonly reported bottom-line benefits center on reduced costs insuch areas as inventory management, trans-portation, and warehousing and packaging,improved service through techniques such astime-based delivery and make-to-order, andenhanced revenues, which result from such sup-ply chain related achievements as higher productavailability and more customized products.
Research conducted by Mercer ManagementConsulting reveals that organizations with thebest supply chains typically excel in certain piv-
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EXHIBIT 5. STAGES OF SUPPLY CHAIN MANAGEMENT
otal performance areas. Specifically, they outper-form their counterparts along such key metricsas reducing operating costs, improving assetproductivity, and compressing order-cycle time.In a separate study, Mercer found that close tohalf of all senior executives surveyed had specif-ic supply chain improvement projects amongtheir top 10 corporate initiatives.
A study by the management consulting firm of A.T.Kearney has approached the supply chain pay-back from another angle—the costs of not payingcareful attention to the supply chain process. TheKearney consultants found that supply chain inef-ficiencies could waste as much as 25 percent ofan organization’s operating costs. Thus, assum-ing even a relatively low profit margin of 3 to 4percent, a 5 percent reduction in supply chainwaste could double an organization’s profitability.
Many organizations focus on the payback poten-tial of specific activities within the total supplychain process. The following examples illustratethe kinds of benefits that can be realized.Individually, these improvements can bringimportant cost savings and service enhance-ments. Collectively, they can lead to dramaticbreakthroughs in profitability and market share.l Distribution network optimization. Optimizing
the distribution network—that is, determiningthe best location for each facility, setting theproper system configuration, and selecting theright carriers—can bring immediate costadvantages of 20 to 30 percent. That’s the fig-ure determined by IBM’s WholesaleDistribution Industry Segment, based on con-sulting engagements in a wide range of indus-tries. This typically breaks down into trans-portation savings of 15 to 25 percent andimprovements in inventory carrying costs of 10to 15 percent.
l Shipment consolidation. A proven, though oftenoverlooked, supply chain lever lies in shipmentconsolidation. Nabisco offers an instructiveexample in this regard. For one retail cus-tomer, the company had been delivering prod-uct from multiple plants via six different deliv-eries. Through the use of a third-party logisticsprovider, Nabisco was able to consolidatethese multi-vendor loads into two truckloads.By strategically consolidating the shipments,Nabisco cut its transportation costs by half.On top of that, it reduced inventory levels,increased inventory turns, cut lead-times,improved on-time delivery, and enhanced case-fill rates.
l Cross-docking. Another supply chain techniquewith proven payback potential is cross-docking.This is the practice of receiving and processinggoods for reshipping in the shortest time pos-sible and with minimum handling and storage.Cross-docking can yield savings of 25 percentor more over conventional warehousing.
l Supplier management. Research fromMcKinsey & Co. demonstrates the substantialimprovements possible through aggressivesupply management. An article by McKinseyconsultants in the Winter 1998 issue of SupplyChain Management Review mentions a client inthe automotive industry that had successfullyintegrated vendors into its product-develop-ment process. On one particular team, theintegration paid dividends in triplicate; theparts count dropped by 30 percent, the num-ber of assembly steps and material specifica-tions was reduced by half, and developmenttime shrank from years to months.
l Supplier integration. The advantages of suppli-er integration were evident in a two-year studyconducted by the Global Procurement andSupply Chain Initiative at Michigan StateUniversity. Drawing on responses receivedfrom around the globe, the study showed that
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organizations that involved suppliers earlier onin the product-design and developmentprocess consistently outperformed those thatdid not. This was true across a range of supplymanagement metrics. The comparativeimprovement in purchased material costsalone was 15 percent.
Supply chain management has become today’smost important concept for competitive advan-tage because it enables companies organizedalong a supply chain to exploit the new realitiestransforming the marketplace.
V I . THE ROLE OF MANAGEMENTACCOUNTINGBecause of the multiple processes and partiesinvolved, implementing ISCM has to be a teameffort. Visible in that team effort are financial pro-fessionals. The financial professional serves avital role in providing data to operational man-agers, assessing the achieved versus plannedbenefits of new supply chain arrangements, moni-toring economic factors, and providing basic inter-nal control system support to ensure that partici-pating organizations are adequately protected.
Moving beyond management support efforts,financial professionals also serve on natural andsystems improvement work teams, providingeconomic insights, analytical support, and objec-tive evaluation of current versus proposed sys-tems. Specific roles and responsibilities of finan-cial practitioners in ISCM include:l providing current estimates of supply chain
costs and performance against defined cus-tomer expectations;
l participating in analyzing proposed changes toensure that economic factors are realisticallyportrayed;
l creating or supporting the creation of an ISCMbusiness case(s) as the need arises;
l developing new measurements, both financialand nonfinancial, to assess the degree ofimprovement of the supply chain;
l providing management with timely reports thatisolate current performance shortfalls;
l participating in natural systems improvementteam efforts;
l supporting the design and development of effec-tive, efficient integrated information systems;
l examining existing transactional systems toidentify ways to reduce the costs or delays thatreduce customer value, including institutingchanges to the accounts payable effort withinthe order-to-payment system;
l developing “virtual control” systems to safe-guard the integrity of company and supplychain databases, transactions, and flows; and
l supporting the development of new forms ofincentives and reward systems to encourageactive participation and cooperation of individ-uals across the organization in supply chaininitiatives.
Building trust and commitment to ISCM beginswith the attitudes and efforts of individualsthroughout the participating organizations. It iscrucial that the financial professional serve as afacilitator and supporter of the change from tra-ditional to integrated supply chain systems.
While also bearing the responsibility for ensuringthe data and financial integrity of the resultingISCM structure and alliances, the financial pro-fessional should actively avoid taking on a“policeman” role in these initiatives. The ulti-mate success of the ISCM initiative depends onopen communication, objective analysis, andcontinuous learning throughout the supply chain.
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VI I . ISCM IMPLEMENTAT IONSTEPSThere is no “proven path” to implementing ISCM.There are so many operational and strategicfacets to ISCM that any given implementationcan take an infinite variety of forms, progressthrough radically different stages, and result inseveral different outcomes. However, broadlyspeaking, ISCM implementations should focuson these steps:l assessing supply chain opportunities;l developing an ISCM vision;l developing an ISCM strategy;l creating the optimum ISCM organizational
structure;l establishing the ISCM information and commu-
nication network; andl translating the ISCM strategy into actions.
While organizations can modify the sequence andemphasis placed on these steps to meet theneeds of a particular situation, these activitiesare recommended as a guide for implementingISCM. These steps are illustrated in Exhibit 6.
Assessing Supply Chain OpportunitiesChanging consumer demographics, the emer-gence of new distribution channels, the consoli-dation of trading partners, and the increasing useof computer and telecommunications technologyare creating a changing environment for organiza-tions. Each of these factors is producing newchallenges and new supply chain opportunities.
An effective way to begin assessing supply chainopportunities is by forming an organization-widesteering committee that oversees all relatedproject activities, challenges the basis of recom-mendations, and approves final recommenda-tions and implementation plans. To spearheadthe opportunity assessment effort, the creationof a supply chain assessment team that worksunder the aegis of the steering committee is rec-ommended. The assessment team should com-prise strong operations people who have a feel-ing for technology without being systems peopleper se. They should also have a knack for work-ing with people in a project environment.
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EXHIBIT 6. ISCM IMPLEMENTATION STEPS
The focus of the assessment team must be onfacts rather than guesswork or emotions.Several categories of information need to begathered and analyzed including:l competitiveness of the organization;l consumer and trading partner preferences;l the strength of the brand or the product line;l the impact on production and logistics opera-
tions; andl risks and rewards.
Competitiveness of the OrganizationThe assessment team’s first task is to deter-mine the supply chain competitiveness of theorganization. This evaluation begins with a com-parison of business objectives against existingcapabilities and performance. This exercise canreveal where the existing supply chain canachieve immediate competitive advantage andwhere inefficiencies may be leaving the companyvulnerable to the competition.
The necessary knowledge to complete thisassessment includes internal competencies andcapabilities, the capability and capacity of supplypartners, and the current and projected perfor-mance of key competitors.
Consumer and Trading Partner PreferencesAn organization must understand the current andprojected behavior of those who buy its prod-ucts. This is normally achieved through inter-views and other analysis. The knowledge gainedfrom this effort is invaluable in assessing supplychain opportunities because the fit between acompany’s distribution actions and the prefer-ences of those who purchase its products ulti-mately determines success.
A major producer of home entertainment soft-ware is an example of a company that analyzedits consumer buying preferences well. Observing
the occasionally ineffective in-store merchandiz-ing of its products by existing distributors, thecompany reasoned that its strong brand identitycould be leveraged much more powerfully if itasserted more direct control over this process. Itdiscovered that in fact its brand was often thekey factor in driving consumer buying behavior.Furthermore, the product was frequently animpulse purchase motivated by strong merchan-dizing programs and advertising campaigns.
The company saw a significant opportunity in tak-ing control of its product in the retail stores of largemass merchants. And by doing so, the organizationwas able to acquire dedicated shelf space for itsbrand, merchandize its products more effectively,improve product availability and inventory control,and thereby improve sales and margins.
Strength of the Brand or the Product LineUnderstanding the marketplace clout of anorganization’s products is also important forassessing supply chain opportunities. If substi-tutes for a product or product line are readilyavailable, the company must approach new sup-ply chain opportunities more carefully than if itsbrand is dominant. Retailers that might willinglypurchase the products through, for instance,direct sales from a manufacturer may balk atpaying extra for the services of a middleman ifsubstitutes are available from another manufac-turer who direct ships.
Impact on Production and LogisticsOperationsA supply chain opportunity may require complexand costly changes in current manufacturing andlogistics operations, information systems, staff,and operations. An organization may find, in fact,that the advantages to be gained by pursuing anew or revamped supply chain strategy will not inthe long run justify the significant investments
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needed. Rigorous analysis of these trade-offs isessential for success.
Risks and RewardsDecision trees and what-if modeling are used toassess the value of potential strategies basedon the probability of various combinations ofevents occurring: changing sales volumes, reac-tion of competition, changes in operating costs,and reaction of trading partners. The final outputwill be estimates of how the economics of theexisting supply chain will be affected with thenew strategy.
The final activity in calculating risks and rewards isto estimate one-time costs associated with eachscenario being evaluated. These costs, which canbe significant, may include those for new informa-tion systems, changes in plant and equipment,and other investments. With this additional infor-mation, a business case can be prepared for eachscenario; it should include a cashflow analysis,statement of impact on shareholder value, andcalculation of return on investment.
Developing an ISCM VisionStep two in the implementation process is to cre-ate a vision of the desired supply chain.Visioning provides organizations with specificgoals and strategies on how they plan to identifyand realize the opportunities they expect to findin the marketplace. Supply chain visioning ismost successful when it is customer focused,strategy driven, and outcome based. Specifically,the supply chain vision should be built from aclear understanding of customer needs and howwell the existing supply chain is meeting thoseneeds. Four critical dimensions to be included informulating an ISCM vision are:l sourcing;l demand flow;
l customer service; andl supply chain integration.
These objectives are achieved through carefulanalysis, collaboration, and communicationamong supply chain partners. Each dimension ofthe visioning process brings new perspectiveand progress toward these objectives.
SourcingSourcing is the identification of potential tradingpartners who can meet both internal and exter-nal supply chain performance requirements.Sourcing can represent a major constraint or amajor opportunity, depending on how open theorganization is to “out of the box” solutions formeeting supply chain and customer needs. If apartner can be found that is willing to pool itsresources within a trusting environment focusedon continuous improvement, the capabilities ofthe trading units can be leveraged to maximizesystem performance against competitors. If nosuch partner can be identified, an organization isfaced with the decision of making the item or dis-continuing the initiative. Determining whereplants and suppliers should be located, whatcapacity they should have available, and the bestway to organize production and logistics flows allcombine to shape the ISCM vision.
The chosen sources have to be willing to give upa part of their autonomy in return for the abilityto participate with other organizations in the pur-suit of superior service and the rewards it pro-vides. All partners have to be willing to invest inthe future of the supply chain relationship. Forexample, sourcing in ISCM is far more compre-hensive than simply searching for a vendor witha low price and acceptable delivery and terms.
Wal-Mart is a company particularly well known forintegrating its suppliers into a network respon-
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sive to a defined vision of customer values.Driving its sourcing partners to a 72-hour sched-ule, with some items down to 24- or 48-hourresponse times, Wal-Mart uses a “rapid replen-ishment” vision to ensure that it has what cus-tomers want, when needed, with minimal in-storeinventories. POS scanners and other technologyenablers indicate current trends, inventory sta-tus, and replenishment needs on a real-timebasis. JIT delivery can then be relied on to movemerchandise where it is needed, when it is need-ed, and in the right quantity and quality required.Achieving customer responsiveness at Wal-Martbegins with choosing trading partners that canperform to expectations.
Demand FlowThe experience at Wal-Mart is also a sound exam-ple of the second key dimension of formulating anISCM vision framework. Matching supply with con-sumption patterns greatly reduces the inventory,and hence cost, in the supply chain. Achieving thisgoal requires that the manufacturing system,along with the suppliers, distributors, and retailersthat participate in the supply pipeline activities
become linked through electronic and othermeans to eliminate buffers and queues, reducelead times, and enhance flexibility.
The ISCM vision has to include both definitionsof the core features of the demand flow patternthe supply chain is expected to match, given cus-tomer expectations, as well as a statement ofhow and when these improvements are to begained. Three elements define the demand flowdimension: channel design, demand planning,and supply chain configuration, as illustrated inExhibit 7. Since a variety of structures can beused to move product and services through tothe end-user, it is important to explore optionsand make channel choices that will improve cus-tomer service and reduce costs.
Dupont offers a prime example. Prior to imple-menting supply chain management the companyexported to Europe a chemical product that wasdifficult to manufacture. It needed to be warehoused in a special facility while tests weredone to “characterize” its quality level. Afterthat, it was warehoused near the port of exit,
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EXHIBIT 7. ELEMENTS OF DEMAND FLOW STRATEGY
Source: R. Evans and A. Danks, 1998: 26.
awaiting containerization. The ocean voyage fol-lowed, then warehousing in Europe, prior to fur-ther storage at the Dupont distribution centerthat would release final shipment to the cus-tomer. That kind of expensive retention of inven-tory had to be eliminated.
The solution to the problem involved focusing onthe demand flow in the supply chain. Dupontimproved the quality of the manufacturingprocess by making the product to customerspecifications. That, in turn, enabled Dupont toload containers right at the plant and shipstraight to port. The process demanded fargreater cross-functional cooperation, but theresults—more satisfied customers and $1 mil-lion in savings—proved the value of the strategy.
Customer ServiceHaving established a definition and vision ofsourcing and demand flow that reflects the cus-tomers’ value preferences, attention turns tocustomer service value requirements. Gainingknowledge of customer expectations is a key fac-tor that must be addressed before a vision forfuture ISCM performance can be fully developed.
Identifying customer service value requirementscan be a complex task. Not only are the needsof every end customer different, but so are theneeds of the chain of customers that constitutethe supply pipeline. Developing service stan-dards for these cross sections of the supplychannel is a painstaking process that seeks toutilize “hard” measurements as well as less pre-cise judgments of what the perception of servicevalue means to each customer. A generalapproach that seeks to address these issuesconsists of the following process:l Segmenting the marketplace. This is a prelimi-
nary activity meant to separate the supplychannel’s customers into groups for the pur-
pose of gaining relevant insights and marketdistinctions as a preliminary to customer valuerequirements identification. The process isiterative in nature; its results are designed tobe reconsidered and revised as actual cus-tomer value demands are revealed.
l Identifying customer expectations. Once mean-ingful market segments have been identified,key customer service values found within eachsegment can be identified, isolated, andmerged to form a comprehensive list. Attainingthis information is not always easy. Some com-panies such as Ford Motor Company, BoiseCascade, and Baxter’s Hospital SupplyDivision are very explicit about their require-ments and expectations, to the point of detail-ing the requirements in policy manuals andbrochures. In other cases where requirementsare unclear, customer input must be solicitedthrough personal interviews, telephone andmail surveys, and marketing-type focus groups.A negative technique is to chart current perfor-mance and “noise levels” to determinerequirements.
l Benchmarking. Besides actively seeking toidentify service value from the customer,organizations can also employ competitivebenchmarking. Benchmarking is a quality man-agement method in which an organization com-pares its bundle of product and service offer-ings with those of its competition and with the“best of breed” in all industries. Whereasbenchmarking will shed little light on whatactual customer expectations are, the tech-nique does provide ISCM efforts with objectivestandards and enables organizations to devel-op proactive approaches to identifying newsources of service value.
l Ranking the importance of customer servicevalue requirements. Once a list of servicevalue requirements has been compiled, it isimportant to rank each value in importance so
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that the critical value requirements are readilyvisible. Delphi groups, rating scale methods,trade-off techniques, and computer analysiscan be used effectively to develop a usablescale of service component elements. Thegoal is to compile a list detailing which servicevalues are market winners and which are base-line values.
The metrics gathered from these approaches arecritical in highlighting, for the entire supply chan-nel, those service values that both the chain ofcustomers and the end customers perceive ascrucial. Applying management methods andtechnology tools to enhance these values andprovide for new avenues of competitive advan-tage is the overlying goal of the process. Thedetailed measurements attained form the basisfor the development of an effective customerservice strategy.
Supply Chain IntegrationThis final dimension of the supply chain visioningeffort emphasizes the integration of supply chainpartners into a seamless, responsive whole. Infact, a supply chain must have one or more ingre-dients that bind the members together or thenetwork will have little or no substance. TheISCM vision must ensure that everyone attachedto or affected by the supply chain benefits fromthe chosen strategy, structure, vision, and perfor-mance objectives.
Benetton is among the leaders in developing andimplementing an integrated supply chain visionthat benefits all of its trading partners. Based oninformation on actual consumption in stores inAmerican malls, this Italian producer and retailclothier is capable of directing replenishmentorders directly to its production sites. Within oneto two days a plain garment is dyed to the spe-cific colors needed to restock each retail site,
shipped, received, and placed back on display forother customers.
Several questions need to be addressed whencreating an integration vision. First, the degree ofsupply chain integration needs to be determined.Different industries and organizations facing dif-ferent customer segments, products and serviceavailability, and geographic limits should beexpected to develop and benefit from very differ-ent integration approaches.
A second issue in the integration vision is thetype of integration to be pursued: information,decision, financial, and/or operational. Havingdecided what elements integration will incorpo-rate, a decision must be made on the nature ofthe linkages. Should the linkages be physical orvirtual? In complete integration, the partnersshare information, finances, operations, anddecision making with each other, constantlyreviewing and refocusing the supply chain asdemand changes. The goals and strategies mustprovide mutual benefit, or the integration initia-tive will not succeed.
ISCM requires organizations and entire supplynetworks to rigorously investigate their channelprocesses to ensure that they are providingsuperlative customer service, effectively utilizingthe productive competencies of every channelpartner, and creating a basis for an unbeatablecompetitive advantage. Only by understandingwhat is currently done, how well existing supplychain performance meets customer needs, howexisting performance compares to competitors’efforts, and what changes can and should bemade, can the benefits of ISCM be gained by thetrading partners.
Developing an ISCM StrategyOnce the ISCM vision has been developed, atten-
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tion turns toward creating a comprehensivevalue-added ISCM strategy. An ISCM strategymust create maximum economic value for thecustomer. It should also provide a win-win situa-tion for both the manufacturer and value-addingchannel participants, creating growth opportuni-ties for each participant. The ultimate goal, todevelop a trust-based relationship among all par-ties, is based on a system of mutual support,effort, and benefit.
ISCM strategies provide the basis for developinga clear direction for the supply chain that helpsidentify current levels of awareness and dedica-tion to the underlying vision and objectives of thesupply chain network. Second, expansion of thecore supply chain strategy to reflect detailedchannel strategies will provide the means todevelop performance metrics, feedback, evalua-tion, and improvement initiatives.
World-class ISCM strategies are based on orincorporate many of the following principles ofsupply chain excellence:l Formulate a differentiated supply chain strategy.
For product categories, product channels, andtarget customers, organizations need an ISCMstrategy that, when executed, makes their sup-ply chain different from the rest.
l Segment customers based on service needs.Organizations have traditionally grouped cus-tomers by industry, product, or trade channeland then provided the same level of service toeveryone within a segment. Effective supplychain strategies, by contrast, group customersby distinct service needs—regardless of indus-try—and then tailor services to those particu-lar segments.
l Customize the logistics network. When develop-ing a logistics strategy, organizations need tofocus intensely on the service requirementsand profitability of the customer segments
identified. The conventional approach of creat-ing a “monolithic” logistics network runs count-er to successful supply chain management.
l Organize business units around major process-es, not functions. Plan, source, make, deliverare more important processes than organiza-tional functions, departments, or other tradi-tional “silos” that separate work and interruptflow. These processes must be customer-driven, efficient processes integrated with trad-ing partners into seamless flow pipelines.
l Outsource elements of the chain for higher per-formance. In many cases, the operating func-tions of the supply chain can be performed bet-ter by third parties. Management time shouldbe spent on innovations, new ways to excel,not on managing the mundane.
l Differentiate product closer to the customer.Organizations today no longer can afford tostockpile inventory to compensate for possibleforecasting errors. Instead, they need to post-pone product differentiation in the manufactur-ing process closer to actual consumerdemand.
l Develop a supply-chain-wide technology strategy.As one of the cornerstones of successful ISCM,information technology must support multiplelevels of decision making. It also should afforda clear view of the flow of products, services,and information.
l Capture signals of market demand and planaccordingly. Sales and operations planningmust span the entire chain to detect earlywarning signals of changing demand in order-ing patterns, customer promotions, and soforth. This demand-intensive approach leadsto more consistent forecasts and optimalresource allocation.
l Set clear guidelines for creating or terminatingalliances with supply chain partners. ISCMstrategy clearly delineates which types of col-laboration with partners must be pursued and
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which must be avoided. Also, clearly estab-lished and mutually agreed-upon performancestandards are established and adhered to,thereby empowering supply chain managers toterminate nonproductive or ineffective supplychain partnerships.
l Adopt channel-spanning performance meas-ures. Excellent supply chain measurement sys-tems do more than just monitor internal func-tions. They adopt measures that apply to everylink in the supply chain. These measurementsystems embrace both service and financialmetrics, such as each account’s true profitabil-ity. They also adopt a common set of metricsthat can be applied to and shared with all ofthe participants in the supply chain.
Creating the Optimum ISCM Organizational StructureOnce the ISCM strategy has been articulatedand accepted, the next task is to define how thecustomers’ needs will be met at each stage ofthe supply pipeline, as well as who among theparticipants can best fulfill that need.
One school of thought is that each supply chainneeds an anchor organization with almost dictato-rial power to orchestrate the actions of tradingpartners. Others argue that many supply chainsare too complex for a single trading partner to havea large impact, and that inter-organizational coop-eration is required to make significant changes.
In support of the anchor organization, propo-nents point to the automobile industry’s imple-mentation of JIT, which was initiated by the largeassemblers and disseminated to the tier 1 sup-pliers. In turn, tier 1 suppliers shared thislargess with the tier 2 suppliers and so onthroughout the supply chain. As the anchororganization, automobile assemblers not onlyhad the power to dictate the necessary changes
for JIT among its suppliers but also forced itscustomers to buy cars made-to-demand ratherthan made-to-order. In other supply chains, largeretailers such as Wal-Mart and Home Depot playthe role of the anchor organization, demandingspecial packaging, pricing, delivery, and invento-ry practices.
To refute the argument for the anchor organiza-tion, proponents of this point of view present theargument that coerced improvements are diffi-cult in supply chains that may have several largeorganizations, each of which may attempt to pro-mote reengineering for their benefit at theexpense of other trading partners. Some arguethat this is what actually happened in the auto-mobile industry. When pushed into JIT deliveryschedules by the big three American automak-ers, equally powerful suppliers such asGoodyear, USX, and Allied-Signal found ways tostay profitable and flourish. Some of this camefrom operational improvements and some camefrom pushing back on the automakers by raisingprices for their components. Despite dramaticoperational improvements, the net result of all ofthis pushing and shoving among trading partnerswas a car that costs more than many consumerscan afford.
In an investigation of the supply chain for simplestamped metal parts, one automaker discoveredover $500 million of inventory at various suppli-ers being used to buffer the effects of mandato-ry JIT deliveries. Although there have been manyimprovements in the quality of cars as a result ofthe JIT/TQM efforts, the impact on the wholesupply chain was not considered and the ulti-mate customer suffered. In light of the problemscaused by some JIT edits, several automakersare now looking at the whole supply chain ratherthan just their immediate suppliers.
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The role of each partner within an ISCM organiza-tional structure cannot be static. As new cus-tomer segments are identified or new channelsare developed to serve current customers, thenetwork structure and the role of participatingorganizations will need to change. In somecases, new participants with new skills, such aselectronic capability or global reach, may berecruited. If this is done, the entire networkshould be reconfigured to ensure effective inte-gration of new with existing players and skills.
Effective ISCM organizational structures requireseveral elements. To begin with, the internalstructures of the organizations must be flat, pro-vide for people empowerment, and be cross-disciplinary and cross-departmental. Inaddition, ISCM relies on the configuration andempowerment of cross-channel process teamstargeted at achieving channel strategic objec-tives and continuously creating innovativesources of customer value. Within ISCM, interde-pendence and teamwork have to be built into thefiber of the participating organizations. Linked toeach other through vision, strategy, structure,and operations, supply chain partners must earnand keep each other’s trust.
Optimization of the ISCM organizational struc-ture requires an advanced form of partneringthat relies on openness, communication, and theuse of the best improvement tools and tech-niques available to gain the quantum perfor-mance enhancements required to create andsustain a competitive advantage. Some of themore beneficial approaches used to create ISCMorganizational structures have been used byfirms such as Corning, Allied Signal, and AT&T,including:l Engineering and design talent is shared among
trading partners, focusing on those projectsand products that hold the greatest promise
for mutual benefit. Joint design and develop-ment and assignment of joint resources towork through challenges and opportunities toisolate innovative and marketable solutionsare part of this collaborative effort.
l Joint training sessions are led by the best avail-able, most highly skilled trainer from among theparticipating units. The sessions are held toimprove problem-solving skills, increase under-standing and use of planning and schedulingtools, and carry out team-building exercises.Providing common skills, common languages,and common tools eases integration andspeeds effective collaboration.
l Executive overviews are conducted jointly asthe search for identifying leading practices thatwill benefit all the trading partners continues.Benchmarking and high-level briefings serve toensure that the network remains responsive tochanging conditions.
l Cross-organizational pilot tests of new ideas orproducts provide benefits both in lessonslearned and problems avoided.
l Joint investments are made in specializedequipment or focused facilities that supportthe supply network.
Establishing the ISCM Information andCommunication NetworkThe thread that draws channel partners togetheris a common objective and its communication.Information, and the tools and technologies thatcreate it, provide the means to bridge organiza-tional boundaries and support inter-organizationallearning. The development of a robust informationand communication network aids ISCM partici-pants in achieving several critical supply chainrequirements, as illustrated in Exhibit 8.
Several primary features define effective ISCMinformation and communication systems including:l they are based on distributed open systems,
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or “client/server” architectures that will allowbusiness systems as well as personal comput-ers to “talk” with one another;
l distributed relational database technologyunderlies the network structures allowing forready access and transparent use by individu-als and enterprises in any location;
l systems span inter-enterprise functionalboundaries and enable the development andstructuring of global channel-wide informationnetworks, allowing companies to share infor-mation regarding customers, production, inven-tory, and finance with their supply chain part-ners; and
l these systems are able to process transac-tions from multiple organizations and infra-structures rapidly and accurately.
ISCM information and communication networkscan be divided into the following three stages:
l Transactional—electronic execution of transactions;
l Information-sharing—electronic sharing orexchange of information; and
l Collaborative—electronic collaboration onstrategic, tactical, and operational planning.
Transactional StageWhen most organizations discuss the growth inthe use of computers to automate their business-to-business commerce with channelpartners, they usually refer to the automation ofsuch business transactions as:l purchase orders and invoices;l order and advanced shipment notices (ASNs);l freight invoices and payments; andl load tendering and acknowledgements.
These transactions involve the electronic trans-mission of a fixed-format document with prede-fined data and information fields. Traditionally,
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EXHIBIT 8. CRITICAL SUPPLY CHAIN REQUIREMENTS
this has been the way EDI has been implement-ed. To facilitate commerce among a large body ofbuyers and sellers, industry-wide standards fordocuments have been established. In NorthAmerica, the most commonly used standards arethose established by the American NationalStandards Institute (ANSI). ANSI has createdstandard transaction sets or ANSI X.12 stan-dards, which define document layout, as in thecase of purchase orders. Outside North America,EDIFACT standards are most prevalent.
Under these standards, many companies useEDI to transmit operational and financial transac-tions over privately owned proprietary intranetsor over commercial value-added networks (VAN).
As a result of the relatively high cost of VAN ser-vices, some small and medium-sized organiza-tions are beginning to experiment using theInternet to transmit EDI transactions. This hasprompted some VAN vendors to offer VAN-likeservices over the Internet.
EDI-based transactional relationships havegrown dramatically over the last decade. Usersfind they can get almost immediate benefitsfrom automating their supply chain executionactivities. The use of EDI facilitates businesstransactions and reduces costs in a variety ofways including:l reducing administrative efforts;l making employees more productive;l improving the accuracy of business transac-
tions by reducing errors;l reducing the paperwork transmitted between
trading partners;l speeding up transactional processes; andl reducing the overall cost of doing business
with trading partners.
These benefits are the result of automating tra-ditionally manual transactional processes thatinvolve a large number of buying and selling per-sonnel. EDI allows computer-to-computer busi-ness transactions to occur without human input,enabling performance improvements in supplychain execution. However, these transactions donot improve supply chain planning. Within theserelationships, the amount of shared informationthat is useful for planning purposes is negligible.
Information-Sharing StageFollowing the automation of buyer-seller EDT-based transactions, the next stage in ISCMinformation and communication networksinvolves information sharing or data exchange. Itincludes at least one of these arrangements:l the partners are given access to a system that
has the shared information in it; andl one partner transmits shared information to
the other partner.
Wal-Mart’s RetailLink System is an example ofan information-sharing technology of the firsttype. The retailer allows its suppliers to haveaccess to a database of store-level POS fromwhich they can view and download informationabout their product sales.
Examples of data exchange partnerships of thesecond type come from the automotive industry.In this industry, certain first- and second-tier sup-pliers are sent a forecast of the original equip-ment manufacturer’s (OEM) material require-ments, which they use to help schedule plantoperations. In addition, some OEMs electronical-ly transmit technical design and component spec-ification information to their suppliers. Electroniccatalogs represent another form of an information-sharing relationship in which manu-facturers can view information about a supplier’sproducts.
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Information-sharing relationships differ from col-laborative relationships primarily in that informa-tion is sent on an “FYI” basis. The recipient isusing the data as-is and is not providing feed-back. Nevertheless, this information is helpful inimproving supply chain performance. Examplesof shared supply chain information include thefollowing:l order status;l shipment tracking and tracing;l sales forecasts;l production schedules;l inventories, including raw materials,
work-in-process, and finished goods;l product designs and specs;l product descriptions and pricing (e.g., elec-
tronic catalogs with online ordering); andl promotional calendars.
Information-sharing arrangements electronicallysupport both supply chain planning and execu-tion, thereby improving supply chain perfor-mance. Relative to planning, these arrange-ments only support independent planning doneby each participant, rather than joint planning.Information-sharing relationships, however, helpensure that trading partners’ plans are as syn-chronized as much as possible. Through thisarrangement, a partner effectively reducesuncertainty in its supply and demand situation bybecoming aware of its partners’ activities—inlieu of having to predict or forecast them.
While information-sharing relationships enablesupply chain synchronization, they do little toreduce the uncertainty faced by channel partnersin determining future demand. Since the informa-tion shared from one partner to another is on anFYI basis only, there is no opportunity for theother partner to provide its own insight andknowledge of consumer needs. In addition, there
is little opportunity to work together on matchingsupply with anticipated consumer demand.
Collaborative StageTo further enhance their buyer-seller relationshipsome channel partners are moving toward col-laborative relationships. Collaborative is definedas “working jointly with others, especially in anintellectual endeavor.” Collaborative effortsenable channel partners to work together to bet-ter understand future demand.
For example, in the case of working collaborative-ly on consumer requirements, channel partnersmight work jointly on new product designs andconsumer demand forecasts. Working collabora-tively to match supply and demand might involvechannel partners jointly deciding how many andwhen products will be produced to meet expect-ed consumer demand. The types of planning thatchannel partners conduct collaboratively include:l new product planning;l product design and technical specifications
(e.g., via CAD drawings or files);l product packaging;l pricing;l promotional planning;l demand forecasting;l replenishment planning; andl store layout and shelf space planning.
Planning done on a collaborative basis by twochannel partners will vary greatly by their func-tion within a product’s supply chain. For example,collaborative store layout and shelf space plan-ning would most likely only be done between aconsumer goods manufacturer and a retailer,since other suppliers would have little knowledgeof the subject. Several organizations have start-ed working on forms of electronic collaborationor plan to do so. Most of these efforts involveinformation sharing leading to collaboration in
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which partners jointly work on a forecast ofdemand to be expected by the seller.
For example, Whirlpool Corporation, a manufac-turer of consumer appliances, started a jointforecasting program with some of its major cus-tomers. The program is an essential componentof its effort to reengineer supply chain process-es. Within this program a group of employeesfocuses on demand planning for Sears and othermajor channel partners. Each week these tradingpartners send Whirlpool a forecast of needs forthe next 16 weeks at the stock keeping unit(SKU) level. Additional detailed information fore-casted about the first three weeks is included.Whirlpool and its partners focus on this three-week forecast window because it is mostaffected by promotional programs, the major driv-er of demand variability.
Another example of supply chain collaborationinvolves Heineken USA, the U.S. distribution armof the European beer manufacturer. This organiza-tion developed a system called the HeinekenOperational Planning System (called HOPS) thatenables the company to collaborate with its dis-tributors on forecasts via the Internet. The sys-tem, with just a standard Internet browser, allowsdistributors to view a Heineken-generateddemand forecast of their needs. A distributor canthen refine or approve the forecast. Upon comple-tion, Heineken’s distribution planning module cre-ates a recommended replenishment order. This ismodified or approved by the distributor andresults in a purchase order against Heineken.
Translating ISCM Strategies into ActionsFor most organizations, implementing an ISCMstrategy spanning material and product flow fromvendors to final consumption, across an array ofdifferent organizations or functional groups, is acomplex task. While the specific implementation
path will vary by organization over the months andyears following the definition of an ISCM visionand strategy, a range of actions are required bychannel partner organizations, including:l appointing a process owner;l aligning culture with strategic response;l reengineering critical business processes;l measuring performance;l developing and training the workforce;l communicating and demonstrating senior
management commitment;l involving stakeholders and gaining commit-
ment to change;l implementing a system to track benefits;l communicating with all stakeholders; andl creating an integration map.
Appointing a Process OwnerISCM is invariably about moving from a function-al or subprocess orientation to one where supplychain management covers all functions and sub-processes across the entire supply chain net-work. Subprocess owners typically have neitherthe perspective nor influence to deal with thisnew environment. The change process involvesmanagers defining who does what in the newenvironment. If these managers report to differ-ent functional heads, then the process of reach-ing consensus can be long and painful.Moreover, the complexity of achieving changeacross supply chain networks will lead to a high-er occurrence of boundary issues, resource prior-itization conflicts, and questions over the per-ceived need for change.
Without a single process owner coordinating thesupply chain in total, change initiatives will resultin optimized performance along functional lineswithout regard to the impact on the total system.Exhibit 9 identifies three supply chain processowner options for management to adopt in imple-menting ISCM.
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For example, Coca-Cola Schweppes is one of themany businesses that have appointed a supplychain process owner. SmithKline Beecham, aleader in ISCM in certain respects, combinesproduction, distribution, and purchasing underone vice president, with sales, marketing, andplanning under another. Xerox named a vicepresident of supply chain management, empow-ered to develop a strategy to cut inventory levelswhile boosting customer service.
Aligning Culture with Strategic ResponseThe failure to recognize the importance of, letalone achieve, strategic alignment is one mainreason that ISCM implementations are not suc-cessful. Culture provides the internal fabric todeliver the business strategy. When mapped andunderstood, it can be a predictor of the likelysuccess of implementing the ISCM strategy.
Regardless of the strength of the logic for astrategic response, change is unlikely to beachieved unless there is alignment with the cor-porate culture. Logic will count for little ifaspects of the existing culture are misalignedwith and work directly against the change.
Achieving alignment, however, is a complexprocess. All the time the alignment is beingsought, customers in the market are changingtheir behavior, the organization is trying tochange its strategy, the different subcultures areresisting the change, and managers and leadersin the firm are trying to respond. For organiza-tions attempting change across a number ofcross-functional and cross-organizational or net-work interfaces, the complexities that arise inachieving cultural alignment are magnified manytimes. Of course, perfect alignment is an ideal
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EXHIBIT 9. SUPPLY CHAIN PROCESS OWNER OPTIONS
Source: R. Easton, et. al, 1998: 439.
state, continually sought but rarely achieved. Thekey task for the organization is to understandand manage the interdependencies that existamong the situation, strategy, culture, and lead-ership style in implementing change. Achievingcloser alignment among them will always resultin more effective performance than if no actionsare taken.
Culture has profound implications for achieving anew ISCM response, but in many ways it is like aniceberg. Above the surface lies only the tip of theiceberg: the rules, structures, behavior patterns,rituals, and style are relatively easily changed.But nothing can be further from the truth,because just as the bulk of an iceberg lies hiddenbeneath the surface so, too, the real essence orcore of the company’s culture lies hidden.
Attitudes, values, beliefs, and assumptionsabout the company underlie the observablebehaviors and structures. The invisibility of theseunderlying variables means that their decisiveimpact on how the organization thinks andbehaves is often not even considered in theprocess of understanding a strategic initiative,yet they act as an invisible barrier to change.
The larger and more diverse or complex anorganization, the more difficult changing the cul-ture will be. The complexity of supply chainchange requires an array of intra- and inter-organizational subcultures to be considered andbought into alignment along the supply chain.Each of the subcultures will have differing goals,priorities, beliefs, standards, and values drivingbehavior. Areas of clashes or inconsistency willhave to be negotiated, although working throughfundamental differences takes time and energy.
Organizations need to address two prerequisitesto alignment. First, the mandate for change must
be based on alignment with the market and cus-tomer base; that is, the organization must havestudied its market and know where it is heading.Second, companies must know what they are orwhat their culture is; this is normally achievedthrough mapping their culture. The mapping exer-cise identifies the changes and refinements oncritical dimensions that need to be made to opti-mize implementation of the desired strategicresponse. Once the gap has been recognized,the organization must be redesigned to supportthe cultures or values and behaviors of the neworganizational state. Identifying the gap betweencurrent and target states also provides the basisfor altering performance measures, training peo-ple and improving their skills, or retrenching andrecruiting others.
Reengineering Critical Business ProcessesMany organizations understand the need tochange employees’ attitudes toward the busi-ness as being critical to the ISCM implementa-tion process. And yet, many organizations tryingto implement supply chain management haveapproached it as an automation of existingprocesses and practices, rather than recognizingit as the need to “reinvent the business” to takefull advantage and reap the full benefit of thenew way of doing the work.
Complete ISCM integration can be difficult with-out significant process reengineering. Without anactive attempt to “break down the functionalwalls” within the organization, or between orga-nizations, the best information technology toolsin the world will be useless. The power of thesetools is that they offer a new way of looking atthe business, a “one number system” thatallows all departments (or independent mem-bers of the supply chain) to work according tothe same plan. If participants persist in followingtheir old ways of doing things and keep function-
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al walls intact, then the benefits of the new toolswill soon be lost.
Measuring PerformanceMeasuring performance is an integral compo-nent of ISCM throughout the planning, implemen-tation, and execution phases of the process.Evaluating each element in the total supply chainallows important trade-off decisions to be madeand focuses attention on eliminating nonvalue-added processes. ISCM should be costjustified initially and on an ongoing basis.Performance should be measured with eachISCM relationship. Each organization needs todevelop financial evaluations specific to its ownmethods and cost structures. The measurementof ISCM typically falls into three categories:l financial impact of ISCM;l internal performance measurements; andl external satisfaction/quality measures.
While all three are interdependent (e.g.,increased quality should result in increasedsales), separating key measures helps organiza-tions identify the impact of ISCM on their differ-ent functional areas, for example:l marketing may want to understand the likely
impact on customer/consumer satisfaction;l distribution may be more interested in internal
performance measures; andl finance may require financial measures to
assess capital requests for new technology.
Many organizations neglect to create effectivemeasurements across their business. For exam-ple, often the measure of quality in one organiza-tion location is not the same as in another.Similarly, measures of customer service in onelocation are not the same as those at other loca-tions. Within many firms, people are still usingapples and oranges comparisons when they lookat performance to customers or performance to
suppliers. Many of their measurements are alsohistorically oriented rather than driving towarddesired outcomes. Many organizations still needto put forward target measures in place. How allthese things are put together varies from indus-try to industry and organization to organization.
Developing and Training the WorkforceEducation is critical at every step of an ISCMimplementation effort. In the initial stages of theexecution phase, the focus of developmentshould be on those key individuals who, by virtueof their personal and/or positional power, havethe ability to change the organization by applyingleverage at the key pressure points. Thesechange leaders have the positional power tomake or break the transmission of key aspectsof the program.
In ISCM implementations, change leaders areoften logistics or supply chain professionals whocan be called on to make rapid, complex deci-sions; coordinate action across multiple product,geographic, functional, and organizational inter-faces; and interact with and manage several rap-idly forming teams. Since few logisticians areeither trained or experienced to manage truebusiness integration, people used to leveragekey pressure points across the supply chainshould be developed, at a minimum, in the fol-lowing four areas:l Group and workshop facilitation skills. Specific
training in facilitating workshops and leadingdiscussions in the areas requiring change willenable managers to elicit ideas and respons-es from staff, confidently involve their peoplein the change process, and make presenta-tions to senior management.
l Organizational behavior and change skills. Sincekey individuals will act as change agents, theywould benefit greatly from knowledge of thetechniques and theories of organizational
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behavior and change. Understanding the psy-chology of change and even a little about orga-nizational behavior will help prepare them forthe specific interventions that may be used toshift the organization toward its desired state.
l Cross-cultural communication skills. Wherechange spans international boundaries orworkforces with differing cultural composition,key individuals would benefit from insights intothe behaviors and perceptions between thecultures in question that might lead to misun-derstanding or that could be leveraged to helpreach the ISCM goals.
l Leadership and performance managementskills. Key supply chain agents require skillsthat enable them to influence, motivate, andmanage personnel around them and form func-tions and organizations different from theirnorm. These skills are necessary to move peo-ple from existing positions toward the changegoal, to generate confidence that the changesare in the organization’s and their own bestinterests, and to monitor and manage theextent of movement of people toward thechange goals.
All affected employees will require some form oftraining and development to enable them toachieve new performance targets. Supply chainchange often results in process redesign thatrequires workers to carry out new tasks andinteract with different people. For example, a per-son who previously just took customer ordersmay now be required to check inventory, checkcredit, confirm the order, and handle many prod-uct types. Carefully crafted training programs arerequired that allow the worker to understand thenew job, its performance objectives, new sys-tems, tools, and techniques.
Involving Stakeholders and GainingCommitment to ChangeResistance to change is a natural humanresponse; it will occur. People resist change morewhen it is imposed on them. The question, there-fore, is how best to involve ISCM stakeholders ina meaningful way. While gaining involvement canbe complex and very time consuming at the out-set, doing so is one of the best ways to alleviatethe unnecessary fear and uncertainty that oftenlead to resistance.
Involving people affected by the upcomingchange assists in building commitment towardand ownership of the ISCM goals. If people areinvolved, it sends a powerful message thatthings will be different and employees are play-ing an important role in making the difference. Ifthey are not involved from the outset they feelleft out and unfairly treated. Target dates may bejeopardized and the chances of success will besignificantly reduced.
ISCM implementations are replete with exam-ples of change programs that have failed throughnot giving adequate attention and time to involv-ing stakeholders in defining the change content.In one important supply chain project in a majorconsumer goods company, for example, thechange effort stopped after a successful firstphase but before any benefits could be realized.Failure occurred because:l local managers were not committed to the
change;l a policy of secrecy suppressed rather than
overcame resistance;l a short-term focus resulted in lack of involve-
ment; andl current high levels of profitability meant that
there was no clear imperative for change.
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Identifying all stakeholders is also a critical pre-condition for successful ISCM change manage-ment. ISCM projects must identify all stakeholdergroups so that their fears, expectations, andneeds can be addressed.
Implementing a System to Track BenefitsDeveloping and using a system to monitor thesuccess of the ISCM change program, as well asto track the benefits reaped, is important to:l ensure that the progress to date and planned
actions will still achieve the business benefits;
l provide early feedback to stakeholders thatwill reassure those funding the project, moti-vate those engaged in the program, and quietthe skeptics and cynics who may otherwiseundermine the change; and
l provide feedback to senior management sothat further refinements can be made to pro-gram plans.
The ISCM cost/benefit impact report illustratedin Exhibit 10 can be used by organizations in
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EXHIBIT 10. ISCM COST/BENEFIT IMPACT
determining their ISCM objectives, the financialimpact, and the impact on their customers.
The ISCM benefits tracking system must belinked to the budgeting process so that the busi-ness benefits are reflected in the targets of oper-ational managers. Links also need to be createdto the product-pricing and customer-profitabilitymonitoring systems. Strategic change will deliverimproved margins by affecting both revenue andcosts. Actively managing the pricing decision asit relates to new services and key customer seg-ments is essential to achieving the expectedbenefits. This is particularly important in imple-menting ISCM because, despite all the focus onpartnerships and win-win relationships, the ben-efits of change (or its value) are rarely distrib-uted evenly across the companies participatingin the change process.
Communicating with All StakeholdersRumor and distrust can undermine any ISCMimplementation. Communication, particularlyfrom top management down, must be a continu-ous process, conducted in an honest, effective,and open manner, so that people understand inadvance what is required of them. SuccessfulISCM implementation programs are character-ized by constant, frank, and timely communica-tion to all stakeholders.
For example, to get the word out about its supplychain management, Nabisco distributes to about300 key employees a quarterly four-pagenewsletter called “Logistics Systems of the90’s.” It uses plain language to explain how theproduct supply channel works and the responsi-bilities of each area in the chain.
While implementing ISCM, communication is alsorequired across company boundaries betweensuppliers, customers, and other organizations in
the chain. Also, the investment community in pub-licly traded organizations must not be ignored.These other parties are affected differently thaninternal employees, and they require radically dif-ferent messages using different means of com-munication. For example, some organizationsinvolve several full-time people from their publicrelations group to manage external communica-tions throughout the ISCM implementation.
Creating an Integration MapIt is essential to create a map of organizationalor supply-chain-wide initiatives and comparethem with the organization’s goals, performancemeasures, and resources. By its nature, ISCMimplementation will lead to a multiplicity of pro-grams springing up across the supply chain.This, together with the array of other change pro-grams that might exist among stakeholdergroups, provides a recipe for confusion andpotential failure.
The integration map is a mechanism for identify-ing the array of change initiatives and programsongoing within an organization or the existingsupply chain, as well as for revealing conflictingtime, resource priorities, and change goals thathave not been addressed. The map proves use-ful in helping to decide which projects to launchfirst and which may need to be jettisoned. Sinceconcurrent conflicting initiatives often lead toconfusion, action taken to integrate initiatives isessential if the ISCM implementation is to besuccessful.
V I I I . CONCLUSIONAs we approach the 21st century, one thingbecomes strikingly clear: Supply-chain manage-ment is not just the wave of the future. It is atsunami that will engulf everything in its path,that resists every attempt to stockpile inventory,to push product blindly into the market, to
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respond slowly (or not at all) to changing cus-tomer demands, to handle business transac-tions on paper.
For financial professionals and others working inthis field, the issue is not so much whether tobecome expert in the art and science of supplychain management but rather, how fast. Thismeans becoming intimately familiar with the cor-porate mission and figuring out how logistics canhelp achieve that mission.
Perhaps the most important mandate of all is toget closer to customers. Supply chain manage-ment in a very literal sense begins and ends withcustomers. Knowing what they want, when theywant it, and speedily delivering the goods—in anutshell, that is what supply chain managementis all about.
GLOSSARYAUTOMOTIVE NETWORK EXCHANGE (ANX). The
Auto Industry Action Group (AIAG) is develop-ing an Internet-based Extranet called theAutomotive Network Exchange, supported bythe Big Three North American automobilemakers. The intent of this large-scale, ambi-tious system is to allow automobile makersand component/subassembly suppliers toexchange information electronically. Thisinformation will include:l e-mail;l production schedules;l CAD files; andl EDI-based transactions (e.g., material
releases and ASNs).
The plans for ANX also include the potentialfor distributing interactive applications suchas electronic maintenance, repair, and operational (MRO) catalogs and groupware.The ANX system, while initially focused on
enabling Automotive OEM/supplier commu-nications, could eventually connect 40,000manufacturers, suppliers, dealerships, andfinancial services organizations.
COMPUTER-ASSISTED ORDERING (CSO). A retail-based system that automatically gen-erates replenishment orders when the shelfinventory drops below a predetermined level.The computer system tracks the inventory ofall items in the store, adjusting for receiptsand sales.
CONTINUOUS REPLENISHMENT. Seeks to moveproducts more efficiently throughout the sup-ply chain, reducing waste, time, and inventory costs.
CONTINUOUS REPLENISHMENT PROGRAM(CRP). A program in which a supplier takeson the inventory control responsibility formanaging inventories at its customer’s loca-tions, with the customer maintaining respon-sibility for inventory planning activities suchas setting target inventory levels. CRP is thepractice of partnering among distributionchannel members that changes the tradition-al replenishment process from distributor-generated purchase orders to one based onactual forecasted consumer demand.
CROSS-DOCKING. A distribution system in whichmerchandise received at the warehouse ordistribution center is not put away butinstead is readied for shipment to retailstores. Cross-docking requires close syn-chronization of all inbound and outboundshipments.
DEMAND ACTIVATED MANUFACTURING ARCHI-TECTURE (DAMA). Created in 1993, thedemand activated manufacturing architec-ture project is part of the American TextilePartnership. DAMA’s mission is to research,pilot, and make prototypes of conceptsaimed at integrating the U.S. IntegratedTextile Complex (ITC). ITC comprises the
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fiber, textile, apparel, and retail industries.The project, funded by U.S. governmentagencies and ITC companies, focuses ondeveloping technology infrastructure compo-nents to enable supply chain collaboration.
ELECTRONIC DATA INTERCHANGE (EDT). Thecomputer-to-computer transmission of busi-ness information between trading partners.The information is usually organized in stan-dard file formats or transaction sets.
OPEN SYSTEM. Technology conforming to gener-al system standards offering users a widerselection of software programs. They facili-tate computer systems linkage and the useof multiple vendors.
POINT-OF-SALE (POS). The place where the pur-chase is made at the checkout stand orscanning terminals in a retail store.However, the acronym POS frequently isused to describe the sales data generatedat the checkout scanners.
QUICK RESPONSE (QR). A program in whichapparel and general merchandisers worktogether using point-of-sale (POS) data tohelp coordinate the flow of goods from man-ufacturing to retail shelves.
VALUE-ADDED NETWORKS (VAN). A company thatacts as a clearinghouse for electronic trans-actions between trading partners.
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