AMR Research has stated the problem, “Brand owners need better visibility into and control of the outsourced supply networks, but current technology options are not up to the task.“
The past decade has clearly seen a dramatic shift in manufacturing to outside the United States. Lower production costs, ready access to labor, and eager markets, especially in Mexico, China, Eastern Europe and India have fueled a move to near-shore and off-shore manufacturing.
In parallel, corporations have shifted their strategies by focusing on their core competencies of brand and product management, and outsourcing the manufacturing of their products. This strategy, known in some circles as virtual manufacturing, requires the product owner to become the master of the supply chain.
In this model, the brand rules, requiring a new set of defining traits required for success. A virtual manufacturing company must be:
Brand and product driven
Nimble to change
Agile to disruptions.
The bottom line in this brand- and product-driven environment is product velocity. It's all about how fast you can move your product from suppliers to end customers and how nimbly you can respond to change in the face of evolving customer requirements and market conditions. To remain competitive, today's “virtual manufacturers” must deliver product velocity across often-complex global supply chains — and, at the same time, deliver ever higher service levels and lower costs for demanding customers.
Different Challenge, Different Risks
What does it take to achieve product velocity? Moving goods from suppliers to customers as fast as possible is certainly not a new concept. Product companies have been trying to do this for decades. The difference is that manufacturing has changed. Manufacturing, once the center of a product company's universe is now outsourced, thus mandating a shift in the requisite supporting models for expediency. One of those models needing to shift the most is software. Most supply chain management (SCM) software was built to support a manufacturing-centric universe, and those suppliers have since struggled to evolve from their factory-focused, vertically-integrated roots.
Based on old architecture, these products are inflexible, rigid, and difficult to customize. (And, they have a nasty reputation for dictating rather than supporting business requirements.) None of this bodes well for the dynamic, globally distributed nature of virtual manufacturing.
Managing the supply chain in an outsourced manufacturing environment may seem a simpler environment than the traditional plant-centric model because many of the manufacturing-centric constraints that previously created operational complexity and drag have been removed. However, in reality most of those constraints haven't vanished; they're just been shifted elsewhere. Complexity and risk associated with planning and execution of manufacturing now rests more on your contracted suppliers.
To manage this team in a virtual manufacturing environment requires a new management model — Community Supply Chain Management (C-SCM). In the C-SCM model, the brand owner must lead collaboration in community with suppliers and customers to optimize brand performance.
Key Enablers Required
Below are the key enablers that the new C-SCM model requires:
Supply Chain Team: To create a supply chain community, you can't get by with transactional relationships; you'll need to cultivate preferred partner relationships with your suppliers. You'll have to prove your worth to each other so that your suppliers will prioritize the work they'll do for you. You'll need to set common goals to achieve and agree upon key performance indicators (KPIs) to measure progress and success. For the team to be sustainable, all in the community must jointly benefit from the work of the community…not necessarily equally, but fairly if you want continuity of partnerships. You won't be able to create this community with a stick; the key is teamwork, which must come from collaboration and building both a trust model and community incentives to solidify the partnership. Only then can you work together to overcome constraints for the benefit of the community.
Cross-Community Business Process Management: Business processes are traditionally designed and managed to be intra-company, or inside the virtual four walls of the business. Forecasting, purchasing, inventory management, order management and fulfillment have been internal activities with connectors for input and output to external suppliers and customers, generally in one-to-one relationships. A significant advancement on that constrained model is cross-community business process management (C-BPM) which focuses on enabling end-to-end business processes across the entire community and requires many-to-many relationships among the owner, suppliers and customers. Key here is a move from manual transactions to automation and from batch to real-time transactions, as well as reporting across the community. Now you can move from a web of fragmented activities to a hub of end-to-end business processes. You can neither efficiently nor nimbly drive product velocity without this orientation.
Cross-Community Visibility: Supply chain partners lament the lack of visibility, the latency and inaccuracy of information gathering, and the draining impact those three have on collaboration and confident decision making. If the supply chain team is to grow into a true community, there must be clear lines of multi-tier visibility across entities and business processes. To drive product velocity, lower costs, and high customer service levels, there must be real-time supply chain intelligence accessible and visible to all for timely decisions that benefit the entire community.
Management by Influence: By outsourcing manufacturing, virtual manufacturers have given up direct control of product supply. The successful supply chain owner must conduct the supply chain community as one would an orchestra. The owner must be expert at managing many contributors by influence rather than directly. While good contracts certainly help in making for good suppliers and customers, the brand owner will be far more successful now and in the future by building and nurturing relationships with customers and suppliers and incenting them with common community goals and rewards. Aligning trading partners around common goals, measuring performance, and rewarding success provides a firm foundation for a collaborative, sustainable supply chain community.
Single Technology Platform: To facilitate C-BPM and have real-time visibility, communication and transactions are best managed on a common, web-native platform, allowing the integration of the variety of ways through which partners communicate with other trading partners. This platform, or transaction hub, is the system of record for cross-community processes and operational data for the supply chain owner, integrating with the Enterprise Resource Planning (ERP) system which remains the financial system of record. This single data repository provides a single source of truth for real-time business intelligence.
Inside Out vs. Outside In
While the business of virtual manufacturing has transformed, the technology — specifically the business management software — required to manage, this new supply chain strategy has not. The available supply chain software is manufacturing-centric by design — built to solve a different problem in another era. This traditional approach is focused on “Asset Utilization,” the key measure of success for manufacturers, versus “Product Velocity,” and the external collaboration required by virtual manufacturers.
It was built to enable the inside-out, manufacturing-centric strategy of maximizing asset utilization — focusing inside and around a factory. Factory planning, shop floor management, inventory management, and order fulfillment form the core of traditional SCM. Manufacturing companies had an inside-out view of operations focused on maximizing asset utilization and lowering cost in the supply chain.
The scope of SCM functionality grew by adding warehouse management, supplier collaboration, and so on. The result of this broader footprint for managing the business was that literally hundreds of variables — thousands in larger, more complex businesses — had to be accounted for in planning and execution. While the software industry created very powerful and equally complex algorithms to address the problem, it took an Operations Research PhD to implement and run it.
Because these supply chains were so broad and complex, they became a planet of their own, with so much inertia from the resulting complexity that software vendors eventually decided to simplify management by separating inbound, manufacturing and outbound processes into separate modules, applications, etc. Attempting to further address this complexity, they often held variables such as supplier lead times static, and limited planning by performing it periodically with time fences to minimize the bullwhip effect it often caused. The oft-attempted, yet inability to truly incorporate dynamic planning made it difficult to keep up with the natural and disruptive fluidity of changes in the business. Asset utilization was optimized, but customer responsiveness and product velocity were relatively constrained.
Any Color As Long as it's Black
SCM software was built with specific actions and business processes designed in. Configuration and customization for corporate and industry requirements could be created, but the architecture made it expensive to build and the resulting product was rigid and inflexible. The customization users wanted required modifying the source code in these packages, which typically broke down when upgrades were issued. This drove companies to either: A) avoid customization and accept the vendor-defined processes, or B) to customize the product but avoid future upgrades. Both of these strategies created an environment of compromise. Companies had to choose between settling for vanilla features and functionality or falling behind new capabilities and strategies by staying on older releases. Both approaches are suboptimal.
As an increasing number of companies move to virtual manufacturing, they require a move away from managing from inside-out, focused on asset utilization, to managing from a new point of view: outside-in, and thus, the concept of community supply chain management.
Brand owners need to manage community forecasts, planning, purchasing, fulfillment and logistics among a team of players. Remember the BASF advertisements where they said they don't make the Jet Ski, but they make the plastic to make it lighter and faster? Well, software to manage the supply chain community doesn't create forecasts for the individual customers, but it needs to gather those forecasts, de-aggregate, assess and scrub them, then send them to suppliers in anticipation of orders. This community focus on collaboration is similarly carried to purchasing, inventory management and fulfillment.
This all makes perfect business sense, but the problem lies with supporting technology. No matter how much twisting and stretching have been attempted, existing SCM software simply cannot support community supply chain management.
Cross-community collaboration today is by phone, fax, email, and by the most popular supply chain management software in the world: spreadsheets. This business process environment is duct-taped together with manual workarounds: workarounds managed by a bevy of expeditors who neither add value nor enhance product velocity. Because of this incremental burden, the advantages planned and anticipated by moving to virtual manufacturing may be zapped by the lack of community supply chain management.
In order to realize the anticipated benefits of virtual manufacturing, of being brand and product centric, virtual manufacturers have to close the technology gap. So, yes, the world does need another supply chain software application. That solution needs to provide end-to-end supply chain visibility and the scalability and agility to support the dynamic nature of today's supply chain communities.
Sean Rollings is VP, Marketing, Amitive, Inc., which developed a class of software purpose-built to provide supply chain management for virtual manufacturers, which it defines as brand owners that manage products, but outsource their manufacturing to third parties. www.amitive.com