IXN Thought Leadership Podcast Series: The Integrated and Intelligent Supply Chain

Last week I joined the Intellectual Xchange Network (IXN) sponsored by SAP to speak on the key issues facing the integrated and intelligent supply chain.  Joining host Donna Papacosta and I were fellow guests Robin Smith (Virtual Logics) and Stephanie Gruber (SAP America), and we spoke on key issues facing the supply chain such as data governance, brand management, and value chain transparency.  Stephanie and I worked together on a preview of the SAP Supply Chain Performance Management release 2.0 last year, and I provided a recap to my SCOR 11 review from the Supply Chain Council.  Excerpts of the transcript are posted here, a full podcast recording may be found on iTunes (episode IXN002).

SAP_IXN-Program_Podcast-Artwork_2013Donna Papacosta:

What are the most important issues facing mid-sized to large organizations today when it comes to their supply chains, and how do these issues affect the business in terms of cost and productivity?

William Newman:

From my side, I see a lot of things in the area of brand compliance, which continues to be an issue ranging from cost and quality control to plant safety. Several professional associations and non-governmental agencies have been seeing an increase in the phenomenon that I like to call audit theatrics. And I think we’ve all seen that in the field from time to time, but it seems to be on an uptick. In this case, a large organization, a brand, may sponsor a compliance audit in a contract manufacturer’s facility and the contract manufacturer then has ample time to create day-only improvements and compliance which reverts to what we like to call standard operating procedures, which can oftentimes be subpar. This results in quality control and worker safety issues. So this underscores the issue that we have, due to recent plant fires over the past months and years in Bangladesh and Pakistan, where communication breakdowns between brand manufacturers who lacked sufficient resources to monitor or govern these situations adequately and the contract manufacturers looking to stay in business through continued cost-cutting. This impacts both financial and social performance areas.

Donna Papacosta:

Robin, did you have something to add?

Robin H. Smith:

I think Bill brings up some very good points in his intro around brand compliance. To me, the single biggest issue that I see in the supply chain is actually the optimization of that supply chain. So, really, what does that mean? The efficient flow of information between partners who have a vested interest in an overall outcome with clearly measurable steps along the way, proper audit trails and solid governance, to me, is an optimized supply chain.

A proper risk assessment around that governance is also something I think that needs to be part and parcel of an optimized supply chain. In the past, and we don’t have to go back very far to see the big stick approach work. And in some sectors, retail, I think, is really still the norm. It seems that in a more complex supply chain, there’s a direct correlation between efficiency and partnership. What do I mean by that? In a less complex supply chain, I think the inverse is true. And really what that means is that the partnership, as the supply chain becomes more complex, becomes tighter.

Stephanie Gruber:

I would like to add to what Robin and William said that today’s environment, with the uncertainty and the global pressures, have really added a lot of complexity within the supply chain. So, I believe that a lot of companies also spend a lot of time focused on demand generation versus efficiencies in their supply chain. Sometimes that prime focus on the revenue generation drives the fact that they’re focused on product launches, marketing, branding and trade promotions but they really need to focus on meeting that demand generation. Because if the product’s not in the right place at the right time in good condition and minimum cost, then all of those activities won’t be successful. Without that visibility, a process supply chain and understanding the upstream and downstream impacts, companies cannot react quickly because of their non-visibility to risks and understanding what is truly driving and impacting their supply chain. I think as Robin pointed out, poor data and outdated applications will hinder a company from truly optimizing their supply chains, which often leads to costs.

Donna Papacosta:

Our listeners are probably familiar with the SCOR model, but with SCOR 11’s recent release it might make sense to get an update on what’s new about this iteration. Bill, I know that this is a key area of expertise for you, so what can you tell us about SCOR 11 that we need to know?

William Newman:

newman_thumb_2011-06 (292x392)Sure, Donna. So just for our listeners, the SCOR framework, which is the supply chain operations reference model and it’s sponsored by the Supply Chain Council, or SCC. This past December the Supply Chain Council issued SCOR 11. The SCOR framework has been used for decades as a standard approach to the design and implementation of supply chain practices and business processes, and these are recognized by many leading companies and practitioners around the world. It really does form an operating model framework for many companies that are either manufacturing goods and services or that are in the process of contracting for the manufacturer of goods and services. Given that a recent release of the SCOR framework comes every only two to three years, an update for SCOR 11, the 11th release, is a big deal in operational circles.

The previous versions of SCOR included several process steps, and they defined this as Level 1 in the framework, which include plan, source, make, deliver and return, which is also known as service. Underneath these Level 1 process steps are several Level 2 and Level 3 processes as well. Many companies’ operating models use these process steps and sub-level steps to define their business practices and procedures. In addition, some guidance around cost models based on process activities can also be gleaned from the SCOR framework.

So, in the new version of SCOR … What’s new? In the new version, the Council review team comprised of supply chain practitioners who walk the walk and talk the talk, as we like to say, noticed that a common Level 2 process, enable, was worthy of elevating this to a Level 1 status. This is really a big deal. Previous to SCOR 11, the framework considered a more linear, what I’ll call “waterfall flow” of activities associated with classical process mapping. So with SCOR 11 the Enable Level 1 process essentially provides guidance on how to support the original five process steps with best practices. This change, you might find, creates a closed-loop model similar to the current ISO 9000 models built on the classic Deming Plan-Do-Check-Act feedback cycle.

Now, an interesting point is that the SCOR model as of yet is silent on many take-back areas such as design for disassembly, or what we call DFD; the various kinds of recycling, upcycling, downcycling, and other cradle-to-cradle approaches. Specifically returns in the SCOR model means more of a service return of a product rather than a material return for these downcycling or recyclings. These areas are driving additional costs into organizations implementing these approaches, which are not accounted for in the current SCOR 11 model, but will be under consideration in the future.

Stephanie Gruber:

I would just like to go ahead and add on SCOR from the standpoint that we really consider it an industry best practice, because they’ve brought so many points of views from companies, industries and other experts. So it’s just not one company’s point of view how a supply chain should be measured. I would just recommend to companies to really look at that SCOR because it gives them a good start on how they can monitor their supply chain and also look at their processes. For example, often when I work with customers when they’re doing a supply chain transformation, I ask them to review SCOR and see what SCOR would recommend. Because from that perspective, the company does not start with a blank sheet of paper. They are looking at performance measurements and how the industry is measuring them. Then they can decide as a company what they want to adopt. But they also know that they can benchmark from those measurements. So from that standpoint, I would highly recommend that companies take this approach when really looking at how to to optimize their supply chain.

Donna Papacosta:

A little earlier you did touch on costs. So here’s a question for you. In a report in 2011, the Supply Chain Council said supply chain costs account for 60% to 90% of overall expenses. That seems high. It goes on to say that a 5% reduction in supply chain spending can increase net income by more than 40%. Now of course the SCC is a reputable organization. I’m not questioning this data. But if I were a CFO seeing these numbers, how would I go about uncovering these costs?

Robin H. Smith:

That’s a good question, Donna. Part of the process of looking at costs is to look at what are those costs are actually incurring throughout the supply chain. And it speaks back to optimization. Are the costs coming out of inefficient systems because those systems are outdated? Are those costs associated with things such as those that William raised earlier related to audit issues? Or are they related to the kinds of things that Stephanie raised?

William Newman:

newman_thumb_2011-06 (292x392)Robin, to your point, the SCC has several operating models that address the plan through the different stages of the product life cycle and associated risks and costs in those stages. These can be significant based on the complexity of product or services delivered. Now having said that, performance-tuning the various stages of the SCOR model for costs and other practices is definitely a leverage benefit. We’ve seen reports that significantly show an uptick in margin to a reasonably modest investment in supply chain processes by the Supply Chain Council. So there are certainly components of supply chain distribution processes, for example, where a relatively low reduction in process cycle time can yield huge incremental margin gains.

One of the areas that we often talk about in performance management situations, such as the SAP supply chain performance management solution, it really can quickly uncover the spend patterns that deviate from norms. The classic case is expedited delivery, and I think we’ve all seen this before. The make process bogs down or there are issues with the sourcing component into the make process so the final customer product needs to be shipped using expensive expediting methods, and these can be extremely cost prohibitive over time. So while the overall supply chain distribution budget may be on track, these expedited shipments appear as blips on the performance management dashboard.

And using these solutions and tools and dashboards, you can drill down into these anomalies and quickly uncover problems in specific plant locations, for example, or operating units. Working backwards, then, you can uncover the root cause of the issue, like saving additional costs during the make cycle, and other upstream places in the supply chain process. That’s real bottom-line money, particularly for company executives who are trying to increase their margins. As well, those funds can be used for new product development, research and other shareholder returns.

Stephanie Gruber:

So just to re-emphasize some of those points, I think it was interesting that one of our supply chain performance management customers wrote an article that stated an organizations that’s really wanting to seek to improve their supply chain need to incorporate key performance indicators, to actually measure their progress against it. I really appreciated the quote when they said: “Otherwise a report is just a report that fails to provide information that can be acted on.” So what’s the point of it? It’s also important to note that the visibility to data is only one component. Really understanding that data and what is driving the numbers are also important, and that’s the reason why SAP uses the SCOR model as the foundation for the supply chain performance management application. It focuses on those relationships between KPI’s and metrics and it also helps the company to analyze them, so they can make better decisions for the future.

Donna Papacosta:

OK. I think you’ve made it clear that SCOR can help CFOs and supply chain managers and operation staff put in place these best practices around supply chain management, but let’s talk a bit about, well, the elephant in the room, and that’s whether all data is being gathered and used productively throughout the supply chain, not to mention that the data has to be timely and accurate and all those good things. Robin, you’re working with companies who are integrating systems and automating supply chain processes. What are you seeing in the market that concerns you about companies and their supply chains when it comes to this data and integration?

Robin H. Smith:

I love the term “elephant in the room,” because it really is the elephant in the room. I look at it from two perspectives. One is poor quality integration, and what I mean by that is often custom-built stuff where somebody’s tried to build a program and also the single-silo approach, where data is viewed from a silo perspective. The other elephant in the room is bad data. Bad data is really the bane of any supply chain. Things fall down because data is poor, it’s inconsistent or there are issues with the overall quality of that information. It’s not timely.

Stephanie Gruber:

And I would just completely support what Robin said because managing data in large quantities are presenting challenges. We’ve actually seen that with the whole introduction of the SAP HANA technology. This technology enables the ability to build and handle a large amount of data, but it also needs to be combined with a data strategy and data governance practices so that it provides meaningful information and analytics. Especially when a company is combining these different sources, a strong data strategy and strong data governance practices are imperative. Otherwise you just have a lot of data.

William Newman:

Stephanie, that’s a great point. I think it’s important to know that HANA, as a in-memory platform, can accept a number of different data sets from many different types, fields and locations. It’s a great opportunity for brand organizations who are trying to get transparency to the data that their contract manufacturing and low-level supply chain are working with, to bring that into the fold and make that a real-time part of their operational data governance strategy and HANA completely supports that approach.

Donna Papacosta:

This is really an interesting discussion, and the topic of this podcast is the intelligent and integrated supply chain. Let’s look at what this “ideal” supply chain would look like. And I wonder if I could paint this picture. Number 1, it integrates suppliers and data seamlessly with little or no friction. Number 2, it’s modeled on best practices and mature, efficient and effective processes. And number 3, the information coming from supply chain transactions and processes is rolled up into performance metrics and dashboards. And of course, these help the CFOs and purchasing organizations to manage costs, predict supply and demand, and get those insights they need to help them make better decisions. Is this vision that I painted a pipe dream? And if not, what real-world examples can you describe where companies use people, processes and technologies to better manage the performance of their supply chains.

William Newman:

newman_thumb_2011-06 (292x392)Well, Donna, many organizations in manufacturing and retail are doing this today. They’re taking advantage of real-time dashboards, analytics, transparency throughout their value chain. And this is really separating the leaders from the laggards. Examples can range from basic order fulfillment and manufacturing cycles to even in-field mobile technologies with advanced mobile analytics really putting the information you need anytime, anywhere in the palm of your hand, which is great. These are all supported across the SAP ecosystem so that no matter what the data source or the process an organization may consider, the essential building blocks can be put together in a seamless information anywhere, anytime approach to managing and operating the business. Again, leading clients and manufacturing organizations are doing this today. I think the real opportunity is how they’re able to drill down into the transparency of their supply chain.

Donna Papacosta:

OK. So it is possible.

Robin H. Smith:

Yes, Donna, I completely agree with William. I think it is absolutely possible. I like the description of the forward thinkers and the laggards. I think for those laggards, the key element here is that they have to have a data strategy. If they don’t have a data strategy around how they’re going to integrate and how they’re going to use data, they’re going to continue to be in that space. Data cleanliness, it’s a huge risk to enterprises. I’m a big advocate, actually, that companies really need to have a chief data officer. That data officer, given that our world is so interconnected today and we trade, really, on the value of the data that we transmit back and forth, this I think is going to become increasingly important.

To listen to the podcast in its entirety, please download the episode for free on iTunes.

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Filed under Big Data, Business Analytics, Compliance, Financial Management, Global Trade, Information Technology, Operations, Procurement, Supply Chain Management, Sustainability, Technology

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