Chapter 16—supply chain process integration and a look towards the future
For those for whom integration is not happening, the future is bleak and getting darker.1
There is a lot of value that is “trapped” between the processes trading partners use to transact business, and when companies work together, they can unlock that value and share its benefits.2
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After completing this chapter, you should be able to:
Discuss and compare internal and external process integration. Discuss the requirements for achieving process integration.
Describe the barriers to internal and external process integration, and what can be done to overcome them. Understand the importance of performance measurements in achieving internal and external process integration. Understand why it is important to align supply chain strategies with internal process strategies. List and describe the eight key supply chain processes, and how trading partners integrate these processes. Discuss a number of the latest trends in the areas of process management and process integration.
Process managent in action
—An Interview with Zack Noshirwani, Vice President of Integrated Supply Chain for Raytheon
The Raytheon Company is a major defense contractor; its major customer is the U.S. Department of Defense. Mr. Zack Noshirwani, vice president of integrated supply chain, joined Raytheon in 2001, and prior to his current post served as vice president for operations for both the Air/Missile Defense Systems and for Integrated Defense Systems. Previously, he worked in operations and supply chain capacities with Honeywell Engines and Systems, Allied Systems, and Lockheed Martin Defense Systems.
Q: How is operating a supply chain different when the Department of Defense is your major customer?
Noshirwani: We need to adapt to the changing customer first. The focus within DOD has shifted from products to capabilities. And, second, they have raised the awareness of mission assurance within the defense business generally and the missile defense business, in particular. Within Raytheon, Bill Swanson, our CEO, has said we are going to take mission assurance to the next level across all our businesses. Putting that together, the challenge we have is: How do you make our supply base aware of our new expectations; and, what do mission assurance and our new business strategy mean to us? That change forces us to look at the historical supply chain in a different set of paradigms.
Q: What was the shift of objectives?
Noshirwani: We went from operating traditional purchasing and supply chain organizations to what we today call an integrated supply chain. With that, we intend to link our engineering groups and our performance excellence groups with our supplier base as early as we can in the process when building relationships with our suppliers. We need our suppliers to be an extension of ourselves. The old routine, when dealing with our suppliers was focused on costs, quality, and schedule. Lack of performance in these categories generally provided a stressful exchange. That has changed. Now, it’s going to be more collaborative. We’ll be working together so that we’re building the right stuff on time, correct the first time. There can’t be three iterations before we get it out the door.
Q: How do you do that? What is the task?
Noshirwani: One key thing: We used to be a very tactically oriented organization; we’re now shifting to become more strategic. For example, we are organizing more supplier conferences at which we can establish expectations with our supply base. This past June, we had 67 of our key suppliers participating in a supplier forum. The theme of the event, “Performance Matters,” focused on how mission assurance is a key element. We are communicating what mission assurance means to us and to our supplier base, to make sure that their behaviors, our behaviors, and our relationships all improve over time.
Q: Ideally, what would you like to get from your suppliers?
Noshirwani: When I look at my integrated supply chain of the future, I’m going to use a phrase: a netted integrated supply chain. What does that mean? As Raytheon IDS works to become a Joint Battlespace Integrator, we will have expertise over multiple domains. The challenge for our supply chain organization, then, is to take the suppliers who are expert in certain domains and knit them together to allow us to create solutions to satisfy our customers’ needs and support our business vision.
Q: Does this mean that suppliers will be working with other suppliers?
Noshirwani: In some cases, absolutely. Then the question is: How do we broker them to partner with each other to bring us the best result?
Q: With this new business focus, what sort of measures do you use to determine your success?
Noshirwani: Previously, the majority of our metrics were internally focused on the supply chain. While we still have some metrics that are internally focused, we now have an organizational perspective that measures the value we provide to the business. These metrics are in the area of effectiveness, efficiency, capability, and capacity. We’ve also now established metrics that are linked directly to our business performance and to our customer’s expectations. The key focus is: How do we create value for our customers and our business?
Q: Now, what are those new metrics?
Noshirwani: One of them is cash-to-cash cycle—how quickly do we collect cash from our customers? Another one is on-time performance to contract. Do we deliver our hardware the way we said we would, when we said we would, with mission assurance and quality levels that satisfy our customers? And third—we have a strategy within Raytheon IDS that is linked around asking: How do we improve our overall cycle time within our business?
Q: Why is that one crucial?
Noshirwani: If our customer is king, and if we need to jump through hoops to come up with a satisfactory solution for that customer, then we need to be very agile, very flexible. We will need to take on challenges we’ve have never taken on before. To make that possible, flexibility within the supply chain becomes very key.
Q: How would you characterize your supply chain effort?
Noshirwani: As I said, we’ve just reorganized our entire supply chain around the Raytheon IDS vision and our customer’s expectations. That supply chain has five major capabilities in it. One is what we call collaborative solutions. That is a group of very talented, top-notch supply chain experts who are engaged with our business development people early in the process. We have supply chain professionals who are engaged in that process, to help with the partnering suppliers, the supply selection process—who do we want to partner with to win this proposal? So that’s one capability.
Q: You mentioned subcontracting. Is there a piece for that?
Noshirwani: Yes, that’s the next capability. With our business shifting from a product-focused to capabilities-focused solutions, Subcontract Management is a key part of our supply chain activity. Our strategy here has been to add new skills, tools, and techniques to manage major subcontracts. Today, we have close to $2 billion in subcontracts that we are managing.
Q: And finally?
Noshirwani: Finally, our Integrated Supply Chain organization continues to support the products foundation for our business. Material Acquisition, Planning & Product Management, and Integrated Logistics are all key elements in supporting our manufacturing operations with the right material at the right place at the right time and cost. The focus in these areas is transformational change to increase the effectiveness and efficiency of operations. Examples include all elements of e-procurement, reduction in transactions, lean supply initiatives, and innovative materials handling and flow techniques.
Q: That’s organizational. What about people?
How do the people you’re looking for today differ from five or ten years ago? Noshirwani: Traditional supply chain professionals are still very critical to the success of our organization. But, if I had a wish list and all my wishes came true tomorrow, then I would want to hire professionals from this day forward who have multi-disciplined experiences and expertise in program management, project management, engineering, operations, and supply chain. Integrating these key capabilities is critical to the success of our integrated supply chain.
Q: How hard is it to find such people?
Noshirwani: It’s very hard to find such people. I might want to hire the next five program managers that come my way, but a lot of other places also want to hire them. The Defense Department is trying to hire those same skills. Of course, if we see people with the skills we want available on the street, we scrounge them up.
Q: If the people you want are at a premium, how do you meet your need?
Noshirwani: Within our new supply chain, we have created and communicated a career path for the future program managers of our business through the supply chain organization. We have set up rotational assignments that move people from engineering to business development to performance excellence—all through the supply chain organization so we create multi-dimensional people. We are sowing some of the seeds for tomorrow. At the same time, we are taking some of the veterans of these functional areas and convincing them to take a career path into integrated supply chain.
Q: Does this change much affect your IT requirements?
Noshirwani: The key IT task is connectivity. The most important question in my mind is how do I connect my programs, engineering, performance excellence, supply chain, and operations professionals to the best of my ability? How do I share information across the board as fast as I can? Then, how do I drive that connectivity into my supply base? That’s one thing that’s required if we are to engage suppliers early in the process.
Q: Is it fair to say that the new standards you have from DOD will ripple back through your organization?
Noshirwani: In my mind it has to—the DOD is our customer. We have strong relationships with our DOD customers, built on our performance and superior solutions we provide. New standards are another aspect of the dynamics of this business. We know we need to listen and be responsive to our customer needs, and provide solutions at ramp speed.
Q: A final question: How important to supply chain reengineering is support from top management?
Noshirwani: My boss, IDS president Dan Smith, will say at every meeting: If we can’t get our suppliers in line, and if we can’t change how we do business internally, then we’re not going to get to where we need to be to. Time is of the essence. It’s an absolute must happen. Source: Bernstein, M., “Raytheon Goes From Traditional Purchasing to an Integrated Supply Chain,” World Trade, V. 18, No. 11, 2005, pp. 36–38. Used with permission.
Unfortunately, in too many journal and magazine articles, books, and television programs these days, supply chain process integration is dealt with solely in terms of information system applications—in other words, simply connecting buyers and a suppliers via the latest software application results in successful supply chain process integration. Hopefully, readers of this text have begun to realize that the latest enterprise software applications increase access to information and can certainly add value to internal and external process integration, but they do not allow companies to replace or leapfrog the necessary people-oriented elements involved in supply chain management or process integration in general. So, while Chapter 9 of the text, which dealt with information flows, and several other chapters of the text have discussed or mentioned the use of information systems when managing processes, this chapter seeks to guide the reader towards a deeper understanding of successful supply chain process integration, and the necessary steps and tools to get there.
described the general idea behind business process integration, namely the sharing of ideas and information, coordination of process activities, and collaboration on process design and implementation between supply chain members, such that products and services are provided at the desired levels of quality, speed, and cost along the supply chain—from raw material suppliers to end-product consumers. Business research over the past 10 or 15 years has, for the most part, found a positive relationship between process integration and firm performance.
In general terms, successfully integrating key business processes among supply chain trading partners is the essence of supply chain management, and remains one of the biggest hurdles for all companies implementing supply chain management practices. However, as described in the two statements on the opening page of this chapter, there is much to be gained through process integration.
This text has been divided along the lines of the eight key processes involved in supply chain management—customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development and commercialization, and returns management. Successfully managing supply chains requires the firm to first become internally integrated in the relevant key business process areas, and then look to integrate these processes with important trading partners. This requires breaking down barriers to integration inside the firm, followed by establishing a high level of trust and working experience with the firm’s trading partners, and involves the use of appropriate technologies and performance measures to improve internal and external integration capabilities. Process integration is thus something that evolves over time within a firm’s workforce and its supply chains. Successful process integration is also something that can be difficult for firms to benchmark; rather, each firm must develop its own unique set of integration capabilities.
Different firms have different employees, cultures, processes, products, suppliers, customers, and technical capabilities; therefore their means to successful integration and supply chain management may vary from their competitors, or other firms like Texas-based computer manufacturer Dell and mega-retailer Wal-Mart who have created reputations for possessing superior supply chain management capabilities. In short, there is no “silver bullet” set of detailed practices that will guarantee process integration or supply chain management success. Managers must define and uncover the appropriate supply chain strategies for their firms, align their own business strategies to those of their supply chains, and then design operations practices that support the strategies. In a multi-year study first launched in 2005 by MIT’s Center for Transportation and Logistics, a number of successful companies are being studied with the intention of identifying general attributes critical to successful supply chain management. So far, they have found that companies need to adopt a “competitively principled” strategic supply chain management framework, or in other words, develop a set of tailored practices for their company that lead to success, based on their unique resources and the required supply chain strategies.
Because successful internal and external process integration also requires the passage of time, most firms and their supply chain trading partners are still heavily involved in their process integration efforts. This is exacerbated by the seemingly continuous entry of new competitors, new suppliers, new customers and customer requirements, and new information and communication technologies to the marketplace. Consequently, there are many new trends in process management and process integration impacting supply chain management. Some of these trends and developments will also be discussed in the final section of this chapter.
Achieving internal process integration
As a reminder, the term process integration means coordinating and sharing information and resources to jointly manage a process. Integration can occur both internally or externally with respect to the firm, and reflects how harmoniously employees or businesses work together to accomplish tasks. Developing communication, information sharing, and collaboration capabilities among employees in different units within an organization can be quite difficult, particularly when departments are busy protecting turf and fighting for their share of tight budgets and other firm resources. But this type of behavior, along with other internal barriers, must change in organizations serious about process integration. In some industries, process integration is the norm and has become necessary for survival—take the automobile industry, for example. As described in Chapter 10, Japanese auto manufacturer Toyota had become quite proficient at lean principles by the 1980s, in part by creating opportunities for its employees to integrate their efforts when designing and building new automobiles, and when solving manufacturing and quality problems. As a result, Toyota has been able to provide higher quality automobiles with shorter new model cycle times when compared to most of their competitors. Consequently, Ford, GM, DaimlerChrysler, and other auto manufacturers have been forced to follow suit to stay competitive. As of mid-2006, Toyota was trailing only GM as the world’s largest automaker and was easily the world’s biggest in terms of profitability (approximately $20 billion per year).
In fact by 2001, most North American automakers reported that they were practicing internal integration of key processes, and working hard at forming fully-integrated supply chains.
To achieve internal process integration, firms must first lay the groundwork necessary to begin process integration efforts.
This includes breaking down internal barriers to collaboration, connecting departmental and unit information systems, and developing performance measures that encourage teamwork and collaboration. When the firm’s employees are comfortable working together and sharing ideas and information, then supply chain management efforts and external process integration with trading partners can begin to take place.
The Preparation Phase
To adequately prepare the organization for external integration and supply chain management efforts in general, managers must first create an internal environment where teamwork and information sharing are encouraged and rewarded. To accomplish this, existing barriers to collaboration must be removed, information systems within the organization must be unified under one central database, and collaboration performance measures must be designed, implemented, and periodically reviewed.
Breaking Down Internal Barriers to Collaboration
Internal barriers to collaboration can be classified as technological (information system software/hardware) barriers, structural (management hierarchy, goals, procedures) barriers, and cultural (employee values, norms, behavior) barriers. Chapter 9 discussed a number of information system problems, including the purchasing of software applications at different times or purchasing best-of-breed software solutions from different vendors, both of which require integration middleware to tie the systems together, or the use of web services and web portals to create information sharing capabilities for the disparate applications. These could be considered technological barriers to collaboration. A few years ago Washington-based fashion retailer Nordstrom’s online site, nordstrom.com, found itself unable to accept gift cards purchased by customers at Nordstrom stores (it lacked a linkage process to the Nordstrom bank’s mainframe required to validate and execute the transaction). The company adapted quickly by using XML web services to integrate its systems and create a standard data format that all of the company’s systems could understand.
7 XML web services are becoming the basic platform for application integration. Applications are constructed using multiple XML web services from various sources that work together regardless of where they reside or how they were implemented.
Structural barriers to collaboration include the often slow, bureaucratic decision-making hierarchy in firms; poorly designed pay systems and incentives; and ineffective administrative procedures and policies. An incentive pay system that encourages groups of employees to work against one another is a structural problem, for example. Steve Banker, senior supply chain analyst at the ARC Advisory Group in Massachusetts advises companies to establish compensation methods that reward teamwork. “If you tell people to work as a team, to make it work, you need metrics that measure supply chain performance. Then you have to tie punishments and rewards to those metrics.”
8 Structural change involves a top-down management approach, because the expertise and resources needed for administrative improvements requires the involvement of middle and upper management. When problems such as a lack of communication and teamwork are acting as barriers to internal process integration, structural changes are needed, and this requires upper and middle management to take the initiative to propose and implement structural solutions. Structural change implementation tactics can include employee education, instituting cross-training and process teams, and manager/worker negotiations to achieve acceptance of the changes. During the early days of U.S. professional baseball, hiring a hearing-impaired player on one team initially caused a severe communication problem among the team’s players. The coach’s solution was to implement a structural change—he taught the entire team a version of sign language to improve communication. This creative solution ultimately led to the widespread use of hand-signaling among baseball team coaches and players.
More recently, when the U.S. Congress mandated the restructuring of the Internal Revenue Service (IRS), a number of structural changes were implemented to improve customer service and protect taxpayer rights.
For example the IRS Large and Mid-Size Business Division was created to administer taxes for businesses with over $10 million in assets. Lately, the IRS has adjusted managerial p of control to better balance the number of employees reporting to managers, eliminated management redundancy in some field offices, and adjusted the number of its core industry groups from seven to five.
Hospital Corporation of America (HCA), a leading healthcare services provider based in Tennessee, designed an organizational structure that groups everyone together to improve the organization’s effectiveness. The equipment people include nurses and lab technicians, and construction people include engineers and construction professionals, for instance. Thus, diverse groups of people at HCA are working together towards the same goals.
At Iowa Health - Des Moines, consisting of three hospitals, a new staff position was introduced called “master of the environment,” where employees are cross-trained in all of the hospitality services, allowing them to better serve patients and permitting them to float between departments and hospitals where needed. This has improved patient satisfaction as well as employee satisfaction.
The third set of barriers to internal process collaboration or integration can be much more difficult to overcome, namely the often deeply-rooted cultural barriers to collaboration within the firm, which can encourage employees to hoard information, hide operating problems, and shy away from working together as a team to develop optimal solutions for the organization. This is sometimes also referred to as the silo mentality, where workers act only in their own best interests, and managers act only in their departments’ best interests. An overall lack of trust can permeate this type of organization. Cultural changes in the organization are required to reduce the silo mentality and improve trust, or how employees think about their coworkers and the organization. In these types of cases, the organization as a whole must undergo change. Training large blocks of employees is perhaps the most frequently used tool for changing an organization’s mindset, and the impetus for cultural change must come from top management. Other activities used in managing cultural change include frequent communications with all employees; management behaviors that are consistent with desired values and beliefs; use of newsletters, intranets, kiosks, and videos; resolving cultural differences as quickly as possible; and the development of a cultural integration plan. Forest product company Weyerhaeuser, headquartered in Washington, uses an arsenal of educational tools to help its employees get comfortable working together under one company culture. It uses an interactive game to convey the payoffs of aligning work styles, and has also created a DVD entitled “All in One” to explain the homebuilding industry and the firm’s collaboration strategies.
When mergers occur, cultural clashes can result in many problems for the newly formed company, requiring managers to be proactive in building a new vision and integrating cultures and values. When pharmaceutical companies Astra of Sweden and Zeneca of the United Kingdom merged in 1999, a senior executive team approved a range of proposals to support the development of a new culture. A key proposal was to create a global cross-functional leadership development program, initially for the top 200 people in the company. This successful program led to a more innovative learning environment and greater levels of trust in different parts of the firm. Within three years, about 900 managers had actually participated in the program.
When California-based switch maker Cisco formally took control of optical transport producer Cerent Corp., also of California, in 1999, the company mobilized a transition team to oversee every detail of Cerent’s assimilation. As soon as Cisco took over, every new employee had a title, boss, bonus plan, health plan, and a direct link to Cisco’s internal website. Team members distributed basic information about the Cisco organization, its vacation policy, and its benefits to employees. The aim was to reduce uncertainty so employees could more quickly focus on their jobs.
The Service Perspective feature describes the integration challenges posed by the merger of U.S. retailers Kmart and Sears.
Service perspective - sears faces massive supply chain integration challenge
With nearly 40 supply chain systems between them, Sears and Kmart must decide which will best support the combined concern’s 3,500 stores. The enormous IT integration challenge will be even harder for the newly formed Sears Holding Corp. because, industry experts contend, neither firm’s supply chain has been a model of agility. “This is a huge endeavor they have to go through, and neither one is known for excellence in IT or supply chain [management],” says Noha Tohamy, principal supply chain analyst with market researcher Forrester Research Inc., in Cambridge, Massachusetts. To realize the $500 million in operational efficiencies that Sears Holding executives promise, analysts believe the retailer needs coherent IT and supply chain operations.
The recent Sears and Kmart marriage, however, creates a protracted supply chain management chore. Streamlining the myriad applications is “a time-consuming and arduous process” that will take Sears Holding “several years,” says Kim Picciola, a retail analyst with Morningstar Inc., an investment research company in Chicago. Amid headlines about cutting expenditures, brand names, and store locations, Sears Holding publicly eschews talk about such issues. Since shareholders finalized Kmart’s takeover of Sears on March 25, 2004, corporate officials have added little to their initial broad statements about improved efficiencies and cost savings.
“The organization is still taking shape,” says Chris Brathwaite, a Sears Holding spokesperson in Hoffman Estates, Illinois. “I don’t think there’s any definitive description of [supply chain] strategy at this point.” That hardly surprises Dean Lane, chief executive of Varitools Inc., a software vendor in Sunnyvale, California. “IT is almost always an afterthought [after a merger],” says Lane, a veteran of several companies’ merger and acquisition activities. When they announced the union, corporate officials pledged to generate $200 million in revenues through cross-selling opportunities and by converting several Kmart stores to the Sears name. Maximizing purchasing power from suppliers, enhancing supply chain and administrative efficiencies, and divesting real estate assets will help save another $300 million, the company stated in a press release announcing Kmart’s planned $12.3 billion takeover of Sears.
It’s unclear what supply chain strategy will help the company attain such lofty goals. “It’s too early to get into specifics,” says Brathwaite. Sears Holding inherits both organizations’ 37 supply chain solutions from a host of vendors, including Manugistics Inc., i2 Technologies Inc., and Manhattan Associates Inc., says Lee Holman, product development vice president at IHL Consulting Group in Franklin, Tennessee. According to Holman, Kmart operates three inventory management, three merchandise planning, and four logistics management systems. Sears runs two inventory management, three logistics management, and four merchandise planning solutions. Despite some commonality, the companies use the solutions differently. Customers, says Holman, can find merchandise on Sears’ shelves, but “you can’t say that about Kmart.” Observers want to know which existing solutions the new retailer will adopt or jettison, and if it will invest in new ones.
Tohamy believes Sears Holding halted an evaluation of new applications, such as in-store replenishment and merchandise optimization packages, while it assesses each company’s operations. While such an undertaking is necessary, Tohamy worries about the pace of review. “They have to clean house, move as fast as possible, and show how they will create additional flexibility and efficiencies in the supply chain,” she says. First, however, Sears Holding must determine its priorities, such as what and why it is, who its customers are, how often they visit and how much they buy, and what it will sell, says Paula Rosenblum, retail research director with Aberdeen Group Inc., a market research concern in Boston. Then the company must assess its business processes, including how stores interact with suppliers and distribution centers. “They need to figure all that out before investing in an inventory-management application that costs $1 million that won’t provide any benefit because it has no clean data to work from,” says Tohamy.
Sears Holding must also determine how to meld two different businesses, and if or to what degree to consolidate supply chain operations. “I don’t see Kmart and Sears being able to work off the same strategy,” says Steve Banker, supply chain management service director with ARC Advisory Group Inc., a research concern in Dedham, Massachusetts. “One’s a department store and one’s a discount mass merchandiser.” Banker recommends integrating resources for the biggest bang. Both sell apparel, for example, so Sears Holding could operate fewer warehouses and a set of common supply chain systems. “The company could standardize on [Kmart’s] Manhattan [application] or on Sears’ third-party logistics providers,” Banker suggests. Conversely, Sears Holding may need separate strategies to support different priorities. Sears, for example, may require higher service levels to stores, which would require warehouses to fill Sears’ orders faster. “That makes using a common warehouse-management system tougher,” Banker says. Tohamy disagrees. “Managing two supply chains is a bad idea,” she says. “They want to exploit economies of scale, especially in purchasing and sourcing.” Procurement, particularly from overseas suppliers, should be a corporate priority, affirms Rosenblum.
The company must use its size “to design, develop, and source products,” she says. “Neither one was all that great [at sourcing], and now they have to become great because all they are [since the merger] is bigger.” Having the right product in stock at the right place seems “elementary,” Rosenblum adds. Long lead times, ever-increasing customer choices, and competing with operational leaders such as Wal-Mart Stores Inc., however, complicate things. Indeed, Sears Holding must manage suppliers as Wal-Mart does, says John Melaniphy III, executive vice president with Chicago-based retail consultancy Melaniphy & Associates Inc. Some suppliers lose money on each item they sell to Wal-Mart but rely on the retailing behemoth for volume sales. Other suppliers move plants offshore to provide merchandise at prices that Wal-Mart demands. “Suppliers are beaten up by Wal-Mart,” Melaniphy says. “Kmart and Sears have to get as tough with their suppliers to compete.” Sears Holding’s supply chain venture will take time. Experts wonder, however, if it can ever compete with Wal-Mart and other retailing rivals. “Realistically, it’s a two-year process” to integrate existing systems or deploy new ones, says Lane of Varitools. Sorting out and implementing supply chain systems is just the beginning, other analysts maintain.
“They have 12 to 18 months to show significant progress,” asserts Alexi Sarnevitz, retail research director with Boston-based market researcher AMR Research Inc. That means “not just being competitive [with Wal-Mart and others]; they need to find their own unique positioning.” For sure, Sears Holding’s newly appointed CIO, Karen Austin, has a grueling assignment. At the same time, Holman notes that the ordeal of merging the two retailers’ IT systems presents Austin with a potential advantage as well. “This is a great opportunity to demonstrate [her] talents,” he says. Mostly, experts agree, it’s an enormously complex consolidation task. “It sounds like she inherited a mess,” says Banker. Source: Kay, E., “Sears Holding Corp. Faces Massive Supply Chain Integration Challenge,” Frontline Solutions, V. 6, No. 5, 2005, pp. 14–15. Used with permission.
Integrating Internal Information Systems
Today, information systems can play a critical role in information use and visibility, and during internal communications occurring between coworkers within an organization. Emailing someone in the office down the hall, for instance, has become so commonplace that office hallways have become deserted. If an organization’s information technologies are largely disconnected, and if data elements are not stored in a common database according to some standard format, then workers and departments will not be able to share information, and internal process integration can be significantly impacted. As discussed in detail in Chapter 9, the most common enabler of information system integration today is the firm’s ERP system. In that chapter, the importance and capabilities of ERP systems were described, along with various software applications or modules that are used today. ERP systems provide a view of the entire organization, enabling decision makers within each function to have information regarding customer orders, manufacturing plans, work-in-process and finished goods inventories, outbound goods in-transit, purchase orders, inbound goods in-transit, purchased item inventories, and financial and accounting information.
ERP systems thus link business processes and facilitate communication and information sharing between the firm’s departments. Since the key business processes overlay each of the functional areas, the firm eventually becomes process oriented rather than functionally oriented, once ERP systems are deployed. This visibility of information across the organization allows for much greater ease in internal process integration. When assessing the current integration status of key processes, firms should first develop an understanding of their internal supply chain. Internal supply chains can be complex, particularly if the firm has multiple divisions and organizational structures around the globe. Managers should consider forming cross-functional, multi-unit teams for setting process integration objectives and performance measures. These cross-functional teams should adequately represent the firm’s internal supply chain.
Once the firm has a good overall understanding of its internal supply chain structure, it can begin to assess the existing level of information access across its internal supply chain. Does the firm have a single, company-wide ERP system, linking all functional areas? Are all of the firm’s legacy systems linked to their ERP system? How easy is it to extract the information needed to make effective decisions? Are data warehouses being used to collect data from the various divisions of the firm? Firms that are internally integrating key business processes successfully are using global ERP systems and data warehouses to make better, informed decisions. Data warehouses store information collected from ERP and legacy systems in one location, such that users can extract information from various functional areas as needed, analyze it, and use it to make decisions.
An enterprise-wide ERP system allows the firm to use a common database from which to make product, customer, and supplier decisions. Information is captured once, reducing data input errors; information is available in real time, eliminating delays throughout the organization as information is shared; and finally, information is visible throughout the organization—all transactions taking place can be seen and accessed by everyone on the system. As the firm moves away from unconnected legacy systems and moves toward the fully integrated ERP system, as organization-wide cross-functional teams are created to link key processes throughout the firm, and as process performance is monitored and improved, the firm will become more focused on managing its key supply chain processes in an integrated fashion. In a recent survey, companies with mature business processes and best-in-class information systems were found to have average net profit margins of 14 percent, compared to 8 percent for other firms.
The Spanish clothing company Zara illustrates how information systems can greatly aid integration and lead to higher profits and a competitive advantage. Zara owns its entire supply chain, from design, to manufacturing, to distribution, to its retail outlets. Its retail stores provide direct feedback regarding demand for its fashions using its advanced information system infrastructure. This allows its designers to quickly identify trends, leading to more new designs and styles. Zara is thus able to bring these new designs and styles to market in just three to four weeks. Its retail competitors often take months to do the same thing, causing them to miss many market opportunities.
Read also Zara’s identification of customer needs can be categorized as which planning and strategic management step
16 Developing Performance Metrics that Support Internal Integration In order to assess the level of integration occurring within the organization and encourage continued integration activities, department managers and others should design a family of performance metrics around desired collaboration activities. Performance in these areas should be regularly monitored and improvement initiatives undertaken when necessary. The old cliché, “what gets measured gets done” certainly applies to the design and support of integration activities.
- Number of traditional and virtual work groups formed
- Number of cross-functional work-groups formed
- Number of workers participating in one or more work groups
- Percentage of work group objectives met
- Number of projects completed by work groups
- Number of jointly developed products or product improvements Number of jointly developed processes or process improvements Information Systems
- Number of ERP application implementations and upgrades
- Percent of employees using ERP applications
- Percent of departments using ERP applications
- Hours of team-based training sessions provided
- Hours of cross-training sessions provided
- Hours of ERP application training provided
- Number of top management discussions of collaboration in company newsletter Employee trust and satisfaction survey ratings
- Reward Systems
- Reward amounts paid to work groups
- Percent of work groups earning rewards
- Percent of reward funds paid out to work groups
While Table 16.1 is by no means exhaustive, it should serve as an impetus for the design of specific collaboration performance measures for department and top-level managers. At a minimum, metrics should encourage the formation of work groups (defined here to mean two or more individuals working together on a common task who generally have computers connected to a network that allow them to send email to one another, share data files, and schedule meetings 17), the integration of information system applications utilizing a central database, employee training, and reward systems. To keep the momentum going, efforts should also be undertaken to monitor the impact of internal integration on the firm’s overall performance. Recent research in this area has shown that there is a direct and positive relationship between internal integration and firm performance.
When Illinois-based food manufacturer Quaker Foods and New York-based food and beverage company PepsiCo merged in 2001, a major hurdle was to create internal collaborations that supported their combined external supply chains. Karen Alber, vice president of integration at Quaker Foods, was selected to spearhead the effort. She did her job so well that she was later named one of “The 25 Most Influential Executives” in the industry. For example, Quaker was able to cut its inventory levels within its Canadian operations by 60 percent and paperwork by 77 percent.
Use of work groups or teams to integrate internal processes and improve firm performance has been described by many as a top priority. Previous studies regarding total quality management, quality circles, agile and lean manufacturing, and JIT have all found team work to be one of the common elements among successful companies employing these techniques.
Further, group performance has been shown to be impacted by the group members’ abilities, their work environment, and their motivation. Maximizing the performance of teams should thus make use of worker skills, their tools, their shared goals and values, and their level of workplace comfort. This supports the use of the other performance measures shown in Table 16.1. Finally, organizations should periodically assess not only the performances of their integration efforts, but the metrics being used as well. As the firm’s internal and external environment changes, so too its performance measures must change. New employees, managers, and technologies will bring new skills to the organization, and new competitors, customers, and suppliers will provide new opportunities and requirements for the firm desiring to remain competitive. This will create additional opportunities for new internal integration efforts. The Active Internal Integration Phase
Firms that have been proactively involved in creating internal integration opportunities and practices will, at some point, reach a stage of development wherein internal process integration is a normal operating condition. This describes firms in the active internal integration phase, the second phase shown in Figure 16.1. Integrated information systems will provide information visibility throughout the global organization to users at all functional levels; work groups will be common fixtures in the organization, including personnel from different departments and in geographically dispersed units as needs dictate. These groups will become successful at generating and meeting project objectives, and in identifying new opportunities for collaboration efforts. Automaker Ford Motor Company is on the cutting edge when it comes to use of information and communication technologies to connect workers within their many production facilities around the globe. Most employees are furnished with company laptops, a secure ID, and an Internet connection that allows virtual teams to communicate. It also allows access to Ford email, mainframe systems, and instant messaging worldwide, from the office or from home computers. And for some, it allows phone calls to be made using Cisco’s Internet soft-phones. Additionally, Ford has constructed its own digital fiber network, and planned to be able to deliver videoconferences within North America by the end of 2006, allowing it to hold virtual meetings.21 Firms that are successful at internal integration have found that the key to building successful teams is in finding people with the right personal chemistry who can quickly develop trusting relationships. “Some of the worst teams I’ve ever seen have been those where everybody was a potential CEO,” says David Nadler, CEO of the Mercer Delta global consulting firm, who has worked with top companies and their executives for over 30 years. Mutual trust is a fundamental element of a winning team, which explains why so many “dream teams” in sports and other areas have failed to accomplish much. For example, the U.S. baseball team assembled to compete in the World Baseball Classic in 2006 included such baseball greats as Roger Clemens, Derek Jeter, Alex Rodriguez, and Johnny Damon, yet they performed relatively poorly, losing games to Mexico, South Korea, and Canada. The 2004 U.S. Olympic basketball team consisted entirely of NBA superstars, yet it finished third and lost to Lithuania. In contrast, the 1980 U.S. Olympic hockey team was built explicitly by considering the personal chemistries of only college players (not necessarily the best players), and yet these amateurs beat the heavily favored Soviet team to win the gold medal. In still another example, Jack Welch, the legendary ex-CEO of the Connecticut-based global conglomerate GE, insisted that members of their Corporate Executive Council meet away from the corporate offices, have no prepared presentations, and wear informal clothing—he believed this allowed more realistic conversations to occur, and trust to be formed within the council membership.22 Organizations proactively involved in internal integration create opportunities for more and better collaborations between staff members. This may include designing facilities conducive to better collaboration; allowing staff to cross-train one another; creating opportunities to see other worker perspectives, make new acquaintances, and see the big picture; holding ad-hoc brainstorming sessions when challenging situations develop to encourage problem-solving skills and teamwork to develop among personnel; and recognizing and celebrating accomplishments when teams hit a milestone, by writing a story in the company newsletter, hosting a luncheon for the team and other employees, or simply putting up a commemorative plaque. The Aetna Information System facility in Blue Bell, Pennsylvania, uses space more efficiently to enhance collaboration. “What our clients are asking us to do is find a way to make a hallway or lobby or gathering space do more than one thing,” says Carol Rickard, of Washington D.C.–based Little Diversified, who oversaw the design of Aetna’s offices. “By increasing the width of a circulation hallway or space pocket, and placing soft seating and a teaming table there, we’re able to maximize the use of that space by creating an informal collaboration hub. We call it chair ballet. People literally wheel themselves over to the table and are able to meet.”23 Forward-thinking leaders in the organization are at the heart of the development of a collaborative culture. They understand how to put teams together to take advantage of each member’s particular style and strengths; they provide for and ensure that team members are sufficiently trained and equipped; they foster a work environment conducive to trust and productivity; and they provide adequate financial and time support. In a recent interview, William Donius, CEO of Pulaski Bank of Missouri, a top-performing bank in terms of return on assets, listed three things as most responsible for success at the bank—the recruitment of the best and brightest people at all levels, the offering of products that meet customer needs, and the creation of an environment where teamwork and collaboration are valued.24 The Process Management in Action feature provides some interesting descriptions of how some companies are encouraging teamwork skills at meetings in Las Vegas, Nevada.
PROCESS MANAGEMENT IN ACTION
Teambuilding the Las Vegas Way Experienced meeting attendees can become immune to the idea of “teambuilding.” They’ve done it already, and it’s a real challenge to get them excited. So if beach Olympics, ropes challenge courses, and build-your-own-survival-rafts sound
like a laundry list of your latest team-building efforts, get ready to create some buzz in Las Vegas, Nevada. With one look at the astounding variety of diversions along the Las Vegas Strip, most meeting participants are instantly chomping at the bit to delve into the excitement. One of the best ways Sharon Geraci, president of Meeting & Incentive Management, has found to give them a taste of the diverse menu is the “Test Your Limits” teambuilding event. She presents the group with a collection of daring activities, each with a specific point value attached to it. The team decides together which elements to tackle as a personal driver takes them around town by limousine. Challenges could include anything from going to the top of the Empire State Building at New York New York to boarding (and riding, of course) one of the heart-pounding thrill rides at the top of the Stratosphere Hotel’s tower. “It’s a really fun ice breaker,” explains Geraci. “It’s all about seeing Las Vegas and building camaraderie.” Perhaps the biggest surprise about spending quality time soaring is what you don’t get: noise. Peace and quiet is a big part of what the Soaring Center is all about, but the rare thrill of mastering the desert’s air currents in a tiny, engineless plane is the real draw. “We can do loops and wing-overs, and if they want to take the controls, we’ll put them in the front of the plane,” says instructor and center owner Mike Henderson, who is sure to cater the flight to the individual rider. For teambuilding, many groups choose the company’s ride on the popular The Amazing Race reality television show. It includes a five-hour soaring/ATV adventure for up to 30, where the participants divide their time riding above and below each other—and for the bravest of the group, there’s a skydiving option. “They just think it’s the coolest thing in the world,” says Henderson. Some people may have heard of a Segway®, but few have actually taken a spin. That is precisely the appeal of Segway polo as a teambuilding activity. “Nobody else is doing it, and it’s a very fun, interactive event,” says Geoff Rhodes, director of creative event services for Ritz-Carlton, Lake Las Vegas, who creates teambuilding programs that his crew stages for groups throughout the Las Vegas area. Segway polo allows participants to play competitive polo without ever having to mount a horse, undergo formal coaching, or train for competition. Geared to all fitness levels (and all sizes between 100 and 250 pounds), the game uses Segway® Human Transporters and soft foam mallets and balls to play the traditional game. Rhodes’ staff provides teams of 4 to 12 players with the battery-powered Segway Human Transporters, polo equipment, helmets, lessons, and practice chukkers. The newest track in Vegas opened on April 10, 2006, and is offering thrill rides for visitors at the north end of the Strip. General Motors’ “The Drive” offers two professionally-designed driving courses—including a high-performance loop and an off-road adventure over a dirt terrain. Groups can check out the performance course, a half-mile paved route with jogs and turns that highlight both the speed and handling control of pure sports car driving. Vehicles available to unleash on the performance course include the Corvette, the Pontiac GTO, the 400-horsepower Cadillac CTS-V, and more. Participants who choose the off-road course will be handed the keys to a Hummer or their choice of several Chevy, GMC, or Cadillac trucks and select SUVs. The food craze has run rampant in Las Vegas, and groups have been clamoring to get into the kitchen. Enter Bellagio Resort and its Tuscany Kitchen, designed specifically for culinary-based teambuilding events. The 1,170-square-foot venue is the first of its kind in the city, an intimate environment for 18 people that can be expanded for up to 60 people by using two drop-down video screens that keep the back rows close to the action. Bellagio’s award-winning chefs lead the fun during a program that can focus on anything the group wants, from how to prepare a specific style of cuisine, such as Japanese, Italian, or Chinese to setting up a friendly competition, a la the Food Network’s popular Iron Chef. Source: West, E., “Take One for the Team,” Successful Meetings, June 2006, pp. 22–23. Copyright © 2006 VNU Business Media, Inc. Reprinted with permission.
The third and final phase of the process integration model shown in Figure 16.1 is the active external integration phase. This phase is discussed in detail in the following section.
EXTENDING INTEGRATION TO SUPPLY CHAIN TRADING PARTNERS
In the most advanced stage of the integration model, the firm’s abilities to integrate internally have matured, creating successful process collaborations between personnel throughout the firm. As the firm witnesses these successes and realizes the value inherent in process integration, the
desire to collaborate and integrate processes with supply chain trading partners also grows. Hopefully, during this maturation phase, the firm is discovering high-performing suppliers, and is also becoming a valued supplier to its customers. It is at this point that the firm is prepared to begin actively managing its supply chain through use of external process integration. Revisiting the ultimate goal of supply chain management—to provide end users with the products and services they desire, at the right levels of price, quality, and service—it follows that firms actively managing their supply chains must become adept at internal process integration and extend the boundaries of the firm through the integration of key processes among supply chain trading partners. Once the firm has set in motion the activities to achieve internal process integration, it can then turn its attention towards external process integration. External process integration can be an extremely difficult task, even more so than internal integration, since it requires, first and foremost, willing and competent trading partners, mutual trust, and potentially a change in one or more organizational cultures. However, the benefits of supply chain collaboration and information sharing can be significant: reduced supply chain costs, greater flexibility to respond to market changes, less supply chain safety stock, higher quality levels, reduced time to market, and better utilization of resources. Through the practice of collaboration, information sharing, and process integration, supply chain management can become a core competitive strength for the firm and its trading partners in the supply chain. The Global Perspective feature profiles Metro Cash & Carry Vietnam, a good example of a company capitalizing on its external integration opportunities with only limited use of technology.
Metro Cash & Carry Vietnam: Keeping Collaboration Simple Successful collaborative relationships can be created using relatively simple but effective practices. And they can be found in some unusual places. Consider the case of Metro Cash & Carry Vietnam, which has developed long-term collaborative relationships both with its local vegetable suppliers and with a major hotel customer in Ho Chi Minh City. These collaborative relationships involve basic information-sharing and coordination practices, which have led to more efficient produce
distribution and more satisfied supply chain partners. Metro Cash & Carry Vietnam is a German-owned business-to-business grocery wholesaler specializing in services to hotels, restaurants, and catering institutions. The company’s main strategy is to be cheaper than its competitors in the traditional wholesale markets while also focusing on food safety and customer satisfaction. According to Metro managers, the company’s success is closely linked to its strategy of building long-term supply relationships, especially with local producers of fresh vegetables. These relationships are based on trust. To gain that trust, potential suppliers, for their part, must show that they can deliver high-quality produce regularly and be responsive to fast-changing customer demands. Metro looks for financially stable suppliers with proven experience in vegetable production and a reputation for produce quality. Trust is built mainly on results. Metro will start sourcing from potential suppliers little by little to check the regularity of quality. This reliability is important. Fresh produce buyers at Metro receive many offers from local suppliers, but a supplier that consistently provides good quality and low price in a stable manner throughout the year is difficult to find. At the same time, Metro also needs to acquire the trust of its suppliers. One way it does this is through establishing secured payment in the supply contract. Although there is a fixed delay in payment, which can go up to 30 days, the company rewards a successful supply relationship by lowering the delay after a period of satisfactory deliveries. These trust-based relationships rely on the exchange of transparent market information between suppliers and Metro buyers. Metro’s individual fresh food buyers are responsible for maintaining good interpersonal relationships with all regular suppliers. This means not only communicating frequently with suppliers by telephone and fax but also physically visiting suppliers several times each month. Metro has even purchased fax machines for those suppliers that did not have one. Although the communications may seem low tech, they have proven to be very effective. According to the stakeholders themselves, the focus on communications and product quality has had a positive impact on supply chain performance. From the viewpoint of the suppliers, Metro’s focus on higher-quality vegetables brings them greater stability in orders and prices. These suppliers also gain greater risk avoidance through the company’s guarantee of payment.
Finally, because reliable quality produce is still relatively difficult to find in Vietnam, established Metro suppliers that focus on quality have a certain power in negotiations with the wholesaler. Trusting relationships are time-consuming to build and regular suppliers are difficult to find in Vietnam. So once a supply relationship is established, it is important for Metro to keep it because of the investment made. Therefore, best-performing Metro suppliers can be assured of a long-term commitment by the distributor. Collaboration doesn’t end with Metro’s suppliers; it extends to customers as well. The company’s relationship with the New World Hotel, a five-star property in Ho Chi Minh City, offers an excellent example. The two companies agreed in 2002 to experiment with a strategic alliance whereby Metro supplies most of the hotel’s needs. As a result, more than 97 percent of the hotel’s purchases come from Metro. The partnership is based on strong collaboration and information sharing in order planning and replenishment. Both companies have assigned a dedicated staff member to manage this strategic alliance: a key-account manager at Metro and a procurement manager at the hotel. The hotel purchasing manager can call the Metro key-account manager at any time during working hours for an emergency delivery, and Metro will deliver immediately, even during weekends. Furthermore, Metro always sends a member of its sales staff to the New World Hotel to supervise each delivery and assess its quality with the hotel’s staff. The New World Hotel orders three times a week on Monday, Wednesday, and Friday for delivery on the following ordering day. This order cycle enables Metro to take its time in preparing the goods and saves time for the hotel’s procurement staff. Transportation costs are minimized because it is cheaper to have one big truck transporting a large order than having several trucks delivering from different suppliers. Metro also extends credit to its privileged partner as the hotel’s payments are made twice a month by bank transfer. The relationship depends on frequent communication between the Metro key-account sales manager and the hotel procurement manager. The hotel procurement manager will call the Metro key-account manager four times every week to assess the quality of each delivery. Additionally, when market conditions lead to shortages, Metro staff provides the hotel’s staff with advanced warning of changing supply factors. This enables the hotel to implement alternative supply arrangements. As with the supplier
communication, the interaction between Metro and its customer is personalized, simple, and highly effective. Overall, the personnel interviewed in the vegetable supply chains of Metro Cash & Carry Vietnam successfully engage in collaboration, joint planning, and information sharing to optimize their forecasting and product replenishment. Moreover, they are doing so with a disarming degree of simplicity: Daily phone calls between dedicated staff in the partner firms and joint planning of supply and demand are enough to lead to the satisfactory delivery of such perishable articles as fresh vegetables. Sophisticated technology certainly has a place in the modern supply chain. But the Metro Cash & Carry story proves the enduring effectiveness of simple, straightforward communication. Source: Cadilhon, J. and A. Fearne, “Lessons in Collaboration: A Case Study from Vietnam,” Supply Chain Management Review, V. 9, No. 4, 2005, pp. 11–12. Reprinted with permission from Supply Chain Management Review, copyright © 2005.
Returning once again to Figure 16.1, external integration requires identifying supply chain business strategies, translating these into key process requirements and integration activities, developing trading partner relationships, identifying information system requirements, and then designing external integration performance measures for continued improvement purposes. Discussions of these topics follow. Identifying and Aligning Supply Chain Business Strategies
Management must identify the basic supply chain strategies associated with each of their products or services, and then align internal process strategies to support the supply chain strategies. If, for example, an end product is competing based on quality, then supply chain members should also be designing strategies consistent with delivering high-quality parts, products, and services to their immediate customers, until eventual delivery of the final product to the end customer. The supply chain strategies should translate into internal functional policies that include the types of parts and services purchased, the suppliers used, the shop layout and manufacturing processes employed, the designs of the products manufactured, the modes of transportation used, the warranty and return services offered,
the employee training methods used, the types of information technologies used, and potentially the amount of outsourcing employed. In each of these areas, policies should be geared towards supporting the above-mentioned quality-oriented strategy of the supply chain. Alternately, if end products are competing primarily based on low cost, then strategies and functional policies for intermediate products within each of the supply chain participants must be consistently aimed at achieving low cost as parts, components, and services are purchased, produced, and moved along the supply chain. This may take the form of purchasing material in bulk to receive pricing discounts, mass producing products to reduce unit costs, operating in a low labor cost environment, and using the least costly modes of transportation. As competition, technology, and customer requirements change, then management must also adjust supply chain and internal strategies to remain competitive. Identifying Key Process Requirements, Integration Activities, and Partnership.
To align internal strategies and policies with external supply chain strategies, managers need to identify the important processes linking their firm and their supply chain partners and establish process integration objectives to ensure that resources and efforts are effectively deployed within each trading partner, to support the overall end-product strategy. These key processes, along with the methods used to integrate and jointly manage processes among supply chain partners, will vary based on the internal structure of each firm, the prevailing economic conditions in the marketplace, the degree that functional silos exist in any of the trading partners, the information systems employed, and the nature of existing relationships within the supply chain. In some cases, it may be best to start small and integrate only one or two key processes with one trading partner, while with other partners, more processes may be integrated. Table 16.2 lists the eight key supply chain processes, as first mentioned in Chapter 1, along with some potential integration elements associated with each process.
These processes are discussed in detail in Lambert, D. M., M. C. Cooper, and J. D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” International Journal of Logistics Management, V. 9, No. 2, 1998, pp. 1-19, and in Croxton, K. L., S. J. Garcia-Dastugue, and D. M. Lambert, “The Supply Chain Management Processes,” International Journal of Logistics Management, V. 12, No. 2, 2001, pp. 13–36.
As the textbook has endeavored to illustrate throughout the textbook, there are eight boundary-pning processes that have generally been identified as the key supply chain processes. Coordinating or integrating activities within these processes between trading partners is what ultimately enables the supply chain and its members to successfully compete. Activities and
integration elements within each of the key business processes must be based on the competitive strategies identified for each product’s supply chain. A brief discussion of the activity requirements and integration elements associated with each of these key processes follows.
Customer Relationship Management Process
The customer relationship management process provides the firm with the structure for developing and managing customer relationships. As discussed in Chapter 3, key customers are identified, their needs are determined, and then products and services are developed to meet their needs. Over time, relationships with these key customers are solidified through the sharing of product and service information, supply chain strategies, product development strategies, the formation of cross-company teams to design and improve products and services, the development of shared goals, and finally, improved performance and profitability for the trading partners. Collaboration elements also include the formation of product and service agreements to meet customer needs, decisions regarding product packaging, transportation, and storage, and the development of guidelines for sharing process improvement costs and benefits. Customer Service Management Process
The customer service management process is what provides information to customers while also providing ongoing management of any product and service agreements between the firm and its customers. Information can be provided through a number of communication channels, including websites, group interactions, information system linkages, and printed media. Objectives and policies are developed to ensure the timely distribution of products and services to customers, to adequately respond to product and delivery failures and complaints, and to utilize the most effective means of communication to coordinate successful product, service, and information deliveries. The process also includes methods for monitoring and reporting customer service performance, which allow firms to understand the extent their management efforts are achieving the process objectives. External integration elements include the gathering of customer satisfaction feedback, the methods used for information dissemination, and the adequate and long-term solutions to customer problems and complaints.
Demand Management Process
The demand management process is what balances customer demand and the firm’s output capabilities. Demand management activities include forecasting demand, and then utilizing techniques to vary capacity and demand within the purchasing, production, marketing, and distribution functions. Various forecasts can be used, based on the time frame, the knowledge of the forecaster, the ability to obtain customers’ point-of-sales information, and the use of forecasting models contained in many ERP systems. A number of effective techniques exist to smooth demand variabilities and increase or decrease capacity when disparities exist between demand and supply. Contingency plans must also be ready for use when demand management techniques fail or when forecasts are inaccurate. Inter-company teams can thus decide how best to share new market and future purchase requirements, point of sale information, and planned production quantities. The creation of formal collaborative planning, forecasting and replenishment (CPFR) agreements as discussed in Chapter 5 is one way to share this type of information, and tends to result in lower safety stocks throughout the supply chain. Integration activities can then also include the use of forecasting techniques, purchasing agreements, and order quantity decisions. Order Fulfillment Process
The order fulfillment process is the set of activities that allows the firm to fill customer orders while providing the required levels of customer service at the lowest possible delivered cost. Thus, the order fulfillment process must internally integrate the firm’s marketing, production, and distribution plans as well as allow customers to provide input in order to be effective. More specifically, the firm’s distribution system must be designed to provide adequate customer service levels, and the production system must be designed to produce at the required output levels, while marketing plans and promotions must consider the firm’s output and distribution capabilities. Related order fulfillment issues are the location of suppliers; the modes of inbound and outbound transportation used; the location of production facilities and distribution centers; and the systems used for entering, processing, communicating, picking, delivering, and
documenting customer orders. The order fulfillment process must integrate closely with customer relationship management, customer service management, supplier relationship management, returns management, and directly with key suppliers and customers to ensure that customer requirements are being met, customer service levels are being maintained, suppliers are helping to minimize order cycle times, and customers are getting undamaged, high-quality products on time.
Manufacturing Flow Management Process
The manufacturing flow management process is the set of activities responsible for making the actual product, establishing the manufacturing flexibility required to adequately serve the markets, and designing the production system to meet cycle time requirements. To be effective, manufacturing flow management activities must be interfaced with the demand management and customer relationship management processes, using customer requirements as inputs to the process. As customers and their requirements change, so too must the supply chain and the manufacturing flow processes change, to maintain overall competitiveness. Close collaboration between the firm and its customers can quickly translate changing customer requirements into new flow management solutions. Manufacturing flow characteristics also impact supplier requirements. For instance, as manufacturing batch sizes and lead time requirements are reduced, supplier deliveries must become smaller and more frequent, causing supplier interactions and supplier relationships to potentially change. The importance of an adequate material planning system connecting customers, the firm, and suppliers should become evident here, as customer requirements must be translated into production capabilities and then supplier requirements. As with other processes, a good set of performance metrics should also be utilized to track the capability of the manufacturing flow process to satisfy demand.
Supplier Relationship Management Process
The supplier relationship management process defines how the firm manages its relationships with suppliers. As discussed in Chapter 12, firms in actively managed supply chains seek out small numbers of the best performing suppliers and establish ongoing, mutually beneficial, close relationships with these suppliers in order to meet cost, quality, and/or customer service
objectives for key materials, components, and products. Integration activities in this process include screening and selecting suppliers, negotiating product and service agreements, developing or improving supplier capabilities, and then monitoring supplier performance and improvement initiatives. Key suppliers most likely have a cross-functional team to manage their progress towards meeting the firm’s current and long-term requirements and establishing a record of performance improvement over time. Supplier relationship management personnel routinely communicate with production personnel to obtain feedback on supplier and purchased item performance, and with marketing personnel to obtain customer feedback. This information can then be passed along to suppliers during periodic performance review meetings. Product Development and Commercialization Process
The product development and commercialization process is responsible for developing new products to meet changing customer requirements and then getting these products to market quickly and efficiently. In actively managed supply chains, key customers and suppliers are involved in the new product development process to ensure that products conform to customers’ needs and that purchased items meet manufacturing requirements. External integration activities in the product development and commercialization process include the development of customer feedback mechanisms; the formation of new product development teams that include customer and supplier representatives; assessing and selecting new product ideas based on supplier capabilities and advanced supplier component knowledge, resource requirements, customer needs, and fit with existing infrastructure; designing and testing new product prototypes; determining marketing channels and rolling out the products; and finally, assessing the success of each new product. Successful new product development hinges on the involvement of external customers and suppliers, and on the internal integration of manufacturing, marketing, purchasing, and finance personnel.
Returns Management Process
The returns management process, given little importance in some organizations, can be extremely beneficial for supply chain management in
terms of maintaining acceptable levels of customer service and identifying product improvement opportunities. Returns management activities include environmental compliance with substance disposal and recycling, composing operating and repair instructions, troubleshooting and warranty repairs, developing disposal guidelines, designing an effective reverse logistics process, and collecting returns data. Returns management personnel frequently interact with customers and personnel from customer relationship management, product development and commercialization, and supplier relationship management during the returns process. One of the goals of returns management is to reduce returns. This is accomplished by communicating return and repair information to product development personnel, suppliers, and other potential contributors to any returns problems to guide the improvement of future product designs. Transportation and distribution services may also be included in the returns feedback communication loop. Product recalls, typically initiated because of safety or quality problems, involves informing customers and determining the most effective return, repair, and/or replacement procedures. Other collaboration activities for the returns management process include developing policies for disposing of hazardous materials and recovering waste packaging across the supply chain. For each of the eight key supply chain processes identified, objectives and policies should be co-developed between supply chain members to achieve the overall supply chain strategies. Additionally, consistent objectives within each functional area of the firm for each process help to integrate the processes internally, as well as focus efforts and firm resources on supporting the supply chain strategy. Internal process integration, trading partner relationships, and external process integration are thus all interrelated. As internal integration efforts get underway, the need for external integration becomes apparent. This, over time, creates the need for close working relationships among supply chain members. For instance, if the supply chain strategy is to compete using low-cost objectives, the customer relationship management process might be to find cheaper delivery alternatives that still meet customer requirements, develop vendor-managed inventory capabilities with suppliers, and to automate the customer order process while communicating the new order process to customers. Production objectives might be to develop bulk packaging solutions consistent with customer order quantities and distribution systems used, to increase mass production capabilities, and to identify the lowest total cost manufacturing sites for specific products. Purchasing objectives might be to identify the least expensive materials and components that also meet specifications, and develop other cost-saving ideas for purchased items with input from suppliers. Firms should similarly progress through each of the key processes using teams of employees, customers, and suppliers to develop process objectives and policies. Identifying Supply Chain Information System Requirements and Capabilities As soon as external integration efforts are underway, it will likely become apparent that information and communications systems need to change to accommodate the need to share information and discuss problems as they arise, both with internal staff members and external trading partner employees. While the topic of information flow management was addressed in detail in Chapter 9, external integration efforts require trading partners to easily and quickly translate information from their own departments’ systems to those of their partners.
- Does the firm have a single, company-wide ERP system that can easily be linked to its key suppliers’ and customers’ information systems?
- Do any of the trading partners have legacy systems that require middleware to communicate with other firms’ enterprise or legacy systems? How can point-of-sales information be shared?
- What are the information system requirements along the supply chain, and who will pay for the system upgrades?
These are external integration elements that all trading partners will have to consider. Firms that are successfully integrating key business processes externally are using global ERP systems, data warehouses, Internet portals and other web-based applications to make better, informed, collaborative decisions with their supply chain partners. Globally linked, supply chain–accessible ERP systems allow trading partners to share information from company-wide databases to make joint product, customer, and supplier decisions. Information is captured once and made visible to all users, reducing data input errors. Information is available in real time, eliminating delays throughout the organizations as information is shared. As firms move away from legacy systems and toward fully integrated ERP systems, as cross-functional trading partner teams are created to link key processes to supply chain strategies, and as firms become more adept at internal process integration, firms will also become more focused on achieving supply chain objectives, resulting in benefits for all trading partners. Information visibility, or the way information is communicated and made available to various constituents, plays an extremely important role in external process integration. Today, connecting buyers and suppliers via virtual linkages is the way supply chains are becoming integrated.25 Supply chain communication technologies provide support for a number of issues, including handling the flows of goods between companies, negotiating and executing contracts, managing supply and demand between partners, making and executing orders, and handling financial settlements, all with a high level of security. Shirley Cooper, supply chain procurement director at UK-based Computacenter, Europe’s leading provider of IT infrastructure services, believes that future collaboration success lies in implementing new technology. “If you have joined-up (integrated) IT you can get a steal on the marketplace. We are looking at how we can get our suppliers in a virtual warehousing space so I don’t have to hold stock. I can look into their systems to say, ‘you’ve got it, and I’ll have it at that price’,” she said.26 Today’s web-based collaborative infrastructures can accommodate an array of communication applications using existing systems and ERP applications. For instance, California-based provider of web conferencing services WebEx Communication’s WebOffice application, Microsoft’s Sharepoint® application, and Florida-based software firm Citrix Systems’ GoToMeeting™ application are just a few of the literally hundreds of software applications enabling businesses to communicate and share data both internally and externally. For example, BDT, a German manufacturer of paper handling components, found that its many legacy systems were impeding its ability to collaborate effectively with its customers and suppliers. R&D staff, for instance, needed to be able to collaborate frequently with customers in the design process, and suppliers needed visibility into parts inventories on a real-time basis to avoid work stoppages. BDT decided to deploy an online collaboration and document management solution from Microsoft’s SharePoint, which provided each customer and supplier with secure collaboration and information access with BDT. The system ultimately reduced administrative labor and supplier management time by over 2,000 hours per year, enabling system payback in less than five months.
Collaboration software application suppliers are busy lumping together everything from Voice over Internet protocol (VoIP), email, instant messaging, web conferencing, document sharing, and web portals to help customers integrate processes. Information systems giant IBM’s collaboration software allows customers to integrate their ERP data across business processes, combining Lotus Notes® tasks, scorecards, dashboards, e-forms, document and content management, instant messaging, team rooms, and presence awareness.28 In the education arena, Arizona State University hosts a web portal that allows all Arizona kindergarten through 12th grade students to interact with the state’s math teachers. The e-Commerce Perspective feature profiles this collaborative effort.
E-COMMERCE PERSPECTIVE—An IDEAL Education
When three-year-old Elias Hinojosa goes to kindergarten in Tucson, Arizona, he’ll have more than crayons, paper, and paste at his disposal. He’ll also have access to a host of interactive educational tools, thanks to a state-sponsored web portal built and managed by Arizona State University. From kindergarten through 12th grade, Hinojosa will head to the Integrated Data to Enhance Arizona’s Learning (IDEAL) portal for math and reading practice tests, supplemental online courses, interactive learning exercises, and state-required advanced-placement tests. He’ll also turn to IDEAL for learning materials, coursework, and video resources his teachers have placed there to supplement their classroom presentations. Ultimately, Hinojosa and as many as 1 million other students will have access to the IDEAL portal, enabled with the open source uPortal software. For now, 300,000 students are authorized to log on to IDEAL to check out sample tests; coursework is not yet available but will be soon. In addition to the students, the state’s 60,000 K-12 teachers have access to the portal, not only to provide supplemental coursework but also for links to student demographics, improvement guidelines, grades, and benchmarks. Teachers manage coursework on IDEAL through Sakai, an open source course management and collaboration application. The focus of this innovative educational initiative is to use technology to enable lifelong learning, says Sam DiGangi, assistant vice provost for IT at Arizona State University (ASU), in Tempe. “IDEAL is not just access to a Web site, but accounts that will stay with students through their schooling and, conceivably their entire career,” he says. ASU is building the IDEAL network per a contract with the Arizona Department of Education, which has invested $5 million in the network. ASU contributes technical and staffing resources. The university is phasing in access on a rolling basis, with all students expected to have authority to use the portal by August 2006. With more than 1 million potential users, IDEAL necessitates a heavy-duty storage infrastructure. “The biggest challenge is managing the authentication and authorization of students and teachers,” says Jack Hsu, director of IS and network management at ASU. “We have 350,000 users authenticated and authorized, but have over 1 million overall users to authorize.” To authenticate portal visitors, ASU uses the open source Central Authentication Service, developed at Yale University. ASU keeps costs in check for the IDEAL network by using technologies such as iSCSI and open source software. “Everything in this project is open source, so that in itself is a huge cost savings, not just in initial but in ongoing costs,” Hsu says, noting that ASU has been running Linux for three to four years. “Then we used iSCSI, which really makes our costs go down. All the Fibre Channel expenses add up. We’ve saved a few hundred thousand right there.” So for Hinojosa, if all goes as planned, a lifelong relationship with IDEAL is in the future (or at least as long as his parents stay in Arizona). Source: Connor, D., “An IDEAL Education,” Network World, V. 22, No. 46, 2005, pp. 54–56. Used with permission from Network World, http://nww.com.
As internal integration capabilities and relationships and information sharing competencies with trading partners mature, firms should begin to notice that additional external integration opportunities are occurring. To maximize the value of these integration efforts, firms should consider developing external integration performance measures to track performance and guide future improvement efforts. This topic follows. Developing External Integration Performance Measures
As was discussed earlier in the chapter when assessing internal integration performance, the firm should also develop external performance measures to monitor its collaboration activities with trading partners in the eight key supply chain process areas. Ideally, a team composed of members from the firm and several primary trading partners should be created to design these measures to be consistent with overall supply chain strategies. Subsequently, these measures can be employed by each of the trading partners to monitor their respective collaboration activities in key process areas. Using a low-cost supply chain strategy example, trading partners would monitor a number of cost-oriented performance measures that could be used by individual firms and that also might be averaged across all of the supply chain members for each of the key supply chain processes. For the customer relationship management process, integration performance measurement examples might include the number of CRM initiatives implemented, the percentage of customers hitting a certain profitability level, the number of customer contacts made, and the percentage of collaborative groups that include key customers. Similar sorts of measures could thus be developed for the other key processes. Obviously, these measures can vary widely by industry, supply chain, company, product type, and strategy employed. At California-based Solectron Corp., a provider of electronics manufacturing services, involving supply chain trading partners is an important part of measuring and improving performance. “Our goal is to drive lean through the supply chain processes, on the factory floor and through our supply base. We want much more visibility between our factory and our supplier’s factory,” says James Molzon, vice president of customer fulfillment at Solectron. With lean principles in place, a factory has much faster response times, Molzon observes. “Customer feedback is an important benchmarking tool within the high-tech industry as well,” adds Molzon. “We do subjective and quantitative customer satisfaction surveys, with more and more emphasis on quantitative assessments.”29 Improving External Process Integration and Supply Chain Performance
Eventually, as supply chain members become more adept at supply chain process integration, poor-performing suppliers and high-cost customers are replaced by better ones, and long-term trusting alliances are established among the firms that remain. Building, maintaining, and strengthening these relationships is accomplished through use of external process integration and continued performance monitoring coupled with problem-solving efforts. As process integration improves among supply chain partners, so too does overall supply chain performance. Supply chain trading partners must concentrate on collaborating and sharing information such as sales and forecast information, along with information on new products, expansion plans, new processes, and new marketing campaigns, in order to maximize profits for the entire supply chain membership. Focusing on building external process integration linkages will enable firms to better share and take advantage of this information. The teams formed to design and organize process integration performance measures should be viewed as a key resource for the supply chain. These teams can determine or consider supply chain process objectives and the corresponding integration activities and work groups that must occur to achieve the objectives. Integration performance metrics can then be designed for each of the processes, followed by monitoring to identify any lack of process integration and potential supply chain weaknesses. Thus, firms should periodically jointly assess their levels of process performance and integration and collaborate on methods to improve both. In many industries, supply chain management–related costs can account for about 70 percent of total firm operating costs and as much as half of a company’s assets. Additionally, improving supply chain efficiency is viewed by many companies as about the only remaining way to significantly reduce costs. Given these statements, it becomes easy to appreciate the important roles played by external process integration along with integration performance assessments. Peter Surtees, European logistics director at Kimberly-Clark, a global consumer goods provider, stated “For manufacturers, the need for collaboration, even between competitors, has never been greater—as the pressure on the physical costs of distribution is now unsustainable.”30 The remainder of the chapter closes out the text by providing a discussion of the latest trends and developments in integration and process management.
A look at trends and developments in inegration and process management
As the push towards “world class” supply chain management continues, driven by the desire to reduce costs while improving quality and customer service, new trends are emerging in areas such as use of technologies, human resource management, and global trade. Some of the more advanced and active
practitioners of supply chain management are already making use of these latest developments, while others are taking a wait-and-see approach. Generally speaking, companies providing the best products and services at the most competitive prices while achieving high levels of customer satisfaction will ultimately prove to be the most successful in the marketplace. And one of the most effective ways to ensure this is through the practice of supply chain management. Central to the practice of supply chain management is the integration of key business processes. Thus, some of the current trends and developments in process management and integration are discussed here. New Uses of Technology
Some of the most exciting and certainly the most rapidly changing developments have to do with the application of technologies to process management and supply chain management. A few of these new uses of technology are reviewed here. Global Data Synchronization
Global data synchronization (GDS) is a term that refers to automated direct product data exchange between supply chain partners. Organizations like the non-profit GS1 Hong Kong serve as a registry where global retailers can look up a Hong Kong-manufactured product and find the full range of product details, as well as initiate an order. Many other local and regional databases such as GS1 are linked by global exchange services such as Maryland-based Data Pool Manager. Global electronic product identification standards have now been adopted to allow companies from all over the world to communicate product information and purchase orders in this fashion. At the time of this writing, GDS initiatives are also occurring in Canada, the United Kingdom, the European Union, the United States, and Australia. Companies connect via GDS to reduce stockouts, new product time to market, and logistics costs, while providing faster flow of accurate information, which also improves merchandising and fulfillment decisions. Externally, fast and accurate information flow improves collaboration with transportation providers, giving them more accurate cargo information. Data synchronization also fosters closer ties between suppliers and buyers. “More cooperation on developing joint trade promotion campaigns will enable both sides to reduce the number of missed opportunities and set more competitive
prices,” says Steve Kiefer, vice president of industry and product marketing at e-commerce software provider Global Exchange Services, headquartered in Maryland.31 Open-Source Communities and Collaborative Environments
Thanks to the Internet and open-source software, workers in every profession with the use of a computer are busy establishing online open-source communities to share ideas and exchange data and information. One of the world’s largest open-source communities is SourceForge.net, with millions of registered users collaborating on hundreds of thousands of projects. This collaboration model is swiftly being adopted by workers worldwide to generate more innovative solutions to a variety of problems. Users can very quickly mobilize information on any topic, project, or problem in any field. Techno-futurist Ray Kurzweil, developer of many artificial intelligence products and patents, calls this moment in time not just a technological revolution, but a “singularity” in the history of humankind. With open collaboration, workers will be able to add significant value to their work, earning additional compensation above what other non-collaborators might expect to receive. The end result will be participatory R&D, benefiting from the unique competencies of rank-and-file employees across their own organizations, their trading partners’ organizations, and all other organizations where workers are willing to share knowledge. The irony is that managers typically would reject the notion of employees sharing in-house experiences and knowledge with their counterparts in other organizations, including competitors—if it weren’t already rapidly spreading throughout the industrialized world. Many of these open collaborations, though, have the full support of management. For example, Maryland-based defense contractor Lockheed-Martin’s contract with the U.S. Department of Defense to develop a new generation of stealth aircraft involves 80 suppliers, operating in 187 locations, who rely on groupware to collaborate with each other and with the 75-member Aeronautics Tech Group, who coordinate the project with the four U.S armed services, the U.K. Defense Ministry, and eight other allied military groups. Primary work groups will thus be made up of workers from various disciplines and from multiple employers, bound together by a common project goal.32 Open source communities are a form of collaborative environment (CE), which simply refers to two or more individuals communicating to accomplish a shared objective. These days, CEs are constructed from a range of computer and communication technologies, including instant messaging, email, chat rooms, Internet telephones, mobile communicators, cybercafés, and web conferences. These forms of geographically dispersed collaborations are occurring in part due to the widespread use of the Internet, reduced travel budgets, threats of terrorism, and health fears such as the SARS epidemic. Unfortunately, in a recent study of business executives, only 38 percent reported that their firms had a formal plan for using collaborative technologies. Additionally, even when these technologies are used, executives generally admitted that there was no consideration given as to how this type of communication could improve business processes.
While radio frequency identification (RFID) tags have already been put into use over the past few years to track products, cases, and pallets as they move along the supply chain, the jury is still out regarding their ability to replace bar codes on products and pallets. Many, though, swear by their use and insist it is only a matter of time until companies realize the full potential of RFID in the supply chain. Spending on RFID tags is projected to hit $4.2 billion in 2009, more than double what it was in 2005. Discount retailer Wal-Mart is perhaps the biggest supporter of the use of RFID. It is beginning to require suppliers to use RFID tags on many items and pallets of goods shipped to its distribution centers. Its ultimate goal is to use RFID across its supply chain to speed inventory to store floors and to eliminate stockouts. By the end of 2005, Wal-Mart store tag-readers had already read over 58 million tags. Global consumer goods manufacturer Kimberly-Clark Corp. has also been moving ahead rapidly with its RFID deployment. The company currently ships hundreds of items to Wal-Mart and Target in RFID-tagged cases and pallets, and overseas to retailers Metro Group and Tesco. Its RFID research lab has become one of the few testing centers in North America accredited by RFID standards groups for consumer goods and retail. One of the current problems associated with RFID is integrating RFID data into an ERP system. Data formatting issues and software incompatibilities make it hard to import data directly. RFID tag readers can also misread tags, causing data errors. “We have a heck of a time with the amount of middleware, trying to get one to talk with another,” says IS director Ed Mathews of Wisconsin-based bicycle and scooter manufacturer Pacific Cycle. They must dedicate one person to literally sort through the 70,000 weekly records it receives from 50 RFID-tagged products it sends to retailers, searching for errors that include duplicate data caused from multiple reads generated when a pallet of tagged bicycles gets stalled near a tag reader at a distribution center. Other problems with RFID include tags that don’t transmit signals at all or signals that are strong enough, the fact that metal reflects signals and water absorbs them, tag readers interfering with one another, tag prices that can range from 10 to 30 cents each, and tags that are too large to fit on some products such as pill bottles. Still, Wal-Mart executives and others insist that RFID problems are being solved and the technology is catching on faster than bar code labels (it took ten years before bar codes were universally accepted).
Wireless Access to Enterprise Applications
Firms desiring workers to remain in contact with company systems while out of the office are deploying Wi-Fi networks to achieve mobile access. For example, industrial chemical supplier Eastman Chemical Company uses Wi-Fi at its Kingsport, Tennessee facility so warehouse workers can track inventory on PDAs while engineers monitor chemical mixtures from their laptops.35 Ron Ghani, an executive at Safelite Corp. of Columbus, Ohio, an auto glass company, believes the time is right for wireless technologies. It has recently given wireless devices to its field technicians and will have provided BlackBerry™ devices to most of its field workers by the end of 2006. “It’s the number one project on my agenda,” he says. Technicians at Safelite can remotely clock in and out, get work orders, and issue status reports in real time. Ghani explains, “The number one goal [of wireless] is to become more efficient and effective in serving our customer.” In fact, a Computerworld Magazine survey of executive-level IT professionals identified wireless technology as one of the top project priorities for 2006, second only to security initiatives.36 Automated Business Processes
The use of software to perform a function and replace a manually-performed one, can reduce time, cost, and errors for the organization. In many cases,
off-the-shelf software can solve a basic problem, but more and more, companies are turning to software designers to design a solution for a unique set of parameters that can meet a specific need. Delaware-based Counterpoint Software, Inc. (CSI) develops business management software solutions mostly for the insurance industry. A CSI representative meets with company personnel, interviews them, and evaluates their hardware and software situation. They can develop a custom agency management system to meet the needs of each client, consisting of claims tracking, reporting, accounting, quoting, and policy issuance modules.
There are numerous software products available that help companies build web-based applications. One of the most comprehensive software products, NXJ 10.5, is available from California-based Unify Corp. NXJ is an enterprise application development suite used for automating business processes, and allows users to build most any transaction-based business application requiring end-user interactions. NXJ includes a process designer module, a reporting module, and a web-services design module. Corporate Express, a French office supply company, wanted to implement web-based automation for its supply chain management, fulfillment, delivery, and transportation scheduling processes. The goal was to increase customer satisfaction, order delivery accuracy, and sales force efficiency while reducing call center expenses. It selected Unify to design the applications, using its existing business application development staff. The initial version of the field sales automation system application was designed in just three days. Each sales representative was able to have “anytime, anywhere” access to customer setup, order management and entry, price lookup, and sales message retrieval. With the new NXJ-based system, Corporate Express eliminated 300 inbound calls per day to its call center and significantly enhanced the call center processes. The Unify web application provides sales representatives with real-time quotations while onsite with the customer. Because the application is linked to Corporate Express’s ERP system, price quotes are based on current contracts, calculated and quoted in real time, making them more accurate.38 Also referred to as smart BPM systems, or automated decision systems, these automated systems are being deployed frequently for a variety of processes in many industries. These are rules-based expert systems, often involving statistical analysis of data, and they typically make decisions in real time after weighing all the data and rules for a particular customer or situation. In banking, real-time mortgages and lending decisions are commonly made using automated decision systems. North Carolina-based on-line lending service LendingTree.com uses automated decision making to decide which of its participating banks are most likely to issue a mortgage to a customer, and to offer several mortgage deals within a few minutes to potential customers.
Human Resource Management Developments
As alluded to earlier in this chapter, firms have to somehow find ways to break down barriers to internal integration, and in many cases this involves use of innovative human resource management (HRM) practices. In fact, research conducted by Professors Casey Ichniowski and Kathryn Shaw studied the relationship between innovative HRM practices and business performance. They found that there were “systems” of innovative practices that were more effective in raising firm performance than the more traditional approaches to HRM. The most successful firms were found to incorporate innovation across seven different areas: employee screening, pay-for-performance plans, work teams, employment security guarantees, labor–management communications, job definitions, and ongoing training in skills and problem solving.40 The U.S. steel industry is a great example of an industry containing both innovative and traditional forms of human resource management. North Carolina steel manufacturer Nucor Steel, for instance, has some innovative ideas regarding HRM. Employees earn a fairly low base salary, but then can earn large bonuses based on productivity. As a result, Nucor’s employees straighten 35 to 40 tons of steel per hour per employee, compared to 10 tons per hour per employee for the industry. Managers can also earn big bonuses, based on return on assets and weekly crew production. Senior officers earn bonuses based on return on shareholder equity. Additionally, no one has been laid off in over 28 years. Employees can voice their concerns in crew meetings, department meetings, shop dinners, and surveys. If they feel they have been treated unfairly, there is an appeals process whereby their voices will be heard.
Innovative and well-designed HRM practices such as the ones outlined here can contribute greatly to the creation of a collaborative and supportive work environment. As a result, these collaborative work environments will enable the firm to more quickly and effectively integrate processes both internally and externally. Collaborative New Product and Process Development
One specific innovative form of HRM is termed collaborative new product and process development (NPPD). Ideally, collaborative NPPD encourages representatives from all key trading partners to act as full partners on design-build-support teams. The teams are responsible for developing a total system of design requirements for both the product and its associated processes. Projects involve bi-directional communications from both team and non-team members, all of whom have access to a common design database. Collaboration ps all disciplines, functions, divisions, projects, and target markets to gather and use expert knowledge and make effective business plans. Today, these collaborative NPPD teams are using the open-source communities described earlier to communicate and share information. Several studies of collaborative NPPD have found benefits in terms of reduced proposal and development cycle times, reduced new product introduction time, reduced non-value-added work, reduced scrap and reworks, and increased design reuse.
Global Trade Issues
In a 2005 interview, Mark Columbo, vice president for strategic marketing for global package delivery service FedEx, thought the largest impact to supply chain management over the following ten years would be the continued liberalization of global trade. Fewer trade tariffs and regulations will open up free trade to many more countries, creating a larger supply base with more access to raw materials, and new markets. To remain competitive, even smaller firms are now considering foreign purchases of parts, supplies, and even new products that can be licensed. Companies like FedEx will be needed to help identify trading partners, transport and store goods, get items through customs, and finally deliver the purchased items. FedEx is building its largest ever logistics hub in Guangzhou, China, since this is where most of the new manufacturing facilities are being built. In a recent study of Chinese and U.S. manufacturing companies, Chinese plants were found to have embraced process integration to a greater degree than their U.S. counterparts. After a closer look, it was found that most of the Chinese facilities studied were joint ventures and foreign-owned facilities. These plants were newer and more modern than the traditional Chinese manufacturers, and their key customer was often their parent or partner firm. There is still a need, though, for outsourcing partners for many Chinese manufacturers in the areas of packaging, customer service, and purchasing.43 India is also having a major impact on global trade, due to the rapid increase of knowledge workers there and the low wages they are receiving. These workers are causing India to become a much larger consumer of goods.44 A number of global organizations are opening facilities in India to make use of these highly skilled workers. For instance, at the end of 2005, CEO Bill Gates of Microsoft announced that the company would invest over $1.7 billion in India over the following four years for its own R&D facilities.45 It is likely that these types of arrangements will also lead to process integration opportunities with Indian service companies. The many software development engineers in India are also having an impact on service firms located outside India that are doing applications development and systems integration projects. Indian IT firms such as Tata Consultancy Services and Infosys are capturing an ever-growing segment of this market. As of 2004, 45 percent of these types of firms worldwide were in India. Even small businesses like CPA firms in the U.S. are now integrating with chartered Indian accountants who can do the bookkeeping and simple tax preparation chores, leaving the U.S. workers more time to do higher-value activities like tax planning.46 Another reason world trade is likely to increase is the overall increase in prices paid for most components and materials. In a survey of U.S. manufacturers, materials costs rose more than 6 percent from 2004 to 2005, while market forces kept sales prices level or even lower for the same time period. Cost reduction and competitive pressures have thus spurred more global outsourcing efforts to produce products more quickly and cheaply. In the pharmaceutical industry, for example, drug companies might take years to develop and test new products, only to find that profit margins are greatly reduced as other competitor products enter the market.
Today, environmental, health, and safety (EHS) excellence means much more than achieving a “green” supply chain. EHS professionals are collaborating on cross-functional supply chain management teams to improve customer
retention, revenue generation, cost reduction, and asset utilization along the supply chain. EHS leaders, historically responsible for regulatory compliance, are now routinely involved in directing supply chain firms’ corporate social responsibility programs. EHS has become important in today’s global economy for several reasons—environmental regulations are continuously growing due to the general understanding of why environmental issues matter; manufacturers are expected to take responsibility for product disposal at the end of a product’s life; companies routinely outsource chemical management, hazardous product handling, and waste disposal; and the current concerns about energy consumption and greenhouse gas emissions. Thus, EHS personnel are needed when products and processes are designed, when companies develop environmental compliance plans, when reverse logistics strategies are developed, when potential outsourcing partners are identified, and when customers expect environmental performance to be part of a product or service. Companies such as Intel, FedEx, Dow Chemical, and Motorola commonly integrate EHS managers into cross-functional teams that guide supply chain business processes. For example, as part of a Six Sigma project at Illinois-based wireless and broadband communications equipment manufacturer Motorola, EHS personnel led an effort to reduce pallet-related injuries. The EHS team discovered that pallets coming from suppliers often didn’t conform to specifications. The team developed a solution for standardized packaging and pallets, which dramatically reduced the number of pallets handled, stored, and disposed; maximized the packaging density to reduce transportation costs; and reduced injury occurrences and costs. In 2004 alone, the plan saved over $5 million.
Outsourcing Business Processes
With continued demands for cost reduction and quality and service improvement, firms are also frequently turning to business process outsourcing (BPO) or the outsourcing of an entire function or capability, allowing more resources to be placed in core competency areas. Within the human resources management area, for example, the training function is one area being outsourced. Industry experts predict that by 2015, half of all company trainers will work for outsourced services. Due to cost-cutting measures and a realization that training can perhaps be delivered more effectively by external training services, the number of companies outsourcing training is rapidly increasing. “The number of requests for proposals has tripled in the last 12 months,” said Doug Harward, CEO of The Exceleration Group, a North Carolina training consulting firm. Training BPO can thus help companies to avoid large training facility capital expenditures, receive high-quality and relatively low-cost training services, take advantage of global training opportunities, and vary training levels as the size of the firm dictates.49 In general, though, BPO needs to be conducted with great care. Some companies are getting very close to outsourcing their core capabilities in search of cost reductions, and instead are finding that external services can eventually be more expensive, create a loss of focus and integration, and can lose customers for the company. A recent study in Germany, for example, found that the internal costs of providing information technology services were frequently much lower than they were at the outsource companies. Lack of an internal IT function also led to a lack of integration between company strategies and IT strategies. Finally, the use of overseas suppliers can create concerns regarding cultural differences, political stability, and infrastructure capabilities, leading to increased risk associated with BPO providers from developing economies.
There is a growing recognition that supply chain process integration creates significant opportunities for trading partners to achieve high levels of competitiveness and financial returns; however, this entails sharing information and requires cultural change in many cases. Supply chain partners must first achieve internal process integration, which means breaking down integration barriers that include the silo mentality, the firm’s culture, and trust issues. When firms have become proficient at internal process integration, they can turn their attention outward to external process integration, or collaborating with trading partners. To improve, firms must also develop performance metrics to assess both internal and external integration efforts. Many issues impact process integration, including new uses of technology, global trade, and process outsourcing.
- Define “process integration” and discuss why it might be difficult to achieve.
- How does internal process integration differ from external process integration?
- What activities are necessary for achieving internal process integration?
- Describe the activities that occur during the internal integration preparation phase. Why is this important?
- What are the three types of internal integration barriers? Discuss each one.
- What is the most common strategy used to overcome technological barriers to internal integration
- What are some of the issues to consider as the firm integrates its various information systems?
- Why is it important to develop a set of internal integration performance metrics
- Why is the use of teams so important in achieving internal integration?
- At what point is the firm ready to work on achieving external process integration?
- What is the key element in building successful teams?
- What is meant by the term chair ballet, as it was used in the section of the chapter describing Aetna’s offices, and why might this be a good thing to do?
- Why might achieving external integration be so difficult?
- What are the general requirements for achieving external process integration?
- Why do you think it is important to align internal functional strategies with supply chain strategies?
- Describe some integration activities for each of the eight key supply chain processes for: a. an upscale hotel
- Shirley Cooper, supply chain procurement director at UK-based Computacenter, Europe’s leading provider of IT infrastructure services, believes that future collaboration success lies in implementing new technology. Provide arguments supporting this statement, and arguments refuting this statement.
- Why is it important to measure external integration performance?
- Why does techno-futurist Ray Kurzweil, developer of many artificial intelligence products and patents, call this moment in time not just a technological revolution, but a “singularity” in the history of humankind?
- What is an open collaborative environment, and how is it formed
- What is RFID, and what are its advantages/disadvantages
- What are smart business process management systems used for?
- Describe the relationship between collaborative new product design and development and process integration.
- What impact will the liberalization of global trade have on supply chain management?
- Environmental health and safety issues play an important role in supply chain process management. Describe why.
- Why can the outsourcing of business processes be risky from a supply chain management perspective?
- 1. Report on some of the definitions and software applications found when searching on the term integration middleware.
- 2. Look up one of the following products and describe how it works: a. WebEx’s WebOffice application
b. Microsoft’s Sharepoint application
c. Citrix Systems’ GoToMeeting application
- 3. Go to http://sourceforge.net, register as a user, and then go to a discussion group of interest to you and report on your group experiences.
Access http://www.infotrac-thomsonlearning.com to answer the following questions:
- Write a term paper on the topic of corporate culture and its impact on supply chain management. Include discussions of how several firms have developed cultural change programs.
- Write a report on Jack Welch and General Electric, focusing on how the company’s culture was impacted by Jack Welch and how that impacted its dealings with its trading partners.
- Report on some of the latest issues in collaboration software or other new uses of technology for process integration or collaboration.
- Croxton, K., S. Garcia-Dastugue, and D. Lambert, “The Supply Chain Management Processes,” The International Journal of Logistics Management, V. 12, No. 2, 2001, pp. 13–36.
- Daft, R., and D. Marcic (1998), Understanding Management, Harcourt Brace & Company, Orlando, FL.
- Wisner, J., G. Leong, and K. Tan (2005), “Principles of Supply Chain Management: A Balanced Approach,” South-Western, Mason, OH.
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