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Managing the Value Chain
by Andrew White
Companies continue to chase the elusive ERP vision: a large multi-national organization with distributed companies all integrated into a single ERP backbone.
As companies strive to achieve strategic competitive advantage, they continually turn to new technology as an enabler. As the five-year waves of the various Continuous Replenishment strategies subside many companies are asking "What Next?" Is Supply Chain exhausted? Have we reached a stalemate, an impasse?
Over the last twenty-odd years companies have focused on "the physical movement and accounting of goods." This is otherwise known as Enterprise Resource Planning, or ERP. This phenomenon is a result of the groundwork in the late sixties and through the seventies on Material Requirements Planning (MRP) and later Manufacturing Resource Planning (MRP II).
These business processes, innovative for their time, focused on an organization's internal ability first to schedule materials in time for production and then later on synchronizing the production schedule across the whole company with respect to aggregate financial and capacity planning. As the computer age in the industrialized West evolved to compete against the "customer is king" onslaught from the East in terms of Just in Time (JIT) and Total Quality Control (TQC), so ERP was born.
Enterprise Resource Planning is the foundation or the nervous system of the enterprise. It is the basic transaction-processing environment on which an organization operates. The ultimate in ERP "vision" is a large multinational organization with distributed companies all integrated into a single ERP backbone. This provides enterprise-level visibility into the "physical movement and accounting of goods." Traditional activities include customer order processing, purchasing, manufacturing, and the financial suite of applications. These are all "execution" oriented activities-which is another way to describe ERP.
In the early nineties the phrase Supply Chain Management (SCM) came into vogue. The original concept of SCM was the "elimination and removal of barriers between trading partners" in order to facilitate the synchronization of information between them. However, this new movement appeared to capture the imagination of senior executives and showed that ERP was in fact incomplete. Since ERP remained principally focused on the organization, the suppliers of ERP tools decided to "own" the concept of SCM in order to leverage the vision it offered-and to extend the life of ERP tools by appearing to offer such solutions. Unfortunately the very underlying tools in ERP did little to address the "elimination of the barriers between trading partners" since all the tools were focused on the internals of the organization.
So over the last 20 or so years most organizations have spent many millions of dollars implementing and re-implementing ERP systems. Today ERP is the most prevalent software tool deployed. It is used successfully to standardize on the financial and transactional processing needs of the organization.
But what companies have not focused on much is the information flow between and across trading partners. How much could be saved if information flow was real-time and collaborative? ERP is internally focused and ensures all departments talk the same language. But what about our customers or suppliers? What ensures that all parties talk the same language there? ERP does not cross boundaries so it cannot help-and so we come to Advanced Planning and Scheduling, or APS. ERP is synonymous with execution, and APS is synonymous with planning-the provision for the materials and processes in order to meet the needs of the customer when it arrives. Planning, or APS therefore typically includes such activities as Demand Forecasting. By forecasting a customer's demand accurately, an organization can take steps to go beyond simple ERP-focused asset efficiencies and move to exploiting asset effectiveness. ERP is all about efficiency; APS is all about effectiveness, which results in reduced costs.
If one looks at Dell Online or Amazon.com one can appreciate the value of using the Internet to extend the ERP processes. In both cases the transaction is the same as it always was-customers placing orders. Using the Internet means that the orders are placed more quickly and "at one's leisure" but the transaction itself is still the same-a customer order. For Dell and Amazon, these processes are strategic in importance as they offer to these respective companies an ability to compete on a different level to their competitors. However, because the technology is not in itself a barrier, and the reengineering of the processes is minimal because the "nature of the transaction" has not changed, all of their competitors will replicate the process in a very short time. Therefore the on line order processing fad of today will be short lived. Inside 18 months most companies could deploy the technology. It is in truth a tactical advantage at best. What does change the nature of the transaction between trading partners is "collaboration."
Collaboration is not only dedicated to trading partners. Once upon a time the concept of "one number planning" was conceived to represent the objective of synchronizing all the facets of an organization in order to focus their efforts in a similar direction. We can all remember the days when each department had objectives and it was assumed that if all departments met their objectives so too would the organization.
However, through painful experience we learned that this was not the case-the sum of the parts did indeed bring down the whole. One number planning was an ideal to ensure all priorities and objectives were reconciled inside the company, so that manufacturing, distribution, finance, sales and marketing all were "operating from the same hymn book." So collaboration is as important inside the four walls of the enterprise as it is beyond the four walls.
The Pioneers of Collaborative Planning
From January through April 1996 Heineken USA, a distributor of Heineken and other European brands in the USA, ran a project with a view to strategically "changing the nature of the processes between ourselves and our trading partners." In fact Heineken USA did not know it but by April 1996, in working with Logility, Inc., they had pioneered the world's first use of the Internet for true collaboration.
Beer is shipped over from the European factories (yes, using an ERP system to "physically move and account for the beer") and delivered to over 450 customers in the US. Heination sent using SET is encrypted, and is only readable by the certificate holders. The main difference between SET and public/private keys is that the digital certificates used in SET are issued by a third party that confirms the user's identity. SET is s. Never before had such a change occur in the "nature of the transaction between customer and supplier." The customers no longer order beer from Heineken-they "collaborate on a replenishment schedule."
Heineken suggests a forecast to the distributor. After the distributor reviews, revises and approves the forecast, that forecast is used to generate a replenishment schedule. Each distributor can then view and revise this replenishment schedule in advance of execution-hence this is a planning, or APS processes. It uses the Internet and is therefore real-time and global in nature. And all this back in 1996!
Another milestone on the evolution of collaboration was the recent publication of the first standards aimed at collaboration between trading partners. The VICS (Voluntary Interindustry Commerce Standards) organization published a voluntary guideline handbook that describes the process activities, responsibilities and deployment options. This is important, as this is the first standard that any company has to draw upon when designing their own collaborative processes.
As the earliest CPFR user, Heineken has published some astounding benefits. Since inception, the process has generated more then a 50% reduction in cycle time-from determining the customer need to delivery and satisfaction of the need. All of the cycle time reduction has come about due to the replacement of order processing by a collaborative forecasting and replenishment scheduling system. This fits the true definition of "a change in the nature of the relationship between trading partners."
Some of the other benefits that Heineken has cited include better inventory utilization, as the ERP systems are synchronized with their customer needs like never before. The collaborative processes itself are self-regulating-giving visibility to Heineken USA management to sensitive changes in the market. Due to the innovative nature of Heineken's efforts and those of Logility who actually built the tool, both companies were awarded the Gartner Group Information Week Internet Electronic Commerce award in the spring 1997. Both companies are proud to have pioneered the implementation of collaboration.
Whither Collaborative Planning
Some people think that collaborative planning, or more precisely the Internet, will destroy EDI. We say not. They are different technologies that do not necessarily overlap. For example, when a company is thinking about implementing Vendor Managed Inventory, and they want to share gigabytes of information between trading partners, the question is purely economic. Which technology provides the best value for money? EDI is designed effectively to transfer large volumes of static, typically transactional data, between computers. The Internet was not designed for that-but it could do it. The Internet was originally designed for college professors and scientists to collaborate on small amounts of information (in comparison) in real-time, directly. Which is the definition of collaboration: changing the nature of the transaction between trading partners.
We believe that collaboration, as expressed in this paper will continue to be adopted over the next three years. It will become the standard, the "industry best practice" as the next wave in Value Chain Management. For once the technology is here and now and we are not waiting for the "next release." For once the technology required is not overly expensive. What is expensive and what is costly is the thought required to reengineer one's organization and one's relationships with customers and suppliers. The benefits however are tremendous. For a short period, as only a few companies in each segment adopt this technology, the benefits are simply strategic. Collaborative planning is the only way in which a company can, at long last, trade inventory and lead time for information.
About the Author
As Vice President, Product Strategy, Andrew White is responsible for shaping the direction of the new generation of Supply and Demand Chain Planning solutions for Logility. He is a member of the (British Institute of Management,) the Institute of Operational Research (ex.BPICS) and the Institute of Logistics.