Chief Executive (U.S.)

Corporation 2010

Feb 15, 1998 nSPEISS pS2(15)

(business in 21st century)(includes related articles)

Peter Haapaneimi

Abstract: Futurists seem to agree that the business organization of the 21st century will function more like an organism than a machine. It will rely heavily on freely flowing information and on the intricate web of relationships with its customers, suppliers and even competitors. Interdependence is foreseen as a vital factor in the success of companies because the enormous challenges of the coming millenium will be too overwhelming for any organization to face on its own. The companies of the future will partner with other firms to become more responsive and more agile and, hence, more competitive. They will also pay greater attention to the supply chain management to fill orders faster and satisfy increasingly demanding customers. It is predicted that companies that do not improve their management of the supply chain will be at a competitive disadvantage and may even be pushed out of business.

Full Text: COPYRIGHT 1998 Chief Executive Publishing

When they describe the organization of the future, the seers are in agreement: Look for organisms, not machines - fueled by information, nurtured by alliances.

In the not-too-distant future, executives accustomed to working the pyramid of boxes and lines on the organization chart may find themselves coping with an entirely different - and far more complex - kind of company.

"I call it the Amoeba Form," says William Knoke, president of the Harvard Capital Group investment firm and something of a futurist. Such an organization, he says, will be "hypermodular," combining with other amoeba-like organizations to provide products and services. "When you need to produce something else, you just pull some organizations out and plug different ones in." In his recent book, Bold New World, Knoke says the Amoeba Form is "like the jellylike blob of cytoplasm seen under the microscope: it is amorphous, changeable, and conforms in shape to its environment; it is difficult to distinguish where one ends and the next begins."

Predicting the future is hardly an exact science, as most futurists will tell you. The futurist's role is to prompt executives to think about new possibilities. Thus, there are many different views of the future, ranging from Armageddon to Eden. But when it comes to describing the organization of the near future, there is a striking consensus among the seers: The corporation of 2010, they say, will be more like an organism than a machine. It will live on a freely flowing flood of information. And, above all, it will thrive by coordinating a complex web of relationships with suppliers, customers, and even competitors.

Futurists see this interdependence as critical because the challenges of the 21st century will be so great that no organization can meet them all on its own. "We have moved into a far more complex economy, and no company can internalize all of the skills required to produce what they need to produce," says futurist and author Alvin Toffler. "Companies are increasingly dependent upon others."

By teaming up with other companies, the corporation of tomorrow will be able to assemble the strengths of many partners to become far more nimble and responsive. It will exist in a world of varied, complex, and powerful relationships - a world where "your biggest competitor also may be your most important ally" and "your most important employee will also be working for your biggest competitor - and it's very possible that you could have a company with a thousand employees and revenue of $150 billion," says Watts Wacker, a futurist and co-founder of the FirstMatter consulting firm in Westport, CT.

But the future is one thing, and today is another. To executives struggling to streamline their own processes today, let alone orchestrate the actions of several companies, that hypermodular, internet-worked world may seem a long way off. However, there are companies that are already laying the groundwork for the organization of tomorrow, and using increasingly sophisticated supply chain management tools and techniques to forge tight, but nimble bonds with customers and suppliers.

Today's supply chain management initiatives are driven largely by an interest in rapid improvements in financial and business performance. For example, by focusing on its supply chain, Tenneco Automotive improved inventory turns by 25 percent and inventory levels by 50 percent. Nike saw a rapid 40 percent improvement in order fill rates and a 27 percent increase in revenues. And Ford reduced its order-to-delivery times from an average of 72 days to just 15 days. The supply chain is key to helping CEOs in the relentless pursuit of shareholder value, says Philip D. Robers, the national director of supply chain consulting at Ernst & Young. "Supply chain is the great frontier for building shareholder value. Outsourcing and creative application of new technologies to optimize performance and improve collaboration are providing a powerful stream of major performance improvements. This is going beyond the traditional focus on cost to build an operational platform for accelerating revenue growth." Indeed, a recent Ernst & Young study found that improving supply chain operations and freeing up cash flow can boost a company's stock price by 20 percent or more.

But a focus on the supply chain has results far beyond next year's annual report. As they hone their ability to manage the supply chain, companies are learning how to cooperate in order to compete. They are building the ability to work across corporate boundaries to serve customers - a capability that will be critical in the coming century, says Roger D. Blackwell, a professor at Ohio State University and author of From Mind to Market: Reinventing the Retail Supply Chain. "Leading companies realize that soon it will no longer be manufacturer versus manufacturer or retailer versus retailer. The nature of competition in the 21st century wilt be supply chain versus supply chain."

The changing demands of supply

In the last few years, the field of supply chain management has been quietly, but profoundly, changing. In the traditional approach to the supply chain, a company focused on its own links, and worked to reduce the costs of products from its suppliers - often by simply shifting the responsibility for inventory to the supplier. Now, however, many companies are looking beyond their immediate relationships, and working to understand the needs of their suppliers' suppliers and customers' customers, in order to get an end-to-end view that will allow them to collaborate all the way through the chain.

There are several converging factors behind this change. One reason is the ever-increasing need for speed; with tighter and more extensive links in the supply chain, companies can get products to market and fill customer orders more quickly. "Selling on the Internet won't help you if you can't deliver the goods at the time and place and in the condition that consumers want them," says Blackwell. "If you have great information telling you what the consumer wants, but you get it there the day after they want it, it doesn't work."

The trend toward "deverticalization" is also playing a role, says Kevin O'Laughlin, a supply chain partner with Ernst & Young in Boston. As companies outsource more and more critical business processes, they need to have more sophisticated techniques for coordinating activity across organizations. "Enterprises are spinning off parts of the supply chain they have historically controlled," O'Laughlin explains. "You can't just spin these things off and assume that you are going to achieve even greater performance. You have to manage them. You have to put in place the technology, management processes, and people used to coordinate that web of suppliers. And we're only seeing the beginning of that trend."

Without question, however, the greatest factor driving today's new approaches to supply chain management is the need to reach increasingly demanding customers in an increasingly competitive world. "A decade ago, there were significant differences in product quality in almost every industry, but now those quality differences have collapsed tremendously," says O'Laughlin. "The ability to differentiate on the quality of the product has evaporated. So companies have to differentiate on services, such as the speed of delivery, the breadth of the products they offer, the package of services around the products - essentially, on customization."

Delivering these targeted products and services requites close coordination across the supply chain - and a solid understanding of what the customer wants and values. Thus, many companies are now thinking in terms of demand chains, or "customer-centric" supply chains, rather than traditional supply chains - an approach that depends on a more extended view of the chain with the customer at the center. In traditional supply chains, the starting point was the product, and the focus was on making and moving that product as efficiently as possible. In a customer-centric chain, the starting point is the customer's needs, and the focus is on delivering tailored products when and where the customer wants them.

Not surprisingly, today's customer-centric approaches rely heavily on information technology. Networks, shared databases, the Internet, and extranets make it possible for trading partners to quickly share information about customer requirements, production, delivery schedules, and so on. Increasingly, says Knoke, such connective technologies mean that information is available to the entire supply chain almost simultaneously. It is no longer necessary for suppliers to wait while a series of orders works its way through the links of the supply chain; even companies far up the chain can have a clear, up-to-date view of demand - which means they can respond that much more quickly. "The traditional price signals of capitalism work in a static or slowly changing economy, where things are largely the same year after year," Knoke says. "But in a rapidly changing world, you can no longer rely on the invisible hand of Adam Smith, because its reflexes are just too slow."

Technology also helps companies manage the complexity that is inherent in the supply chain. A vast array of detail goes into the manufacture and delivery of products, says Ernst & Young's O'Laughlin, and "even trying to reduce inventories is not an easy thing, because they are the result of a lot of decisions made all across the organization, from product development to operations to marketing and sales." What's more, supply chain complexity is increasing, as companies begin to address "reverse logistics" - the recycling, return, and repair of products - and explore new delivery channels, such as the Internet. And underneath it all is the trend toward globalization, which not only increases the scale of supply chain issues, but also introduces an array of variables in terms of pricing, regulation, and business practices.

To contend with this tangle of information and options, many companies are using sophisticated software that is designed to help synchronize work across the supply chain. These supply chain management systems integrate information about demand, production, inventory, schedules, and transportation throughout the chain and then create projections of future needs, providing executives with a '"single view" of the supply chain that makes it easier to decide where and when to move materials. Such systems were virtually unknown at the beginning of the decade, but as more companies have turned their attention to the supply chain, the market for supply chain management software has reached $1.8 billion and is expected to top $13 billion by 2002, according to Advanced Manufacturing Research in Boston.

Supply chain management software often complements the enterprise resource planning systems (ERP), such as SAP, that companies have been installing in recent years, says O'Laughlin. Such enterprise systems "may not improve performance per se," he explains. "But they do provide visibility to your problems. For example, a lot of companies that have implemented ERP technologies find that the inventory that's out there in their global supply chains is much greater than they ever anticipated. So the ERP technology casts light on the problems, but it doesn't solve the problems." Supply chain systems can link up with the enterprise systems "to provide the decision-support capabilities that help you make real improvements in the business."

Getting from here to there

The combination of advancing technology and an increasing awareness of the customer tends to drive companies through five evolutionary stages of supply chain management, says Mary Lou Fox, senior vice president of Rockville, MD-based Manugistics, a supply chain management software and services firm. In the first stage, companies focus on quality and costs in internal processes and departments. In the second stage, they begin to work on customer service. "You can tell a typical Stage Two company because everyone in the business is focused on doing whatever it takes to fill customer orders," says Fox.

In the third stage, companies begin to work across the enterprise to coordinate supply chain processes. "What triggers a company to move into Stage Three is the realization that all that customer service is costing a fortune," Fox says. "They're shipping product without considering whether the trucks are full, inventories are high, and production schedules are constantly changing. So the big issues are around cross-functional processes and enterprise-wide visibility into demand and what's in the supply chain."

In the fourth stage - which leading companies are now exploring - the organization begins to look for ways to manage and optimize the extended, end-to-end supply chain in order to provide customized products - and still make a profit. "Their customers are typically asking for a whole range of custom products, custom services, custom information flows," says Fox. "As the company responds, its margins start withering as it tries to customize and meet all these varying needs. Companies begin to realize that if they're able to tailor their supply chains so that they can be more flexible and get their costs down, then they can grow. So they share information and use it for planning across their supply chain."

This Stage Four approach builds on familiar tactics such as vendor managed inventory, continuous replenishment, and just-in-time delivery, but it reaches farther up and down the supply chain, and involves a far greater level of information sharing so that partners can look farther into the future. "Collaborative planning capabilities come to bear in working with customers and suppliers," says Fox. "There are multiple levels of information sharing. There's the short term - here's what I think I need for the next four weeks. But there's also a level of planning above sharing your plans about upcoming marketing programs, new markets you might enter, and the like. With this information, trading partners can plan to have product available at least cost."

In this stage, suppliers do not simply respond to demands coming along the supply chain, but instead work together to find mutually beneficial ways to meet customers' needs. At Black & Decker, which has launched a supply chain initiative dubbed Power Chain, "we feel that if we're going to win and flourish long term, our suppliers have to win big as well," Joseph Galli Jr., president of World-Wide Power Tools & Accessories at the company, recently told a Chief Executive roundtable. "It feels like the internet could turn many suppliers into commodities, and a company like Black & Decker could go from this steel company to that one, or from this aluminum company to that one, without regard to relationships or senior-level commitments. We don't think that's very good. We feel that for us to win, our suppliers have to share in the success."

To date, few companies have mastered this fourth stage of supply chain management, says Mary Lou Fox. One that's well on its way, however, is Compaq Computer, which has been "re-engineering our entire supply chain - from product design, supplier relationships, order management and manufacturing processes to distribution and delivery," CEO Eckhard Pfeiffer told shareholders earlier this year. Under its "Optimized Distribution Model," the company coordinates its supply chain to provide custom-built or configured systems in seven to 14 days and gives buyers the choice of having the products shipped to their homes or to a nearby retailer if they want additional support and service. In general, Pfeiffer said, Compaq's move toward a build-to-order approach "has led to quality improvements across our product lines, market share gains, and improved competitiveness while greatly reducing order cycle times . . . and inventory costs."

From such relationships, it's a fairly short step to the fifth - and yet-to-arrive - stage of supply chain evolution, in which companies begin to form tightly-knit supply chain communities[TM]. In these communities, information flows freely among trading partners, who develop plans and strategies together and essentially work as a single competitive unit, with roles in the community shifting to meet the need at hand. "In tomorrow's supply chain communities, you'll be able to put the work where the competency is, and reconfigure the community and the flow of product for different customers," says Fox.

These communities will be flexible, but relatively stable, Fox says. "It's not a situation in which everybody will become a commodity supplier, and companies will be constantly switching partners." There will be some interchangeable commodity suppliers, but the real hallmark of these communities will be close, long-term relationships, with companies working together to design, make, and deliver products.

"If I move my manufacturing or my logistics operations out to somebody else, they become a real key supplier to me. They are my partner," says Fox. As a result, companies will build communities with fewer, but more highly valued, partners. "If you don't have mastery of your own supply chain, and mastery of your ability to build value with your customer, you'll be winnowed out. You'll become a non-preferred supplier - and a non-player." And the real competitor then will be not the individual company, but the supply chain itself - the interconnected web of amoeba-like companies, if you like, whose operations and destinies are closely linked. Indeed, such groups might more accurately be called "supply webs," according to Gene Tyndall, a senior partner at Ernst & Young and co-author of Ernst & Young's recently published Supercharging Supply Chains. "What evolves is a network of interrelated firms whose primary objective is to gain strategic advantage for the whole supply chain."

Building n sense of community

What can CEOs do to prepare for the world of supply chain communities? To begin with, experts say, they can recognize that they have a key role to play in their companies' efforts to rethink the supply chain.

Supply chain improvements require not only sophisticated technology, but also a revamping of business practices. Processes must be streamlined and redesigned, and links must be built between traditional functional silos. "You have to be able to share information and understand how processes connect with your customers and suppliers," says Fox. "Business practices and functions are usually very entrenched, and it takes the CEO's clout to break down the internal barriers between departments. The CEO has to provide the leadership to build bridges across the gaps so that logistics, manufacturing, materials, purchasing, sales and marketing, and other areas are working together."

The CEO must be involved in building bridges with trading partners, as well. "Supply chain relationships are so critical that they depend on trust between organizations," says Ohio State's Blackwell. "If you can't trust your partners, you're probably going to be unwilling to share information with them. One of the dangers is thinking that these relationships can be delegated to people fairly low in the organizational chart to work out the details. In fact, CEO-to-CEO is an important part of the supply chains that work best, because that is where the trust is developed.

"That trust isn't just a matter of showing good intentions," Blackwell adds. "It frequently requires the commitment of resources. In other words, if you say you are going to exchange information, that means having competent people and systems that are capable of doing that. The CEO's word that the organization is committed is a prerequisite for 'demand' chains to work."

Chief executives also need to do some long-term thinking about the role that their companies will play in tomorrow's supply chain communities. With the increasing sophistication of supply chain management techniques, and the changing nature of competition, many observers say that corporate leaders should think broadly about the possibilities presented by supply chain relationships. That is, executives should look beyond today to see how trading partners can help them reshape their companies, and to find ways to combine the diverse strengths found in a supply chain community in order to innovate and enter new markets and even new industries "The challenge at the CEO level is to recognize places where you can leverage new kinds of core competencies and create new structures that do things more effectively and efficiently than before," says Ernst & Young's Robers.

"You had better have a continually changing core competency," adds futurist Toffler. "The assumption that many people make is that once you have identified your core competency, you have got a stable base. But nothing will be stable in tomorrow's economy, and therefore you need to have a changing succession of core competencies. You need to be shedding parts of the business and acquiring other parts of the business. But the acquisition does not have to be a financial acquisition. It can be an acquisition in the sense of acquiring a partner or a strategic ally."

Indeed, says FirstMatter's Wacker, executives should look at the flexibility and depth of resources in the supply chain as a tool for reinvention - because in the long term, companies survive by adapting and exploring new markets. "Nokia is a 271-year-old company. Do you think they made cell phones 270 years ago? Motorola once stood for motoring Victrolas. They haven't made a car radio in 30 years. At GE, 42 percent of revenues today are from financial services. I really don't think this is what Thomas Edison had in mind. In the future, the more successful you are, the faster you will be at getting out of the business you're in."

But if the supply chain community and the organizations in it are constantly evolving and entering new businesses, what holds a supply-chain community together? The key, says Wacker, is to look beyond the hard facts of products and services, and into the soft stuff. "Start looking for companies that think the way you think and have the values you have, no matter what industry they are in, and start making a supply chain based on your values, rather than the execution of deliverables." Wacker recommends thinking in terms of the "promise" that the company - and by extension, the supply chain community - makes to customers. For example, Gateway, a client of Wacker's, promises "to be the wagon master across the silicon prairie. Their product is merely a residue of that. Once we have all learned how to use computers, Gateway won't be making boxes, they will be on the next part of that journey. They have already started that by moving toward providing Internet service." By articulating such a promise, executives can provide an organizing principle for forming and evolving their supply chain communities and formulating strategies in the face of constantly changing markets.

Overall, says Ernst & Young's O'Laughlin, CEOs should start down this road by looking at the supply chain From a strategic perspective. "You have to give considerable thought to what the core competency of the business is and what you want it to be - and bow that vision can be implemented through the supply chain." Unfortunately, however, many CEOs are not well-equipped for the exercise. "At a certain level, CEOs understand supply chains because they have all managed their own businesses, which have a supply chain in them. But at a different level, it's complicated to them. Most CEOs don't arise out of the operations side of the business. So, even if they recognize the trends and issues involved, they struggle with their own competencies with respect to supply chain. And they are uncomfortable with any supply chain vision that is a significant departure from their current practice. They tend to be much more comfortable with new technology as it relates to marketing and sales, such as putting Web-enabled marketing programs out there. It's harder for them to think about these issues in supply chain, let alone embark on major changes."

But think about them they should, says futurist Knoke, because ultimately, the powerful supply chain-based organization of tomorrow will emerge - "and it will evolve Darwinistically. Some companies will do it, and some companies will do it better. And the ones that do it better will get more market share and more profit, and they will grow. And those that don't do it quite right will shrink and even disappear."

Manugistics, Inc. is a leading provider of software solutions and services for supply chain management and has the largest global client base of any supply chain provider. The company's solutions are used by more than 700 companies to improve the flow of product within and among companies from raw materials or parts through manufacturing to delivery of product to the end customer. For more information, please contact: Manugistics Inc., 2115 East Jefferson St., Rockville, MD 20852, Telephone: 1-301-984-5263, Facsimile: 1-301-984-5370 On the Internet: www.manugistics.com

Ernst & Young is a global leader in providing clients with consulting and professional services. The firm's approach is to integrate process, knowledge, and information management with organizational change far solutions which increase shareholder value. Ernst & Young LLP is the U.S. member of Ernst & Young International, an organization whose member firms include more than 82,000 people in 131 countries. For more information contact Philip D. Robers, Two Commerce square, Suite 4000, Philadelphia, PA 19103. Telephone: 1-215-448-4039. Far thought leadership articles on supply chain and other topics see: www.ey.com

CASE STUDY: OSRAM SYLVANIA

LAMP LINKS

At Osram Sylvania, most of the supply chain is in-house, but that doesn't mean it's simple. The company turns out more than 5,000 kinds of light bulbs, with material ranging from sand to finished lamps flowing through 28 plants and eight distribution centers and on to a variety of customers ranging from major retail chains to local hardware stores.

The company was created in 1993 when Europe's Osram acquired the Sylvania lighting business from GTE - a move that prompted a major review of the company's supply chain. "We constantly look for new ways to become better, faster, and more responsive to our customers' needs. This must start with supply chain planning," says Dean T. Langford, president of the Danvers, MA-based company. "Our bottom line is give customers outstanding service, which adds value to the products they buy from us."

In its review, the company realized that it had a fragmented approach to planning, with various plants and facilities each creating their own schedules. "We had specialists in individual departments doing their own separate thing, and sometimes they crossed purposes," says Allan J. Wallace, manager of distribution planning and deployment. "Somebody in the plant would optimize for the best possible production costs, for example, but that would drive inventory through the roof."

Executives decided to turn that approach on its head and let customer demand, rather than supply, drive operations. The company shifted planning responsibilities from the plants to several cross-functional, product-focused planning teams "that are fully accountable for the entire supply chain planning process for a given product line - forecasting, distribution, manufacturing, everything," says Wallace. Using sophisticated supply-chain management software from Manugistics, these teams can coordinate material flows across the company and make changes in manufacturing and transportation whenever demand changes. "We put all those disciplines under one roof with an integrated tool. It was really a philosophical change that said supply chain management is a strategic part of our business; it will be managed from a centralized perspective and be driven by the demand forecast."

That philosophy has helped Osram Sylvania become more responsive. For example, shortly after the new process was in place, a retail customer announced that it would soon be opening a number of new stores and would therefore need more light bulbs. Osram Sylvania planners adjusted their forecasts. and the system automatically updated production schedules at the manufacturing and feeder plants and scheduled shipments of materials to the warehouses. "We didn't have to schedule last-minute overtime or pay extra freight to make the deadline," says Wallace. Overall, the integrated view of the supply chain has helped reduce manufacturing cycle times from 18 weeks to as little as four weeks and push customer fill rates into the upper 90 percent range.

In the coming years, Wallace says, the company's approach to the supply chain will keep evolving as its business evolves. "The continued compression of time throughout all our processes will reshape a number of things how we supply product to a customer, where we maintain inventory. So the structure that we have today is not necessarily the structure we are going to have five years from now. We have 45,000 active customers industrial customers, consumer products customers, specialty lighting. We think supply chain management has to remain very flexible to respond to those different markets.

"In the past, your relationship with the customer was defined by the sales and marketing relationship," Wallace says. "In the future, I think the supply chain view of life is going to drive links deeper and deeper into the customer's organization. The supply chain management side of a company is becoming as important to the customer as its marketing policies."

CEO INTERVIEW: JACK KAHL

LEVELS OF TRUST

Jack Kahl is the CEO of Cleveland-based Manco, which supplies adhesive tape, home weatherization materials, and other consumer products to retailers such as Target, Walmart, and Ace Hardware. Here, he discusses some of the lessons learned in being part of some of the world's most innovative and fast-moving supply chains.

On the CEO's role in supply chain management.

I tell people to elevate the understanding of supply chain in their mind, because it's becoming the determinant of victory or defeat. To start with, the CEO has to visit with customers to hear what they are trying to accomplish, and then make the investment in people and tools to make the supply chain relationships work. For instance, I know that some companies have promoted clerical-type people into the positions dealing with data mining and information coming from the customer. Those people didn't feel comfortable talking to the managers and executives of the retailer, so the result was fairly limited, from the retailer's standpoint. What we did, at the urging of some of our customers' executives, was find high-powered people with MBAs and market-research degrees, and put them in there. They often travel to team meetings at the retailer, so everybody knows everybody on a personal basis. We think that these people must be positioned as a key part of our future. They can't be lost in the basement.

On the growing importance of information in supply chain management.

I think Moore's Law has really come through for us, and we see the amount of information doubling every 18 months. For example, four years ago, we supplied Wal-mart with weather stripping based on three zones across the country; then we went to 20 zones, and then to a state-by-state basis, and now we supply them on a store-by-store basis. So now, instead of looking at selling one chain with 2,300 stores, you're looking at selling to 2,300 chains, each of which has one store. We couldn't have done that four years ago because the tool wasn't there and the mindset wasn't there.

On the role of learning in the supply chain.

The big retailers are always focusing on the supply chain, so they can teach us a lot of new tricks. We think it's important to go back and teach our vendors those tricks too. That's not always easy, by the way. In some cases, the manufacturer may not be operating at the speed level that the retailers are operating at. So some may not be as ready to change - but others are. We have one vendor's CEO who tells us, "you may not be our biggest customer, but you are probably our best partner." That's because he takes the information we are able to give him, and uses it to motivate the troops to push the industrial service levels higher. He learns from the Wal-marts of the world through us, and he improves his overall company that way.

On the future.

The world is going to get down to fewer vendors and fewer retailers, and everyone is going to be picking their partners more wisely - because everybody is going to be more and more important to the other guy. And that means that you will have to keep elevating the level of trust with your partners.

BLURRED BOUNDARIES

In their recent bestseller, Blur: the speed of change in the connected economy, Stan Davis and Christopher Meyer of the Ernst & Young Center for Business Innovation offer a glimpse of how three factors - speed, connectivity, and the increasing importance of intangibles - are shaping the organization of the future:

"The need for speed means that many companies that want new capabilities don't have time to grow their own. On the other hand, the probability of further rapid change makes out-and-out acquisitions too risky; while the ease of electronically connected coordination makes them unnecessary. Presto! A new density of connections among companies, industries, and individuals. The intangibles are the value of all these new relationships, some of which are downright surprising given their surface incompatibility."

"Most organizations have habits and structures that keep them at arm's length from the rest of the world. That's the way the machine economy is constructed. But though each organization is an economic web of its own, it is also an integral and intimately connected part of the larger global web. Where does the company start and stop? What does the boundary mean?"

CASE STUDY: CANADIAN TIRE

WHAT CUSTOMERS VALUE MOST

In the spring of 1993, Stephen Bachand took over as CEO of Canadian Tire and offered a new vision: "To be the best at what our customers value most." And what customers want, the company determined, was the right assortment, excellent service, and competitive prices.

In its 430 stores across Canada, the retailer sells not only tires, but also some 70,000 other items, including auto parts, housewares, and sporting goods and to deliver what customers valued, the company decided to take a hard look at its supply chain. "We started by getting cross-functional buy-in about what processes needed to be addressed through continuous improvement, and which ones needed a more substantive change to get a radically higher level of performance," says Patrick Sinnott, the company's vice president of logistics.

One area that was ripe for radical improvement was the process and system used to forecast demand and place orders with suppliers. Under that process, the company would hit certain reorder points and send a purchase order to the supplier, who would then scramble to deliver the goods. "The supplier might get a surprise asking for 1,000 units this week, and then hear nothing for three or four weeks, and then get another surprise asking for 3,000 units," says Sinnott. "He would be hard pressed to deliver in a timely fashion with any consistency."

Canadian Tire talked with suppliers about how to improve the situation. "We'd always had a good idea of what we needed from them, but not of what they needed from us," says Sinnott. What the suppliers needed, it turned out, was better information sooner.

In response, Canadian Tire took the concept of "time-phased replenishment" - a fairly common practice in manufacturing - and applied it to the retail world, where it is relatively rare. The company brought in supply chain management software from Manugistics that integrates inventory and point-of-sale data from across the supply chain.

Once a week, the system creates a 26-week forecast for each item that gives suppliers an increasingly accurate view of the future. For example, at 26 weeks out, the report might tell a bicycle manufacturer how many total bicycles the chain will want; in contrast, at eight weeks out, the increasingly accurate forecast can hone in on how many women's 10-speeds will be needed. "Getting this projection every week helps the supplier plan raw material requirements and production scheduling," says Sinnott. "We are giving them the best information we can about what we are likely to need in order to satisfy the consumer when he or she comes through the store door."

Canadian Tire's efforts have resulted in improvements in suppliers' delivery service levels. "At the end of Q1/1998, the lead time that the supplier needed, from the time we cut a purchase order to the time the supplier delivered, dropped 80 percent. Our distribution center inventory is down 8 percent. So service levels from our suppliers are up, and inventory and cycle time are way down."

Just as important, Canadian Tire has also built a sense of partnership in its supply chain and opened the door to ongoing improvements. "We are all in this together - the stores, the distribution centers, our suppliers, and their raw material suppliers," Sinnott says. "Everybody has a better understanding of the needs of each and every member of the supply chain and what their particular role is with respect to getting product to the end customer."

DISINTERREMEDIATION

NEW RULE OF THUMB

In the coming years, perhaps nothing will have as great an impact on the supply chain as the Internet. Already, it has linked suppliers, customers, and companies in new ways, opened new channels for selling goods, and even provided a new method of transporting some products, such as software. As these links grow, the Internet promises to shorten the chain for many companies through "disintermediation." That is, by making their products available over the Internet, companies farther up the supply chain can disintermediate downstream companies; they can cut out the middleman and go directly to the customer, as Dell does with computers, or as CDNow does with recorded music.

As is so often true in business, however, things may not be that simple, notes Paul Saffo, a director at the Institute for the Future in Menlo Park, CA. "Old intermediaries are disappearing," he says, "but that is only part of the picture. The introduction of computers and networks lowers transaction costs. When you lower transaction costs, you enable new kinds of transactions, which leads to new market niches for new players. So you get disinterremediation: The Internet makes the commercial environment more complex, creating new opportunities for new kinds of intermediaries." What's more, traditional companies that are cut off by Web-based competitors don't necessarily go away. Amazon.com, for example, used the Web to disintermediate store-based sellers such as Barnes & Noble, "but Barnes & Noble has now adapted to sell on the Web as well. So you now have more intermediaries, not fewer."

The concept of disinterremediation suggests a new rule of thumb, says Saffo. "Get closer to the customer at your peril. Rather than getting blindly closer, you want to get farther away from the customer in the right way. You want to interpose intermediaries who can help you reach customers." For example, a catalog sales firm, with skills in customer service and rapid delivery, may be more effective at working with the customer than an original product manufacturer that is new to direct customer contact. The bottom line: "This doesn't mean that you never go direct to the customer. But it does mean that you want to think real hard about when you want to go direct and when you want to go indirect."

GLOSSARY

TERMS OF ENGEARMENT

Like many fields, supply chain management has its own terminology and concepts. Here are a few definitions that will help CEOs stay on top of supply chain issues:

Assemble to Order A manufacturing practice in which subassemblies are maintained at a factory or in a distribution center, and quickly assembled when a customer order is received. (often called postponement; contrast with "make to order," below)

Collaborative Planning, Forecasting, and Replenishment (CPFR) A multi-company initiative using the Internet in supply chain management. By sharing information over the Internet, companies hope w be able to collaborate more closely to create a single, accurate demand plan and coordinate supply plans to meet demand.

Customer-centric Supply Chain An approach to supply chain management where supply chains are tailored to meet customer needs rather than focused on internal efficiencies.

Extended Supply Chain The close cooperation of several companies in the supply chain to take advantage of new opportunities and create new capabilities from supplier's supplier to customer's customer.

Made to Order A manufacturing process in which raw materials are procured only when a customer order is received, typically avoiding inventories or stocks that need to be sold, but resulting in the need for long lead times.

Make to Stock A manufacturing process where finished goods are made and stocked before the order is received.

Reverse Logistics The management of supply chain activities that take place after a product is shipped (i.e., returns, repairs, recycling, disposal).

Synchronization The state of having all supply chain functions integrated and interacting in real time, so that when a change is made in one function, it is then automatically reflected in the others.

Time Phasing A method of viewing what a company needs combined with what it expects to need in the future. Typically, future needs are allocated to a series of time "buckets" (hours, days, weeks), making it easier for supply chain partners to plan ahead.

Vendor-Managed Inventory A technique in which the supplier, not the customer, makes decisions for replenishing the customer's inventory. The supplier is then responsible for keeping the stock at the customer's distribution centers or stores at the appropriate levels.

CASE STUDY: IMATION

DRIVEN BY DEMAND

In 1996, 3M spun off its data storage and imaging business to create Imation, a $2.2 billion company with 20 research and manufacturing facilities, and a presence in more than 60 countries. The new company faced great opportunity, with a potential $20 billion global market for its products. It also faced great challenges, not the least of which was the need to integrate the processes of five different business units and create a streamlined, integrated supply chain in order to free up cash tied up in inventory and, especially, improve service.

"Our success at Imation begins and ends with how well we meet customer requirements," says William T. Monahan, chairman and CEO of the Oakdale, MN-based company. "Our global supply chain initiatives are central to our establishing processes that will allow us to meet our customer's needs, and therefore our corporate goals of profitable growth, operational excellence, and true customer loyalty."

Those initiatives began shortly after Imation was created, with the assessment and benchmarking of supply chain processes. The company determined that it was too focused on optimizing internal manufacturing processes, rather than the overall supply chain - which sometimes made it hard to meet customer needs. Reports on backorders for one office supply company, for example, typically ran to 60 pages, and in general, it was difficult to shift production and distribution whenever there were unexpected changes in demand.

To begin the redesign of those processes, Imation brought together 60 employees from around the world in the Ernst & Young Accelerated Solution Environment to identify opportunities for improvement. The effort ultimately led to a raft of changes, from the outsourcing of warehousing and logistics operations to pilot projects involving standardized practices and procedures, and the elimination of marginal products that dogged the supply pipeline. To drive this streamlined approach to its supply chain, the company used information about customer demand being provided by new planning and forecasting software. "That was a real mindset change away from the 'quick fix,'" says Dave Mell, vp of business process. "Now they're looking at demand on the front end, and the total expanded supply chain, and really understanding why we need the product, when we need the product, and where we need the product."

Today, working with such partners as Manugistics and Ernst & Young, the company is a majority of the way through the implementation of this extensive, two-year initiative, and the new approach has been rolled out in operations in several countries. "Every operating business unit within Imation has been involved in piloting these initiatives, and the programs that are in place have shown excellent results in improving customer service, reducing working capital, and improving efficiencies," says Monahan. "The greatest impact thus far has been in the areas of customer service and reduced finished goods inventory."

In the coming months, Imation will be rolling its new supply chain processes out to the entire company - and more benefits are expected. "I think there is great potential in the area of demand planning and in truly understanding where the marketplace is," says Mell. "Our culture in the past was that we were hard working and we would respond to the customers' needs, but we were always in a reactive stage." Now, he says, the company has the foundation of attitudes, processes, and technology that can change that culture, "and we're ready to cascade it throughout the company and create an environment in which everyone understands their impact on the supply chain."

WORKING KNOWLEDGE

SUPPLY CHAIN HYGIENE

Without the right preparation - of people, processes, data, and management systems - even the best supply chain management software has little bite.

At Oral-B, the Belmont, CA-based manufacturer of oral-care products that is a division of The Gillette Co., executives are preparing to put in sophisticated supply chain management software - with the emphasis on preparing, says Brad Newman, director of planning and logistics.

The new software will help the company "form a true synchronized supply chain that enables us to serve our customer better as we grow," says Newman. But the key to getting the full benefit of such systems is laying the right groundwork. Before the software goes in, says Newman, companies should:

* Understand their business processes. "Flow those out and see how they work and fit together - the manufacturing processes, the forecasting processes, the deployment processes."

* Clean up historical data. The development of various versions of products over time can cloud the data, which are critical to forecasting demand. "You want to go back and tie up all those products into a continuous stream of order history."

* Match up measurements. "Make sure all your parameters - the number of cases on a pallet, the location of items, the units of measure - are consistent within your systems and with suppliers. You can't be close on the number of cases per pallet; you've got to be perfect."

* Don't forget the human element. Using supply chain management involves new tasks and responsibilities; make sure people get the training for their new roles.

* Develop processes to support the ongoing effort. Be sure that correct data are being fed into the system; measure results; and keep reviewing supply chain management efforts over time.

Getting ready for a new system clearly involves a lot of detail - but it's worth it, says Newman. "When you go through the exercise of making sure everything is right for supply chain management software, it improves your other systems as well, because you find problems and fix them. We are going to go through a SAP implementation in a few months, and the preparation we're doing for the Manugistics implementation is going to help make that a lot smoother."