Tools and Techniques for Implementing Integrated …docshare01.docshare.tips/files/17268/172684990.pdfTools and Techniques for Implementing Integrated Supply Chain Management Published

Statements on Management Accounting

B U S I N E S S P E R F O R M A N C E M A N A G E M E N T

C R E D I T S

T I T L E

This statement was approved for issuance as aStatement on Management Accounting by theManagement Accounting Committee (MAC) of theInstitute of Management Accountants (IMA®). IMAappreciates the collaborative efforts of the CostManagement Competency Center at Arthur AndersenLLP and the work of Dr. C.J. McNair, CMA, of BabsonCollege, who drafted the manuscript.

Special thanks go to Randolf Holst, CMA (Canada),Manager of Knowledge Creation at Arthur Andersen, forhis continuing oversight during the development of theStatement. IMA thanks the Consortium for AdvancedManufacturing-International (CAM-I) for their support inthe development of this SMA. IMA is also grateful tothe members of the Management AccountingCommittee for their contributions to this effort.

Tools and Techniques forImplementing Integrated

Supply Chain Management

Published byInstitute of Management Accountants10 Paragon DriveMontvale, NJ 07645www.imanet.org

IMA Publication Number 99347

Copyright © 1999 in the United States of America by Institute of ManagementAccountants and Arthur Andersen LLP

All rights reserved

ISBN 0-86641-283-2

Statements on Management Accounting

T A B L E O F C O N T E N T S

Tools and Techniques for ImplementingIntegrated Supply Chain Management


I. Rationale . . . . . . . . . . . . . . . . . . . . . . . 1

II. Scope . . . . . . . . . . . . . . . . . . . . . . . . . 1

III. The Role of Management Accounting . . . .1

IV. ISCM Implementation Steps . . . . . . . . . .2

V. Implementation Tools & Techniques . . . . .3Concept Phase

Assessing Supply Chain Opportunities . . . . . . . . . . . . . . . . . .3

Developing an ISCM Vision . . . . . . . .9

Conversion Phase

Developing an ISCM Strategy . . . . . .13

Creating the Optimum ISCMOrganizational Structure . . . . . . . . .16Establishing the ISCM Information and Communication Network . . . . . .23

Execution PhaseTranslating ISCM Strategyinto Actions . . . . . . . . . . . . . . . . . .30

VI. Conclusion . . . . . . . . . . . . . . . . . . . . .34

References

ExhibitsExhibit 1: ISCM Implementation Steps . . . . .3

Exhibit 2: Supply Chain Segmentation Factors . . . . . . . . . . . . . . . . . . . . .4

Exhibit 3: Customer Service Survey . . . . . . . .5

Exhibit 4: Purchasing Process Value Chain Map . . . . . . . . . . . . . . . . . .8

Exhibit 5: Supply Chain Vision—Whirlpool Corporation . . . . . . . . .10

Exhibit 6: Cost/Service Trade-off Curve . . . .11

Exhibit 7: Matrix of Potential Value:Best-in-Class—Internally . . . . . . .12

Exhibit 8: Matrix of Potential Value:Best-in-Class—Externally . . . . . . .13

Exhibit 9: Customer Profitability Analysis . . .14

Exhibit 10: Order-to-Cash Model . . . . . . . . . .16

Exhibit 11: Cross-Channel Process Teams . . .17

Exhibit 12: Outsourcing Potential . . . . . . . . .21

Exhibit 13: Supply Chain Activities . . . . . . . .23

Exhibit 14: Integrated Supply Planning Process Model . . . . . . . . . . . . . .26

Exhibit 15: Transportation Planning Elements 27

Exhibit 16: Supply Stream Costs . . . . . . . . .31

Exhibit 17: ISCM Effectiveness Indicators . . .33

I . RAT IONALEToday, the assumption that the supply channel isan unbendable business constraint is being chal-lenged. Company after company is turning tointegrated supply chain management (ISCM) inorder to bridge the gap between trading part-ners. For example, Procter & Gamble, DuPont,3M, Xerox, Coors, Cummins Engine, LandO’Lakes, Alpo Pet Foods, and Thom McAn—tocite only a few of a diversified lot—have adoptedISCM. Focused on improving the flow of materi-als through the entire supply chain, ISCM tech-niques are being used to create networks, ortrading alliances, that allow the participatingfirms to compete externally as though they wereone entity.

ISCM creates a new business design, one thatcuts across organizational boundaries andestablishes direct communication, information,and structural links across firms. ISCM supportscross-organizational innovation by removing thewaste caused by miscommunication, fragmenta-tion, and interorganizational tension, as well asby leveraging the competencies of multipleorganizations into a new competitive weapon.

Gaining these advantages begins with designing,then implementing, ISCM through a variety ofpowerful tools and techniques. Focused on theunique challenge of cross-organizational change,ISCM tools and techniques emphasize the cre-ation of mutually beneficial procedures andprocesses, knitting participating organizationstogether with a common vision and strategy—todeliver superior service and value to the supplychain’s customers.

I I . SCOPEThis Statement on Management Accounting(SMA) is addressed to financial professionalsand others who may lead or participate in efforts

to implement integrated supply chain manage-ment in their organizations. It supplements theInstitute of Management Accountants’ SMA pub-lication, Implementing Integrated Supply ChainManagement for Competitive Advantage, whichdescribes the ISCM implementation process.

The focus of this publication is on core tools andtechniques that improve the effectiveness ofimplementing supply chain management. Coretools are emphasized because it is beyond thescope of this guideline to discuss all of the manytools and techniques that can be used to sup-port the implementation of ISCM.

This SMA assumes the reader is already familiarwith basic supply chain concepts. This guidelineis intended for organizations that have alreadydecided to implement ISCM. The tools and tech-niques discussed apply to any organizationregardless of its size or primary industry focus.It will help an organization:l develop a framework for planning and manag-

ing the implementation of ISCM;l learn about the various core tools and tech-

niques to improve the effectiveness of imple-mentation of ISCM; and

l understand the roles and responsibilities offinancial professionals in implementing ISCM.

I I I . THE ROLE OF MANAGEMENTACCOUNTINGFinance professionals play an increasingly vitalrole in all major improvement initiatives in orga-nizations today. Serving on design and imple-mentation teams, these professionals provideanalytical expertise, an economic perspective,and an objective mindset with which to examine,evaluate, and prioritize the opportunities andchallenges inherent in a major change initiativesuch as ISCM.

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ISCM implementation creates unique opportuni-ties for the participation and support efforts ofthe finance function. Specifically, the finance pro-fessional provides services to the teamscharged with ISCM design, development, andexecution. These services include:l developing financial analyses of the costs and

benefits of ISCM to the participating firms;l creating performance benchmarks, mile-

stones, and measures to support the develop-ment of the ISCM business case;

l providing economic and nonfinancial evaluationof alternative improvement opportunities tofacilitate the development of ISCM priorities;

l participating in the identification and imple-mentation of new databases and informationtechnology enablers for key supply chain transactions;

l supporting process redesign efforts focusedon removing waste, reducing throughput time,and increasing the flexibility and responsive-ness of financial transactions across the supply chain;

l collaborating with finance and operations pro-fessionals in the partnering organizations tofind creative ways to solve logistics and sup-port problems;

l providing analytical support to ISCM teamsincluding identifying and estimating the costsand benefits of various decisions throughoutdesign, conversion, and execution efforts;

l creating management reporting and evaluationtools to ensure that the ISCM initiative meetsits objectives and delivers the required perfor-mance improvements; and

l ensuring the integrity of supporting databases,internal control procedures, key proprietarytechnologies, processes, and physical and/orknowledge assets.

The role of the finance professional, who is serv-ing as a team member with a unique set of ana-

lytical skills and competencies, is not to controlor audit the ISCM initiative. Finance profession-als are not the policemen of the changeprocess—they are active participants in themanagement process. Collaborating, supporting,enabling, and analyzing, the finance professionalbrings a unique perspective and objectivity aboutthe potential costs and benefits of the changefor all trading partners. These professionals pro-vide the facts and figures, as well as insights,required to ensure that ISCM achieves its prom-ised profit and performance improvements for allthe organization’s stakeholders.

The finance professional is required to have asolid understanding of the basic concepts thatmake up ISCM, as well as the core tools andtechniques that support its design, implementa-tion, and use. Having gained this basic knowl-edge, he or she can develop new analytical tools,performance metrics, and processes to supportand sustain the ISCM system in its drive forsuperior service to customers.

IV. ISCM IMPLEMENTAT IONSTEPSWhile each ISCM effort is unique, an organiza-tion’s actual implementation will likely includemost or all of the six steps outlined in Exhibit 1,although not necessarily in the order presented.Keeping this fact in mind, ISCM implementationsteps include:l assessing supply chain opportunities;l developing an ISCM vision;l developing an ISCM strategy;l creating the optimum ISCM organizational

structure;l establishing the ISCM information and commu-

nication network; andl translating the ISCM strategy into actions.

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The first stage of ISCM implementation isassessing customer needs within existing andnew customer segments. Since the driving forcefor implementing ISCM is the provision of superi-or service to customers, the starting point in itsdesign and rollout is gaining detailed knowledgeof what customers expect, when, where, andwhy. It is also important to determine how wellthe current supply chain is delivering againstcustomer expectations so that improvementscan be focused on those areas where majorproblems or opportunities exist.

To begin with, the existing and potential needs ofcustomers are identified. Then attention turns todeveloping a shared vision for the channel partners—one that can guide implementationand downstream execution decisions. Followedby a competitive strategy assessment, whichensures that the integrated design will provide acompetitive advantage, channel partners devel-op a supply chain strategy that makes optimaluse of interorganizational competencies and knowledge.

The supply chain vision, once designed andfocused, is transformed into reality through aseries of changes to the structure of relation-ships and communication among the channelpartners. Establishing the communication andinformation network is key to the development ofthe ISCM structure. Finally, the design is translat-ed into action as the ISCM strategy is executed.

Each of these core implementation stepsrequires a different set of tools and techniquesfor achieving its stated goals and providingrequired benefits at minimal cost and disruption.Typically, ISCM implementations are undertakenin the midst of ongoing operations at all of theaffected firms. Therefore, it is important that theinitiative be well structured and executed.

V. IMPLEMENTAT ION TOOLS ANDTECHNIQUES

Assessing Supply Chain OpportunitiesISCM provides unique opportunities for creatingadded value for customers by leveraging thecompetencies and knowledge of the entire trad-ing alliance, including:

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EXHIBIT 1. ISCM IMPLEMENTATION STEPS

l lowering costs;l providing superior customer service;l adding new value-added services;l achieving greater flexibility; andl attaining faster innovation.

The key to effective ISCM implementation is totarget service enhancements to the needs ofspecific customer segments. Not every customerwants the same bundle of services delivered inthe same way. It is the underlying diversity ofcustomer requirements that makes the develop-ment of a supply chain strategy, based on

careful assessment of opportunities for differen-tiation and competitive advantage, so important.

The development of a balanced supply chain seg-mentation approach requires the identification ofreasonably sized groupings of customers thathave similar requirements and expectations, asillustrated in Exhibit 2. Typical factors that arepart of a segmentation analysis include buyingrelationships, order-taking and billing require-ments, delivery and support services, and order-ing and delivery complexity.

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EXHIBIT 2. SUPPLY CHAIN SEGMENTATION FACTORS

Source: L. Torres and J. Miller, 1996: 49.

Meeting this challenge requires unique informa-tion about customer service levels, expecta-tions, costs, and segmentation characteristics.Various core tools and techniques are available

to provide the information required in theassessments phase of ISCM implementation,including:l customer service survey;

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EXHIBIT 3. CUSTOMER SERVICE SURVEY

Source: L. Torres and J. Miller, 1994: 56.

l transaction survey; andl value chain mapping.

Customer Service SurveyAn important technique in assessing supplychain opportunities is gathering key informationfrom customers through customer service sur-veys. Well-designed customer service surveysaccomplish several things, including:l providing a quantitative understanding of key

customer requirements for each of the basicfeatures of the service profile, including speedof delivery, delivery reliability, order complete-ness, product availability, and billing features;

l supporting the development of customer seg-ments by ensuring that a broad spectrum ofcustomers serve as the basis for the study;

l measuring the relative importance of each ele-ment of customer service, using a forced rank-ing (e.g., allocation of 100 points amongrequirements based on importance to cus-tomer) approach if possible;

l assessing the performance of the organizationcompared to the firm’s major competitors oneach element of customer service; and

l identifying and defining the relative signifi-cance of customer service issues in the cus-tomer’s overall buying decisions versus othercore features such as price, product features,quality, and innovation.

Typically, a cross-functional, cross-entity taskforce develops the survey. The first chore of thetask force is to decide on the method for com-pleting the survey (telephone, mail, interviews,focus groups, or a combination). Subsequentdecisions include the survey target within thecustomer’s organization, the definition of cus-tomer and product groups, the design of the sur-vey itself, and the analysis to be conducted oncethe study is completed.

The output of a customer service survey for alarge U.S. paper products manufacturer is illus-trated in Exhibit 3. It was developed from inter-views with a large number of customers of vary-ing size, geographic coverage, and supply chain.The task force discovered that all customersviewed order accuracy, fill rate, and on-time deliv-ery as very important. In contrast, the varyingimportance of other service requirements indi-cated a potential opportunity for the organizationto differentiate itself.

The task force learned that while their organiza-tion was performing well on these basic require-ments, all paper suppliers are doing well in theseareas, so these requirements presented noopportunities for differentiation.

For the other services providing an opportunity toset apart the organization’s offerings (in theupper left-hand corner), the task force learnedthat they did not consistently deliver many ofthese. An opportunity in the lower left cornerwould have been developed if an important cus-tomer considered it important, and if the eco-nomics supported it.

A well-designed customer service survey canhelp identify the existing versus required strate-gic focus of the supply chain. It also providesinformation on specific requirements and designcriteria for the supply chain, facilitating commu-nication and development of a shared vision andstrategy within the organization and across thetrading alliance. The valuable competitiveinsights yielded by a customer survey can pro-vide clear direction to the ISCM implementation,including the optimal choice from among therange of opportunities available for creatingsuperior customer service.

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For example, Mobil Oil Corporation’s lubricantunit in Fairfax, Va., ordered supply chain manage-ment software after it received disturbing resultsfrom its customer survey. The division, whichmakes oil, lubricants, and other materials, wastold by its customers that it was not very easy todo business with Mobil. Mobil did not alwayshave what the customer needed at the rightplace and at the right time. As a result of the sur-vey, changes were made that allowed Mobil todeliver on demand more often. Inventory wasbetter managed, and sales data were tied to sup-ply and inventory management for better fore-casting, as well.

Transaction SurveyA transaction survey is a real-time data collec-tion tool that isolates the supply chain’s perfor-mance on a specific transaction. Simple andinexpensive to use, the transaction survey pro-vides a powerful means of keeping in touch withcustomers on an ongoing basis. It also providesan effective tool for evaluating the level of supplychain compliance with customers’ expectationsand requirements and for assessing supplychain opportunities.

The basic transactions that customers have withthe supply chain include order placement, receiv-ing shipment, making order/status inquiries,placing complaints, receiving credits and invoic-es, and paying the invoice. Each of these trans-action types can be monitored for actual versusexpected performance by contacting a smallsample of affected customers (2-5 percent) on adaily or weekly basis.

While the exact structure of the transaction sur-vey can vary, several core questions typically areincluded in the questionnaire, such as:l Did the service meet all of the customer’s

needs?

l Was the order/request handled quickly andeffectively?

l Was the company/supply chain representativecourteous and responsive?

l How could the company have better met yourneeds?

l Are competitors more effective/responsive inperforming these activities for you?

The optimal way to conduct the transaction sur-vey is to make direct phone contact with anappropriate individual at the customer’s location.The details of the transaction should bereviewed to ensure that the response is reflec-tive of recent performance on the transactionunder study.

Transaction surveys can provide a source of real-time information about the current perfor-mance level of the supply chain. These surveyscan supply accurate, reliable feedback, whichserves much the same purpose as statisticalprocess control, finding and correcting problemsrapidly before they create excess costs or reducecustomer satisfaction and loyalty.

Value Chain MappingValue chain mapping allows the trading partnersto examine all the steps currently embedded inthe supply chain. This analysis supports thebrainstorming efforts required, eliminatingunnecessary steps and waste from the valuechain. Mapping also highlights opportunities toleverage the value-adding efforts of the partici-pating firms. Combined, these analyses lead tothe development of a list of continuous improve-ment initiatives that span every facet of thevalue chain.

A value chain is a process that comprises a num-ber of related activities, each adding uniquevalue to the final outcome. Value chain mapping

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is the analysis of the process to identify theunderlying activity structure and better under-stand the value added (or not) by each activity.Developed by a cross-functional, cross-organiza-tional team, the complete set of steps for provid-ing a material or service from initial supplysource to the end user is detailed. Whatemerges is a picture of the intricate interlockingsteps that span the supplier and purchaser rela-tionship. Three goals drive effective value chainmapping, including:l achieving the best/lowest total cost, including

all process, transactional, and handling costsfor the entire supply chain;

l pursuing the fastest cycle time performance;and

l identifying and implementing “best-in-class”practices for each core activity, subprocess, orprocess.

Value-adding activities are required elements ofthe supply chain, while essential activities encom-pass indirect support of the value-added efforts.Nonvalue-adding activities are not necessary orrequired. As detailed in Exhibit 4, a value chainmap can be used to categorize the supply chainactivities visually into three distinct groupings:value-adding, essential, and nonvalue-adding.

For example, a large pharmaceutical companycreated a multiplant model of its internal supplychain by using value chain mapping. The processmap identified 97 different production nodes—

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EXHIBIT 4. PURCHASING PROCESS VALUE CHAIN MAP

Source: D. Riggs and S. Robbins, 1998: 72.

links within the supply chain—spanning six differ-ent plants around the world. At the completion ofthe mapping project, the pharmaceutical compa-ny had achieved substantial inventory reductionswithout compromising customer service. In somelocations, inventory levels were trimmed by asmuch as 90 percent, with 20 percent to 30 per-cent being a common reduction at a given node.Lead times were reduced by 50 percent.

As a source of real-time information about the cur-rent performance level of the supply chain, trans-actional surveys supply accurate, reliable feed-back that serves much the same purpose as sta-tistical process control—finding and correctingproblems rapidly, before they create excess costsor reduce customer satisfaction and loyalty.

Developing an ISCM VisionISCM visioning places emphasis on thoroughlyunderstanding customer requirements and howthe current supply chain compares to competi-tors’ supply chains in meeting these require-ments. Effective visioning ensures that theresulting value proposition is consistent with theway the organizations have chosen to compete inthe market. Visioning is also used to establishstretch targets for ISCM, challenging the channelpartners to find innovative ways to improve sup-ply chain performance.

Finally, ISCM visioning provides the frameworkfor crafting a focused strategy for the supplychain. The visioning initiative serves to enhancecross-functional and cross-organizational linksand develop boundary-spanning solutions to thesupply system challenge. Exhibit 5 is an exampleof an ISCM vision developed at WhirlpoolCorporation, the world’s leading manufacturerand marketer of major home appliances, withrevenues of $8 billion in 1997. Whirlpool’s sup-ply chain challenge was to improve productivity,

lower finished goods inventories, improve prod-uct availability, and improve its cash-to-cashcycle.

Three core techniques that have proved helpfulin the visioning process effort are:l scenario building and “what-if” analysis;l cost/service trade-off; andl competitive/internal benchmarking.

Scenario Building and “What-if” AnalysisThe emphasis of this visioning tool is on thedevelopment of plausible “what-if” scenariosthat assess the risks and rewards of new supplychain opportunities. Decision trees and scenariobuilding efforts are used to assess the value ofthe different strategies open to an organization,based on the probability of various combinationsof events occurring. Some of the events thatmight be considered are changing sales volumesby channel, reaction of competitors, changes inoperating costs, and any number of potentialreactions by supply chain partners to strategicshifts.

Inherent in the development of scenarios for dif-ferent channel and segment opportunities is therecognition that the number, value, and complex-ity of different strategies must be tested. Twospecific forms of information are usually incorpo-rated when using this tool: 1) the impact on sup-ply chain partners and end users and 2) the cal-culation of risks and rewards.

Assessing the Impact on Partners and End UsersIf not pursued carefully, ISCM opportunities canactually alienate rather than integrate tradingpartners or customers. In this case the risks oflosing business might well outweigh any project-ed benefits from the implementation of new sup-ply chain opportunities. Three key questions that

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should be considered during the visioning phaseto help avoid undesirable results include:l How will the new channel affect existing sup-

ply/distribution channels?l What will be the true net increase in sales

(e.g., will the new channel take sales awayfrom existing channels)?

l How much impact will the new channel have ontrading partners’ margins?

The profitability of channel partners can be sig-nificantly affected by shifts in the supply chainstrategy. Changes in sales volume, mix, or ser-

vices offered can reduce revenues or increasecosts at any point in the supply chain. In devel-oping a vision, it is important that the impact ofalternatives on each partner’s economic perfor-mance be considered.

Calculating Risks and RewardsThe ultimate goal of differentiation and the devel-opment of new supply chain opportunities inISCM is to improve profits within acceptable risklimits. In creating scenarios and evaluatingthem, it is important for the channel partners tolay out what the economic impact of the deci-

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EXHIBIT 5. SUPPLY CHAIN VISION—WHIRLPOOL CORPORATION

Source: Planet Supply Chain Summit: Dallas, September 1998.

sions will be, as well as to openly debate andchallenge the risks of the identified options. It isoften useful to develop a business case for themost desirable options, including a cash flowanalysis, statement of impact on economic valueadded or related financial performance metrics,and estimated impact on nonfinancial perfor-mance criteria.

Cost/Service Trade-offA key activity of ISCM visioning is determiningthe level of performance required to meet (orexceed) customer requirements.

While delivering superior service is the goal, theongoing realities of business underscore the factthat the ISCM strategy is shaped by thecost/service trade-off. A useful way to depict thisrelationship is illustrated in Exhibit 6.

In creating this graphic, the cost-versus-servicelevels provided by the potential list of supplychain strategies are plotted against each other.On one end is the high-service, high-cost option(point A). This might imply more warehouses, useof premium transportation modes, and higherinventory levels so that high service levels canbe provided. Its alternative, the low-cost,low-service position, is placed at point B. Thisoption might imply a single warehouse, longerorder lead times to allow for more consolidation,and use of less costly transportation modes. Theresulting curve represents the optimal horizonfor assessing ISCM opportunities.

In most instances, the ISCM strategic optionswill fail initially to fall on the efficient horizon. Inreality, many organization’s supply chains are notat maximum efficiency, and they are located off

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EXHIBIT 6. COST/SERVICE TRADE-OFF CURVE

Source: W. Copacino, 1997: 28.

the curve (point C). By measuring the gapbetween the cost-service performance of the pre-ferred solution, channel partners can gauge thelevel of improvement needed and brainstorm toidentify alternative ways for closing the perfor-mance gap.

Competitive/Internal BenchmarkingObjective information is key to effective supplychain visioning. While a number of sources ofinformation can be harvested from the supplychain, benchmarking remains one of the mostpowerful tools available to ISCM visioning.

Benchmarking is a process of gathering, analyz-ing, and using data about the structure and per-formance of comparable processes within oracross organizations. Benchmarking is one ofthe best ways to gain consensus and motivationfor process improvement by emphasizing theevaluation of current performance against adefinable standard.

Many different approaches can be used to gath-er benchmarking information, including tele-

phone or mail surveys, research of external data-bases, focus groups, and company site visits.The focus of data collection can be on compara-ble internal processes, competitor performance,industry standards, or best-in-class performers.A best-in-class benchmarking study examinesthe practices and results of best-practice organi-zations for a specific type of process, regardlessof what industry the company is in.

Exhibit 7 illustrates the development of a hypo-thetical performance matrix that identifies keyinternal process drivers of a completed bench-mark study. Focused on key performance drivers,such as changeover time and line efficiency in amanufacturing setting, the performance matrixprovides an overview of the relative performanceof the supply chain against benchmarked alter-natives. By comparing current against best-practice results, the matrix provides details onwhat can be accomplished by an effective supplyprocess and the immediate value that could bereaped from achieving this level of performance.A strong incentive to improve is created by theobjective appraisal of benchmarked results.

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EXHIBIT 7. MATRIX OF POTENTIAL VALUE: BEST-IN-CLASS—INTERNALLY

Source: C. Poirier and S. Reiter, 1996: 165.

Most leading organizations also look externallyto determine how their performance compares tothe best in the industry or the “best in their cat-egory.” Exhibit 8 illustrates a hypothetical perfor-mance matrix that can be developed to find thehighest benchmarks for each driving categorythat can be proved to be attainable anywhere inthe industry. This matrix can be used to developmeaningful benchmarks in key areas, with thefocus on competitors and on firms that operatein similar industries or have similar characteris-tics. This requires looking for the best in class ineach category, regardless of the business. Thefinal column becomes the potential value forbringing all sites up to the best-in-class level ofperformance. The grand total for this column istypically quite impressive and can establish thebasis for a multiyear improvement effort, asactions are oriented around the highest-valuecategories in the prioritized system.

As organizations use this type of performancematrix to develop their visions for improvement,they invariably begin within their organization,

developing internal best practices before going tothe outside for further improvements. By startingon the inside, they bring existing operations tothe best level that can be achieved, either withcurrent technology and equipment or with a care-ful redeployment of people, equipment, andselected new investments. They then benchmarkagainst the best in class, regardless of the indus-try, in the areas critical to success and competi-tive advantage. With this information, they set outto exceed the benchmarks and establish newnorms for the competition to pursue.

Developing an ISCM StrategyISCM strategies are usually developed by anorganization to answer the question: “How do weget from where we are to where we want to be?”The strategies are shaped by analyses of valuechain maps that identify the constraints limitingthe performance of the entire supply chain andthe benchmark-driven strategic assessment.Strategies should be developed that help chan-nel partners manage identified constraints andachieve best-in-class performance.

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EXHIBIT 8. MATRIX OF POTENTIAL VALUE: BEST-IN-CLASS—EXTERNALLY


Whereas ISCM strategies are concerned with thecreation of new visions of supply chain manage-ment that transcend conventional techniques ofpurchasing, producing, moving, storing, and sell-ing products and services, their real importanceresides in their ability to assist executives indesigning a clear blueprint for new organization-al architectures.

Two core tools and techniques have proved espe-cially helpful in the ISCM strategic developmenteffort. These tools and techniques include:l customer profitability analysis; andl order-to-cash model.

Customer Profitability AnalysisCustomer profitability analysis provides insightinto the profitability of various segments, helpingchannel partners focus on creating competitivestrength in those areas where their efforts willyield the greatest payoff. Profitable marketshare, not share at any cost, is the key to lever-aging resources and competencies.

The costs for servicing a specific customer orsegment can be found in every corner of theorganization and the supply chain, from sale toprocurement to manufacturing on to distributionand pre- and post-sales customer service. Eitherdirectly or indirectly, most of the costs within thechannel alliance should be tied to creating cus-tomer value and satisfaction.

Inventory carrying cost and transportation costto meet unique customer requirements are twokey costs to consider when conducting a cus-tomer profitability analysis. Other areas that canbe affected by unique customer demandsinclude order fulfillment, finance, and customerservice, each of which may be asked to performspecific activities for one customer segment thatothers might not require. The frequency of orderplacement, delivery, sales calls and support, andaccounts receivable efforts all create differentlevels of cost and potential profitability for thesupply chain.

Activity-based cost management, with the inclu-sion of adjustments for the amount of effort one

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EXHIBIT 9. CUSTOMER PROFITABILITY ANALYSIS


customer requires versus another (intensity orcomplexity factors), can provide much of theinformation required to analyze the relative prof-itability of different customer segments.

The resulting analysis, illustrated in Exhibit 9,often reveals that some customer segments arenot profitable to serve. In fact, it is often foundthat 20 percent of the customers generate morethan 80 percent of the profits. The results of thistype of analysis suggest several different things,including:l early strategic efforts within the supply chain

should ensure that the differentiated supplystrategy emphasizes the features and servicesmost desired by the segments with the highestprofit margins;

l additional services should be analyzed toensure that they will yield profit improvementsin all customer segments;

l low-performing segments will be unlikely candi-dates for enhanced services unless they willsupport premium pricing; and

l dropping segments is not the first order ofbusiness. Instead, improvement efforts shouldbe undertaken to convert unprofitable or low-profit segments into ones with acceptablemargins. The strategy for low-profit segmentsshould emphasize process improvementrather than service enhancements.

Customer profitability analysis can be used todesign the sales and operating policies thatguide the business and can also be used tofocus continuous process improvement efforts.

Order-to-Cash ModelWhen developing an ISCM strategy, it is impor-tant to create a common language and under-standing of the value creation process amongthe supply partners. The order-to-cash model isa tool that facilitates this knowledge building and

sharing effort. Across the top of Exhibit 10 arethe activities that comprise the order fulfillmentcycle for the supply chain. Underneath thesecore activities are the key supporting activitiesfor that part of the process to be completedeffectively. For instance, forecasting and manag-ing customer orders are key elements of the firstphase of the supply process, as are respondingto customer requirements and completing keyaccount analysis.

From generating orders through order entry andcustomer support and product warranty, thereare activities that need to be completed synchro-nously by one or more of the supply chain part-ners to achieve optimal customer service levels.A graphic model also allows the developmentand strategic assessment team to note wherecontinuous improvement efforts are underwayand identify points where changes still need tobe made. Two assumptions drive the use of theorder-to-cash model:l any organization of any size has a number of

important initiatives already started, in variousstages of temporary completion. It would behard, and deemed inappropriate, to divertattention away from the best efforts, so jointinitiatives should be focused on building fur-ther enhancements; and

l no organization has all of the resources neces-sary to complete all of the valuable initiativesat one time.

Through a mutual sharing of resources, the sup-ply chain can improve the performance andremove many of the constraints facing a non-aligned competitor. First and foremost, channelpartners should eliminate activities in the matrixwhere sufficient resources are already beingapplied, where substantial improvements havealready been gleaned, or where more resources

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would actually inhibit the successful completionof current improvement efforts.

As the order-to-cash model is completed, thechannel partners will be able to identify activitiesthat should be eliminated or minimized andthose to which additional resources need to bedirected. The model also provides a useful base-line for identifying customer segments and spec-ifying the unique demands and effort each seg-ment requires from the supply chain. Focusingcollective thinking on those areas most likely toyield high payoffs for all involved parties is theprimary benefit of the order-to-cash model.

Creating the Optimum ISCM OrganizationalStructureOnce the ISCM strategy is created, it needs astructure. The ISCM organization does not sim-ply apply a traditional pyramid structure to a newfunctional initiative. In fact, the ISCM structureisn’t really a structure at all—it is a comprehen-sive collection of work tasks and role definitions,processes, organizational mechanisms, andcompetencies that together span traditionalboundaries, wherever they occur.

To create an organizational structure founded onbusiness partnering concepts, it is important toensure that internal barriers to cooperation are

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EXHIBIT 10. ORDER-TO-CASH MODEL


first removed. Breaking down functional orexpertise-based silos to create the integratedstructures required for synchronous actionbegins inside each channel partner organizationbefore it can be ready to link efforts with itschannel partners. Team problem solving andcross-boundary sharing of information mustbecome engrained in the culture and actions ofpartnering organizations.

Several specific tools and techniques are avail-able to develop operational alternatives for thealliance, including:l cross-channel process teams;l strategic vendor-customer-manufacturer

alliances;l outsourcing; andl business process redesign.

Cross-Channel Process TeamsCross-channel process teams that span theentire supply channel have become an increas-ingly important dimension of competitive advan-tage. The linkage of underlying marketing, pro-duction, and information flows across the supplychannel, from raw materials to end consumers,creates a powerful foundation for performanceimprovement and innovation.

Several primary advantages accrue to organiza-tions using cross-channel process teams: 1)sharing infrastructure competencies; 2) leverag-

ing channel infrastructures; 3) reducing processcycle times; 4) increasing process capabilities;5) expanding market reach; and 6) developingunique solutions.

The cross-channel process teams shown inExhibit 11 are made up of individuals with com-plementary skills who perform similar activitieswithin each organization involved in the supplypipeline. In other words, the professionals work-ing in sales at the manufacturing site, at thewholesaler, and at the retailer all belong to thesame cross-channel process team. The samecan be said for similar teams involved in trans-portation, purchasing, and other functionalareas.

Creating total channel value does not necessari-ly mean radical reengineering of underlyingprocesses, organizations, or relationships.Instead, the emphasis of these teams is onbuilding commitment to the other organizationsin the supply chain. Other goals are borderlesssharing of power and knowledge among channelpartners, empowerment of teams to develop andimplement innovative solutions to supply chainchallenges, and the creation of an effectivebasis for combating politics and authoritarianismin one or all of the affected organizations.

There are six key steps to follow in the develop-ment of cross-channel process teams.

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EXHIBIT 11. CROSS-CHANNEL PROCESS TEAMS

Source: D.F. Ross, 1998: 310.

l Develop objectives. Multi-company process own-ers need to distinctly define the channelprocess to be used and agree on the objectivesand benefits to be gained from its deployment.

l Confirm commitment. All individuals and orga-nizations that participate in the supply chainmust be fully committed to providing criticalresources, participating in joint activities, andcontinually searching for improvements thatbenefit the trading alliance.

l Develop ISCM teams. The individuals who willserve on cross-organizational process teamsneed to be identified and assigned by the par-ticipating firms. It is important that therequired skills and competencies for teammembers be detailed for and possessed bythe candidates.

l Develop network links. Inter-channel communi-cation and information linkages are a criticalelement of effective ISCM. The process teammembers must have access to, and the abilityto leverage, technology enablers such as EDI,fax, computer notes, and related support toolsif the virtual structure that is a prerequisite tocross-organizational teaming is to be achieved.

l Ensure team management skills. There is noclear process owner in a multi-companyprocess team. Multiple leaders with multipleobjectives are more likely to be found in ISCMprocess teams. Creating a team structure thatwill accommodate this factor and that willmeet the unique needs of each trading partneris critical. Strong team management skills arethe means for achieving this difficult goal.

l Develop performance measurements. Withoutthe creation of effective channel-wide perfor-mance measurements, the integration effortwill not reach its potential.

The success of joint efforts, such as Apple’spartnering with Sony to bring the MacintoshPowerbook to market and with Sharp to manufac-

ture the Newton, underscores the simple princi-ple that forming collaborative inter-companyprocess teams, regardless of how they areformed or what their objectives are, can provideunique sources of competitive advantage.

Strategic Vendor-Customer-ManufacturerAlliancesOnce organizations begin to exhaust what theycan do autonomously, they begin crossing organi-zational boundaries. For example, if they aredeveloping a new product and want to do it morequickly, they may need to use the assets of theirsuppliers. Organizations may also need to useassets of their customers in terms of what theywill do in product service design, what invest-ment they will make, and what investment theirtier one and tier two suppliers will need to make.Building alliances, or processes through whichthe channel partners pool resources in a trustingatmosphere focused on continuous, mutualimprovement, is key to developing a sustainablecompetitive advantage.

For example, some organizations, including BoseCorp., IBM Corp., Honeywell, Inc., and AlliedSignal, are bringing carefully selected vendorsinto their plants or warehouses. This approach isknown as JIT II, a concept that was developedoriginally by Bose Corp. Under JIT II, vendorshave access to their customer’s productionschedules. Based on that and other information,they order raw materials, parts, or componentsand get them to the manufacturing line just intime. The benefits for the buyer are significantlylower costs and reduced administrative burdens.The vendor gets higher sales volumes, lowercost of sales, reduced administrative costs, andlong-term contracts. Both parties, of course, alsobenefit from the close relationship that isrequired to make this joint effort work.

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Extending the core supply chain to other organi-zations in this way creates an entire set of chal-lenges as the costs of finding and integratingnew members is compared to the benefits of theenhanced supply network structure. The dangeris that unfocused supplier integration can createwaste and duplication instead of reducing it. Theneed in many organizations is to examine close-ly what is necessary to tie critical suppliers intothe overall finished production or new productdevelopment processes. The degree of complex-ity tends to rise from that required for a structureserving a simple partnership or alliance, but thepotential rewards also rise. Because alliancesdeal with opportunities to improve over time andamong multiple organizations by jointly looking atissues and problems, it is often possible to builda much better overall solution than would bepossible by simply looking at problems from thepoint of view of one company’s organization.

Among other organizational considerations thatneed attention as companies get involved in vendor-customer alliances is the matter of recon-ciling differences in operating style and coordina-tion. Thought needs to be given to the appoint-ment of leadership or coordinating persons topreside over the integration among organizations.For instance, problems involving shifts in person-al relationships may need to be addressed.Typically, one organization’s technical communitycomes to think that it has sole responsibility forproduct design and development. However, in anew integration mode, design and developmentmay become a shared decision process.

In addition to personnel considerations, therestructuring needed to make vendor-customeralliances work often involves resolution of alarge number of disparate problems. Someexamples are:l ownership of intellectual properties, a major

issue in new product development;l investment concerns, such as how much

investment each party will have to make interms of human capital, resources, and capitalinvestment, versus what each party can expectto gain from its investment;

l determination of investment priorities in com-mon types of computer-aided design;

l information disclosure concerns for ongoingproduction or order fulfillment;

l identification and resolution of compatibilityissues between alliance information systems,for instance, how a firm can provide informa-tion regarding its production plans and sched-ules to its first- and second-tier suppliers; and

l consensus on methods of analysis of ongoingproduction, including reaching agreement onhow to improve the product cost structure interms of how the product is being produced,where inventory is being stored, and howinspection is being carried out.

Strategic vendor-customer alliances, if appliedthoughtfully and managed well, can be benefi-cial. For many companies they are a critical suc-cess factor. However, partnerships cannot betaken lightly.

Outsourcing1

While the creation of strategic alliances is theultimate in ISCM structures, organizations thatlack the core competency, resources, or inclina-tion in their own supply chain processes may findthat outsourcing is a preferable solution. In out-sourcing, an organization makes the consciousdecision not to pursue the development of leading-edge practices in every area of the busi-ness. By outsourcing, these organizations findthey can direct their scarce resources to activitiesthat strengthen their core competencies.

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1 Outsourcing refers to the decision to have processes per-formed by outside agencies. Numerous tasks, processes, andeven entire systems and departments can be outsourced inaddition to outsourcing production.

However, while outsourcing is by far the mostcontroversial form of alliance, it can also holdthe greatest risk and return potential. The con-troversy evolves around the idea that others canperform a task or set of tasks better, faster, orcheaper than can be done in-house. The contro-versy also concerns the effect this has on jobs.

Organizations considering outsourcing need tofocus not only on the potential effect on its work-force but also the processes and tasks mostlikely to be outsourced. Different processes andtasks have different levels of importance to anorganization’s objectives. The higher the degreeof importance, the higher the level of compe-tence and resources dedicated to ensuring thatthe task is performed well.

At the center of an organization are its level one orcore processes. Core processes are those tasksthat create the goods or service for which theorganization is known or are key to its survival. ForWEPCO, a utility company, level one processesmight be the generation and distribution of elec-tricity. For Miller, it might be the process for brew-ing beer. But both companies perform many tasksbeyond these core processes.

The next level out from these core processes arestrategic support or level two processes—thosetasks that directly support the core processesand help ensure that the core processes areaccomplished. For example, warehousing formost companies would not be viewed as astrategic function or task, but WEPCO and Millerwould most likely view the storage of coal or bar-ley as strategic support processes.

Warehousing and storage in most companieswould be an example of a support or level threeprocess. Support processes are those activitiesthat are required but that add little direct value

to the accomplishment of the core processes. Amailroom and an accounting department may berequired for an organization to operate, but theyare somewhat removed from a core process,unless the organization’s business is to provideaccounting or mail services to its customers.

From the standpoint of outsourcing, the furtherthe process is from a core process the lower therisk in outsourcing and the greater the potentialreturn. The reasoning is based on the core com-petencies of the organization to which theprocess is outsourced. WEBCO outsources themanagement of its fleet to Ryder Truck. RyderTruck’s core competence is fleet management;therefore, Ryder should be able to perform thetask better, faster, and cheaper once it under-stands WEPCO’s needs.

Core processes are rarely outsourced. Theexception can be a lack of capacity or specialneeds and skills. Strategic processes are sus-ceptible to outsourcing but incur higher risks ifthe outsource organization does not performwell. Exhibit 12 depicts the three process levelsand makes distinctions among their levels ofimportance to an organization.

As organizations evaluate the outsourcingoption, two types of factors are in play, a pushset and a pull set.l Push set. The push set includes various inter-

nal skill deficiencies (typically technical, func-tional, or process in nature) and infrastructuredeficiencies (typically physical or technologicalin nature). These deficiencies push organiza-tions in favor of outsourcing as the mostattractive option for redressing these short-falls, considering the time, costs, and risksinvolved.

l Pull set. The pull set includes various dimen-sions of competitive differentiation or advan-

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tage in the market. In the supply chain arena,these revolve around improved cost efficiencyand improved speed and flexibility. Theseadvantages pull companies to outsourcing.

The most frequently outsourced types of supplychain management activities include:l transportation and operations management;l sourcing and procurement;l warehousing and distribution center opera-

tions; andl manufacturing.

Ford Motor Company awarded an outsourcingcontract to Ryder Integrated Logistics Inc. todesign and manage an integrated just-in-timesupply chain and transportation system forFord’s 20 North American manufacturing plants.The project integrates their plants’ individualsupply chain systems and connects them to sup-

pliers for real-time information about componentand part inventories, as well as real-time trackingof deliveries. The system helps Ford “squeezeout” the cost of transporting parts and compo-nents to its plants. The consolidated system willlet Ryder and Ford managers monitor whenplants in the same area need deliveries of simi-lar auto parts. Currently, each plant’s shipmentsare delivered individually by separate trucks.Managers now will be able to coordinate partstransportation to multiple plants in the sameregion using just one truck. Ultimately, outsourc-ing will help Ford save money, streamline produc-tion, and eliminate inefficiencies.

Business Process RedesignFor many older organizations, supply chain net-works are often the product of years of decisionsdriven by tax laws, duties, franchise rights, andtransportation channels. These networks can be

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EXHIBIT 12. OUTSOURCING POTENTIAL

Source: Miller, 1998: 153.

so complex and archaic that they need to beredesigned.

For example, Pepsi-Cola has a large and enduringdistribution system that grew and matured incre-mentally over time. Franchises were sold, bot-tling lines were built, and warehouses wereopened and closed with little regard to demo-graphic trends and long-term distribution needs.Decades later, the resulting distribution system,although amazing in its size and ability to deliv-er, was operating under the shackles of complex-ity. Introducing new products throughout theUnited States became an ongoing challenge, asdid coordinating marketing campaigns and serv-ing national customers.

Fortunately, supply chain processes lend them-selves extremely well to business processredesign (BPR).

The emphasis in BPR is on removing waste fromthe chain of activities performed to meet a cus-tomer requirement or support the productiveprocess. BPR in ISCM supports the drive to findinnovative ways to remove inefficiency and costas the value chain expands to the channelalliance.

In ISCM, the principles of business processreengineering are applied to the overlappingprocesses among supply chain partners. It is inapplying improvement efforts across these com-monalties among supply chain member organiza-tions that truly radical, innovative, and advantage-creating solutions are found.Customers do not care if one or many organiza-tions are engaged in the process of meetingtheir need—they care only about the total valuethey receive for their expenditures.

Applying BPR to the supply chain requires thatthe management team set priorities and chooseredesign targets that promise the greatestimprovement. Areas that might be consideredinclude forecasting demand, order fulfillment,and purchasing. Having chosen a target processor subprocess, a process improvement team isdeveloped, made up of people from each of theaffected organizations.

Organizations benefit by improving existingprocesses. Within ISCM the improvement poten-tial broadens significantly. BPR partner organiza-tions understand how their internal practices cre-ate cost and cause delay within the supply chain,as well as for their trading partners. Often thenewly designed process replaces many different,fragmented processes that might have beeneffective and efficient for one stand-alone com-pany but that are suboptimal when viewed fromthe perspective of the entire supply chain.

BPR implies a series of paradigm shifts from theold way of doing things to the new. Once thevisions that embody these shifts are internal-ized, they become powerful motivators for thepeople implementing the reengineering, who arethen able to assess the potential impact ofthese shifts. In redesigning the supply chain,these paradigm shifts include:l moving from arms-length, adversarial supplier

relationships to close, cooperative supplierrelationships and partnerships;

l moving from an “over-the-wall,” departmentallyoriented environment to cross-functionalteams;

l moving from purchasing and supply decisionsbased primarily on initial price to decisionsbased on life-cycle costs;

l moving from a bureaucratic process with manyhand-offs to a flat, “one-stop” environment; and

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l moving from a paper-intensive, heavily clericalrequisitioning environment to a “paperless”environment.

BPR applied to supply networks can be a primarysource of leverage and competitive advantage.Creating the information and communication net-work is yet another area in which joint resourcescan be brought to bear to create superior perfor-mance within the supply chain.

Establishing the ISCM Information andCommunication NetworkThe thread that ties the supply chain together isthe information and communication network.This network transforms the many organizationsinto one seamlessly functioning supply chainwhole. The broad goal of this information andcommunication network is to supply computer-ized intelligence to an ever-growing network ofraw-material suppliers, factories, warehouses,distribution centers, delivery vehicles, andpoints-of-sale. That way, each player in the sup-ply chain conducts business with the latest andbest information from everyone else. Product

moves from point of origin to that of consump-tion as quickly as possible, at the lowest cost.

A variety of supply chain network tools managethe Plan, Source, Make, and Deliver processesboth inside a company and among a firm and itssuppliers and customers. These tools can rangefrom transactional systems (focused on day-to-day operations) to planning systems usedfor weekly or monthly operational planning.Strategic tools can also be used to design andimplement the supply chain infrastructure.

While there is no single supply chain manage-ment solution to the challenges of creating across-organizational information network, thereare hundreds of supply chain management tools,ranging from ERP systems to sophisticated sup-ply chain planning tools and PC-based forecast-ing packages.

As suggested by Exhibit 13, the underlying rea-son for their use comes down to one simpleobjective—to support the operation of and flowof information in the supply chain. Key tools andtechniques include:

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EXHIBIT 13. SUPPLY CHAIN ACTIVITIES

l strategic business planning;l demand planning;l distribution planning;l supply planning;l transportation planning;l warehouse management;l enterprise resource planning; andl electronic commerce.

Strategic Business PlanningStrategic business planning tools are used to col-lect and deliver the information required to deter-mine the optimal infrastructure of the tradingalliance and to support strategic decision making.For example, many organizations have a growingneed to coordinate production and distributionacross national boundaries. Production is fre-quently divided among several factories. For many,this is a long, slow, and highly sensitive process,but the opportunity to reduce stock levels (andunit costs) while improving response times is vitalif competitiveness is to be maintained.

Decisions that fall under the heading of strategicbusiness planning include the number, capacityrequirements, and preferred location of distribu-tion centers, warehouses, terminals, and plants;supplier and transportation mode preferences;optimal material sourcing locations and productgroup manufacturing sites. The types of informa-tion required to support these efforts includetime-phased customer/regional demand pat-terns; key resource constraints and costs; trans-portation, warehousing, and manufacturingcosts; performance capabilities; and overall prof-it and return on investment targets.

Demand PlanningDemand planning entails predicting the futuredemand for the range of products and servicesprovided by the supply chain. Focused on improv-ing key demand drivers through statistical mod-

eling of prior demand patterns, demand planningtools provide decision-making support. Thesesophisticated forecasting models deploy a variedrange of simulation and analytical approaches,incorporate projected promotion-based demandand price elasticity, and allow the examination ofthe impact of varied customer, supplier, andindustry trends on overall requirements.

Demand planning tools depend on accurateinformation from retail, distribution, manufac-ture, and supply locations. Enabled by technolo-gies such as EDI and supported by the creationof integrated, networked databases, these toolsmerge scanner data from retail point-of-sale sys-tems with forecasts to create real-time adjust-ments to the supply chain sourcing plan. Sinceno retail plan goes exactly according to predic-tions, adjustments can be made to accommo-date the incremental changes necessary. Thisinformation is then fed to the manufacturer’splanning, scheduling, and distribution systems;orders are processed effectively; and the goodsare sent to the stores without the need forexcess safety inventory stocks.

For example, the Lee Apparel Company, based inMerriam, Kan., is part of VF Corp., the giantReading, Pa.-based clothing maker. VF Corp. hasa replenishment program with nine retailers, sup-plying them with jeans and other merchandisewithin seven days, based on point-of-sale data.In the case of four of those retailers, Lee auto-matically ships the jeans to maintain what itcalls a “model stock.” Basically, a “model stock”is the mix of products that Lee and the retailerdetermine they should keep in a store to maxi-mize sales. Point-of-sale data are transmittedelectronically from the retailer to Lee on either aweekly or daily basis. The retailer can easily con-vey the identity of fast-selling products becauseeach garment is bar-coded. That is, every Lee

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garment shipped to a store comes with a univer-sal product code (UPC) bar code that is attachedat the manufacturing plant. When that bar codeis scanned at the checkout counter, the retailer’scomputer records the item’s style, color, andsize. Lee uses the point-of-sale data for morethan just determining what to ship. That informa-tion also is used to drive its production.

Related tools for demand planning include prod-uct life-cycle modeling, online review of actualconsumption and unexpected changes for allsupply chain partners, exception-based perfor-mance measurement and reporting, and recon-ciliation of multiple forecasts at the intra- andinter-enterprise level.

Distribution PlanningThe cost of distribution typically accounts for upto 40 percent of an organization’s sales revenue,and of that amount as much as 60 percent goesfor transportation. Even if a manufacturer cannotreduce its transportation costs, eliminating thewarehouse or minimizing stored goods inventorywill make a big difference in the bottom line.

Distribution planning begins with anticipatingdemand. Then as orders come in, manufacturersdecide how to make, store, and distribute goods.It requires users to look at the big picture, notjust implementing new picking techniques tooptimize the warehouse or reducing the numberof shipments to minimize transportation costs.

A good example is in the furniture industry. Amanufacturer may make only a few styles ofsofas yet offer hundreds of fabrics and cover pat-terns. By displaying a few finished sofas andnumerous fabric swatches at showrooms, themanufacturer can eliminate finished goodsinventory. The manufacturer then predicts cus-tomer demand and builds frames and includes

the stuffing, which is the time-consuming stage.When an order is received, the manufacturerdecides which facility will fulfill the order, basedon proximity to the customer location and prevail-ing shop-floor capacity. Workers then cut the spe-cific fabric, attach it to the sofa frame, and shipthe sofa.

It is easier to predict demand for sofa stylesthan it is to predict demand for sofa styles withspecific fabrics or covers. Customers want thefreedom to select options, but they also wantquick delivery. Accurate distribution planningdemand helps manufacturers meet both thoserequirements.

Ortho-McNeil, a pharmaceutical manufacturer,uses a forecast to plan distribution and trans-portation activities. As a result, distribution man-agers plan to receive shipments from manufac-turing facilities, know how many workers arerequired for put-away, and predict space require-ments. Cisco Systems, a supplier of internetworking solutions, uses distribution planningwith product and part allocation to determineinventory levels for its distribution hubs andparts depots. Having the correct inventory levelsat the parts depots enables the company tomeet its customers’ service requirements, typi-cally a two-hour or four-hour response contract.

A range of tools are available for distributionplanning, from decision-support tools, which useconstraint management to optimize operations,to software products for detailed planning ofproduct distribution and deployment, includingvendor-managed inventory and closer integrationwith forecasting systems.

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Supply PlanningThe other side of the coin in managing the flowof goods through the supply pipeline is supplyplanning. Supply planning tools support strate-gic, tactical, and operational decision making,providing guidance on which products to make,how to make them, what order to make them in,and where to source materials. Supply plans arelargely created assuming a given demand plan. Itis typically achieved through a sales and opera-tions planning (SOP) process with multifunction-al teams meeting to develop a consensus-basedoperational plan. This process ensures that sup-ply meets demand.

Input from the supply side comes from the orga-nizations and suppliers. The output of the SOPprocess consists of the operational supply

plans. Sophisticated supply planning toolsinclude interactive planning, simulations, andkey constraints on the system (i.e., capacity uti-lization, customer priority, and due dates).Exhibit 14 depicts a typical business model inwhich input from the demand side includes onlyan unconstrained demand forecast.

Black & Decker Corp. is an example of a compa-ny that uses supply planning tools to improve itssupply/demand planning efforts. Selling 40 per-cent of its products through large retailers suchas Home Depot and Kmart, the company wasfaced with the need to meet a seven-day “ship orcancel” sourcing requirement. Discovering thattheir existing planning systems were incapableof handling this requirement, the company’smanufacturing technology group developed a

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EXHIBIT 14. INTEGRATED SUPPLY PLANNING PROCESS MODEL

Source: Advanced Manufacturing Research (AMR): 1998.

proactive system called “capacity-optimizedplanning” (COP) to address the impact of seven-day demand directly.

Specifically, the system tracks the availability ofparts for seven-day items. When it is found thatparts will not be available, the entire manufactur-ing system is “relieved” of the order, allowingplants to focus on making items that could becompleted on time. The customer is notified atthe same time as the plants, allowing the entiresupply chain to adjust its efforts. Manufacturingflexibility, as well as supply chain communicationand responsiveness, have been enhanced byimplementing this supply planning tool.

Transportation PlanningAt the heart of the supply chain is the set of corelogistics activities that ensure that goods aremoved between trading partners on time, in theright quantity, and with guaranteed quality, allwithin acceptable cost limits. Transportation pro-curement and management alone can consumemore than 40 percent of an organization’s physi-cal distribution costs and 3 percent to 12 per-cent of overall corporate revenues. Total costing

methods underscore the financial impact of thiscritical supply chain process.

Service is equally important. Competitive pres-sures require companies to maintain a high levelof differentiated services for their customers,business partners, and internal units.Restraining costs while maintaining or enhancingservice levels has become the major challengefacing executives responsible for transportation.

Transportation planning tools facilitate theseactivities, providing information and decisionsupport on preferred carriers, consolidation andback-haul opportunities, optimal load creationand sequencing, vehicle utilization optimization,shipment tracking, and dynamic routing/routescheduling.

The effective use of transportation planningtools, such as those illustrated in Exhibit 15, canresult in automated, faster shipment planning;quicker identification of consolidation opportuni-ties; and the capability to focus shipping choiceson fewer, more efficient carriers. The increasing

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EXHIBIT 15. TRANSPORTATION PLANNING ELEMENTS

trend toward customer-driven, small-order sizes,with more frequent deliveries, suggests thatdecision-support tools that help the supply chainoptimize its transportation planning are fastbecoming a requirement for achieving competi-tive advantage.

Warehouse ManagementA decade ago, the warehouse was viewed prima-rily as a necessary evil to hold inventory neededto mitigate risk and uncertainty in physical distri-bution. The warehouse played an important rolein distribution, but that role was not recognizedas a source of competitive differentiation. The sit-uation today is much different. Supply chains aretrading inventory for information. The warehouseis taking on new roles, each a source of compet-itive differentiation. To cite three such roles:l Customers are expecting suppliers to provide

specialized physical distribution services (e.g.,more frequent and complex deliveries, storespecific labels), often in promotion-driven envi-ronments. These requirements are pushed upthe supply chain, well beyond the retail environ-ments where they were introduced, into finalassembly, component manufacturers, and rawmaterial supply. These requirements influenceall aspects of warehouse operations includingreceiving, inspection, put-away, forward replen-ishment, picking, value-added processing,packing, and shipping.

l Channel partners expect distribution centersto handle flowthrough operation, cross-dock-ing, merge-in-transit, and customer-specificshipment configurations. This ability requiresreal-time process monitoring of events on thefloor, the yard, in transit, and in manufacturingoperations.

l Customers expect value-added service pro-cessing in such diverse environments asapparel, component assembly, electronics, dis-crete, and repetitive manufacturing.

Differentiated logistics strategies (by cus-tomer, market, and product), as well as post-ponement and late differentiation strategies inmanufacturing, are blurring the distinctionbetween manufacturing and warehousing. Insome instances, where products are packagedin kits from components, salable items are cre-ated just before packing and shipping, with thedistribution center taking on some attributesof a manufacturing operation.

Warehouse management tools provide the fol-lowing functionalities:l Real-time process monitoring to improve visi-

bility of real-time conditions inside and beyondthe four walls of the warehouse, including yardoperations, production, and transportationactivities. Process monitoring systems spottrends to predict future conditions that fall out-side the allowable tolerances of executionplans. Examples of such functionality includekey performance indicator reporting systems,management dashboards, and executive infor-mation systems. The reporting scope of thesesystems extends beyond the physical invento-ry status and covers the status of work againstplans, inventory, orders operator performance,and equipment condition.

l Active, alert, and intelligent messagingimproves the execution of flow-through, cross-docking, and merge in-transit distribution prac-tices involving shippers and carriers beyondthe four walls of the warehouse.

l Decision support capabilities analyze alterna-tive solutions to planned workloads placed ona warehouse (e.g., volume of value-added ser-vice processing) and critical conditions predict-ed by real-time process monitoring.

l Activity-based cost collection and reporting.Decision support capability hinges on the qual-ity of information available for actual costs ofkey tasks and processes based on the

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resources consumed. Facility managers, sup-ply chain planners, and account managersneed accurate activity-based cost (ABC) infor-mation to analyze customer service agree-ments executed at the warehouse, to assigndemand for value-added service (within a facil-ity and across the network), and to addressstrategic issues.

Enterprise Resource Planning (ERP)ERP did not begin as a supply chain manage-ment tool, but as organizations have begun tounderstand the advantages of integrated intra-enterprise information, they have appliedthese solutions to the challenges of inter-enterprise management.

ERP systems are transactional tools that capturedata and reduce the manual activities surround-ing the processing of financial, inventory, andcustomer-order information. These systemsachieve a high level of information integration byutilizing a single data model, developing a com-mon definition of the shared data’s characteris-tics and meaning, and creating a set of proce-dures for accessing and using the data.

With origins as single-plant materials require-ments planning (MRP) systems, most ERP prod-ucts have grown into the ERP designation byadding applications to cover other functionalareas, such as order entry and plant mainte-nance, within the plant or division. Most ERP sys-tems became multiplant-enabled by replicatingsingle plant functions and providing rudimentarysupport for shared data. Unfortunately, littlefunctionality has been developed to address theinter-plant and intra-organization processesoften found in large enterprise supply chains.ERP vendors have been slow to recognize thatsupply chain management requires

process-oriented systems that support cross-organization and cross-company collaboration.

The Supply Chain Council has identified the needfor supply chain applications in four broad areas,including tactical logistics, the distributed enter-prise, collaborative supply chain, and electroniccommerce. From this perspective, no ERP vendorcan fully support all requirements. However, thesupply chain strategies of the leading ERP ven-dors represent a wide variety of initiatives rang-ing from interfaces with niche applications to thecreation of new levels of enterprise and collabo-rative applications. Some of the conceptsexpressed by the Supply Chain Council are begin-ning to show up in the product developmentvisions of today’s leading vendors.

Electronic CommerceElectronic commerce (EC) is the application ofcommunication and information-sharing toolsamong channel partners in the pursuit of busi-ness objectives. Three distinct types of electron-ic commerce exist: l Information access provides search and

retrieve capability for public domain and propri-etary data archives (examples include wwwand Gopher sites or private databases on legaldecisions). In addition to access, a fully func-tioning service of this type would provide ser-vices related to the creation, update, andmaintenance of information.

l Shopping services allow one to seek and pur-chase goods or services through electronicnetworks. This type of EC is the most popular-ly held image when the term “electronic com-merce” is used.

l Virtual enterprises are business arrangementsby which enterprises separated by geographyand core expertise are able to engage in com-plex interrelated business activities (commonroles played by these enterprises include cus-

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tomer, supplier, shipper, regulatory agency,subcontractor, bank, and information serviceprovider). EC is a major enabling technologythrough which such business arrangementscan flourish. Mature examples in this categoryare electronic data interchange (EDI) arrange-ments between original equipment manufac-turers (OEMs) and their suppliers or betweenlarge retailers and their suppliers.

Electronic commerce utilizes several technologyenablers to create a fluid supply network: barcoding, EDI, point-of-sale (POS) information,e-mail, electronic storefronts and selling sys-tems, supplier marketplace, web-enabled ERPapplications, and universally accessible propri-etary applications (such as Federal Expresspackage tracking system).

Bar codes provide a common identification codethat links the data surrounding the sourcing,shipment, sale, and replenishment of specificproducts. EDI allows trading partners to moveinformation electronically. Finally, POS informa-tion is the key trigger for the replenishmentcycle, integrating the forecasting, demand, sup-ply, warehousing, and transportation planningsystems.

For example, customers can go to the publichome page (www.bcop.com) of the $2 billionBoise Cascade office products corporation andenter the order site by typing in a user ID and apassword. From there, they can peruse an onlinecatalog of about 10,000 products. Or if theymake regular purchases, they can call up easyorder forms or file a template to order the sameproducts they buy every month. Purchases aremade online with common credit cards such asVisa, American Express, and Mastercard.Eventually, customers will be able to use digitalcash to buy products. Boise Cascade even has

an answer for managers afraid of employeesgoing online and making extravagant purchases.Through the use of IDs and passwords, the sys-tem knows who is making a purchase and whathe or she is authorized to buy.

Boise Cascade’s internet effort has already paidfor itself. The company paid in the low hundredthousands of dollars to set up the system, andafter six months of operation, it has saved morethan $1 million by reducing the time customerservice representatives take orders on thephone.

Translating ISCM Strategy into ActionsDeveloping performance measures to gauge theprogress of the supply channel network in meet-ing customer expectations is a required and crit-ical element for successfully implementingISCM. These measurements are understood andused throughout the organization, using a limitednumber of key measures toward the corporatepyramid’s top and an increasing number ofprocesses and operational measures at lowerlevels. This principle holds true for measurementof the supply chain and the enterprise as awhole.

While many different metrics can be used, typicalfactors in ISCM measurement systems are cus-tomer satisfaction, asset utilization, operatingcosts, product quality, and cycle time. If thechannel alliance performs well on these criticaldimensions, it can create a new competitive environment.

Three useful core tools and techniques facilitat-ing performance measurement include:l perfect order;l total cost of ownership measurement; andl supply chain effectiveness metrics indicators.

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Perfect OrderThe “perfect order” is a specific measurement ofcustomer service and logistics effectiveness.Emphasizing supply process performance, notthat of an individual function or organization, per-fect order measures the percentage of ordersthat are performed flawlessly the first time (e.g.,no errors, exception handling, or interventionrequired).

For a service occurrence to be considered per-fect, every step in the order fulfillment processmust go smoothly. Whether the transactiontakes place in order entry, credit clearance,inventory, picking, delivery, invoicing, or accountsreceivable, the result must be perfect adherenceto requirements with no delay or error. If anythinggoes wrong, anywhere in the process, the orderis not perfect.

For most companies, when initially measured,the perfect order accounts for less than 10 per-cent of the total orders processed. That means9 out of 10 customer orders commonly facesome form of error or delay, falling short of meet-ing requirements. A major consumer packaged-goods company has been able to improve its per-formance significantly, from 10 percent to 60percent, through business process redesign andthe alignment of functional objectives with those

of the supply chain. Serving as a viable measureof order management and logistics effective-ness, the perfect order provides a reliable lever-age point for improving customer service whilereducing service costs.

Total Cost of Ownership MeasurementMany costs are associated with the developmentand maintenance of the supply chain. The totalcost of ownership (TCO) metric summarizesthese costs, then uses present value calcula-tions to discount the anticipated future owner-ship costs over the life cycle of the material orservice stream. Serving as a basis for discus-sion and analysis, the TCO measure is not a pre-cise estimate but rather a way for the channelpartners to scope the costs of the planned sup-ply system. This allows for querying projectedcosts, identifying improvement opportunities,and communicating the benefits that can begained from enhanced coordination.

As detailed in Exhibit 16, various costs areincurred throughout the supply chain. The TCOmeasure sums the acquisition costs plus thepresent value estimate of operating, training,maintenance, warehousing, environmental, andsalvage values to create a supply chain life cyclecost estimate that serves as the basis for

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EXHIBIT 16. SUPPLY STREAM COSTS

Source: D. Riggs and S. Robbins, 1998: 76.

incentives, negotiation, baseline performancemeasures, and target cost improvement efforts.

TCO analysis underscores accountability withinthe supply chain as well as the improvementavailable or required for the supply process. Thesingle largest opportunity in developing total costmodels is identifying how a material or service isbest used. Measures of usage should includehow much material or service the supply chainconsumes, how long it lasts, its capacity, and howefficiently and effectively it is used. Looking atthe supply chain from the long-term perspective,TCO analysis provides supply chain managerswith the tool and incentive to identify and imple-ment cost and performance improvements.

Supply Chain Effectiveness MetricsIndicatorsAssessing the effectiveness of the supply chainin meeting customer requirements is a key areato which ISCM tools and techniques can beapplied during the implementation and executionof the original vision. Metrics often used to makethis evaluation are promise-to-deliver time, cus-tomer order-to-delivery time, on-time delivery per-formance, total lead time, and customer reten-tion. These metrics are designed to answer keyquestions, including:l How effective is the supply chain strategy in

maximizing value per dollar spent by a customer?

l How effective is the management of the supplychain in implementing that strategy?

l How effective is the ISCM strategy comparedto that of key competitors?

l To what extent are the key processes withindemand planning linked?

l To what extent are the key processes withinsupply planning linked?

Cycle time metrics provide one means of assess-ing supply chain effectiveness. Assessing thetotal time elapsed from the original placement ofthe order or identification of an unmet customerneed to the fulfillment of the request/utilization,cycle-time metrics gauge the relationship of totaltime in the order cycle versus that time absolute-ly required to meet customer demand. The cycle-time measure can be trended to ensure improve-ments in responsiveness are gained. It is a keymeasure of the supply chain’s ability to transfernew features and process capabilities from thesupplier through the supply chain to the finalcustomer.

Other supply chain effectiveness measuresinclude satisfaction of requirements (on-time/complete delivery, product/service perfor-mance against specifications, quality/price per-formance) and benefits delivered. Serving as aproxy for customer satisfaction, these measuresemphasize meeting customer needs at the righttime, in the right place, in the right quantity, atthe right price.

On-time and complete metrics detail the numberof orders placed and delivered 100 percent com-plete the first time and/or delivered exactly whenrequested (not before or after the defined deliv-ery date). Promised dates are the benchmark forthe delivery effort: Are customer expectationsreasonably set and met? Does the promiseddate match customer needs? If not, what gapexists between promised delivery and desiredperformance? How can this gap be closed?

The customer retention metric is an indication ofthe long-term performance of the supply chain ascompared to competitors’ performance. Giventhe inherent investment required to calibrate thesupply chain to meet the requirements of specif-ic customers/segments, retention is a critical

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determinant of life-cycle profitability. The inabilityto retain customers is a warning sign that thesupply chain is not meeting its objective to cre-ate superior customer service, and serves as a“failure” indicator. Exhibit 17 provides a list ofthese and other potential supply chain effective-ness indicators.

Basic guidelines to be incorporated in the supplychain effectiveness measurement effort include:l Keep it simple. The chosen metrics should be

easy to track and contain intuitively under-standable variables.

l Tailor measures to ensure controllability.Focusing measurements on what an area cancontrol, and making sure that what is meas-ured is the right thing, are essential to creatingeffective supply chain performance. Individualsshould be able to control what they are meas-ured against, but the measures should alsocreate behavior that is optimal for the entiresupply chain, not just the function or activitybeing measured.

l Develop and use multiple measures. One-dimensional performance measures lead totunnel vision. Measures should include cus-tomer service, supply chain productivity, andsubprocess performance metrics.

l Measure trend performance over time.Successful ISCM is based on the continuousimprovement philosophy. Graphically portray-ing performance over time captures this keydimension.

Koppers Industries (a $500-million bulk com-modities producer of coke, roofing tar, railroadties, and telephone poles) has a series of eightsupply chain effectiveness indicators. Theyinclude the value of inventory in dollars, the num-ber of inventory turns, the percentage of ship-ments made using each transportation mode,the load factor for each shipment, on-time ship-ment record, equipment utilization, backhaul,and demurrage, the penalty carriers charge whena shipment is not loaded or unloaded from theirequipment within a pre-negotiated period of

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EXHIBIT 17. ISCM EFFECTIVENESS INDICATORS


time. A final metric calculates Koppers’ totallogistics costs as a percentage of the cost ofsales.

A monthly report distributed to all Koppers’ loca-tions uses these indicators to track Kopper per-formance on a company-wide, divisional, andplant basis. Plant managers can see how theyare doing in relation to other plants.

V I . CONCLUSIONThe supply chain represents, to date, one of theuntapped areas of potential performanceimprovements. When closely aligned with cus-tomer requirements, the supply chain can createa sustainable competitive advantage that is hardfor fragmented, traditional suppliers to match.Building from the recognition that fulfilling cus-tomer requirements entails the cooperation ofmultiple supply chain organizations, ISCM facili-tates a fluid, responsive, flexible supply pipelinefrom original source materials through the deliv-ery and use of final products by the consumer,synchronizing activities in the supply stream.

ISCM leverages multi-organizational capabilitiesto provide a platform for creating superior ser-vice within defined customer segments or forcustomers with unique requirements. Replacingthe “vanilla” logistics strategies that have domi-nated in the past, ISCM promises to create cus-tomized supply channels at mass productionprices—a win-win solution that holds great prom-ise for the future of business.

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