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The Supply Chain Operations Reference-model (SCOR), consists of four basic supply-chain processes: plan, source, make, deliver. Source: Supply Chain Council
Total supply chain management costs can account for 3% to 7% of revenue cost. Companies leading in SCM typically show a 45% cost advantage over competitors with average SCM capabilities.(Source: Pittiglio Rabin Todd & McGrath)
The fundamentals of supply chain management (SCM) haven't changed in the 5,000-plus years since people got off a boat somewhere in the Mediterranean and traded with another culture. Back then, the exchange rate might have been in bottles of wine for pounds of sugar and the communications written on bark.
What is different today are the technologies that make those fundamentals more efficient and productive, and that give enterprises the ability to respond to a customer's request quickly. Another difference is that the concept of "supply chain" goes well beyond the enterprise and includes both customers and suppliers.
It is that last item that makes SCM different than all the other acronyms foisted on business management over the last few decades. "While the supply chain is a hot topic these days, many industry veterans may be tempted to dismiss it as another fad headed for the buzzword graveyard. This would be a mistake," says John Bermudez, group director, SCM at the Boston-based market research and consulting firm Advanced Manufacturing Research (AMR) Inc. These buzzwords include MRP (material requirements planning), MRP II (manufacturing resource planning), CIM (computer-integrated manufacturing), and ERP (enterprise resource planning)—concepts/applications/information technologies that all focus on getting the right information at the right time to the right place so that the right people can get the right resources to make the right product at the right time for it to be delivered—rightly to the customer.
SCM is greater than all of these buzz-concepts by virtue of its horizontal and cross-functional perspectives of the enterprise and its trading partners. SCM is a more holistic view of the enterprise. It replaces the functional silo view of the enterprise with a mostly externally focused view. Moreover, SCM throws the self-limiting, push-driven, infinite-capacity, MRP II-steeped models of the enterprise out on their collective ear.
The new model of the supply chain shows a more demand-driven (pull) environment that starts well within the customer's enterprise. This model of the virtual enterprise, called the Supply Chain Operations Reference-model (SCOR), consists of four basic supply-chain processes: plan, source, make, deliver.
What Is SCM?
"Everybody knows what MRP is thanks to Oliver Wight and APICS," says Bill Helming, director at Pittiglio Rabin Todd & McGrath (PRTM; Weston, MA). The same is not true with SCM, which is exactly where MRP was in the 1970s when the "MRP standard system" was being developed. Today's SCM banner is being carried by the Supply-Chain Council, which was co-founded in April 1997 by PRTM, implementation consultants in supply chain management, and AMR.
The Council currently has members from a diverse set of industries—over 300 members at last count, and not one an automotive OEM. These members continue the work started by PRTM in constructing the SCOR model, which gives manufacturers, suppliers, distributors, and retailers a "common structure, set of practices, and language to develop SCM strategies," says Steve Lachowski, the Council's executive vice president. Adds Helming, "The SCOR model defines common SCM processes and matches them against `best practices,' benchmarking performance data, and optimal software applications."
The model also incorporates every supply chain-related activity from "the supplier's supplier" to the "customer's customer." For Indiana Precision Technology (Greenfield, IN), a dedicated repetitive manufacturer of fuel systems for Honda, the supply chain is the continuum "from the design and identification of materials; through procurement and inventory control, manufacturing, scrap control analysis, and finished goods; and then on out to our customer," says Mike Mitsch, Purchasing, Inventory Control, & Information Systems manager.
Managing this supply chain is important to Indiana Precision because the fuel systems it manufactures are delivered to Honda "in a pretty unplanned manner. They do send us forecasts, but the model mix can change because Honda is sensitive to consumer demand," explains Mitsch. "We have to react quickly to their changes." Reacting quickly is a challenge because Indiana Precision has suppliers both here in the U.S. and abroad, with lead times for some raw materials stretching out to 26 weeks. "It becomes essential that we know each beat along the way in our supply chain," says Mitsch.
The SCOR model also builds on "the concepts of business process reengineering, benchmarking, and process measurement by integrating these techniques into an easily configurable, cross-functional framework," continues Helming. This framework consists of four levels leading to the implementation of an effective SCM strategy:
•Level 1 broadly defines the key supply chain processes—plan, source, make, and deliver—thereby helping companies establish their SCM objectives.
•Level 2 defines 26 core process categories that can be found in an enterprise's actual and idealized supply chain. For example, the "source" category includes "source purchased materials," "source engineer-to-order products," and "source make-to-order products."
•Level 3 contains information for companies to plan and set goals for their SCM strategy, including process definitions, benchmarks, and system software capabilities.
•Level 4 focuses on implementation. Because SCM implementations are unique to each company, the specific elements of Level 4 are not defined within the SCOR model.
One goal of the SCOR model is to help companies "break out of the box"—the ERP box—and see where they fit into the supply chain. The model helps people see how SCM involves balancing tactical approaches against satisfying an enterprise's business goals. Says Bermudez, "Under increasing competition, manufacturers from many industries are looking for better ways to reduce costs and improve customer service by implementing SCM concepts." For example, the inventory manager and the transportation manager have to work together when trying to improve the bottom line of their company. Shipping inventory as soon as possible by air freight helps reduce inventory, but it also increases transportation costs. Buying more inventory qualifies the enterprise for volume discounts and consolidated transportation costs, but the increase in inventory carrying costs may eliminate any possible savings from those discounts.
Approaching this quandary from a supply chain perspective would be better. If the enterprise can decrease the cycle time between when finished goods are manufactured and when they are delivered to the customer, overall inventory will drop while transportation costs can remain constant. The result: a net gain in the overall savings to the enterprise. Here's proof. Experts estimate that logistics costs can account for 10% of a company's sales revenues. That's quite a windfall for, say, a $2.7-billion company, such as Council member Dow Corning.
SCM Software Is Limitless
SCM is a management process. These processes can work just fine without sophisticated technology. The trick is in properly integrating these processes into the enterprise's business strategy—and the SCM strategy that executes that business strategy. Case in point: The technology exists to fax purchase orders straight from your computer. But if nobody is at the other end to pick up that fax and act on it, your supply chain falls apart. Implementing electronic data interchange (EDI) can be just as useless if the receiving company cannot properly respond to the EDI transaction. And EDI is a far more expensive technology than fax.
Interestingly, banks have had wire transfers for years. The automotive industry has had EDI. These technologies are now called "electronic commerce." Why? And why the sudden popularity? It's because people are thinking supply chain. They're thinking payables and receivables. They're thinking about both sides of the equation. And they are thinking that the quicker these and other processes can be transacted, the better we all are.
This thinking forces new perspectives on information technologies. "SCM is a process solution and a discipline that typically cuts across the historical functional reporting lines of most organizations. ERP is a technology," says Lachowski.
The sad fallacy, says Helming, is that "many companies have really bought the line that ERP is all the software they'll ever need." The reality is that ERP has mostly been a technology push, specifically using client/server technologies to retire mainframe—"legacy"—operations. In their place would be common hardware, common resource planning software, and common databases throughout the enterprise.
Quite simply, ERP doesn't work, practically speaking. And part of why that is, explains Helming, is that ERP packages have typically been built from the inside out. They never had an overall model of the enterprise to which the resource planning was for. Consequently, none of the ERP packages can effectively plan across enterprises.
However, as a transaction system, ERP provides an invaluable foundation for capturing, storing, and sorting enterprise-wise information. And truth be known, an enterprise just can't perform effective SCM without a good information foundation. So, junking ERP is not a reasonable thing to do, says Helming, but leveraging that investment is reasonable.
More important, realize that any information-based technology within an enterprise is a supply chain technology. Supporting the SCOR "source" process are sales automation tools, including order entry systems, sales kiosks, and product configurators linked to CAD visualization systems. Increasing numbers of companies are eschewing the MRP aspects of ERP and using advanced planning and scheduling systems to provide the finite scheduling and decision support for both manufacturing ("make") and logistics ("deliver"). Warehouse management systems, distribution requirements planning, and logistics management systems fulfill the SCOR model "deliver" component.
And not to be forgotten are a plethora of support technologies, such as bar coding, radio frequency, and other automatic identification technologies, as well as e-mail, EDI, and the ubiquitous Internet.
A lot of what makes these information technologies relevant to SCM is in where the "pain" exists within an enterprise's supply chain. Obviously, ERP supports the "plan" process within the SCOR model. Indiana Precision, for example, relies on the Glovia ERP system from Glovia International LCC (Los Angeles, CA) for planning. "It had become glaringly apparent that we needed a system that would give us a central database that could retain all our information—from when a part is conceived, through its design and manufacture, and then into our supply chain," says Mitsch.
Another company might focus on its "make" processes. Consider MNP Corp. (Utica, MI), a manufacturer of threaded fasteners, washers, and coiled steel. The company's four divisions provide parts to probably every possible tier in the automotive industry, including the component assembly people, OEMs, and fastener distributors. Sometimes the company is at Tier 1, sometimes Tier 2, sometimes lower. "We're definitely at the low end of the totem pole," admits Michael Gasparovic, MNP's director of Technology & Business Services Group. "A car may have $200 worth of fasteners on it, so we're a small fraction of that whole pie." And yet, without fasteners, you couldn't hold the car together.
Helping to hold MNP together—and it within its various supply chains—is TCM (Time Critical Manufacturing) from Milwaukee-based Effective Management Systems Inc. TCM is a manufacturing execution system that includes classical shop floor control, factory data collection, purchasing, job costing, time and attendance reporting, statistical process control, and messaging and alarms.
By using TCM in a just-in-time environment, MNP dispenses with the need for classical MRP. TCM also dispenses with the need for printed shop orders. Instead, TCM on-line dispatch shows a schedule based on date and priorities. This scheduling is the heart of MNP's planning process. "Without that, we would not be able to maintain a manufacturing flow," continues Gasparovic. And that flow is pretty tight: MNP operates fairly closely to a 2-week or less manufacturing cycle. With inventory turning 26 times a year, MNP not only has to consider the ramifications of receiving raw material, but it also has to manage shipping product out of manufacturing and into the various distribution channels.
"Information has to be available and our entire supply chain system has to be in synch," concludes Gasparovic. Obviously, the company has been managing its supply chain well; in 1996, MNP won the Chrysler Role Model Award for Delivery.