June 1997, Volume 14, No. 6
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June 1997, Volume 14, No. 6
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Successful manufacturing companies have made the transition from the internally focused MRP and MRPII environments of the 1970s and '80s to extend their capabilities and system linkages to customers and vendors using more sophisticated enterprise resource planning (ERP) systems and supply chain techniques that provide for dynamic information flow. One result is that mission-critical business processes have been reengineered to achieve more seamless integration between what their customers want and the information that manufacturing needs to respond.
Manufacturers are also able to pass useful information along to their own vendors upstream, at the beginning of the supply chain. "Everyone in the supply chain needs to get precisely the information they need to act on, and precisely when they need it," Donovan observed.
Information sharing with customers and supplier partners is absolutely essential to successful supply chain management. The supply chain revolution requires much more than just the switch from the old paper-based tracking systems to computerized data flows, which the earlier MRP revolution and other computer systems accomplished. It requires eliminating many non-value-added activities and creating a leaner, quick response order-to-delivery process.
Effective supply chain management not only eliminates many of the bottlenecks that characterized the old functional silos, but mandates breaking down the walls between suppliers at one end of the chain and customers at the other. High velocity flow of information and material is essential to success.
In consumer goods companies, when retail purchases are rung up at the cash register, the bar code scanner at the point-of-sale delivers the information directly to the immediate supplier, who disseminates supply-base information to its own vendors at the far end of the chain through electronic linkages. Often the vendors, at different points in the supply chain, take over the management of part or all of the inventory requirements. While this trend has become prevalent in consumer goods, many of the practices are being used in durable goods and OEM industries as well.
Effective supply chain management has significant business impact extending beyond just better service and delivery performance for customers. "When the necessary information is being shared with everyone up and down the supply chain, and when that information is appropriate, accurate and fast, tremendous savings can be achieved by compressing the order-to-delivery cycle time," Donovan said.
Under these conditions, inventory planning and deployment become far more predictable. Savings of 20% or more in overall operating costs can be obtained with a properly designed and implemented ERP system molded to fit best practices. Also, companies can slash order-to-ship cycle time by 60% to 80% and reduce inventories substantially. Without increasing capacity by adding people or machines in the plant, production throughput can also be increased by 5% or more.
Considering how inventory investment is often the biggest balance sheet item in manufacturing, a 25% reduction in inventory alone represents major savings and is easily achieved when effective supply chain management is introduced. A modern ERP system can provide the foundation for business process reengineering because it pares away the non- value-adding hand-offs, transfers and control checks and, most importantly, provide effective decision support.
Companies that do this well can actually improve their revenue and profits because today's customer is very aware of the performance impact of overall supplier performance and not just price alone. Donovan cited the case of a company that required an average of six weeks to get a typical order delivered. "We examined how they were operating the business and figured out a way to slash their average cycle time from six weeks to just four days, and also had the new process that would do this up and running within just four months. With more time and effort, this company can probably get cycle time down to as little as two days."
Well functioning supply chain management represents a quantum leap in performance for companies over the earlier MRP systems, which were internally focused on discrete events, intended mainly for improved inventory control, and which also suffered from information queuing problems between various applications causing lags between order entry, planning, production and distribution operations. Today's systems must provide for effective sales forecasting and inventory deployment, on-line product configurators, simulation scheduling and fact-based schedule execution. Moreover, the information can flow in real time to what actually has to happen in the business.
Taken together, a new system should provide the tools to predict what is going to happen in advance, which helps companies avoid problems before they occur. The major result is in achieving better balance and flow with processes that help manage order fulfillment, production output and inventory velocity, all of which has a significant impact on overall business results.
"There's no magic in installing new ERP or supply chain software,"
Donovan warned. "The benefits come from effective implementation and
system use, which sounds like the obvious but nine out of 10
companies don't get it right the first time around. Unfortunately, in
some cases executives expect the new software system to be a quick
fix, silver bullet solution. The real need is for companies to
analyze their business processes first, then implement the ERP and
supply chain software tools that will support those processes
adequately, while also having the flexibility in information
technology to configure and reconfigure systems to accommodate
rapidly changing business conditions."