In 1990 and 1991, the combined forces of the Coalition undertook the task of liberating Kuwait from the grasp of Iraqi forces. The world watched as live telecasts from Baghdad entered their living rooms showing the air assault on the Iraqi capital. Even the chairman of the Joint Chiefs of Staff, General Colin Powell, reportedly watched live broadcasts of activities in the Persian Gulf while he awaited word from his commanders on the scene.

We were struck in awe as laser-guided munitions selectively entered their targets through doors and smoke stacks. We were overwhelmed by the use of technology that could direct a cruise missile from a battleship off the coast of Kuwait down a street in Baghdad to its destination. All of this was taking place while global positioning systems guided ground forces to their objectives through blinding sand storms across featureless terrain. Clearly, the U.S.-led Coalition understood how to employ advanced technology to achieve its objectives.

Not unlike the military, the business community has been placing increased emphasis on the role of information technology (IT) in its own competitive "battles." Businesses are actively transitioning from an Industrial Age to an Information Age business model. They are restructuring and reengineering their enterprise business processes and supporting IT applications to meet the requirements of operating in an integrated business environment. In the course of this transformation, many business entities are recognizing that the real value proposition lies in the implementation and integration of decision-support enabling technology, particularly in the area of supply chain management.

As the U.S. military discovered several years ago, the ability to see the battlefield in advance and to formulate plans and contingencies can lead to victory with optimal expenditure of resources. Similarly, businesses now recognize that to win in the future they must optimize and focus their resources to create profitable growth through sustainable competitive advantage. Supply chain management and its enabling technology can provide the fuel for the engines that drive today's successful business ventures.

Through our client work, we have seen first hand the value of supply chain management technology. In particular, we've noted how industry innovators are applying this technology to clearly differentiate themselves from the competition. The benefits realized by these leading-edge companies have created an awareness of supply chain management technology benefits across multiple industries. The explosive growth potential for the implementation of that technology has been fueled not only by the technology providers such as our company, but also by premier consulting organizations such as Andersen Consulting and Ernst & Young. Endorsements by leading industry analyst organizations like Advanced Manufacturing Research (AMR), the Gartner Group, and Benchmarking Partners have only added to the momentum.

Though the advances in this area have been impressive, one essential element has been missing from the equation: a common model from which businesses, technology providers, and consulting organizations could quickly determine an organization's current business environment and align it with future goals and objectives. Recognizing this need, we worked in partnership with a number of our clients, industry analysts, and alliance consulting partners to develop a business model to fill this void. (For more on the evolution of this collaborative effort, see the accompanying sidebar titled "Evolution of the Compass Model.") This framework, which can ultimately lead organizations to market leadership, is called the Supply Chain Compass.

In developing the Supply Chain Compass, we focused on certain key objectives. First, the business model would present a common foundation and understanding of supply chain management and its associated enabling technology. Second, it would provide the framework for linking business strategy, goals, and objectives with supply chain management strategy. Simply put, the model had to use the business strategy as its centerpiece and demonstrate the appropriate supply chain management strategy to ensure efficient accomplishment of the business objectives. One of the model's most important components would be the delineation of the supporting information technology.

Finally, for the model to be complete it had to provide a roadmap for companies to utilize as they move through various stages of business maturity in their quest for sustained competitive differentiation. In total, the model had to link business, supply chain, organizational, and information technology strategies into a single framework that companies and their technology and consulting partners could use to create a competitive advantage and profitable growth.

As companies around the world advance toward the supply chain management ideal, they are migrating through five stages of development—from fundamentals to synchronized supply chain communities. The five stages represent the typical path companies take in their migration toward total business operational efficiency. As might be expected, organizations typically do not fit cleanly into any one stage. Typically, different aspects of their operations span multiple stages, a reality that reflects the competing demands being placed on them both internally and by customers and suppliers.

The Supply Chain Compass charts the course for corporations as they strive to achieve preferred supplier status in tomorrow's "supply chain community." It enables them to determine their supply chain, organizational, and information-technology infrastructure relative to the business goals set and business pains endured. The compass model provides direction and a roadmap through which companies can identify the supporting infrastructure required to meet their ultimate business objectives. This lets them function profitably and efficiently across multiple levels of development, while consistently guiding the corporation through the process. The compass affords the ability to create significant competitive differentiation and market dominance, and to leverage today's competitive advantage into tomorrow's market leadership.

Though the compass model provides the framework to understand the various stages of supply chain maturity, it assigns no negatives to being in any given stage. The essential point is to determine the company's operating and competitive environment, and then assess the supporting infrastructure. If there is misalignment, as is typically the case, companies can use the Compass to determine their future infrastructure needs in support of current and future business challenges.

A simple illustration might involve a company that has developed a tailored product offering for a particular valuable client and is managing the movement of the inventory from its own manufacturing process facilities through to the customer's stores. However, the company does not possess the information-technology infrastructure to incorporate point-of-consumption information into an integrated enterprise supply chain planning system. Obviously, it needs to execute this business strategy with many of its key accounts. The model can provide the framework for the CIO and vice president of supply chain operations to work with the vice president of sales and marketing to determine the right supply chain, organizational, and information-technology strategy to ensure that these business activities are profitable and contribute to sustained competitive advantage.

Exhibit 1 delineates the five stages of the Supply Chain Compass. For each stage, it identifies the following characteristics: business pain, driving goal, organizational focus, process change, metric, information-technology focus, key planning tools, and execution. The different stages and their accompanying characteristics are discussed below.

Stage I: The Fundamentals

The focus in Stage I is on quality—from the quality of the products being produced to the way in which they are packaged and delivered to keep that quality intact. The primary business pain for companies at this stage is the cost of providing this quality. The driving goal: to produce dependable, consistent, on-spec products at the lowest possible cost. Like any organization in any business venture, mastering the fundamentals is essential to remaining a viable competitor in the marketplace. Companies cannot graduate to other stages of business development and achieve market dominance if they cannot manufacture and deliver quality products.

To meet the standards of Stage I, each department or function within the organization must focus on its contribution to quality and product cost. Manufacturing strives for reliable production processes that generate a high percentage of on-spec products. Purchasing buys materials on the basis of both cost and quality. Distribution and transportation strive for damage-free product handling.

Each department or function utilizes standard operating procedures to ensure reliable, predictable execution. The ultimate goal is to achieve predictable costs (typically measured as "standard costs"), delivery times (as determined at the time the order was received, but within published leadtimes), and production rates (typically measured in tons or cases produced). Additionally, companies at this stage pay close attention to accuracy of inventories, bills of material, and invoices. Planning, although limited in nature, is generally done on spreadsheets and performed by individuals who have additional responsibilities in other functional areas.

Companies in Stage I typically focus on automating existing functions and tasks. Automated process controls are put in place to ensure consistency and quality of products coming off the production lines. These organizations spend a significant amount of time maintaining legacy-based transaction and execution systems and attempting to ensure data integrity.

In today's supply chain environment, companies are rapidly progressing from Stage I to Stage II with information technology leading the way. The more difficult transition centers on the organizational change-management processes that must be in place to successfully navigate to the next stage. Companies that reach Stage I competency will experience financial benefits in such areas as damage claims, returns, and off-specification product that results in high manufacturing costs because of large batch sizes and significant scrap rates.

Stage II : Cross-Functional Teams

Customer service is the primary focus of Stage II companies, which view this capability as the primary discriminator in today's marketplace. They believe that failure to maintain highly reliable order-fulfillment standards with key accounts will result in lost sales, customer dissatisfaction, and ultimately de-listing of products from the retail shelf. Predictable product quality and cost are a given at this stage; the emphasis here turns to shipping orders complete and on time to satisfy customer demand. To remain competitive, customer service becomes the driving goal—often at almost any cost. Expediting orders through the supply chain and maintaining stockpiles of inventory are common methods for meeting service goals.

Stage II companies organize themselves into cross-functional teams that typically incorporate compatible functional areas. An example would be the combining of physical distribution and freight departments into logistics organizations. Success is measured on how well the company meets its customer-service objectives and its cost and profit targets. Because these measurements reflect how the business is managed, the results often are mixed and generally unfavorable in one or more areas. For example, customer-service levels may be at their targeted levels. Yet logistics and manufacturing costs exceed budget because of excess and obsolete inventory and high manufacturing costs associated with multiple unplanned changeovers.

Trade programs at this stage often are not coordinated with operational capabilities to supply, resulting in unfulfilled customer commitments or excessive spending to move stagnant inventory. Seasonal inventory offers a good (and very common) example of this kind of problem. The merchandise is destined to meet key account demand plans. But when the order finally arrives, inventory is not available since it has been ordered and allocated to other accounts.

Stage II companies are not enabled with an infrastructure that supports cross-functional processes. Instead, they rely on establishing business processes through which cross-functional communications can occur. Since the teams use disparate systems from which to draw their information, the integrity of the data—and by default the business process—becomes difficult to manage effectively. Companies at this stage realize that they cannot continue to operate effectively without some planning or decision-support functionality. Typically, they are searching for solutions to specific problems. And this often leads to the selection of packaged applications to address such issues as demand planning, manufacturing scheduling, and transportation planning. Execution of transactional activities still is largely supported by legacy systems with the addition of MRP II technology.

The following case example illustrates how Stage II companies can use the compass model to mature their supply chain operations in support of the ultimate business objective of becoming a preferred supplier to key accounts.

The company is a primary supplier of private-label aged and processed cheese to numerous grocery retailers and fast food restaurant chains across North America. As such, it receives multiple demand streams from a variety of customers. These customers manage the ultimate sale of the product to the consumer or use the product as a main ingredient in menu offerings. In this environment, the demand variability is highly influenced by promotional activity at the retail and restaurant outlet. Having established cross-functional teams to manage logistics and manufacturing, this company was capable of meeting these challenges within reasonable expectations. However, the opportunity to improve the efficiency of the processes and the profitability of these trade relationships drove the company to examine supply chain management processes and related technology. The objective was to develop new business processes and create a path to operational excellence and preferred supplier status.

The cheese company used the compass model to assess its current situation (business strategy, organizational strategy, supply chain strategy, and information-technology strategy) and to examine what was needed to achieve preferred supplier status with strategic customers. The goal was to create an infrastructure that would ease the immediate business pain and build the foundation necessary for future growth. Working with our firm and a leading industry analyst, the company selected the underlying information technology that would enable it to receive a significant return on investment while providing the foundation for continued profitable and competitive growth.

Companies like the one described in this example can expect significant financial benefits as they move from Stage II to Stage III. These include improvements in order fill (revenue), shipping accuracy (minimization of deductions), on-time delivery (customer satisfaction and reduced freight), responsive production (smaller, more efficient manufacturing runs), and rapid order fulfillment (inventory reduction and flow-through logistics operations). All of these efficiencies deliver results to the bottom line while increasing customer satisfaction. The operational excellence grounded in Stage II is the precursor to driving business efficiency in the next stage.

Stage III: Integrated Enterprise

Efficiency is the primary focus for Stage III organizations. Their driving goal is to be highly customer responsive—building on the successful customer service attained in Stage II, while leveraging the ability to quickly deliver high-quality products and services. All of this is accomplished at the lowest total delivered cost. Managing the complexity of the Stage III environment can be problematical as companies expand their product offerings to enter new markets and develop special packs/products for key accounts.

Stage III companies become highly responsive by investing in operational flexibility and by integrating their internal supply chains—from the acquisition of raw materials to the delivery of product to the customer. Cross-functional processes (such as "create demand," "fulfill demand," and "source supply") commonly replace traditional functional silos. Consensus forecasts, intelligently combined with customer orders, drive all downstream operations planning. By integrating the internal supply chain and focusing on the critical organizational metric of lowest total delivered cost, Stage III companies dramatically reduce the amount of expediting and inventory found in the Stage II environment.

At this level of development, companies have undergone significant reengineering to implement enterprise-wide transaction systems. Yet all too often they discover that while operational efficiency has improved, they have failed to capitalize on the opportunity potential of implementing enterprisewide decision-support technology. Once that realization is made, they quickly move to reconfigure their business infrastructure to take advantage of the technology. Had they used the process model as defined in the Supply Chain Compass (like the cheese manufacturer did), they could have turned to their existing technology provider and added additional required functionality as part of a totally integrated solution without discarding expensive disparate systems.

A large beverage company in Stage III has used the compass elements to chart its strategy for implementing supply chain management technology in support of business goals. Early in the selection process the company identified the need to use technology to solve specific business problems, particularly in the area of demand management. After the initial implementation, it determined that a number of other business areas needed the same attention already given to demand planning. The beverage company selected a technological solution that added fully integrated functionality to manage manufacturing scheduling, supply planning, and transportation management. This was done prior to implementing standard enterprise transactional technology, thereby affording the company the opportunity to achieve significant financial benefits.

By driving business efficiency with integrated enterprise operations, companies can expect to see improved market capitalization through significantly improved management of business and supply chain operations. The benefits include efficiencies in tax management (particularly for those multi-site, multi-county companies); fixed capital utilization and fewer manufacturing changeovers; lower inventory and higher working-capital efficiency; increased revenue growth due to consistently delivered perfect orders; and cost reductions, particularly in transportation management. By building upon the Stage II operational excellence with the enterprise business efficiency in Stage III, companies are well positioned to gain and sustain the competitive edge found at the next level.

Stage IV: Extended Supply Chain

The focus in Stage IV is on creating market value. In many markets, relatively slow growth and margin erosion has led companies to pursue "preferred partner" status with key accounts. The driving goal is increased market share and profitable growth, accomplished by providing customer-tailored products, services, and value-added information that differentiate them from competitors. Vendor-Managed Inventory (VMI), Efficient Health Care Response, and the emerging practice of Collaborative Planning, Forecasting, and Replenishment (CPFR) are excellent examples of industry processes oriented toward achieving preferred partner status. By developing close partnerships with key customers, suppliers, and service providers, companies can collaborate on forecasts and production and shipment plans. At the same time, they can work with their partners to jointly design products, services, and value-added information.

Stage IV companies often reorient their organizations and processes to integrate external parties into their supply chain view. They segment the markets, channels, and customers served. Different trading relationships and fulfillment strategies then are instituted within each of these segments, depending on the specific business objectives. For key accounts, many companies create customer-focused, cross-functional teams to handle all aspects of service. To further establish favorable relationships, they offer a menu of options for collaboration—forecasting, production planning, delivery scheduling—for which each jointly executed process results in a pricing or other advantage.

The operations functions of a Stage IV company must be very flexible in order to rapidly respond to the tailored products and services offered. Some customers will be make-to-order, others will be assemble- or finish-to-order. Still others will be served from products made-to-stock. This strategy of committing resources to specific customer segments at different points in the process is called a dynamic customer commit point strategy. It is crucial to a Stage IV company's success. The ability to execute mass customization—or the tailoring of products to customer-specific requirements—often is accomplished through postponement. This is the strategy of first producing products to a certain base form and then completing the final products upon receipt of customer orders. Postponement frequently accounts for a large percentage of a company's business at this stage.

The information-technology focus here is interoperability, or making internal systems interact with those of customers, suppliers, and partners. Internet and message-based communications are utilized to achieve this goal. The key planning system implemented in this stage is consumption-driven supply chain planning. It integrates actual consumption data at every consumption point (including retail point-of-sale) in the supply chain with optimized sourcing; constraint-based, dynamic supply planning; and manufacturing scheduling. Such systems enable dynamic customer commit point capabilities. Consumption-driven supply chain planning systems allow everyone to operate from a single view of the extended supply chain. On the execution side, Stage IV companies frequently implement customer management systems such as sales force automation and order configurators.

Canadian Tire, Nike, and Warner-Lambert all represent Stage IV companies that have recognized the value of supply chain management and its applicability to solving business problems. The ability to find innovative means of enabling profitable growth and competitive advantage differentiate these companies from their competition. Nike Apparel, for example, uses supply chain management information technology to automatically replenish basic merchandise for key accounts. Nike focuses intensely on integrating process improvements and technology to respond to increased sales demand for key items. Warner-Lambert has helped drive the Collaborative Planning, Forecasting, and Replenishment initiative throughout the industry, leveraging its understanding of information technology and its ability to significantly change business processes. Canadian Tire has utilized an integrated information-technology infrastructure to improve its business operations, dramatically reducing inventory and improving supplier performance without affecting customer service at the store level.

As they create market value, Stage IV companies can clearly see unprecedented financial benefits across their business that translate to profitable growth. This final linkage of business strategies and supply chain effectiveness creates an environment of competitive advantage that strategically positions them to become a "preferred supplier" for Stage V operations. Reduced inventory, lower total supply chain costs, and improved cash-to-cash cycle times provide capital to reinvest in the business to create and fuel new business strategies. At the same time, these enhancements effectively link consumer consumption to promotional spending to consistently out-flank and overwhelm the competition. Market value—as determined by increased share of the consumers in all chosen markets—is the final measure of successful Stage IV operations.

Stage V: Supply Chain Communities

In their book Hope Is Not a Method, Gordon R. Sullivan and Michael V. Harper write: "Vision is a sense of the future. It is an imagined possibility, stretching beyond today's capability, providing an intellectual bridge from today to tomorrow, and forming a basis for looking ahead, not for affirming the past or the status quo. The power of a vision is that it gives leaders a basis for positive action, growth, and transformation."

Similarly, at Stage V, companies strive to achieve preferred supplier relationships within an environment of continuous reinvention of business processes and organizational structures. The focus is on achieving synchronous integration of common goals, objectives, and metrics within the preferred supplier community. In this stage, the attention is on gaining and sustaining market leadership. Organizations are consolidated into supply chain communities. And companies that have not achieved supply chain management maturity are excluded from those communities.

As customers—whether they be retailers, distributors, or manufacturers—within the supply chain community consolidate their market power, it becomes absolutely critical to be a preferred supplier within that structure. These larger, more powerful companies will have the ability to enact highly efficient business practices and will expect the same from their principal suppliers.

At the same time, disintermediation takes place within the networked enterprise. Networked companies are connected with networked customers—and even consumers—frequently bypassing traditional channels of distribution. To compete and survive in this marketplace, companies form dynamic value nets that demonstrate flexibility, speed, innovation, and detailed market knowledge. They also leverage instantaneous information transfer into levels of customer responsiveness that were previously unattainable.

Stage V supply chains become rapidly reconfigurable organizations, linked by Internet commerce software. These supply chains organize to meet the needs of customers and then disappear, only to be reassembled as other demands are identified and different combinations of companies dynamically connect to service them. They forge direct links with customers, suppliers, and consumers through real-time information transfer throughout the community, enabling shared processes, services, and goals. Companies not prepared to participate may find their market distribution/penetration opportunities limited to second-tier outlets.

According to Gary Hamel and C.K. Prahalad in their book Competing For The Future, getting to the future first requires that a company "learn faster than its rivals about the precise dimensions of customer demand and required product performance." One early response to this imperative can be found in the CPFR initiative being addressed by companies like Warner-Lambert, Nabisco, and Wal-Mart as well as by leading technology providers and analysts. This initiative will transform the way companies do business and provide entry into Stage V. By leveraging inter-networked technology infrastructure, supply chain partners will minimize the amount of time spent coordinating between one another while achieving visibility across multiple organizations.

The journey across the supply chain stages is never-ending. The constantly changing business environment will challenge businesses to reinvent themselves and leverage the power of information technology to support their new business processes. The Supply Chain Compass model can help them do that...and in the end differentiate these leaders from the rest of the pack.