Toward Enterprise Supply Chain Management
By Omar B. Chaudhry and Christopher M. Schnieper -- Supply Chain Management Review, 9/1/1999
Major corporations today are viewing the cost savings and revenue enhancements generated through supply chain management (SCM) as key sources of competitive advantage. In fact, research suggests that among Fortune 500 companies, enterprise SCM—the process of integrating your operations with your supply chain partners' operations—is capturing the attention of the CEO's office.
The business and operations concepts underlying supply chain management date back several decades, as do the early supply chain initiatives launched by the industry leaders. The pace has quickened in the 1990s, fueled by the proliferation of systems technology. The technological evolution has led to an array of Web-based solutions for enterprise systems. These systems have combined with a maturing vision of the enterprise to accelerate the evolution of supply chain excellence. Yet at the same time, confusion remains over the ways and means to leverage supply chain initiatives across the enterprise successfully.
This article offers some guiding principles to help resolve that confusion, providing readers with a framework in which to achieve SCM benefits along an extended enterprise platform. The discussion examines the following issues:
- What does the term enterprise supply chain management mean and how can the concept be applied in today's business world?
- What are the major levels of enterprise SCM and how can companies advance within this framework?
- How does Economic Value Added (EVA)—a measure of profitability trademarked by Stern Stewart & Co.—fit into the supply chain equation?
- What types of supply chain initiatives can be taken at the various enterprise levels to achieve operating excellence?
First, some definitions are in order. Within the supply chain context, optimization can be described as the art and science of getting the most from the least resources. Integration is the process by which the optimization activities across enterprise entities are linked to form larger enterprise units. The enterprise thus becomes the "domain" of those integration efforts. It is the precise application of optimization activities across a larger enterprise spectrum that leads to superior supply chain planning.
The authors hold that optimization carried out across a "super" or "extended" enterprise platform inherently leads to important benefits for a company. The argument does not imply a specific threshold for pursuing optimization activities at each enterprise level. Nor do we suggest that increased integration conflicts with or mitigates the impact of optimization activities. And while the terms integration (sometimes called synchronization) and optimization may imply a systems bias, their use here applies equally to process improvement activities.
The term enterprise, as used in this article, intrinsically defines the domain of integration activity. The domain is linear in nature, and the enterprise is the unit across which the majority of supply chain planning and optimization activities take place. As illustrated in Exhibit 1, the enterprise embraces suppliers, customers, and other supply chain partners. Note that we define the enterprise as the largest unit in terms of its influence across the entire supply chain. As such, this article is geared toward the larger suppliers, manufacturers, retailers, distributors, and transportation providers in any given supply chain.
Companies need to strategize, plan, monitor, and control their migration across the supply chain continuum carefully. And throughout this journey, supply chain performance must be closely measured for financial impact. One of the best ways to do this is through EVA, a technique described in the sidebar on page 77.
In mapping out that desired supply chain journey, a company needs a model that is sensitive to key universal supply chain variables as well as salient industry factors. As such, a two-phase planning and strategy approach can be used: the first is a universal strategy and planning phase and the second is an industry-specific planning phase. The need for a robust universal framework reconciling key supply chain strategies and financial goals with incremental levels of operational and informational improvement across an enterprise thus becomes key.
The enterprise framework described below and depicted in Exhibit 3 arbitrarily defines a three-level migration path to world-class supply chain management. The framework's linear progression is fundamentally guided by two key goals: 1) broader and more integrated planning across an enterprise spectrum that is increasing in size and 2) higher levels of EVA or financial benefit to the company. The enterprise framework is intended to provide the management team with a guideline for strategic SCM planning. A discussion of the framework is followed by further explanations of the model's link to its two key drivers (integrated enterprise planning and enhanced EVA) and then the relationship of the two drivers to key supply chain strategies.
Levels of the Enterprise FrameworkIn presenting the concept of levels in an enterprise SCM framework, we should note that the operations components of Source, Make, and Deliver apply differently to different industries. Just as importantly, we should note that supply chains in different industries are affected uniquely by the framework. With those caveats, we can examine the nature and scope of the three levels of the enterprise framework.
Level I:Intra-Enterprise
At this initial level, tactical and operational solutions are being applied at various points in a corporation's internal supply chain. The operations processes are defined at the site or division level. Technology-enabling solutions at this level include legacy-type enterprise transaction and execution systems. At this stage, supply chain planning and execution is often fragmented and disjointed. As Bernard J. LaLonde, professor emeritus of logistics at Ohio State University, has written, "The most challenging aspect of the whole process is not so much building the external linkages to the partners, but rather overcoming obstacles within the organization."1 Before it can advance along the framework, a company must first be able to identify which components of its operations are at the basic or intra-enterprise level. In completing this exercise, keep in mind that with the exception of world-class organizations, most supply chain operations in most companies lie below the enterprise threshold. All too often, these organizations prematurely embark on the journey to advanced supply chain levels only to fail because they don't have all the intra-enterprise basics in place. As the framework implies, the defining characteristic of companies or supply chains at the intra-enterprise level is a diminished, fragmented optimization domain. Typical symptoms include disparate information systems within enterprise entities, little or no historical detail on supply chain transactions, and planning parameters set at low domain levels. Companies at this level also struggle with inadequate order-fulfillment performance. Consequently, advanced planning and supply chain savings become distant, not easily achievable goals.
Level 1 companies need to standardize their transaction systems and processes, while implementing supply chain planning systems that target higher domain levels across the enterprise entity.
Intra-enterprise case example: A major industrial equipment manufacturer at Level I recently was facing certain supply chain operations issues. The company's transaction system had proved inadequate over the years and was being largely ignored by the procurement, manufacturing, and distribution organizations. Procurement was responding to manufacturing needs in a reactive, push-based order mode. Inconsistent shop-floor practices were causing significant quality issues compounded by the complex nature of the 8,000-plus part products being assembled. Shipping discrepancies abounded.
The company moved to Level II through a combination of process improvement and technology initiatives. The transaction systems were re-implemented along with a push-pull business methodology of demand and production floor management. A rigorous simplification of procedures and systems detail enabled adherence to the transaction system. This, in turn, allowed the supply chain planning systems to be implemented to aid the push-pull demand-management business practice.
Level II: The Enterprise
The enterprise level is a major threshold. Companies at this stage have developed comprehensive centralized processes supported by robust technology enablers. The enterprise domain implies planning across all entities within a major organization. While attaining the enterprise level for most components of supply chain operations, Level II companies also may have extended certain supply chain activities to the next level.
Organizations at the enterprise level have a full suite of transactional enterprise resource planning (ERP) systems supported by a broad mix of supply chain planning systems. The systems and processes, in turn, have an integration domain encompassing the divisional entities within the enterprise. Procurement and sourcing decisions are centrally strategized and de-centrally executed. Production planning is undertaken at significant divisional levels with extensive use of distribution requirements planning and source networking. Manufacturing and production planning typically have simple communication links to outside suppliers and supply chain partners, usually in the form of EDI (Electronic Data Interchange) transactions.
Logistics planning, including transportation and distribution, is centralized. The logistics services providers participate in standardized transportation planning using transportation management systems. Distribution operations feature a basic level of network rationalization and the use of standardized warehouse management systems. Parts of both the transportation and distribution operation often are outsourced.
Organizations at the enterprise SCM level are well positioned to migrate to the financially lucrative extended enterprise. They have a sound understanding of their operations and cost structures in relation to their supply chain operations. Companies at the enterprise level also exhibit the strong business performance that comes with sound management of supply chain operations and consistent order-fulfillment performance. Accordingly, these companies enjoy a positive EVA impact through reduced operating costs and lower costs of goods sold.
Enterprise-level case example: A Fortune 500 consumer-products retailer recently launched several initiatives to move its supply chain operations from Level I to Level II and higher. Facing high inventories in its global supply chain, the company moved to a push-pull method of inventory management, replenishment, and control. It also introduced a direct Web-based channel to counter the competition. Transportation and distribution activities are being shored up with centralized planning through technology-enabled solutions. Level III initiatives include extended enterprise planning and execution for various product lines from its manufacturers (including sole sourcing). This consumer-goods company has established both financial and service metrics to monitor its supply chain progress.
Level III: The Extended Enterprise
Level III, the extended enterprise, presents an extended view of a company's integrated supply chain. It embraces the supply chain trading partners to varying degrees. The more expansive the extended enterprise domain or sphere of influence as shown in Exhibit 1, the greater the advancement along the framework. Companies at these levels are grounded in their internal operations and display all of the characteristics of Level II companies.
The extended enterprise domain greatly facilitates the supply chain strategies discussed below. World-class extended enterprise companies conduct comprehensive collaborative planning through a variety of technology-enabled initiatives. They apply comprehensive enterprise processes supported by robust Supply Chain Execution (SCE) systems and Supply Chain Planning (SCP) systems. These systems provide the platforms for more advanced Web-based e-Commerce initiatives.
The Level III leaders leverage responsive product design and supply chain compression through cross-company processes and various electronic media. The products-based anchors at this level are beginning to employ comprehensive outsourcing arrangements. The cross-industry anchors provide supply chain services through creative extended enterprise ventures. These include resource sharing and Fourth Party Logistics (4PL).2 Through 4PL, a supply chain integrator assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.
Companies often reach the enterprise level of supply chain management through boundary-spanning alliances across the supply chain. The powerful top- and bottom-line benefits of initiatives executed at this level extend to all of the participating organizations.
Extended enterprise case example: A Silicon Valley marketer of networking hardware, which sources product from a host of manufacturers, faced some tough challenges in its global supply chain. The company's order-management process is extremely high volume and complex. The sensitivity of the demand information is crucial for the supply chain, which comprises cross-continental logistics activities. To streamline interaction with its suppliers, the company put in place an extended enterprise supply chain initiative. It rolled out a technology-enabled extended enterprise platform that allows for accelerated demand communication and planning throughout the supply chain. This Level III initiative has allowed the organization to reduce its supplier leadtime by half and reduce its inventory by 25 percent.
Strategies Enabled by the Extended EnterpriseAs organizations advance across the enterprise SCM framework, the overarching objective is to enable an ever-larger domain for the integration activities. Once optimized, the larger domain leads to higher EVA impact for all supply chain participants. Moving toward the extended enterprise will facilitate the design and execution of at least three key supply chain strategies: collaborative planning, supply chain compression, and responsive product design. At the highest level of the framework, companies also will be able to pursue a global supply chain financing strategy.
Collaborative Planning
In their analysis of the personal computer industry, Hau L. Lee and Terrence A. Austin define collaborative planning as the ability to jointly plan and execute tasks that transform a product from raw materials to the finished good brought to market.3 Collaborative planning is undertaken by the anchors, cross-industry anchors, and other supply chain participants. In the context of the enterprise SCM framework, collaborative planning is a factor of the domain size. To this day, large corporations have difficulty undertaking complete collaborative planning even at the enterprise or intra-enterprise level. The problem is largely due to inadequate strategic supply chain planning and IT alignment.
Technology initiatives are a major component of collaborative planning. At the first two levels on the framework, the collaborative strategy usually entails planning across a division or multiple divisions. The benefits of collaborative planning can be easily understood. In one case, Motorola had employed disparate technology-based planning tools at various plants within a single division. Yet this approach resulted in only limited supply chain benefits at the divisional level. After aligning the supply chain strategy and technology goals of those operating entities, however, the division was able to realize the supply chain benefits envisioned. The example obviously makes a case for the benefits of collaborative planning. Yet, it also demonstrates that for larger companies, simply increasing domain size does not guarantee supply chain efficiency if intra-enterprise planning remains inadequate or absent. Put another way, companies need a fundamental infrastructure for intra-enterprise collaborative planning to advance along the enterprise supply chain framework.
At advanced levels of the enterprise framework, collaborative planning becomes a multi-enterprise activity. At Level III, the cross-enterprise supply chain planning initiatives call for advanced tools enabling Enterprise Applications Integration (EAI) across an industry supply chain domain. Fourth Party Logistics, the authors argue, can be the driver for super-domain integration activities. Further, it would be fair to conclude that collaborative planning in a 4PL context is directly related to domain size. As such, efficiencies are realized mainly with larger data points in the domain.
Supply Chain Compression
Compression is the reduction of supply chain complexity. As a strategy to improve supply chain efficiency, it has a number of inherent advantages. Simplification efforts include direct channel strategies that invariably bring the end-customer closer to the supplier. In collapsing the supply chain structure, the direct channels provide for efficient product and information movement across the chain. Another compression tactic is product postponement, which is also closely related to responsive product design. Again, within the context of the enterprise SCM framework, the compression activities carried out across larger domains will yield the greatest benefits. Direct channel and postponement programs are examples of supply chain initiatives across a multi-enterprise domain.
Responsive Product Design
This strategy means designing product with an eye toward efficiency in the supply chain—from raw materials to end-consumer delivery. In the past, design efforts for products have included some elements of supply chain efficiency. The majority of those design efforts, however, have been material-centric—that is, concentrating on materials sourcing and selection. A truly responsive design effort, by contrast, must include a comprehensive supply chain structural analysis conducted early in the product-development stage. Such an analysis likely is to derive the most benefit with the largest enterprise domain possible.
Global Supply Chain Financing
The global financing strategy is an advanced concept even for companies at the extended enterprise level of evolution. It is easy to see, however, how major supply chain anchors might effectively embrace the strategy against such ills as the Asian flu. As major corporate entities wield more influence over true global supply chains, the global financing strategy can help provide stability across the entire chain.
The aim of global supply chain financing is to support organizations throughout the network. One technique is to provide partners, mostly in other countries, with lower cost of capital.4 This is similar to bank-facilitated interest rate swaps, whereby long- and short-term interest rates are swapped among companies to achieve a total lower cost of capital. With supply chain financing, the results are similar to swaps in the sense that all of the participants are given an opportunity to succeed.
A related initiative would be to support smaller key supplier organizations, especially in Asian and third-world nations, in times of financial distress.5 When countries such as Korea and Malaysia suffer a drop in currency, key suppliers in those countries cannot pay back debt obligations in dollars or other hard currencies. In such situations, stronger supply chain partners can step in and leverage their ability to obtain cheaper financing to save their key suppliers from insolvency. The stronger partners may pay more out of pocket for "underwriting" their smaller supply chain partner. But they avoid a greater potential loss of not having a key component that could derail their entire supply chain. By taking a broader view of the financing picture, companies are more likely to avoid such practices as "channel stuffing"—the propensity to shift inventory responsibility to other partners in the supply chain.
As the new global economy unfolds, operations and finance managers must learn to collaborate with parties both inside and outside of their own organizations. A strategic view of integrating the enterprise supply chain partners helps ensure long-term financial benefits for all of the supply chain partners. These benefits will increase as the level of integration increases. Clearly, the complexity of the integration may increase as the number of organizations increases, but so will the opportunities for wealth creation. The use of EVA financial metrics will help everyone identify the financial benefits that can flow from integration and understand the role they play in achieving those benefits. Instead of viewing initiatives from their individual silo perspective, the partners will strive to coordinate their actions to reach total system benefits.
The Enabling InitiativesAn exhaustive discussion of the enabling initiatives along the enterprise supply chain framework is beyond the scope of this article. It is appropriate, however, to highlight some of the major initiatives that organizations typically undertake as they move toward the extended enterprise level. These initiatives are organized under the operations areas of source, make, and deliver. (They are summarized in Exhibit 4.)
Source Initiatives
Source initiatives at the enterprise and intra-enterprise levels typically centralize and rationalize procurement practices and interaction with suppliers. Material control and planning system components of ERP systems are used as planning aids. Procurement execution becomes increasingly streamlined and automated. Advanced Supply Chain Planning (SCP) systems enhance materials planning and extend the requirements planning and optimization across broader domains. Extended enterprise sourcing initiatives allow collaborative planning with suppliers through a host of technology-supported solutions, including e-Procurement. Enterprise Application Integration (EAI) initiatives allow for faster demand communication across entire supply chains. Web-based consumers, retailers, and distributors increasingly are using solutions such as the real-time trading exchange (RTX) to source product over an extended Web-based domain.
Make Initiatives
At the intra-enterprise level, "make" functions generally are plant and division specific. As organizations progress to the enterprise level, broader supply chain planning initiatives are undertaken to plan manufacturing demand at a higher level. Supply chain planning at an enterprise level is supported by division and enterprise-based planning and execution systems. Product data-management initiatives are used to enhance data-management accuracy. Through collaborative planning, enabled by initiatives such as EAI, enterprise-level organizations can plan much more efficiently. Certain segments of manufacturing, such as consumer products, can have production planning decisions guided by logistics activities. In such cases, a 4PL can provide optimal production-planning criteria for this effort.
Deliver Initiatives
Distribution and transportation functions at the intra-enterprise level are markedly nonstandardized and fragmented. Typical initiatives for Level I organizations to increase their logistics effectiveness include implementing warehouse management systems to improve inventory management and centralized transportation planning and execution systems. Outsourcing and simple third-party logistics activities at Level II give way to 4PL-type relationships at the extended enterprise level. Through 4PL, multientity partnerships are formed to provide customers with logistics services at the lowest cost. Fourth Party Logistics also sets the playing field for cross-industry anchors—that is, the distribution and transportation service providers. Fourth-party providers must be able to harness large amounts of information and provide for a sophisticated technology infrastructure to cover a broad domain. The requisite technological expertise is provided by e-Commerce and supply chain entities of major consulting firms.
Change Management: Prerequisite to ProgressThe journey toward enterprise SCM is replete with variables. And one of the most important and difficult of these relates to management of the change process. The early phases of evolution along the enterprise SCM continuum will be the hardest to accomplish. It is at the basic intra-enterprise levels that corporations begin to lay the piping for major supply chain efforts. In most cases, laying this piping will require the creation of entirely new processes that need to be supported by new enabling technology. Organizational structures will be modified significantly in the early phases as well. Perhaps most importantly, work methods will change drastically, demanding new skill sets and, as a natural consequence, precipitating employee turnover.
It is tempting for corporate executives to plan a progression to advanced levels of enterprise SCM framework without fully understanding the related change-management attributes. Yet a corporation looking to advance toward the extended enterprise level must understand the consequences in terms of resource requirements and business impact. Exhibit 5 offers a timeline of these related impacts as a major corporation moves toward the extended enterprise.
Looking forward, it's clear that e-Commerce will alter the playing field significantly for most established enterprises. Newer direct-channel companies will continue to aggressively leverage Web-based technology to sell products to the end consumer. The market confidence in the Internet is providing for ever-greater amounts of cash for Web start-ups. In light of these seminal developments, companies will need to adopt an extended enterprise view in their supply chain operations. With such an extended enterprise strategy in place, they can more effectively capitalize on the business-to-business potential of the Internet to secure a long and profitable future.
Authors' Note: The authors would like to acknowledge Robert S. Stokes, a senior consultant in Process Competency at Andersen Consulting, for his help in the development of this article.
| Levels | Source Operations | Make Operations | Deliver Operations | EVA Impact |
| III Extended Enterprise | Extended enterprise procurement planning | Extended enterprise manufacturing planning | Extended enterprise logistics planning and execution | High |
| Global sourcing | 4th Party Logistics | |||
| II Enterprise | Centralized procurement, demand planning, and execution functions | Decentralized production planning and execution functions | Centralized transportation/distribution planning and execution functions | Medium |
| I Intra-Enterprise | Divisional and site level procurement planning and execution | Divisional and site level manufacturing planning | Divisional and site level logistics planning | Low |
| Enterprise SCM Level | Representative Initiatives |
| III Extended Enterprise | • Industry alliance initiatives |
| • e-Commerce (e-Procurement) | |
| • 4PL | |
| • Direct demand management model | |
| • Enterprise Applications Integration (EAI) | |
| • Global sourcing infrastructures | |
| • Postponement | |
| II Enterprise | • Enterprisewide planning and business transaction processes |
| • Integrated enterprise supply chain management systems | |
| • Enterprise Resource Planning (ERP) systems | |
| I Intra-Enterprise | • Disjointed corporate transaction and planning processes (with little or no enterprise view.) |
| • Some components of ERP and SCM systems (mostly at plant or divisional level and generally legacy-based) |
| Author Information |
| Omar B. Chaudhry is a manager in Andersen Consulting's Global Supply Chain Management practice; Christopher Schnieper is a manager in the firm's Financial Services practice. Both are based in Andersen Consulting's San Francisco office. |
| Footnotes |
| 1 Bernard J. LaLonde, "The Quest for Supply Chain Integration," Supply Chain Management Review, 2 (No. 4, 1999), 7–10. |
| 2 The term 4PL is a trademark of Andersen Consulting. |
| 3 Terrence A. Austin and Hau L. Lee, "Unlocking the Supply Chain's Hidden Value: A Lesson From the PC Industry," Supply Chain Management Review, 2 (No. 2, 1998), 24–34. |
| 4 Roland Hartley-Urquhart, "A New Way of Financing the Global Supply Chain," Supply Chain Management Review, 2 (No. 3, 1998), 48–56. |
| 5 Urquhart, ibid. |
| 6 A. Ehrbar, EVA, The Real Key to Creating Wealth, John Wiley & Sons, 1998. |
|
View All Blogs
