For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.
Robert D. Kugel, CFA
SVP & Research Director – CFO and Business Research
Ventana Research
Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Rob has been a technology analyst for over 20 years. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.
Kinaxis: A century ago Ford Motor Company succeeded in assembling a vertically integrated automobile used to have a fully integrated supply chain from steel manufacturing through to the sale of a car. Now other companies make the steel, most of the components are manufactured by other companies, and yet other companies sell the cars.
- Will this trend in supply chain specialization concomitant with outsourcing continue at the current pace?
- What will be the effect on the supply chain if this trend continues?
- Is there a “natural” number of actors in a supply chain which gives greatest flexibility while limiting complexity?
- What will this mean in terms of systems requirements to support supply chains with many actors?
Robert: B2B planning is essential in today’s economy.
Business to business (B2B) planning is an emerging imperative driven by the dis-integration of business models and the resulting increased complexity of their supply chains. For more than a century, many industries found value in vertical integration. At one time Ford Motor Car even owned iron mines, barges to transport the raw material, rubber plantations and so on. The rationale for vertical integration has diminished as a result of freer trade and more transparent markets. Rather than capturing value, vertically integrated organizations increasingly found parts of their business were losing them money. Over the past 25 years, vertical integration has been waning as companies seek to focus on those parts of the business system where they have unique competence and strategic advantage. Consequently, businesses now have longer and more complex supply chains to manage. This trend is likely to continue as long as governments remain committed to free trade.
More extensive and fragmented supply chains, however, have exposed corporations to risks that vertically integrated companies don’t have. Buyers must keep on top of suppliers’ ability to deliver reliably at a given price while suppliers must be able to have an accurate forecast of demand. The more specialized the product and the longer the lead time on the item, the greater the risks. Timely and accurate sharing of information is the most important aspect of mitigating these risks.
Early on in the dot-com days, some naïvely assumed that information exchanges would be the solution for effective communication, especially since these could be less expensive than proprietary networks. However, this proved to be useful mostly for high volume, commodity-like items. Rarely are these a problem for businesses. Over the past decade, well managed companies have started to focus their business to business planning efforts with a select group of trusted, strategic partners.
The planning process must provide executives and management across the entire supply chain with the ability to integrate their planning and forecasting activities to achieve better coordination in establishing accurate plans. When conditions change (as they always do) companies must adapt quickly and collaboratively. They must have an integrated business to business planning process in place to succeed in today’s dynamic global economy.
The lack of ongoing, integrated business to business planning may not be a big issue when business conditions are stable, but how often does that happen? Over the past two years, businesses worldwide have had to contend with extraordinary levels of volatility in commodity prices and exchange rates. Economies once booming have gone into recession. When forecast accuracy is almost impossible, the value of having up-to-date demand visibility and being able to re-plan quickly with the most important members of a supply chain is clear. B2B planning ought to be a structured dialogue across the organization – “structured” by the inclusion of numbers that bring precision to the discussions. The challenge is to figure out how to collect the relevant forward-looking data and analysis from the various participants and assemble them into a coherent view in a consistent, timely and accurate fashion.
Companies need tools to help them achieve an effective business-to-business planning effort. Until recently information technology to support a structured dialogue across an organization could not do that in a way that people would find easy to use. Most companies continue to use stand-alone spreadsheets to manage individual planning processes, not realizing that the limits of spreadsheet technology constrain the effectiveness of the process itself and the ability to share information.
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Brian Dreckshage made the following comment on an associated group, Materials Management, on LinkedIn, To see the original posting please go to http://www.linkedin.com/e/vaq/2768096/122591/3176598/view_disc/
“I’d think the answer is really one of scale and desire for control. Can you use all the capacity of the vertical and does management want to invest in the assets necessary in exchange for the control?”
I think outsourcing is a process that will continue and may even gain pace. At its very heart outsourcing is a financial tool, not an operational tool. It is all about getting assets off the books. Yet it has a profound effect on the span of control of the organization especially when it comes to that all important aspect of delivering finished goods into the hands of customers in the quantity, quality, and time that the customers desires. Without effective collaboration at the planning stage, supply chains can disintegrate very rapidly into a disjointed mess.
As Robert writes, it is the speed of change that is so very different at the moment. Knowing sooner can help mitigate the risks. In the late 1990’s I was working on one of the B2B portals to which Robert refers. There were some real issues to be addressed in terms of shared visibility and planning capabilities. The most glaring example was a catalyst manufacturer – single sourced I might add because of a unique capability of manufacturing a specific catalyst for diesel engines – that received orders before they received the forecast. The result was very bloated inventories for a new model introduction and a huge strain on cash reserves.
Undoubtedly though, Brian brings up a crucial point. Much as we have come to realise that outsourcing to China comes with additional transportation costs and increased supply chain risk, so too we are coming to realise that outsourcing itself comes with risks that can only be mitigated by investment in processes and tools for collaborative planning. I think a crucial difference from the Ford days and even the early days of outsourcing is that now manufacturing is being outsourced completely, in some industries such as High-tech and Footwear & Apparel anyway. The risks to the supply chain are very different when what has been outsourced is the complete manufacture of finished goods, rather than the manufacture of some components, even key components.