FT.com / Technology - Control of the supply chain turns critical

FT.com / Technology - Control of the supply chain turns critical

Control of the supply chain turns critical
By Stephen Pritchard

Published: September 19 2007 00:54 | Last updated: September 19 2007 00:54

An efficient supply chain is a prize worth striving for. According to Accenture, the consultancy firm, “supply chain leadership” can increase a company’s market capitalisation by between 7 and 26 per cent above the industry average.

But for a business, even competing for that prize demands a significant investment in resources. In sectors such as consumer goods and retailing, established companies have already achieved the easiest supply chain efficiencies.

“Things that are likely to move the dial have to make a significant difference, rather than be technology experiments,” says Stephen Proud, a partner in Accenture’s supply chain practice.

None the less, an efficient supply chain is a must for a widening range of businesses. Fashion, hi-tech and grocery retailers grasped early on the importance of ensuring the right stock reached the right store at the right time.

No one wants a warehouse full of summer dresses in October, or indeed shelves of last season’s mobile phones in the run-up to Christmas. But the supply chain is now moving up the agenda in slower-moving sectors such as heavy manufacturing.

Effective supply chain management is the only way to make efficient use of global sourcing strategies and especially, the huge manufacturing capacity of China and the Pacific Rim.

Although globalisation has reduced production costs in a wide range of sectors, the trend to source components or even finished goods from China and elsewhere has made the supply chain manager’s task far harder.

“Our internal systems handle more than 700 suppliers,” says Christian Verstraete, worldwide supply chain expert at Hewlett-Packard. “We have to be able to ex-change messages not just with them, but with their suppliers.”

Supply chain managers in many sectors are looking for greater visibility of what is happening in their supply chains and faster access to more accurate data.

This means that if there is an unexpected event, be it storms affecting shipping or a production shortfall, companies can divert stocks or bring in alternative suppliers.

“Companies are not just asking suppliers why there is a problem with an order,” says Sanjiv Sidu, president of supply chain management software vendor i2. “They are asking: ‘When did you first know, and why did you surprise me?’”

In sectors such as retail, supply chain problems lead to “stock outs” or empty shelves, which send customers elsewhere. In heavy or complex manufacturing, supply chain problems can lead to cancelled orders running into billions of dollars, or severe penalties for late delivery.

As manufacturers move away from vertically integrated production, the supply chain suddenly becomes critical.

“In aerospace and defence, we are 10 years behind the hi-tech or even automotive sectors and how we improve the performance of our supply chain is quite a challenge,” explains Bill Black, chief quality officer at aerospace manufacturer EADS.

“The cost of running our supply chain logistics is minor, set against the $100m cost of an aircraft. But the cost of failure is enormous.”

About 80 per cent of the cost of an aircraft is accounted for by suppliers and partners,” says Black, making EADS “architects of complex products”.

“I need to know if an event can affect our master schedule and that means that I need to know what is happening, not just with my tier one, but with tier four, five or six suppliers.”

The increasing demands of customers, as well as the drive to cut supply costs, are causing manufacturing companies in particular to renew their investment in supply chain technologies.

But efficient supply chain technology can also open up business opportunities.

For Kautex-Unipart, an automotive component manufacturer based in Coventry, in the UK, supplying BMW’s Mini production line with fuel tanks came with an onerous condition attached. The company had to achieve 100 per cent delivery accuracy, matched to BMW’s JIS 5000 manufacturing process.

Kautex-Unipart is BMW’s sole tank supplier for the Mini plant at Cowley, in Oxfordshire. It has to supply 250,000 tanks each year, in exactly the order specified by BMW, for each of the 13 tanks used on the Mini car.

The tanks even have to be stored the right way round in the shipping containers. If they are not, BMW’s production robots cannot fit them.

The company used a photographic identification system, Visidot, from Israeli vendor Image ID to ensure that tanks can only leave Coventry if the order exactly matches BMW’s requirements.

“Getting supply wrong is the cardinal sin in the automotive industry,” says Jan Parylo, IT manager at Kautex-Unipart. “But the BMW contract has also brought us benefits. We used to have 24 to 48 hours’ visibility of orders. Now BMW can give us six days. As a result, we have more flexibility in our manufacturing and supply processes.”

Visidot is one of a number of new technologies that are helping businesses improve supply chain visibility and the speed at which they collect supply chain data. Others include radio frequency identity (RFID) tags as well as three-dimensional and even colour bar codes.

“In the past, for manufacturers [supply chain] visibility stopped at the batch or lot level,” says Krish Mantripragada, head of RFID and Auto-ID solutions at enterprise software vendor, SAP. “But recalls and quality issues are putting a lot of pressure on companies to make their data more granular, and to be able to track single items.”

The response to RFID, however, differs from industry to industry. Mr Mantripragada says that interest is greatest in sectors such as pharmaceuticals, aerospace and defence “where complete traceability and product integrity are the priorities”.

In other industries, some companies are looking to use RFID to make their supply chains more efficient, but they are finding the costs to be higher than expected. The costs of RFID tags may be heading downwards, but there is far more to a supply chain project than the tags alone.

RFID, for example, produces a unique serial number for each product, while conventional tracking systems may be designed just to record a product’s stock code, and assume that each product with the same code is identical.

“It is partly an infrastructure problem, with the need to deploy sensors. But the second problem is serialised data management,” says Mr Mantripragada. “Many production processes batch supplies, so business processes need to adapt to handle serialisation.”

Business processes that are already designed around items with individual serial numbers often lend themselves best to technologies such as RFID; for others, bar codes or similar scanning technologies might be good enough for some time to come.

“We are certainly not wedded to RFID as a technology. If the project is about better serialisation and that could be done as well with coloured dots, that would not be an issue. And there are environments where radio frequency technologies are not applicable,” says Mr Proud at Accenture.

For businesses considering their supply chains, the most important step is to look at the business process and how it could be improved, and then pick the technology that fits best.

Nick Costides, portfolio manager for UPS Supply Chain Solutions, based in Atlanta, says: “As an express delivery company, barcodes meet our needs. But in the long term, there are opportunities. For example, if every item in a warehouse had an RFID tag, it would make taking physical inventories much easier.”

Companies also need to consider how access to item-level data, or indeed more up-to-date status information from the supply chain will support decision making.

“Distribution centre operators clearly have different needs from C-level executives,” says Mr Costides. “We give them the information they want to see, so they are not overwhelmed.”

Fortunately, modern enterprise IT systems have the capacity to handle the increased data coming in from systems such as RFID. But technologists caution against relying on a single change to improve supply chain performance.

“There is not one killer application but rather a series of incremental steps before we see the ground shift,” says SAP’s Mr Mantripragada. “Some customers have seen significant returns on investment from better data accuracy and visibility, but no two customer scenarios are the same.”

Copyright The Financial Times Limited 2007