Cover Story: The New Supply Chain 2000

Only a Y2K-compatible supply-chain can give your company its competitive advantage. BT presents the vital links in supply-chain management for the Net-enabled economy.

Every link in it can add up to a competitive advantage. Time was when companies looked at their supply chains-the upstream part of the value-chain from the company's perspective-as a means of focusing on their own core competencies, of leveraging those of vendors, of lowering their costs, and of becoming more responsive to customers. Those goals won't be swept away by the supply chain in the New Millennium. But they will be superseded by a single super-objective: competing on the basis of how well you manage your supply-chain.

For, as the calendar rolls over to reveal the figures 2000, that's where the source of your differentiation may well lie. Says Rohit Agarwal, 35, the Vice-President (Strategic Marketing) of the Herndon (US)-based BaaN Company: ''It was companies who used to compete with each other earlier. Today, the competition is much broader-between supply-chains. The one with the best supply-chain will walk away with the customer, however competent individual pockets in the supply-chain arbe.''

Several parallel forces re-shaping the world of global business are contributing to this shift of the supply-chain from a position where it was critical to cost and quality to one where it is becoming one of the most powerful ways for companies to offer greater, and differentiated, value to customers. Manufacturing is giving way to assembling on shopfloors since companies no longer find it either economical or quality-smart to be vertically integrated. Two years ago, the Mumbai-based Blow Plast used to buy lock components and give them to an assembler. It would then test them before passing them on to its manufacturing line. Today, it procures entire lock assemblies-tested and certified for quality by its vendor. This was the result of an analysis of transaction-costs vis-à-vis material costs, which revealed the inefficiencies in the system.

ERP & SUPPLY CHAIN

In tomorrow's instant economy, your supply chain must operate at the speed of thought. And since the combination of infotech and the Net enables data to flow in real-time from source to destination, the information of your supply-chain can, certainly, be made to zip. That's why most Enterprise Resource Planning (ERP) software packages now include a supply-chain management module which uses the Net to link up companies with their suppliers-with the information flowing in and out of the organisation-wide system that ERP represents. Thus, SAP offers a 3-product menu that companies can use to plug supply-chain management into their ERP, all of them offering ways to integrate information and decisions automatically and seamlessly from the entire value-chain into the supply chain: SAP Advanced Planner and Optimizer, which includes advanced supply-chain planning tools for real-time planning and decision-making; SAP Business-To-Business Procurement, an inter-enterprise closed-loop procurement software package; and SAP Logistics Execution System, which handles the logistics part of the process.

BaaN's answer: a new package named Collaborative Planning Framework (CPF), which uses the Net to enable companies to interact with their suppliers in real-time. CPF uses a Net portal for collaborative planning between the manufacturer and its various suppliers. As soon as an order is received, the ERP automatically generates the relevant purchase-orders and sends them to the associated suppliers-following up with auto-alerts in case confirmation isn't received. The package also organises a Net meeting of all suppliers where they can bid for the product quantity and prices. Documents like purchase-orders, forecasts, and shipping notices are posted by the ERP package and stored in a document repository. The system notifies everybody on the supply-chain by e-mail that they should use the portal to view, approve, or import the documents into their back-end systems. In fact, CPF makes the manufacturer's entire production plan transparent. You can bet on it: you cannot do without on-line supply-chain management.

Indeed, every component and raw material-and, in some cases, even the design-that goes into a product needs increasingly-specialised manufacturing expertise. Larsen & Toubro, for instance, outsources its CAD/CAM designs for gas turbines for power stations instead of doing it itself. Hero Motors shops for its post-engineering moulds and dies in Taiwan, Japan, and Europe. Reebok outsources its entire product range, limiting itself to marketing. Like them, any company that focuses only on value-adding to inputs can benefit by outsourcing from specialists. Says Vijay Crishna, 54, CEO, Godrej-GE: ''The idea is to focus on the tasks that add the real value-so that you can also capture the greatest profits-while leaving the rest to your suppliers.''

Thus, the competitive advantage is shifting from the shopfloor-where the assembling process is becoming a commoditised one-to getting those inputs into the company. Or, from manufacturing to managing the supply-chain. Consider how the Delhi-based Liberty Shoes is able to introduce 1,000 new styles every year.

While the dummy foot is created in Italy, Korea, Spain or Germany, moulds for soles also come from Italy and Germany. The uppers are designed indigenously through internal CAD/CAM facilities even as some specialised designs are also bought from design studios in Europe. Says Adarsh Gupta, 38, Executive Director, Liberty Shoes: ''If I have to launch a product from scratch every 18 months, and continue modifying it every 3 months, it has to be a collaborative effort.''

At the same time, another major upheaval is taking place in all industries around the world: the emergence, in the post-Net economy, of the truly global marketplace. This is turning the conventional wisdom of supply-chain management upside down in many cases. In the past, a great supply-chain pre-supposed long-term relationships with vendors, with your company and your suppliers working together to improve design, boost quality, reduce costs, and share the benefits.
Sure, aggressive supply-chain managers have been shopping in labour-intensive countries with low-cost manufacturing bases. But, even there, the assumption was that relationships were meant to be long-term. But now, suddenly, it has become quicker, cheaper-and, by implication, smarter-to shop globally, using the Net.

Need 100,000 tyres a year? Why limit yourself to suppliers in your country when a company halfway around the globe is offering a better deal? Earlier, this potential supplier wasn't even on your radar-screen-and even if you were on its, it didn't have the muscle to storm into your view. Not anymore, since in the Net-market, every player is, necessarily, a global one. So, you are likely to discover a low-cost, high-quality supplier who fits the bill.

What's more, it could be a different supplier each time since pricing of Net-based transactions is becoming flexible, being determined more by demand and supply at the specific time you want to make your purchase rather than by any fixed-pricing strategy on the part of the seller. When the Bangalore-based Wipro's fluid power division needs rubber seals for its hydraulic cylinders, it shops for suppliers in the UK, Japan, the US, and Germany on the Net for the best bargain each time it needs to import them. Lift-manufacturers Otis Elevators found an excellent bargain for its travelling-cables in the form of a Swiss supplier, which lowered the input cost by 25 per cent. Says S.K. Chakravorthy, 58, General Manager, Otis: ''We were even able to reduce our cycle-time from 4 weeks to 2.''

The outcome of these 2 forces is that your supply-chain can no longer be the carefully-cultivated, long-term relationship-driven construct that it needed to be even 5 years ago. Instead, finding the right supply-chain, given your strategic needs, will be a constant matter of choosing the right options from a menu which is itself in a constant state of flux. Thus, you will have to aim at temporary equilibria in the dynamic supply-chain market, not at building static, quasi-permanent chains.

As you've guessed, few challenges are tougher-particularly since this will not allow you to abandon earlier practices like Just-In-Time supplies or collaborative design. That's why competition in tomorrow's markets will, essentially, be a clash between competing supply-chains-explaining why your supply-chain can be a source of competitive advantage. How? Competitive advantage flows from the ability of a company to perform activities on the industry's value-chain-designing, or manufacturing, or servicing, for instance-in a way that offers greater value to the customer than those of competitors. In today's typically-deconstructed value-chain, upto 80 per cent of the value-addition is done not by the manufacturer and the marketer, but by those who supply the components and raw material. In the TV industry, for instance, tuners and electronic gadgets undergo such quick changes that all TV manufacturers rely heavily on the supplier's ability to introduce new concepts and components.

Your focus, in this situation, must shift from building differentiation into your own activities to ensuring that the players on your supply-chain are building differentiation into theirs. A car-maker, thus, cannot expect to offer value to its customers from the way that it assembles its vehicles. Instead, it must ensure that its suppliers perform their tasks such that the specific component that each manufactures can offer greater value to the customer. So, the aggregation of the unique customer value that your company can extract from your entire supply-chain can provide you with a definitive competitive advantage.

For instance, if Maruti Udyog can give its customers the benefit of improved seating systems with bucket seats, it's because its vendors, Krishna Maruti and Bharat Seats, have been continuously upgrading their products with fresh technology and investments. And if Greaves has been able to minimise the failure rate of the radiators in its engines, that's because its vendor had the capability to upgrade its systems.

Now you know why supply-chain management has become a short-cut to competitiveness. Whether you are plagued by a financial squeeze, hyper-competition, poor manufacturing practices, or a technological shift, your supply-chain can put you back on your customer's shortlist of companies to buy from. Indeed, efficient supply-chain management has brought about astounding results for corporates around the world. In the US, Dell's focus on supply-chain management has crushed its cash-to-cash cycle time from 7 days to 36 hours, and Chrysler has reduced its Concept-To-Production (CTP) time by more than 40 per cent, from 234 weeks in the 1980s to 160 weeks now, by supplier-involvement at concept stage. Says Vasant Cavale, 52, Principal (Supply Chain Management), KPMG Peat Marwick: ''There is not an industry where it can't be applied, and there's not a company where it won't bring about dramatic results.''

Of course, one major factor that has forced corporates to re-examine supply-chain management is the cost tied up in it. As K. Ramachandran, 52, CEO, Philips, points out: ''The cost of an activity has to be lower than the value it adds. Otherwise, it is of no use.'' And the poorly-constructed and -managed supply-chain (read: melange of vendors) that many companies in India used to operate with led to supply-chain management becoming a major cost-management effort. But that's not all that your supply-chain can serve up for you tomorrow. Against this backdrop, just how can India's companies leverage their supply-chains for competitive advantage? BT presents the 4 strategic links in supply-chain management for the 21st Century.