Smart Supply Chains

Supply chain management is a key differentiator for corporations around the globeand theres a whole new world of possibilities
By Bill Shepard ince its origins in the 1980s, the field of supply chain management has emerged as a strategic game-changer for enterprises around the world. Now, experts say, its poised to play an even bigger role. Supply chain management encompasses a broad range of fundamental interactive processes in product design, procurement, production, distribution, and demand management. The promise of supply chain management is equally wide ranging: to deliver the right product in the right quantity at the right price to the right customer at the right time at the lowest-possible supply chain cost. A push view of supply chains, where product and materials move toward the final market, driven

by forecast demand, is being replaced by a pull view where customers initiate supply chain decisions, configuring products and initiating orders that pull product through the chain, says Professor John (Jack) Nevin, executive director of the Grainger Center for Supply Chain Management at the Wisconsin School of Business. In a pull-oriented supply chain, demand signals are collaboratively shared with key supply chain partners. Nevin says supply chain management responds to demand as it occurs, as opposed to responding to delayed orders or forecasts: It integrates demand signals throughout the supply chain, he says. In its early days, a push model of supply chain management was divided into distinct silosproduct development, procurement, production, logistics,

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sales, and marketing, explains Verda Blythe, director of the Grainger Center. By the 1990s, a new supply chain management model had broken down the silo walls, she says, enabling customer-focused information to be shared among the distinct functional areas of companies to meet customer demand. In recent years, businesses using supply chain management gradually have shed the linear model of pushing raw materials and labor into one end of the chain in order to produce finished products at the other end. Imagine three overlapping circles representing supply, demand, and products/services. These three domains are interconnected through demand-driven networks encompassing customers, employees, and suppliers. The networks share real-time information about everything from customer orders, to parts and labor, to inventory levels and distribution channels, to customer requests for product improvements and innovation. In short, these networks efficiently respond to customer demand signals, whether they relate to producing existing products or innovating new ones. Supply chain management enables us to negotiate the best pricing in the industry, says Evan Smestad, MBA 04, strategic procurement manager at Hewlett-Packard. Youre not following the market, youre setting the market. And that gives you a greater advantage over your competitors.

Value chains: focusing on the end customer

These days, companies are adopting the value chain concept, coined by competitive strategy expert Michael Porter, as part of their overall supply chain management operations and strategy. In essence, this means building value into every step of planning, sourcing, making, and delivering products and services.

Nevin cites Hewlett-Packard as an excellent example of the value chain in action, noting that HP redesigned its products and processes to reduce costs and add value. Theyve condensed all of their sourcing, reduced the number of motors and other parts in their printers, and redesigned them so that there is a base unit module that can be further assembled and customized in distribution centers around the world, Nevin explains. They started at the design stage, and established outright how products would be sourced, produced, assembled, and distributed. Lean thinking and process improvement also play key roles in the value chain, notes Scott Converse, director of technology programs in the business schools Executive Education unit, and program director of its supply chain management certificate series. At every step, you identify whether it involves an activity that the customer would be willing to pay for, says Converse. So youre identifying re-work, excess movement of goods and services, excess transportation, idle time and wait time, and reducing those types of things to add value to the product or service. Focusing on customer needs and feedback is integral to all successful value chains. It is the supply-demand balance being achieved up and down the chain, from the consumer back to the source, and value is created at every transaction along the way, says Kevin OMarah, group vice president, supply chain research at AMR Research, who serves on the Executive Advisory Board of the Grainger Center. So, when you buy a Happy Meal from McDonalds, the value provided in reverse is the customer knowledge provided to McDonalds from its Happy Meal datafor example, that drinks should be smaller, or that different plastic toys should be included. Value is created in the transaction, and that always is a two-way street. At Cisco, Inc., Customer Value Teams (CVTs) reflect an intense customer focus. CVTs are made up of dedicated value chain experts focused exclusively on proactively connecting Cisco value chain capabilities with our largest customers and partners, says Karl Braitberg, vice president of demand management,

PaybaCk
Whats the impact of skilled supply chain management? According to benchmarking data from AMR Research, a global authority on supply chain management, the most-advanced demandsensing companies enjoy these advantages:

10 percent more revenue 5 to 7 percent better profit margins 15 percent less inventory

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planning, and customer operations. Braitberg serves on the Grainger Centers Executive Advisory Board. Each team is focused on delivering personalized, high-touch, customer value chain solutions, he says. These teams are accountable for driving customerspecific metrics throughout the value chain.

trends and challenges

Increasingly, businesses and organizations are discovering the critical role that supply chain management plays in responding to new challenges, which are shaping new trends in the field.

GrainGer Center for SuPPly Chain ManaGeMent

The Wisconsin School of Business has one of the only endowed, university-based centers specializing in supply chain management in the United Statesthe Grainger Center for Supply Chain Management. The center supports an MBA career specialization in supply chain management, an undergraduate specialization, and assists faculty research in the field. Its MBA offering has earned particular acclaim in various publications including U.S. News & World Report, Gartner/AMR Research, and Supply Chain Management Review. Average starting salaries of its graduates are consistently the highest among peer schools, ranging from $80,000 to $110,000. The center is known for close ties to industry. Its Executive Advisory Board comprises senior executives from firms recognized for excellence in supply chain management. Verda Blythe, MS 02, the director of the Grainger Center, is an alumna of the program. According to Blythe, the centers reputation and the growing importance of supply chain management have increased the demand for supply chain management education and talent. Blythe says, I feel confident telling prospective students that if they want to become a leader in world-class supply chain management, the Grainger Center is the place to start. To learn more about the Grainger Center for Supply Chain Management and careers in supply chain management, visit bus.wisc.edu/grainger.

Company after company used supply chain management to take huge costs out of the system when the recession hit, says Nevin. HarleyDavidson, for example, closed its distribution center and outsourced it. It also placed its transportation operations with third parties. Supply chain management has made companies more resilient in tough times. Quraish Baldiwala, MBA 01, is the commercial director of strategic markets for Abbott Nutrition, a Chicago-based division of Abbott Laboratories. He lists several industry trends that developed over the past two decades: Globalization, focus on emerging markets, and the decoupling of the supply chain into a web of autonomous entities designed to work together. Other aspects of important trends he cites are growing efforts by companies to offset higher costs in developed countries, take advantage of a growing middle class overseas, and developments in transportation and information systems that have allowed remote supply chains to function. Through the economic crisis, not only have we been able to ride it out, but supply chain management has enabled us to continue our cost-saving initiatives to provide top-line dollars to invest in other areas, like R&D, says Smestad. In fact, as weve grown over the last five years, it has tripled that ability, if not more. Other supply chain trends have stemmed from the challenges of political, economic, or other vulnerabilities in overseas markets. In the last few years, with escalating global risks, the need to have effective risk-mitigation programs is paramount, says Braitberg. A crisis in a distant region can now spread very quickly across the world economy, creating tremendous turbulence. In response, companies have diversified their supply bases and located them throughout the world, rather than basing them in one location, to spread risk. In order to reduce fuel costs or product safetyrelated risk stemming from tainted or unsafe products, some U.S. companies have moved operations, suppliers, or other parts of their supply chains from China to Mexico, comments Blythe. Jennifer Schultz, MBA 08, is in the Supply Chain Leadership Development Program at Raytheon Co. She points to another growing trend: supply chain

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A crisis in a distant region can now spread very quickly across the world economy, creating tremendous turbulence.

optimization. Essentially, supply chain optimization strives to maximize commodity technology, while at the same time reducing the number of suppliers for a commodity, giving highest priority to the highestperforming suppliers. Supply chain optimization is extremely important, especially when it comes to global sourcing and logistics, says Schultz. Who are my key strategic suppliers, and what do they bring to the table? When we concentrate on those issues, were going to enhance efficiency in the supply chain.

expanding into non-traditional areas

Supply chain management has grown in scope and influence largely within the realms of manufacturing and related sectors. Increasingly, there are additional areas where supply chain management is having an impact, providing solutions, and driving profits especially in new markets. Take IBM, which has successfully applied supply chain management principles and practices to provide solutions in a host of non-traditional areas beyond manufacturing. For IBM, our focus is on the trend of smart supply chains in support of smarter planet solutions, which are rooted in the basic elements of Instrumented, Interconnected, and Intelligent, says Steve Loehr, vice president of operations and strategy, value services. Loehr is another supply chain management expert who serves on the Grainger Centers Executive Advisory Board. He cites IBMs consulting work for the Swedish National Road Association in Stockholm and other cities around the world to reduce road congestion and vehicle emissions. Think of cars on roads like one big distribution network within a supply chain, or multiple components moving along various assembly lines inside a factory, says Loehr. By equipping roadways with instrumentation to both track and charge for usage, interconnecting the system to manage the overall flow, and then applying analytics/intelligence to both provide real-time feedback on usage as well

as insights on variability of demand throughout the day, week, or month, overall supply and demand can be managed better. Congestion can be controlled and better planning can be developed for roadways and public transportation usage. Not only can these smart solutions enhance the world around us, but theyre also generating considerable profits for IBM. In fact, supply chain management in non-traditional areas like business consulting has helped Big Blue transition from a manufacturing-based company into a knowledge-based enterprise. When I started at IBM years ago, the majority of our profits came from hardware, says Loehr. In contrast, he notes that hardware accounted for 15 percent of IBMs gross revenues for the first quarter of 2010, whereas consulting and services generated about 60 percent. The IBM roadway example points to other non-traditional fields where supply chain management will likely have a significant impact: social and environmental responsibility. Supply chain management is going to be responsible for managing initiatives related to broader social issues, says Nevin. IBM, Hewlett-Packard, Timberland Co., Starbucks, and many other companies are incorporating the goals of sustainability and ethical labor practices into their supply chain management strategies and practices, demonstrating that it is possible to do the right thing while delivering superior returns to shareholders. Whether youre scoring suppliers based on their carbon footprints or energy usage, or reducing waste in your own operations, supply chain management makes it happen, comments Converse.

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helPinG firMS hone their SCM exPertiSe Another non-traditional sector where supply chain management can make a significant impact is the U.S. health care system.
Many companies have built recycling into different parts of their supply chains. For example, Nike reprocesses discarded athletic shoes to create rubber for soccer fields, foam for playground surfaces, and fabric for padding under basketball floors. Another non-traditional sector where supply chain management can make a significant impact is the U.S. health care system. In health care, there is a lot of waste in inventory and sourcing, says Blythe. Typically, hospitals and health care providers dont buy directly from manufacturersthey buy from distributors. So this results in multiple layers of inventory. Blythe suggests that a first step might entail improving electronic communications between hospitals and suppliers at the front end of the supply chain, thereby facilitating more direct and efficient demand signals that will reduce response times and inventories. Sourcing and inventory management would be other significant areas ripe for improvement via supply chain management. OMarah agrees. Patients dont communicate their demand information directly back into the system they communicate their needs back through the insurance industry, which distorts the demand signal, he explains. The insurance industry collects all that demand data but distorts the demand signal with rules about what it will and will not pay for. OMarah envisions a solution involving demanddriven networks of retail health care suppliers that would provide routine services, like physicals, directly to consumers who would pay out of pocket. But, he says, higher-risk procedures, like surgeries, would remain covered by insurance companies. Even when companies recognize the importance of supply chain management, their efforts to pursue SCM improvement or technology solutions can fall short. To help translate strategy into successful practice, the business schools Executive Education unit offers one of the nations broadest offerings of courses in supply chain, purchasing, and transportation/logistics. A sampling includes:

Supply Chain Leadership focuses on how to identify and minimize uncertainty in supply chains to improve customer satisfaction and lower costs. Strategic Global Sourcing provides insight on the best mix of domestic, near-shore, and far-shore sourcing, and practical advice on how to execute the mix effectively. Industrial Transportation Management offers metrics, tools, and methods to integrate a logistics and transportation network into the overall supply chain for quicker response and lower total costs.

Information on these courses, related offerings, and earning a professional development certificate in supply chain management is available at exed. wisc.edu or by calling 1-800-292-8964.

Whether supply chain management can reform Americas intractable problems with health care remains to be seen. But one thing is certain: supply chain management is not a flashy fad that will fade away. It already has transformed companies around the world, providing a strategic platform for meeting customer demand through value-rich processes. By offering solutions to environmental and other problems, it may even make the world a better place. Bill Shepard is a Madison-area freelance writer.

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