MRO Magazine

Supply Chain Management: What plant professionals need to know


November 14, 2000
By PEM Magazine

Almost daily, manufacturers are under increasing pressure to deliver goods in a way that more closely matches their customer’s needs. Just-in-time delivery, smaller quantities, closer tolerances to client specifications, and shorter time-lines to make changes or deliver new orders, are all part of the new way of doing business.

Senior management is always looking for more flexibility, too, and faster responsiveness to market changes. At the plant level, this often means more computers, new software and better record-keeping. You may be under pressure to keep track of and report on more statistical information than ever before: production, quality rates, equipment failures and downtime, time required for retooling and more.

Your company may be on the verge of installing "enterprise-oriented" computer systems. One of these systems, broadly known as Supply Chain Management — or SCM — may actually make it simpler for you to accomplish many of those goals. But be forewarned — at the same time, it could completely turn around the very fundamentals of the way your company does business.

So, what is SCM?


Explaining the basics
At its most basic level, supply chain management is sold as a set of software, networks, protocols and procedures. In reality, though, it is a whole way of doing business. In many ways, it’s a response to the pressures of global competition and the increasing speed of product development, the push for faster responses to market changes and the need for greater corporate flexibility. It’s also a response to the opportunities created by technologies like the Internet, e-commerce, rapid prototyping and flexible manufacturing.

You can think of SCM as the art of coordinating the activities of all the companies, divisions, sectors and people who are involved in the production of a single item. As such, SCM includes:

  • Forecasting demand;
  • Sourcing and purchasing;
  • Planning production and inventory;
  • Transportation and distribution;
  • Warehouse management;
  • Customer and supplier relationships.

A supply chain management system is a set of software and communications procedures that makes this simpler. In fact, without sophisticated software and excellent real-time communications between computers in different locations and different companies, meaningful supply chain management simply isn’t possible.

Why manage the supply chain?
Let’s look at an often-used example of SCM in action — the automotive manufacturing industry. Most components in this process are outsourced, and assembled at the plant owned by the company whose nameplate appears on the car. Making sure that all the parts used are the right ones, in the right place and quantity, is enough of a management challenge. But that wasn’t enough for the thinkers in the corporate offices. No, in an attempt to compete even more fiercely in the marketplace, they had to come up with "just in time" (JIT) assembly as well.

In the JIT environment, suppliers found themselves having to bring the perfect part, manufactured to precise specifications, in the right quantities, packaged appropriately, exactly when they were needed for the manufacturing process. The "sooner or later" mentality no longer cut it when it came to delivery at any level.

The idea was that the parts went directly from the truck or train onto the assembly line. This removed the need for the car company to store the parts, thus reducing inventory costs. JIT manufacturing proved so beneficial that it began to be applied in almost every industry. Today, it’s not just being implemented by the final assembler or vendor of a consumer product: the various suppliers "upstream," who make brakes or steering assemblies or computers are also outsourcing components and demanding JIT deliveries, too.

But in time, everybody got used to that system. Then, the concept of "just in time" started to get more precise. Delivery schedules got shorter, and they continue to do so. Customers, whether industrial or consumer, now want their orders sooner. International competition is ready to deliver. And that’s not the only way schedules are getting tighter. Global competition means more players in every market, all with new and different products vying for the same dollars. In turn, the market values innovation and has come to expect it. That means that manufacturers are looking for ways to bring new developments and enhancement to their products to the market, and are looking to do it faster.

Making changes to the product in this kind of manufacturing process means many different organizations must adapt. The pressure to share the right information fast enough to make rapid development and short turnaround in production requires computers closely linked in a fast network. And that’s how the supply chain management system was born.

An SCM system links information systems throughout a company’s various locations and divisions — the parts that make up the "enterprise" — in real time. SCM also links information about product flow between suppliers and manufacturers. It has a certain amount of built-in intelligence so that it can notify the appropriate parties about changes in demand or supply. By delivering all this information as quickly as it becomes available, SCM helps businesses not only to plan production decisions, but to decide things such as whether to accept rush orders, which way to ship finished goods, and how to source or procure key supplies and components.

Putting SCM to work

Benefits and pitfalls
Implementing an SCM system is not cheap, and it’s not a matter of buying a box of software for a couple of thousand dollars, either. SCM systems are major installations, based on extensive networks. They’re largely customized and cost anywhere from $25,000 to hundreds of thousands of dollars. For that reason, typically only the largest companies have full-blown SCM systems. They are getting cheaper, however. While the traditional enterprise-wide-system vendors like JD Edwards, SAP and Oracle have aimed at the biggest and richest, tier one and Fortune 500 companies — the Fords and IBMs and Boeings and Kelloggs of the world — a large number of smaller firms are bringing supply chain management to smaller companies.

At costs like that, the payoffs have to be large, too — and they are. Louis John Krass, project director at Unisys Corp. distinguishes between "hard" benefits and "soft" benefits in a paper in the journal Supply Chain Management Review. Hard benefits, writes Krass, include things like lower costs, better cash flow, and reduction of inventories.

"Within the typical supply chain, investment in inventory represents one of the largest single uses of capital — often as much as 25 percent of total sales," Krass writes. For a company whose cost of goods sold is, say, $3 million, Krass estimates that reducing inventory can save as much as $250,000. And that’s money that could be used for developing new products, acquiring new equipment, or physical expansion.

"Soft" benefits are also important, says Krass. These include better decision-making ability, faster processing of orders, and a closer relationship with clients. SCM practices can also allow a company to source inputs from around the world, getting the best value possible. These are all impressive goals, but assessing their impact on the bottom line is more difficult. Still, considering SCM’s bottom-line effect may be the most important criterion.

Looking carefully at what SCM actually does, you can see a whole different way of doing business. SCM software allows you to make better predictions of customer demand. With each new order, you can see how it’s affecting your entire enterprise, and you can check quickly whether a customer’s new demands can be accommodated by all your suppliers. With that kind of information in your hands, in advance, you can change the focus of your production planning from your own production abilities to the customer. Or as SCM software supplier IMI puts it, the change is from "vendor-push to customer-pull".

Getting involved in an integrated supply chain does tend to tie you closer to your customer. But linking computer systems between different companies into a supply chain information system is not simple. If your customer can easily order more from you, then they are more likely to do so than to go to a supplier when ordering is more difficult — as long as the product quality, price and delivery are comparable. Supply chain management is also closely tied to the "just in time" delivery concept. For raw materials to arrive just in time, the suppliers must have enough advance notice all the way up the supply chain. SCM systems make the information flow quickly and, in many cases, automatically.

The SCM dilemma

It’s hard to build a business case
There are drawbacks to SCM, however. First, because it ties you more closely to your customer, it may link you to their problems, too. This may also make it difficult to expand your customer base. The cost of implementing the system can be high — and that’s not just in the cost of installing the computers, networks and software, and then training people to use them. There is also the cost of the changes to your basic business processes. SCM demands that you take a careful look at the relationships with all your customers, and that you focus on supplying their demands, almost before they make them. If your company has built its success on making a certain product and then promoting it to a market, SCM is a major about-face. Changing that approach isn’t done for free.

In fact, the bottom-line benefits of SCM are sometimes hard to quantify, and take a lot more work than it does to quantify "soft" benefits like faster processing speed. The hard benefits are the result of better use of the company’s working capital — such as reducing inventory of raw materials or of finished goods, or both. Better processing and quicker response to market changes are also important, but those represent more of a long-term strategic advantage.

What you need to make it work
Luckily, the computer revolution has brought the cost of SCM implementation, and the implementation of other enterprise-oriented systems, within the reach of more companies than ever before. Where systems like JD Edwards, Oracle, PeopleSoft or SAP once required mainframes, today they are being deployed on standard Wintel boxes — simple PCs running Windows NT.

And while the largest companies still spend millions on implementing these systems, medium-size companies can start to get into SCM for tens of thousands of dollars. That’s not cheap, but it is affordable for many firms, considering the savings in inventory costs alone.

The Internet is helping to lower costs, too, as it becomes the communication protocol for many enterprise-oriented systems. This removes one obstacle from the SCM implementation plan: How to link different sites and different companies.

This also means that Web browsers are becoming the "front end" or the way for people to interact with or use the software. Since most people employed in manufacturing today have at least some idea of how to surf the web, this makes it easier to learn SCM systems.

What you need to implement SCM
Supply chain management is probably coming your way. You can get ready for it by taking a careful look at your business processes. You can start by answering these key questions:

  • How do you respond to new orders?
  • What do you do to accommodate "rush" or "emergency" orders without disrupting your regular production schedules?
  • How do you source supplies?
  • How do you research or choose new suppliers? And how do you communicate with them?
  • Can you check quickly on the status of your orders, and how can you request rush deliveries of key components to accommodate your own rush orders?
  • What are your inventory costs? How much inventory do you carry? Do you have a plan to reduce inventories and inventory costs?
  • How do you communicate with other areas or other divisions of your own company, like remote plants, or the administrative departments such as accounting?

All of these can have a major impact on your production processes.

In the end, SCM is about sharing information and coordinating activities. Doing these two things can free up significant amounts of working capital, which can then be used for other things like newer production equipment, expansion of the company or perhaps even employee bonuses.

Better information also makes it easier to find new and better sources of components and materials. It makes a company more flexible and more responsive to market changes, further enhancing that company’s position.

So look out — SCM is coming your way. Be ready for it!

Scott Bury is an Ottawa-based freelance writer and a regular contributor of technical features to PEM.