Supply Chain Networks Are More Than Technology

Abstract

Networks have been the focus on a revival in technology architecture for the last five years in supply chains. But not all networks are the same. The business partnerships and processes that are catalyzed by these federated models, create a profound path to business value.

Article

Introduction

Supply Chain Networks are a topic we have written about for a decade.1 Lots of the discussion has focused on the unique aspects of the technologies as well as the services provided by the network provider that distinguish them from one another. But not as much as has been said about the businesses that conduct more and more of their supply chains on these networks.

In this discussion, we focus on those organizations — federations of organizations — that leverage the network to operate as one. For example, order fulfillment, manufacturing, joint products development, go to market, and so on. We are not talking about ecommerce or procurement. Though today the term ‘network’ often applies to these Uber-like businesses, the fact is, these are not models where a joint and continuous process takes place. Contract manufacturing or 3rd party fulfillment takes a lot of work and time to establish strong relationships. They are not merely transaction-based, but often represent years of work to fine-tune processes and the relationships.

The exclusive rewards from optimal and clever management of network-enabled business processes may not be reaped from enterprise-centric on-premise software.

Let’s look at a few examples where benefits are derived.

Distributed Inventory Management

For decades, partners up and down the chain have tried to modulate inventory levels based on forecasts, safety stock calculations, postponement strategies and so on, but always struggle due to the lack of an actual status of inventory by location throughout the day. Of course, there are many leading-edge techniques for improving and fine-tuning forecasts,2 and these are important — essential — for proper inventory planning. But though essential, they are not sufficient.

Wherever inventory is in the chain, it adds costs to the entire chain when there are excesses. (Figure 1 shows a typical chain where one manufacturer is working towards reducing, not only their own inventory, but working with suppliers to reduce theirs, reducing overall inventory in their entire chain.) And a sad fact is that often there is demand for much of the inventory somewhere else, but the demander cannot see or access it.

A good example of this is the US military.3 A few years back, the Senate called the DoD on the carpet for one branch disposing of inventory worth over $1 billion that another branch could use.4 Simply described, if one user needs tires or bullets but they are from a different organization, they usually order more, since they have no visibility into the stock of another.

Whether one large complex organization like the DoD or a chain of customers and their partners, inventory is tucked away in so many locations, it is hard to account for it all.

But the whole chain is paying for those excesses, markdowns and write-offs. Those excesses have to be accounted for and shows up in the cost of goods, increasing the product costs and/or reducing margins.

If a customer, partner or internal cross-function needs that inventory, first they need to see that it exists. For an organization to have the right to dip into a particular supply, there can be so many rules that govern access. So, it is not so simple to just see and then purchase or pull. And the day-to-day status of that inventory changes. So not only the requestor, but also the current owner may need to optimize their inventory, understand the best source location, as well as make subsequent decisions once the inventory is pulled.

Specifically, if one department needs more tires, for example, and sees the supply, it may make sense to use existing stock to save dollars. But the current owner may have long term demand, or the cost of restocking may be prohibitive.

So many rules and nuances have to be considered. The rule applying to one type of inventory may be quite different than another, as well as rules for different partners. A network provider like One Network, not only provides inventory visibility, but also provides for business rules to be attached to every relationship, data-type and so on, so organizations like the DOD, or a chain of retailer, or an OEM and key suppliers can manage these types of nuances.

Another challenge is what One Network calls sequential network-wide requirements. This would look across the whole network and make fine-grain decisions about when and how to order or move inventory. For example, it may not make sense to pull from another location and ship to the warehouse if the receiving labor is not available; or to stockpile components, when not all the parts to the manufacturer are available.

3PLs are notorious for not providing inventory visibility to their upstream and downstream customers, due to their lack of investments in IT. Customers need to feel like third parties are part of the process. So, by joining a network, the 3PL can reduce the IT burden (and cost) and provide richer services to their customers.

Cash Management Across the Chain

Many planning systems can look at material planning or other issues for one point in the chain, but to look across the whole multi-site, multi-partner process and optimize and fine-tune each move takes a network with lots of smarts. But, as we are talking about, it takes the trading partners to actually use the network in this way. They then reap the rewards of preserving working capital and leveraging labor and transporting spend wisely.

Another example is GT Nexus who allows trading partners to leverage the data for financing of trade, as well as modulate the payment cycles between retailers and suppliers. Supply Chain Finance is visibility of operations (WIP, receiving, and so on) across the network which includes the relevant banks. (You can read about how this works in the report: Reinventing Supply Chain Finance). This can provide superior cash management across the whole chain, through the purchase to the pay cycle for multiple partners in the chain. This benefits those banks who are lenders, as well, protecting their investments, since they are also members of the network.

Small suppliers can be major beneficiaries of the system like this, since they are often very strapped for cash. They can set up agreements with the banks to finance their inventory or get early payment from their customers, based on work in progress achievements. Banks or the customer (retailer or OEM) can see the work steps being accomplished and provide the supplier the cash they need to continue financing the operation. This visibility reduces the risk for the retailer and/or bank and often provides a lower cost of capital to the supplier since the lender can see that the risk of default is low.

Often the supplier will also have access to the competitive lending marketplace. Instead of relying on their local bank or in-country lenders, the supplier gets access to an international marketplace of lending institutions. A much broader pool of lenders may be competing for the supplier’s business. The supplier may gain access to competitive rates around the globe.

Another aspect of this network arrangement is early payment to the supplier. Suppliers are often struggling to get favorable payment terms from customers. Reducing the DSOs provides the cash to manage their own cash flow in a timely way. And the retailer or OEM actually earns interest (a cut of the % interest paid by the supplier) from the bank. With interest rates so low on cash-on-hand this provides greater interest rates earning for them.

Pooling Resources

It is well known that the use of 3rd parties can often reduce operational costs. The use of a 3PL, who often stores and fulfills orders, is common for manufacturers and etailers. A growing trend though is pool distribution. From a network perspective, these unite retailers with suppliers and transportation carriers to manage transportation flow, consolidation/deconsolidation in a shared resource mode. Thus, suppliers and retailers can leverage consolidation and transportation services to increase flow and reduce logistics cost. Descartes’ Bearware not only has the network technology platform but has worked with the key pooling services providers by territory so their customers not only get the technology, but pre-vetted and already connected carriers.

Pooling today has become more important with the retailers’ need to manage razor-thin margins, increase velocity and visibility with their supply chains and manage the many and often complex dynamics of Omni-channel.

Creating Communities

Another aspect of networks is the building of communities. Rather than just casual social, these are structures to inform and build cooperation with a foundation of shared values. Descartes has such a model encouraging cooperation amongst customers. So rather than one organization creating a ‘social network’ that rapidly becomes stale, customers can explore new business opportunities and build an exclusive network to conduct trade on top of the overall Descartes network.

Conclusions

Major organizations from aerospace, grocery, retail, and defense organizations operate certain processes exclusively on supply chain networks, interactively managing tasks, plans and execution. Rather than stilted activities with huge latencies that create guess work — and cost — up and down the chain, using traditional ERP, these organizations have worked diligently to create shared processes and information so that everyone who participates gets value.

Again, if costs are incurred in the chain, ultimately everyone pays for those, not just the impacted organization. And if the end-seller — OEM or Retailer — does not sell the goods, ultimately the entire supply chain is affected with mark-downs, write-offs and depressed revenues.

Today, network players recognize they are ‘all for one and one for all.’ Many business pundits, in fact, have declared that businesses will not survive and thrive unless they have partnership collaboration mastery. The foundation of that mastery is in that shared information and the ability to act on it in real-time.

As you can see from the brief examples, network-wide partnerships do not boast of elusive benefits. Rather they are quite tangible. But if users engage in using these popular networks merely as an EDI+, these types of benefit will be elusive.

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1 Supply Chain Networks, also read:

2 Read reports:

3 The DOD, due to poor systems and processes, was unable to audit its inventory which led to billions in write-offs. Here are two websites that help frame the issues:

4 The DoD has been found lacking in systems abilities/ERP weaknesses to manage the data to support better financial and asset management. You can read more about that here. — Return to article text above


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