McKesson Corp.'s medical and surgical division had too many distribution centers and its logistics were problematic. It approached the predicament a year ago by gathering data, testing variables and simulating scenarios, all to increase productivity. What McKesson executives concluded was that the company's distribution system was costly and inefficient, and the only way to fix it was to coordinate its supply chain management with its customers and suppliers. Suddenly, the Web was in the mix, and McKesson brought in Web-enabled software first to help it with planning and then ultimately to implement collaboration with its trading
partners. The reward: McKesson was able to cut its square footage by 25% and reduce its annual expenses by $15 million. "The changes improve customer service and lower our operating costs," says Dan Neuwirth, senior vice president of operations for Richmond, Va.-based McKesson.
Throughout the 1990s, when executives discussed supply chain management, they were usually referring to an internal control function–basically an attempt to maintain inventories of production supplies and finished product at optimum levels from both cost and operational perspectives. But industry research began to suggest that companies can really only control about 30% of their supply chain costs; the remaining 70% was in the hands of customers and suppliers. That's when supply chain control started to move beyond the domain of the information technology department and into the CFO's office, out of the confines of a local campus and, via the Web, into the operations of trading partners. "Supply chain management is a team sport, and the CFO is the captain," says David Hough, director of supply chain management for Schaumberg, Ill.-based consulting firm PSC. "By collaborating effectively with their suppliers and customers, companies can reduce cost all along the supply chain. Most software programs available on the market today have some form of Web enablement. Within two years every software package in the marketplace will have some version of Web services enablement."
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But despite this recognition about the need to reach beyond your own offices, studies by technology consultants Forrester Research showed that in the last decade companies were still "overspending" on software that addressed principally internal networks. By 2000, that excess spending was 12% of all purchases, or $62 billion, according to Forrester. Thanks to the recession, spending is now flat on all systems. But Forrester expects those outlays to rise nearly 10% in 2003 and about 12% by 2004, with one key difference–most will be dedicated to external "supply chain" networks. Investment bank Bear, Stearns & Co. agrees, noting that over the next few years distribution strategies will be a key factor in a company's ability to compete efficiently.
The move to external supply chain management can mean a lot for a company's bottom line. Software maker Yantra Corp. boasts that revenues can increase by 3%, inventories can drop by 15% and operational costs can improve by 35%. Even those without product to push put the savings high. "Overall, that's conservative," says Ned Covic, president of technology consulting firm Sysix in Westmont, Ill.
And there is no time like a recession to make CFOs particularly sensitive to the need to save money in the least painful way possible. "The smarter companies are taking advantage of the downtime to install systems to facilitate collaboration," says Hough.
Planning comes first. By performing "what-if" scenarios as McKesson did with Insight software, investments can be properly allocated and the repercussions of almost any event can be mitigated, says Dan Ross, CEO of Boston-based software maker Optiant. The results from testing will determine subsequent software purchases. "Typically, (planning) is not done in a rigorous way," notes Dick Powers, president of Insight. "But good management consists of planning and control."
Solutions vary, and so do any subsequent returns. But, "companies that want to use supply chain technologies must think more about the business process than the hardware and software," says Adam Fein, president of Pembroke Consulting in Philadelphia. "The Internet is critical to any business strategy."
Consider America West Airlines: Last August, it executed an electronic procurement process with MaterialNet's Custom Procurement Management software that consolidates its purchasing power among fewer suppliers. By doing so, the Phoenix-based carrier expects to save 30% annually. It has driven down the cost of everything and cut procurement times in half, says Michael Inman, director of purchasing for America West. He expects a pay-back within a year.
Conversely, inadequately addressing supply chain management not only represents lost opportunities to save money; it can also mean hits to revenues, profits and share prices. A study by the Georgia Institute of Technology says that snafus along the supply chain hurt sales and push stock prices down. The study claims stock values dip on average 18.5% when price performance is measured starting two months before and ending two months after a supply chain malfunction.
Clearly, bad supply chain management is a competitive disadvantage. Compare Kmart Corp. with Target Corp. to see the potential impact. Over the last decade, Kmart spent about $730 million on new software, but failed to streamline operations. Ultimately, poor implementation has translated into a higher cost of goods sold than its competitors, says Hough, who worked with Kmart on past management projects and says that its distribution network needs reorganizing. Kmart, which has filed for bankruptcy, did not comment. By contrast, Target reduced its manual processes and consolidated gradually six different systems into one central network, says Scott Pulsipher, director of solutions for Yantra in Tewksbury, Mass., which worked directly with Target on its new system. Although Target refused to give details, Yantra says the new network, which is slated to go live in April, is expected to reduce operational costs between 40% and 53% and pay for itself in a year.
To make integrated supply chain systems work, it requires seamless communications among supply chain partners. That's why many look to the CFO to provide the momentum. However, management experts advise that baby steps sometimes work as well as trying to bite off the whole system in one piece. "We are seeing companies make modest initial investments and realize a return on investment quickly," says Laura Witt, general partner of ABS Capital Partners, a private capital firm in Baltimore that backs new software enterprises. "They are then taking that savings and rolling out additional software on a larger scale."
THE CHAIN GANG
A listing of supply chain management software providers and their products
180Commerce Inc.
www.180commerce.com
Return Management Platform
Exel
www.exel.com
Exel Supply Chain Solutions
Framework
Technologies
www.frametech.com
Active Project
IBM Corp.
www.ibm.com
IBM e-Server for IBS
Insight Inc.
www.insight-mss.com
X-System Solver Engine
Manugistics Inc.
www.manu.com
Enterprise Profit Optimization
MaterialNet Inc.
www.materialnet.com
Custom Procurement
Management System
Optiant Inc.
www.optiant.com
PowerChain
PurchasePro
www.purchasepro.com
e-Procurement
SPS Commerce Inc.
www.spscommerce.com
SPSCommerce.net
Viewlocity Inc.
www.viewlocity.com
TradeSync Suite
Yantra Corp.
www.yantra.com
Distributed Commerce
Management
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