Tear down the silos: supply chain evolution leads back to the bottom line

Frontline Solutions, August, 2004 by Jim Lawton

As global competition gets hotter, the world grows more uncertain, and the economy remains soft, forward-looking manufacturers are rethinking supply chain strategy. The supply chain is particularly vulnerable to a silo mentality, where decisions to cut costs at one stage can subvert overall business goals--whether it's boosting profitability, speeding time to market, lowering inventory costs, or improving service levels. Negotiating the price of widgets down two cents may seem like a coup, but if the longer lead time stalls production when demand spikes, the missed revenue could add up much more quickly than component savings.

Without the ability to quickly evaluate the end-to-end effects of supply chain decisions, companies also risk major setbacks when things don't go according to plan. Moving beyond the day-to-day hustle requires built-in flexibility, not just contingency plans. Manufacturers can gain tremendous competitive advantage if their supply chains are robust enough to keep up with the latest sales trends, or if they can determine the cost of ramping 10 new SKUs.

Why haven't manufacturers solved this problem yet? Applications have followed the same development trajectory that organizations did, so that each department now has a system devoted solely to its role and metrics, a system that captures only the data relevant to its own particular scope.

The result? The supply chain is a virtual tug-of-war as managers make decisions that improve their corner of the world but could wreak havoc down the line.

When Less Is Really More

One example of this "cut-no-matter what" mentality: A leading CD manufacturer decided to save on labor and material costs by moving a major production facility to Asia. The company did save on dollars-per-hour but was quickly the victim of major whiplash when supply was suddenly much further from demand. Fickle consumer taste led to costly expedited shipments, empty shelves, and lost dollars.

To design the best supply chains and create optimal plans to drive them, manufacturers must overcome departmental boundaries with a seamless approach that incorporates the needs and restrictions of all constituents--including those beyond the factory walls.

For the CD maker, the solution was determined after evaluating several end-to-end options with real-world constraints and conditions. By doing last-step customization at a local distribution plant, the company balanced lower labor costs with better ability to quickly meet shifts in demand--without incurring expediting fees and hassles.

It's a step toward powerful collaboration, where even marketing and manufacturing can work together effectively, each making decisions that support overall business objectives.

A Global Design Delivers Success

To be a world-class manufacturer today (and in many markets only the world class will survive), companies must realize that strategic supply chain design and planning decisions need to be made within a broader context of profitability and business results. To obtain that breadth of scope, new tools that cross departmental boundaries must be employed to complement the existing systems infrastructure.

The isolationist decision making of the past must be replaced by an enlightened environment--one that provides a way to evaluate the entire supply chain in a single model. The context for evaluating strategic decisions, as well as more tactical ones, should be total cost to the enterprise, not departmental optimization. In this way, companies will reduce the impact of daily disruptions and be armed to create effective solutions when dockworkers strike, the threat of SARS suspends production at an Asian plant, war compromises trade routes, or the price of widgets increases by a penny. The most basic enterprise goals--profitability and customer satisfaction--must be supported by robust supply chain decisions.

Jim Lawton is vice president for marketing for Optiant Inc., a provider of supply chain design and optimization software. You can reach him at ExecutiveView@Frontlinetoday.com.