Success in the Multi-Enterprise World

From WikiSCM

Summary In the high-technology industry, every company exhibits multiple personalities. Each company has its own identity reflecting an internal environment it controls– the enterprise. But each company must also adopt the external personalities of the many supply chains it inhabits–the multi-enterprise. These internal and external “personalities” are often in complete contrast and require fundamentally different management strategies. They drive different IT architectures and solutions.

To succeed in today’s dynamic environment, companies need to coordinate across the internal and external elements of their extended supply chain. Companies must enhance the value of their legacy systems to better run their enterprise and implement world-class multi-enterprise control systems to better manage their extended supply chain.

Evolution of the Extended Supply Chain

Throughout the 1980s, electronic equipment companies strived to improve their efficiency by focusing within the four walls of the enterprise. Enterprise resource planning (ERP) systems were deployed to connect and monitor the functional silos of internal operations such as manufacturing, accounting, sales, and marketing. Supply chain activity was effectively managed within this environment because vertical integration placed most of it within the enterprise. The typical large original equipment manufacturer (OEM) had its own sheet metal shop, paint shop, printed circuit board shop, cable and wire plants, assembly plants, and sometimes even semiconductor manufacturing capabilities.

Managing the supply chain was viewed as a matter of asset ownership. This is no longer the case. In the 1990s industries began to focus on “core competencies” and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond the four walls and distributing management across specialized supply chain partnerships. This transition also refocused the fundamental perspectives of each respective organization. OEMs became brand owners that needed deep visibility into their supply base. They had to control the entire supply chain from above instead of from within.

Contract manufacturers had to manage bills of material with different part numbering schemes from multiple OEMs and support customer requests for work-in-process visibility and vendor-managed inventory (VMI). Electronics manufacturing services (EMS) companies had to manage both the buy side and the sell side of these workflows.

Specialization enabled efficiency, while creating new challenges—specifically, establishing control over operations outside direct domain.

The multi-enterprise environment is fundamentally different. It includes business processes and workflows unlike those that enterprise platforms were designed to manage. ERP systems are now dependent on external variables that transpire outside of the four walls; success requires coordination of extra-enterprise activity. The enterprise itself, once the centralized source of all information, has become the orchestration point of external activity. Companies are now faced with managing two separate domains; enterprise and multi-enterprise environments. This change has significantly affected the value equation of the internal management systems (ERP) and the external supply chain management systems.

Because of this, companies need to focus their ERP on running the enterprise domain, and develop multi-enterprise control systems to manage the multi-enterprise domain.

Changing the Management Orientation

Specialization has re-engineered entire supply chains by segmenting and distributing operations across multiple enterprises. This has shifted the supply chain from a vertical, enterprise-centric entity to a horizontal, multiple-enterprise chain. Picture a graph with an “X” and “Y” axis. Prior to specialization, the supply chain had been viewed from a single point (the enterprise) with a series of events occurring along the Y, or vertical, axis.

Each enterprise managed the activity within its vertical orientation and communicated information from vertical enterprise to vertical enterprise. When a demand signal was received by the markets, it was communicated to the brand owner, who communicated it to its EMS partner(s), who in turn communicated it to the component suppliers. Because each event was in an isolated silo on the Y axis, there was a lag time between each communication–from a few days to a few weeks. The information exchanged across these silos was asynchronous. That created a potential for inaccuracies including overages and shortages. Companies addressed this by accounting for variability through buffer inventory. This practice led to excess inventory and reactive sourcing, which directly impacted profitability and efficiency.

The specialization model requires a fundamentally different approach to supply chain management. In an in-sourced environment, Y axis management made sense because the issues involved coordination across different work stations within an enterprise. In the multi-enterprise environment, where contribution is spread out across multiple tiers of supply chain partners, management needs to be shifted to the X, or horizontal, axis. Failure to adjust the management horizon causes inaccurate and untimely data exchange which, in turn, generates excess inventory, shortages, liability exposure, poor customer service, and production issues.

In shifting the management horizon to the X axis, the weakness in the system is effectively addressed. Demand signals are transparent and shared to all the parties in a given supply chain in real time as the changes occur. This enables accurate information to be monitored and managed in an actionable manner; eliminating the bullwhip effect before it is amplified downstream. Management on the X axis feeds accurate information across planning processes at all levels and to all participants in the supply chain. It enables accurate measurement and control over inventories, both static and in motion, which eliminates excesses and shortages, balances supply and demand, and limits liabilities.

Many Supply Chains, Many Programs

The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers. In the electronics industry, individual supply chains are based upon “programs” where several companies work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own configuration.

Each supply chain participant must therefore adopt a supply chain management strategy that incorporates the ability to control many programs effectively and efficiently, each with its own set of unique operational caveats.

A program defines the partners, items, and locations involved in a given supply chain. This includes their roles and agreements, the processes and workflows they adopt, and the metrics by which they measure success and more. A solution designed to view the supply chain at this level of complexity makes it possible to model and manage multi-enterprise operations to gain productivity, visibility, and control.

For example, a large electronics manufacturer might have one program dedicated to a television set, another program for a computer, and programs for its other major products.

Within each program lies a series of relationships that govern the flow of materials across the supply chain. Various component suppliers ship to various EMS suppliers who ship either directly to the market or to the electronics manufacturer or brand owner who then ships to the market. In this high-volume, high-transaction environment, the challenge is the dissemination of program-specific information to the right place in the supply chain at the right time for the purposes of planning, execution, and exceptions management.

According to Eugene McCabe, executive vice president for worldwide operations at Sun Microsystems, “If you look at our industry, fundamentally we’re all buying the same components. There are only a couple of memory suppliers in the world, a couple of disk drive suppliers and so on, so there isn’t a lot of cost opportunity left in the materials. The opportunity for savings is in the efficiency of the supply chain process from the time you start with the raw material until you get the product to your customer.”

Essentially, this is a data roll-up from component supplier through EMS to OEM, and ultimately to the market. Program-specific management capabilities are required to segregate and organize item-level inventory information so that exact requirements of the specific customer, product, and end market are visible and actionable across the supply chain. This aligns supply chain management to the view that is most significant—the end product.

A New Paradigm Brings New Challenges

The management of programs in the supply chain has posed significant challenges to traditional enterprise models and business solutions because they were built to solve fundamentally different business issues. What has become clear is that enterprise-centric solutions are not sufficiently flexible or configurable to manage this complex web of relationships.

Enterprise vendors often minimize the importance and urgency of these supply chain issues. But by oversimplifying this problem and attempting to solve it through portals and hubs, they ultimately handicap their ability to generate value in their core competency—enterprise planning. Even a world-class ERP system will produce distorted results if it is fed untimely and incorrect data. Supply chain control is now central to the overall performance and efficiency of an organization—both in the extended supply chain and the enterprise. The primary variable of enterprise control now firmly rests within the supply chain.

According to Bill Swanton of AMR Research, ERP systems cannot meet the challenges posed by the modern, extended global supply chains. He states that, “Companies are finding that their massive investments in ERP are now restricting their flexibility to morph their supply network operations. Standardized business processes are fine for accounts payable, but unique supply networks by product or market will require variations from traditional product development, order to cash, and procure to pay that extend beyond a single enterprise. Right now, and perhaps for a long time to come, tools to manage these processes are the province of third-party (solution providers).” “Rewire High-Tech Supply Chains and Enterprise Applications for Competitive Advantage” AMR Research, April 13, 2005.

The Demand-Driven Supply Chain is Multi-Enterprise

Managing a supply chain so it produces competitive advantage or differentiation is not an easy task. As AMR Research has observed, “Small differences in products, markets, and strategies can yield radically different supply chains, which need to change as the market matures.” In order to handle rapidly changing requirements, companies need to connect all their suppliers, contract manufacturers, trading partners, and customers into what AMR calls a “demand-driven supply network (DDSN).” A DDSN has three very specific characteristics. It must be agile, flexible, and collaborative in order to produce maximum value. Agility and flexibility allow a supply chain to rapidly respond to unexpected changes in demand in a highly predictable and flexible manner.

Collaboration means that multiple enterprises within the supply chain are networked together and work collectively to their mutual benefit—making the supply chain more efficient, responsive, and productive. This requires constant, global, real-time visibility into demand and supply for all the participants in the network. In order to leverage a supply chain for competitive advantage, a company must be able to respond quickly and transparently to unforeseen events. This includes a fast and flexible reaction to changes in supply or demand, events requiring exception management, or any other unpredictable supply chain event.

Improving Buggy Whips in an Age of Automobiles

ERP vendors have tried to extend their systems to handle modern supply chain management by patching together point solutions. These have taken the form of portals that provide self-service access to external users to offload data entry and reduce service requirements. But this process is error prone. In addition, it does not effectively factor the importance of time synchronization across the supply chain. It cannot ensure that 100 percent of the events are recorded and are visible across the chain.

In the multi-enterprise world, all parties must share common, real-time metrics. They must be able to choose how to access and integrate at the user, transaction, and event level. They need a highly configurable system that can manage by exception according to the specific requirements of their operations. They can’t be limited by the logic dictated by inflexible ERP systems designed to solve totally different issues.

One of the major reasons for the gap between ERP systems and best-of-breed solutions is that ERP solutions are not industry specific. No where is this more apparent than within the dynamic, outsourced electronics manufacturing supply chain. Industry analysts have specifically noted that supply chain solutions from SAP and Oracle are inadequate for the task at hand; particularly when compared to best-of-breed solutions.

In January 2005, Supply Chain Digest released the results of a survey it conducted on the issue of ERP vs. best-of-breed (BoB). It was based on interviews with 160 leading companies in a variety of industries. Almost all the companies had annual revenues of more than $100 million. Key findings included: • Users overwhelmingly preferred BoB over ERP solutions. The BoB solutions tend to offer far deeper functionality, easier integration with outside systems, and superior overall value compared to ERP systems. • The more the respondents knew about the differences between ERP and the BoB offerings, the more they favored BoB. • A majority of respondents considered the BoB providers to be more than two years ahead of ERP in supply chain planning and supply chain execution.

This last finding is particularly important. Commentators have suggested that it means organizations must carefully evaluate ERP vendor promises that “the functionality you need will soon be available.”

Supply Chain Strategy as Growth Strategy

The issues facing supply chain managers today are more than a question of whether the tools put in place can solve immediate challenges. The issues, however, are much more significant and longer term. A supply chain strategy should lay the foundation for an organization’s ability to compete today, as well as to manage the changes and future challenges—the multi-enterprise future.

In the past, operational efficiency within the enterprise drove cost improvement and allowed managers to engineer their internal operations to leverage centralized control. In today’s distributed environment, this same strategy is a liability. In order to compete and grow, resources must be deployed within the specialization model in a way that supports agility and innovation. Pursuing incremental improvements in the old model while rivals reinvent the industry is comparable to designing a better buggy whip as Model Ts role off the assembly line.

Winning in a global, distributed economy means managing partners and events far beyond the four walls of the enterprise. As Ralph Waldo Emerson wrote, “There are always two parties, the party of the past and the party of the future; the establishment and the movement.” By the time those entrenched in the enterprise model realize that the future requires multi-enterprise tools and strategies and not modifications to systems designed for other challenges, they will have lost significant ground to more forward-looking competitors.

At the end of the day, companies need a best-in-class ERP system to run the enterprise and a best-of-breed multi-enterprise control system to run multi-enterprise operations.