Opportunity lurks in the supply chain

There are many different aspects and possible approaches to optimising and managing an effective supply chain. Ranging from internal issues such as optimising warehousing procedures and implementing effective alert systems, to external integration with suppliers aimed at reducing inventory levels, the issues are diverse and complex.

Many companies are taking a piecemeal approach to supply chain management (SCM). Others are hoping to implement SCM on a grand scale, in a co-ordinated project that ties together all the overarching business strategies.

Both can work, although the more common - and probably more advisable - approach, is to take SCM a step at a time, and to build a foundation for future functionality, integration and efficiency.

The objective of SCM is to reduce friction in terms of organisations doing business: "Improve efficiency, reduce cost, improve revenue flows."

This is the view of Mark Bowman, MD SA of Dimension Data subsidiary i-Commerce, who says the company has grown out of a focus on customer relationship management into supply chain integration, linking buyers, sellers and financial institutions. He sees a tight link between the requirements of customer management on the demand side, and the need for a more effective supply chain to service this demand.

Stephan Smith, director of Ixchange subsidiary Ability, says that because products are becoming increasingly commoditised, customer retention and responsiveness to customer needs is key for a successful supply chain.

"You need to point out the inefficiencies first."

Stephan Smith, director, Ability

Johan Stumpf, GM of Incito, a member of the AST Group, agrees that servicing customers better with lower inventory levels is a major objective.

Stumpf says the biggest SCM opportunity for South African companies is in inventory reduction. "SA runs very high inventories. Especially in small and medium-sized enterprises (SMEs), 50% to 60% - sometimes 100% - of annual turnover is held in inventory. And because this doesn`t show on income statements, people don`t see the capital cost involved."

Smith agrees, saying that while on the one hand all its customers are referencable, what is a problem is that people don`t believe they have a problem in the first place. "You need to point out the inefficiencies first," he says.

Stumpf estimates that in the fast-moving consumer goods (FMCG) sector, inventory turns of 30 to 50 per annum should be achieved. For imported products, he says, one can expect the targets to be lower. "My gut feel would say that below 10 turns is a problem. It`s a long chain from here to Europe, though, so there`s a lot of opportunity," he points out.

He adds that in the bulk industry - with products such as iron ore and coal - the view is that the stuff has to be mined anyway. "They often don`t even get one turn a year, and I`m sure they can do it better. Even though they do have to mine anyway, there is a significant cost involved in stockpiling the product."

He cites SA Breweries as a good example of a company that has been able to reduce inventory levels on its 750ml bottles, for example, from 60 days to seven days, by progressively removing inefficiencies in its processes over the last 10 years.

One ex-employee of SAB - who declines to be named - says the brewery`s project is limited to a large-scale SAP implementation and the application of best processes, to take costs out of the business.

Brandon Spear, MD of Miraculum, disagrees, referring to SAB`s operation as "one of the slickest production operations in a Third World environment. My perception is of SAB as top 10 in SCM development."

There are many components to SCM, according to Spear, and there are pockets of excellence at South African companies. "Realistically, addressing individual components is the right way to get into SCM. Otherwise it`s an absolutely massive undertaking, and companies are gun-shy about expensive implementations."

Peter Adams, an SCM consultant at KPMG, says many implementations focus on technology, when it`s really about people. In addition, two-thirds of supply chain projects are focused on the internal processes, rather than integration between different companies up and down the supply chain. "That`s pretty unusual, because of the different cultures that are often involved."

Smith, however, sees the world as moving to competition between supply chains, rather than between individual companies. "You need critical mass, and collaboration with competitors," he says. "However, this requires considering who one involves and who one excludes."

According to Stumpf, collaboration - ie sharing full-service demand planning technology - is what makes SCM feasible for smaller companies. "In SA, however, companies are still scared of shared systems because of the competitive landscape. They don`t see the collaborative advantage, so it`s a difficult sell," he says.

PQ Africa senior business development manager Hennie Coleman believes collaboration is achievable in non-competing industrial environments.

"You need critical mass, and collaboration with competitors. However, this requires considering who one involves and who one excludes."

Stephan Smith, director, Ability

Spear agrees, saying that collaboration on SCM depends on what companies see as their core competence. "In sectors like FMCG and retail, many will say their differentiator is their purchasing skill and power. On the other hand, McDonalds, for example, considers its core competence to be real estate."

He believes companies that don`t compete on the basis of the efficiency of their supply chains would find it a lot easier to collaborate with competitors.

Stumpf believes integration between existing process systems, manufacturing execution systems (MES), enterprise resource planning (ERP) systems and supply chain management systems is still a way off.

"The major cost is integration," agrees Bowman. "The second biggest cost is cataloguing and standardising catalogues between different companies in the supply chain."

SAP consultant Doug Hunter believes that ERP companies like his have an easier time with integration. Yet, consultants estimate that 50% of the effort in any implementation is integration - and this is even higher in heterogeneous environments where companies have opted for best-of-breed solutions for each business process.

"There are key financial issues," says Bowman. "Particularly in the manufacturing sector, where people`s margins are under pressure and increasing globalisation are putting players under pressure to improve efficiency. There`s a fine line for those organisations between spending a huge amount on an IT integration exercise and not seeing the value, or not doing anything and being disintermediated by some international player that operates at much lower margins.

"So organisations are starting to put their toes in the water, and they have to pick priorities. Integrating your MES systems with your ERP system is probably a lower priority than integrating your inventory planning system with your up-side suppliers, because that gives you a clearer revenue benefit. I think it`s a question of trade-offs, and there`s no single silver bullet which will allow you to address all your internal integration issues and collaborate externally too."

He believes organisations aren`t yet geared for real-time integration, collaboration and transactions, but that they are creating platforms for future integration.

"There`s no single silver bullet which will allow you to address all your internal integration issues and collaborate externally too."

Mark Bowman, MD SA, DiData i-Commerce

Spear says he doesn`t know of anyone that has fully integrated financial settlement into their SCM initiative. "There`s still a concern about taking the financial director out of the payment chain. It won`t take too long. People will start with high-volume low-value transactions and move up. But at this stage," he adds, "we`d love to offer it, but there`s zero demand."

Smith, however, says that in his experience, integrating electronic settlement facilities is the first thing companies focus on. "Financial transactions operate at an MRP/ERP level, while supply chain planning focuses more on decision support."

Of course, there are only about 150 ERP implementations in SA, as Spear points out. "For the 1 500 smaller companies with a couple of 100 million turnover that wouldn`t implement ERP, we may be able to provide some interesting SCM services."

Incito similarly provides different types of offerings for different requirements: specialised services, aimed at the large companies that can afford hugely expensive SCM projects, as well as outsourcing and shared services models for smaller organisations.

While doing so is not necessarily easy, the return on investment (ROI) of SCM implementations can be made abundantly clear. This should come as good news for organisations that have struggled to show any measurable ROI on big software implementations in the past.

Spear believes evaluating the true ROI of supply chain projects is tough. "Various benefits accrue in various parts of the supply chain. There are intangibles, like improved customer service, which leads to less churn, and leveraging information across the supply chain. But there are also simpler ROIs, like reducing inventory levels, increasing stock turns - work-in-progress measurements that are reflected on the balance sheet directly.

"I think you can put a pretty decent business case together," he says, "but it`s a lot harder than people think."

"Various benefits accrue in various parts of the supply chain."

Brandon Spear, MD, Miraculum

Stumpf believes that even for small companies, operational cost savings of between 10% and 20% can be achieved. "But operational cost isn`t the biggest saving. Loosening cash by optimising inventories can save 50% to 70%. These are huge ROIs that result in cash that can go back into companies. There are companies that sit on inventories of R3 billion - so these are substantial percentages."

He adds that better forecasting can lead to better customer service, and that the scope of improvement in SA is substantial. One of Incito`s customers, Mali Plumbing, has managed to increase sales by 16% in this way.

That`s the kind of cream on top that companies need to remain both competitive and profitable.

Ability`s business model is essentially based on achieving measurable ROI. Says Smith: "If R100 million worth of inventory costs R30 million a year, and we can reduce the level to R50 million, our customer saves R15 million. It`s easy to measure, and we take a percentage of the saving."

PQ Africa`s Coleman points to an oft-overlooked hurdle: "The problem is that while very small companies can exist in this value chain, in SA there is no proven or tested model that fulfils this requirement. It doesn`t help to outsource IT, or implement supply chain integration systems, if your smaller suppliers don`t have the capacity to use the technology."

Spear says nobody has the answer to this problem. "Government legislation will impact on this - when they require a percentage of the business to go to the SMME sector."

He notes that cellular companies, for example, can play a role in pulling these guys into the online world. "Even low-tech businesspeople have cellphones, after all," he says. "Considering what it costs to manually deal with these guys - manual purchase orders cost between R200 and R400 to process - the sums are easy."

While some companies have done better than others, examples of real failures in the SCM space are hard to come by.

"Nobody`s actually failed yet," says SAP`s Hunter. "They`ve come across unexpected problems, but those happen with any implementation."

"The problem is that while very small companies can exist in this value chain, in SA there is no proven or tested model that fulfils this requirement."

Hennie Coleman, senior business development manager, PQ Africa</P>

One observer contrasted a big liquor distributor with SAB, saying that like the brewery, the liquor distributor was an early adopter, but has done much worse than SAB. "But they`ve done better than companies that have done nothing. So it`s not a failure, but it`s taking long."

The same observer pointed out that some major retailers are also struggling, and because they`re in an environment where they`re unusually scared that competitors see what they do, collaboration to achieve better efficiencies is out of the question.

Spear says the SCM mainstream is probably two to three years off. "Companies want case studies, and those will have to come from the market leaders in FMCG, that are under global competitive pressure."

KPMG`s Adams, however, points to pharmaceutical companies that have a turnaround of 90 minutes from order to delivery - figures that are impressive no matter what business you`re in.

"The early adopters have been and gone," he counters. "SCM is in the middle of the growth phase in SA right now."

Execulink, a specialist inventory chain optimisation company, has achieved significant results in optimising the supply chain both upstream and downstream from autoglass manufacturer, Shatterprufe.

Starting with an initial project at the Shatterprufe factory in Port Elizabeth and the company`s central warehouse in Johannesburg, the project has since been expanded to cover both the primary upstream supplier, PFG Glass, downstream outlets in SA such as PG Autoglass, as well as the export market in the US and Europe.

The aim of the initial project was to improve the quality of the forecasts coming from the market, and smoothing the orders coming into the factory. This entailed understanding the capacity limitations on the factory, and adjusting the planned replenishment cycles to ensure the factory could meet the market demand. The results of this initial project were an increase in availability of 7% and a simultaneous inventory reduction of 16% at the warehouse.

Parallel to this project, Execulink moved down the supply chain, implementing a system at the PG Autoglass outlets whereby they would be replenished from the Shatterprufe warehouse based on "real demand" on short cycles (up to twice a day). A replenishment model was designed that was based on the number of times and the probability that a customer would demand any piece of glass in any one day. Availability improvements of up to 12% were experienced in the fitment centres.

Focus then turned to the export warehouse in Charleston, US. This inventory is now managed from Port Elizabeth, using forecast input from the US. The result was a 33% reduction in the inventory holding in the US warehouse with no drop in availability.

Moving upstream in the supply chain, Execulink was asked to look at how it could optimise the inventory at PFG Glass, which manufactures raw glass blanks for Shatterprufe. By providing better forecasts upstream, it was hoped to reduce the pattern loss at PFG by cutting the correct windscreens from the most optimal blanks. This resulted in a 24% reduction in wastage, 33% lower inventory levels and an availability improvement of 3%.

Receiving better forecasts from customers was identified as a key issue in providing stable lead-times into the European customer base. An Execulink methodology and software implementation at Autoglass UK`s Leicester distribution centre took place. Improved forecast accuracy achieved 20% lower inventory levels there as well. Subsequently, an implementation agreement was entered into with Autoglass` parent company, the Belron Group, for all its main warehouses in the UK and Europe.

Further restructuring of the export division, which moved export planning to the factories, improved communication, and took links out of the chain, removed the "silo" mentality that had existed before. The contract with the incumbent logistics provider, which outsources the export warehouse and is responsible for the receiving, binning, warehousing, crating and container filling for the export company, was renegotiated. This made the contract more performance-based and resulted in improved communication, productivity and throughput.

With improved forecasts coming through from all markets, Execulink is helping Shatterprufe implement a "family group" production system, to add the demand for common products from different markets into single replenishment orders to reduce set-ups in the factory, and reduce working capital through reduced batches on single line items.

Initial results on 70 parts show that total stock (export and aftermarket combined) has been reduced by 25%, and the factory reduced costly and time-consuming production changeovers by up to 50%.