14. Supply Chain Technology
There really isn’t any aspect of supply chain and logistics that isn’t touched by technology in today’s world. Thanks to both advances in software and hardware technologies and the Internet, companies of all sizes can automate and integrate internal processes and connect with customers and suppliers with ease.
Up to this point, we have briefly discussed technology applications in various aspects of supply chain and logistics management, including forecasting, inventory planning, production scheduling, and beyond. In this chapter, we go into a bit more depth in terms of understanding both the information flows and the systems used to make decisions at all levels of an organization, from longer-term decisions such as where to locate plants and warehouses, down to short-term decisions such as how many cases of product to ship to an individual warehouse on a given day.
Supply Chain Information
First, it should be made clear that there are subtle differences between data and information. Data are the facts from which information is derived to make decisions. Pieces of data are rarely useful alone; for data to become information, it needs to be put into context. That is the purpose of information systems.
According to Simatupang and Sridharan (2001):
An interactive view of information enables people to define the level of information they need to solve problems or make decisions. Depending on the decisions, some people can use data to answer the questions, but others need to extract information from the same data to solve their problems. This interactive view also enables people to trace the source of knowledge from the available data, or to specify the required data based on their explicit knowledge (see Figure 14.1).
An information system is used to collect, process, and disseminate information to make it available for decision makers at the right time. Traditionally, an information system deals with transferable data through plain media of communication such as EDI and the Internet. The recent advance of information technology offers a rich variety of media such as video conferencing and online decision support systems that enable decision-makers to convert tacit knowledge into explicit knowledge and to share explicit knowledge.
An organization’s information requirements in general are that it needs to be easy to access, relevant to them, accurate, and timely.
Thus, the information technology used will have a direct impact on a company’s performance, both internal and external through integration, which will enable collaboration (see Figure 14.2).
The bullwhip effect, which was discussed earlier, is largely the result of poor information management in the supply chain and therefore can lead to excess inventory levels. By having greater demand visibility throughout the supply chain, inventory levels can be reduced. As mentioned earlier, it is possible to substitute information for excess inventory through the use of information systems.
McDonnell, Sweeney, and Kenny (2004) proposed four supply chain information technology solution categories:
Point solutions: Used to support the execution of one link (or point) in the chain (for example, warehouse management systems [WMSs]).
Best of breed solutions: Where two or more existing standalone solutions are integrated, usually using what is known as middleware technology to connect them.
Enterprise solutions: Based on the logic of enterprise resource planning (ERP), these solutions attempt to integrate all departments and functions across a company into a single computer system that can serve all those different departments’ particular needs.
Extended enterprise solutions (XES): Refers to the collaborative sharing of information and processes between the partners along the supply chain using the technological underpinnings of ERP.
Since the 1990s, there has been movement away from point solutions toward enterprise solutions, partially reflecting the shift from internal and functional to an external management orientation.
This has been at least partially driven by other technologies, primarily electronic data interchange (EDI) and the Internet, which have enabled supply chain partners to use common data. This enables supply chain partners to act on actual demand, thus reducing the negative bullwhip effect to some degree.
Supply Chain Information Needs
SCM information systems use technology to more effectively manage supply chains.
Because there are so many applications in today’s global supply chain, it is best to look at the technology from strategic, tactical, and execution viewpoints, as suggested by Bozarth and Handfield (2008). The viewpoints are as follows:
Strategic: Develop long-term decisions that help to meet the organization’s mission and focus on strategic plans for meeting such as new products or markets as well as facility capacity decisions.
Tactical: Develop plans that coordinate the actions of key supply chain areas customers and suppliers across the tactical time horizon. They focus on tactical decisions, such as inventory or workforce levels. They plan, but don’t carry out, the actual physical flows.
Routine: Support rules-based decision making. Usually in short time frames, where accuracy and timeliness are important to the user.
Execution: Typically more transactional oriented, where they record and retrieve transaction processing data and execute control physical and financial information flow. These systems usually have very short time frames, are highly automated, and use standardized business practices.
All these types of supply chain systems may also link both downstream with customers and upstream with suppliers.
Supply Chain Software Market
Today, most companies have implemented at least some components of supply chain systems, such as warehouse management or forecasting. The organizations that have taken an integrated, extended supply chain approach to these systems are the ones who get the greatest benefit.
Supply chain management (SCM) software is also benefiting from what is known as supplier relationship management (SRM) software, customer relationship management (CRM), and product lifecycle management (PLM) software.
SRM software is a subsystem of SCM software that helps to automate, simplify, and accelerate the procurement-to-pay processes for goods and services.
CRM software originally was a standalone system directed at sales force automation, marketing, and customer service. More recently, it is becoming more integrated with supply chain software such as ERP systems.
PLM software helps companies to collaborate and manage the entire lifecycle of a product efficiently and cost-effectively, from ideation, design, and manufacture, through service and disposal. It is where applications such as computer-aided design (CAD), computer-aided manufacturing (CAM), computer-aided engineering (CAE), and product data management (PDM) come together.
According to Gartner (2013), the supply chain software market was $8.3 billion in 2012, which was a 7.1% increase over the prior year. This particular software market is very fragmented. (The top 20 vendors account for over half of the market, with the largest 2 vendors, SAP and Oracle, having a 38% combined share, and there are literally hundreds of vendors overall.) Driving this large investment has been the need to be more competitive, reduce risk, operate in the global market, and meet various government regulations and industry standards.
SCM systems can be viewed in terms of planning (SCP) and execution (SCE).
In general, SCP applications apply algorithms to predict future requirements of various kinds and help to balance supply and demand.
SCE software applications usually monitor physical movement and status of goods as well as the management of materials and financial information of all participants in the supply chain.
Supply Chain Planning
SCP software vendors address short- to long-term planning and focus on demand, supply, and the balance of demand and supply together usually in the form of a sales & operational planning (S&OP) process described in more detail later:
Demand management: There are three main functions of demand management software, which are 1) predicting demand, 2) using “what-if” analysis to create sales plans, and 3) using what-if analysis to shape demand. Forecasts are typically a rolling 24–36 months. Modern supply chain systems have moved toward a demand “pull”-driven model, so demand management has moved from a purely forecasting tool to one that optimizes and shapes demand to some extent.
Supply management: This area helps meet demand with minimal resources at the lowest cost. Software functionality typically found in this area includes supply network planning or optimization (SNP), production scheduling (sometimes referred to as advanced planning systems or APS), distribution requirements planning (DRP), replenishment, and procurement.
Sales & operational planning: S&OP, as mentioned earlier in this book, facilitates monthly executive planning meetings to tie together sales, operation, and financial plans, along with the related tasks. Input is collected from demand, capacity, and financial plans, culminating in a consolidated sales and operational plan.
Supply Chain Execution
SCE systems primarily include warehouse management software (WMS) and transportation management software (TMS) and feature planning, scheduling, optimizing, tracking, and performance monitoring:
Warehouse management systems: WMS controls the flow of goods through the warehouse and interfaces to the material handling equipment. They also typically include automated processing of inbound and outbound shipments and the storage of goods. Administrative features can include processing of EDI transactions, planning shipments, resource management, and performance tracking.
Transportation management systems: A TMS helps to manage global transportation needs, including air, sea, ground, and carrier shipments. In terms of transportation acquisition, and dispatching, a TMS may also handle the planning, scheduling, and optimizing of shipments. They also provide tracking of vehicles, including exception management, constraints, collaborating with partners, and monitoring of freight. Administrative features can include cost allocations, freight auditing, and payment and contract management.
Enterprise resource systems (ERP): Some might not include ERP systems as SCM tools, but a great deal of the functionality is supply chain and logistics related. ERP systems are an extension of an MRP system to tie in all internal processes as well as customers and suppliers. It allows for the automation and integration of many business processes, including finance, accounting, human resources, sales and order entry, raw materials, inventory, purchasing, production scheduling, shipping, resource and production planning, and customer relationship management. An ERP shares common databases and business practices and produces information in real time and coordinates business from supplier evaluation to customer invoicing.
E-businesses must also keep track of and process a tremendous amount of information, and therefore have realized that much of the information they need to run an e-business, such as stock levels at various warehouses, cost of parts, and projected shipping dates, can already be found in their ERP system databases. As a result, a significant part of the online efforts of many e-businesses involve adding web access to an existing ERP system.
ERP systems have the potential to reduce transaction costs and increase the speed and accuracy of information, but can also be expensive and time-consuming to install.
Other Supply Chain Technologies
Other categories of software are also often used in the supply chain, including the following:
Supply chain event management: These are software applications that enable companies to track orders across the supply chain in real time between trading partners, providing managers with a clear picture of how their supply chain is performing. The information provided by these systems allows a company to sense and respond to unanticipated changes to planned supply chain operations. This breed of systems conveys information regarding supply chain processes at a specific event level, such as a handoff from one supply chain entity to another, the commitment of a product to an order, the movement of a shipment between two logistics network nodes, or the placement of a product into storage.
Business intelligence (BI): This category is made up of applications, infrastructure, tools, and best practices, providing analysis of information to improve and optimize decisions and performance. BI tools help to sort through the vast amount of data that has become available through the continuing adoption of SCM technologies.
In addition, there are related tools for supply chain collaboration, data synchronization, and spreadsheets and database software.
In fact, many smaller companies today still operate their primary planning functions using spreadsheets and run their day-to-day operations with accounting systems such as Quick-Books and Peachtree rather than spend the resources on a full-blown ERP system.
SCM System Costs and Options
The final cost of supply chain management software can be three to five times the cost of the software license because it also includes planning, implementation, training, customization, interfaces, hardware, and configuration of the software. SCM software vendors also typically charge a 15% to 20% annual fee for maintenance and technical support.
A new alternative to installed software is what has become known alternatively as software-as-a-service (SaaS), on-demand, or cloud supply chain software.
Cloud supply chain systems may reduce or eliminate upfront software acquisition costs by offering subscription fees for web-based applications, allowing you to “pay as you go” because fees are based on usage. In this model, there are typically no installation or maintenance costs for the customer.
The major concern of most potential users is security, which may or may not be as big a risk as imagined. Nevertheless, cloud software represents the single highest growth sector in the enterprise software market, and some software vendors are expanding into the cloud by offering some of their SCM modules as SaaS.
According to Gartner (2013), “Software as a service (SaaS) SCM offerings showed above-market growth (13 percent in 2012), while perpetual new licenses experienced slower growth of 3.5 percent, as organizations focused on fast implementation at a lower upfront cost.”
Best-in-Class Versus Single Integrated Solution
For more specialized types of supply chain applications such as network optimization and forecasting, choosing a best-in-class solution may be the way to go because supply chain vendors with a single integrated solution are limited to larger vendors such as SAP and Oracle. In many cases, companies may select one vendor for SCP and another for SCE.
When licensing best-in-class software, costs may be greater to implement because they require additional interfaces when having multiple vendor relationships. An application known as an enterprise application interface (EAI) system can reduce some of the integration cost.
The benefits of one integrated solution are many, including having a single point of contact, common user interface, and common IT architecture.
Consultants
The three types of supply chain consultants involved in the technology selection and implementation process are as follows:
SCM experts or management consultants: SCM experts help with the planning and modeling
Software vendor consultants: Consultants employed by the software vendor who are application software subject matter experts (SME) and help implement the software
IT consultants: Information technology (IT) consultants who help with infrastructure, interfaces, and custom programming (Erpsearch.com, 2014)
The number and mix of consultants in an SCM software implementation project will vary depending on the size and scope of the project.
Current and Future Trends in Supply Chain Software
Technology is evolving at an ever increasing rate. This was never more true than in the world of supply chain and logistics management. As a result, it is important that we look at some of the short term and emerging trends in supply chain software.
Short-Term Supply Chain Technology Trends
The 2010 annual Gartner supply chain study (Gilmore, 2010 and 2013) looked at supply chain application areas and where companies say they stand in terms of adoption.
The top application area fully implemented (not including ERP systems) were WMSs, which were fully deployed by only 39% of respondents. That was followed by SCP (32%), S&OP (29%), and TMSs (28%).
The top-three obstacles to achieving their company’s supply chain goals were forecast accuracy/demand variability (59%), supply chain network complexity (42%), and lack of internal cross-functional collaboration and visibility (39%).
According to the study, the investment priorities when it came to supply chain technology were “improving planning processes,” with 20% of respondents, followed by “aligning corporate and supply chain strategies” and “improving supply chain visibility,” both at 11%.
Interestingly, in the 2013 study, partially due to continued sluggish economic growth, the focus on using the supply chain to drive business growth was the top priority of companies surveyed, with customer service in the second spot.
The obstacles to reaching supply chain goals, however, were similar to the ones mentioned previously from the 2010 survey.
Emerging Supply Chain Technology Trends
Although the types of software applications in a supply chain probably won’t drastically change, the methods for gathering data and using and sharing applications will.
Major areas of innovation most recently include the following:
Cloud computing: As mentioned previously, this method, also referred to as software-as-a-service or SaaS, delivers a single application through the browser to thousands of customers “on demand,” thus avoiding costly licensing, implementation, and maintenance costs. It allows companies to focus on their core competencies while allowing a third party to manage technical elements. Salesforce.com is probably the best-known example among enterprise applications, but it is also common for HR and ERP applications as well as some “desktop” applications such as Google Apps.
Mobile computing: Supply chain execution and event management is becoming more mobile with basic visibility and traceability available on smartphones and other mobile devices.
Third-party logistics providers (3PLs) providing technology: Cost is a big driver of this because 3PLs can offer economies of scale, especially for small and mid-size companies.
Radio frequency identification (RFID): An automatic identification method using electronic tags with an embedded microchip and antenna. RFIDs can be utilized in a variety of forms within the supply chain (for example, they can be embedded in between the cardboard layers in a carton or product packaging).
To become more widespread (the 2010 Gartner study showed 51% of the companies surveyed not doing anything with RFID), RFID costs will need to continue to decline to make it more economically feasible. There are also equipment issues that will need to improve, such as reader range, sensitivity, and durability.
An example of the use of RFIDs is with Intel (Harrington, 2007), the global semiconductor manufacturer that needs to know where its product is at all times. They are embarking on a joint effort with DHL, utilizing sensors to monitor the condition of containers as they move around the world. Intel has another project, in Costa Rica, using RFID technology to minimize handheld scanning of inbound and outbound shipments. They have achieved labor savings of 18+% as a result of faster processing and have also eliminated steps in these processes (Harrington, 2007).
There is also emerging supply chain technology being developed now that will have a major impact in the near future, including the following:
Multi-enterprise visibility systems: These are systems providing a comprehensive and timely view of processes, solutions, and metrics across the entire value chain. When implementing collaborative programs such as VMI (vendor-managed inventory), outsourcing, or JIT (just-in-time), it is important to also implement the infrastructure or processes necessary to manage inventory in this extended supply chain. This type of emerging solution offers a 360-degree view of supply chain events.
People-enabling software: This is technology that empowers people to analyze, find, use, collaborate, and to share data to maximize efficiency and workflow. ERP and other enterprise software solutions help enable and automate business processes, but they only alert users when problems occur; they don’t help solve the problems themselves. Technology companies are coming out with productivity tools that enable people to combine unstructured information and business processes with the structured business processes that ERP applications provide. This type of technology platform would enable users to handle multiple alerts to a smartphone; for example, empowering them to put the fires out on the spot by connecting customer, manufacturer/distributor, and supplier systems on a mobile device.
Execution-driven planning solutions: These are tools that utilize data from current executed processes to drive future planning and forecasting. Over the years, it has been common for many companies to have a disconnect between planning and execution. These systems will use information as to the current state of a business to help drive planning decisions for the next planning period in real time. This will enable users to consolidate and aggregate massive amounts of data in meaningful ways by applying machine learning techniques to data-mining algorithms to detect data trends. This will give businesses the chance to respond to problems and take advantage of opportunities much faster than before.
Human supply chain technology: These are solutions that apply supply chain technology to the management of human resources (that is, the labor supply chain) and allow companies to standardize job descriptions, capture spend and labor rates, and improve their hiring practices.
At this point, you should have a fundamental understanding of the supply chain and logistics function as well as the technology used to enable it. We will now take a step back to examine the more strategic concept of supply chain and logistics network design and its impact on cost and efficiency.