Management Summary In the world of e-business, enterprises' continued profitability requires closer connections with suppliers and customers along with the ability to invent new business models to meet customers' unique demands. Enterprises need the agility to change how they do business on the fly. Thus, e-business means that enterprises must fundamentally rethink their processes and organizations; they cannot remain competitive simply by finding and implementing the "right" technology. Supply chain management (SCM) represents a philosophy of managing technology and processes in such a way that the enterprise optimizes the delivery of goods, services and information. However, the software industry has started using "SCM" so extensively that many enterprises do not fully understand what SCM involves. Many enterprises have the dangerous misconception that, because enterprise resource planning (ERP) vendors have now decided to offer supply chain planning (SCP) functions in addition to transactional functions, they have won the battle for SCM. However, SCP forms only one half of SCM, which also requires enterprises to manage and optimize the execution of supply-chain processes. This Strategic Analysis Report describes the major components of SCM and the problems that enterprises must solve before becoming connected, agile and profitable e-businesses. This report analyzes the following Key Issues: How will changes in the business environment impact corporate SCM initiatives through 2005? How will SCM applications evolve to meet changing business requirements? How will SCM integration strategies change through 2005? The following Strategic Planning Assumptions address the Key Issues: By 2004, 90 percent of enterprises that fail to apply SCM technology and processes to increase their agility will lose their status as preferred suppliers (0.8 probability). Through 2005, the Collaborative Planning, Forecasting and Replenishment Committee and other standards bodies will fail to produce a cross-industry, unifying collaborative standard because alternative standards will arise that will allow for more-specialized types of collaboration (0.8 probability). Optimizing finances, not operations, will distinguish best-in-class SCM systems through 2005 (0.9 probability). Through 2002, enterprises that fail to model their supply chains accurately and to give the sales organization access to capable-to-promise (CTP) information will lose 15 percent of potential profits from transactions because they will promise their customers too little or too much (0.7 probability). By 2003, the role of a transportation application will evolve from transaction systems to real-time incremental decision-support systems for supply chain execution (SCE) (0.8 probability). Through 2005, enterprises that implement SCP applications with a continuous-improvement program will increase return on investment (ROI) by 40 percent during a five-year life cycle (0.7 probability). Through 2005, enterprises that attempt to standardize processes with trading partners (rather than reconfigure processes based on supply chain variability) will operate at a cost disadvantage and will miss opportunities to enhance revenue (0.8 probability). By 2004, supply chain e-markets, enabled by integration hub architectures, will become a commonly accepted alternative for in-house management of supply chain information (0.7 probability). The Changing Business Environment Key Issue: How will changes in the business environment impact corporate SCM initiatives through 2005? Business pressures force enterprises to work more directly with suppliers and customers and to respond more rapidly and intelligently to change. These pressures include: More rapid commoditization of products Margin pressures Channel proliferation Increasing speed to market Web commerce demands Touch-based competition (i.e., based on the quality of relationships with customers) Time-based competition (i.e., based on order cycle times) Customer-specific demands Market globalization Outsourcing relationships Technologies such as the Internet enable more enterprises to have personal relationships with customers, yet at the same time, customers become more demanding and less patient. Enterprises that can build agility into their corporate processes and IT systems can meet customers' individual needs quickly and flexibly. Through 2005, enterprises that retain the old mind-set of mass production (e.g., with functions arranged in distinct silos, monthly planning cycles and waterfall processes) and channel control will become less competitive. By 2005, 90 percent of enterprises that fail to apply SCM technology and processes to increase their agility will lose their status as preferred suppliers (0.8 probability). However, enterprises cannot gain agility simply by implementing the latest technology; rather, enterprises must fundamentally rethink their business. Making operations cost efficient preoccupied enterprises during the 1990s, and this focus led many IT departments to insist on standardization, simplification and integration. This mantra, which underlies the phenomenal adoption of ERP systems, worked well for systems centered on the enterprise. Now, however, new business pressures challenge enterprises to rapidly configure and reconfigure their goods, services, information and processes to differentiate themselves from competitors (see Figure 1). Leading supply chain practitioners de-emphasize standardized supply-chain systems and processes intended to reduce costs and instead focus on strategies to create agile supply chains that help drive revenue. Some sectors (e.g., PC manufacturers) already going through this dislocation have found that to become agile enough, they must embrace a new set of SCP and SCE applications. These new projects focus as much on external as internal processes, and enterprises measure their success not in efficiency but in how they affect the business financially. Collaborative commerce (c-commerce) offers the next model for how enterprises will interact to create goods and services in the Internet economy (see Figure 2). C-commerce does not just extend the supply chain. Whereas supply chains are pre-engineered, rigid entities, c-commerce enterprises are transient and recombinant. Just as good supply chains need strong supporting domain applications, so does c-commerce. Like ERP, SCM systems, which optimize strategic c-commerce interactions, are a critical domain application for supporting the evolution to c-commerce for many manufacturers, distributors and retailers. Both supply chain and domain applications can become elements within c-commerce, which essentially represents a framework that applications can plug into. This approach stands in contrast with the approach of stand-alone Internet e-commerce companies (e.g., Amazon.com and portal sites). The latter will not continue to grow unless they continue to offer good customer service and excellent information (e.g., accurate delivery commitments and supply chain streamlining). Executing these tasks successfully requires optimization engines such as c-commerce provides. Likewise, brick-and-mortar manufacturers and distributors must adapt to the realities of the Internet economy by participating in c-commerce — a model that exploits interenterprise integration rather than hierarchical control. Optimize Finances Strategic Planning Assumption: Optimizing finances, not operations, will distinguish best-in-class SCM systems through 2005 (0.9 probability). Most operational plans seek to optimize efficiency locally (e.g., minimizing changeovers and maximizing machine use) rather than at the enterprise level — e.g., meeting financial objectives by increasing return on assets and achieving profitable growth. Similarly, most SCP tools do not maximize profits but model constraints, conditions and objectives with the goal of achieving low operating costs for a given level of customer service. As a result, many enterprises that meet their operational objectives by implementing improved planning processes and systems will still miss their financial objectives. Through 2005, a variety of SCP applications will emerge that enable better financial performance (see Figure 3). Some model fixed and variable costs as an intrinsic part of their constraint-based planning process. Others use constraint-based accounting to show enterprises how to make more money by optimizing the financial return of goods flowing through bottlenecks. Still others will apply airlines' yield management techniques to help determine product mix and allocation and to create more dynamic pricing. Optimizing finances will bring the power of SCM to sales, marketing and finance workers, not just operational planners. Thus, enterprises selecting SCP packages should weigh their ability to optimize finances and should invest tactically in bolt-on packages with a short ROI. The Future of Supply Chain Management Applications Key Issue: How will SCM applications evolve to meet changing business requirements? Enterprises often associate SCM with ERP, plant control and tactical SCP applications — certainly important (often necessary) components for effective SCM processes. Nevertheless, they form only a portion of the SCM framework that most large enterprises must deploy through 2005. To compete in an increasingly dynamic, demanding c-commerce world, enterprises must construct a digital nervous system for their supply chain that includes: Real-time communication as each event warrants Shared planning and analytical processes Monitoring and alerting systems Intelligent supply-chain execution Despite any hype about them, the enterprise should implement each of these technology pieces when they are mature enough to ensure quick benefits but early enough for the enterprise to gain a competitive advantage (see Figure 4). Enterprises can determine the timing only by analyzing internal and external processes as well as market conditions before evaluating and piloting promising technology. Supply Chain Planning Tools Tactical planning tools receive much press today, but enterprises must expand their focus if they wish to improve the ROI or return on capital employed from these applications (see Figure 5). To improve tactical operations in manufacturing and distribution operations, enterprises must first understand how these improvements will affect their physical network. Given the improved ability to operate, the enterprise may have to rethink how it serves customers and from where. The enterprise may also have to change its physical network to support fundamentally new processes — e.g., outsourced manufacturing and postponement (providing a unique configuration for a customer's goods right before shipment). Traditionally, enterprises have used strategic planning tools periodically as stand-alone solutions. However, with the rapid adoption of c-commerce, business relationships and channel strategies have become more dynamic and time-sensitive; therefore, enterprises should integrate strategic planning tools tightly with tactical SCP, sometimes including information and processes from trading partners. Doing so enables enterprises to set customer service policies, spares and repairs rules, sourcing guidelines, and other business rules as conditions and strategies change — and then automatically pass these guideposts down to the tactical planning tools. Likewise, few tactical SCP systems receive accurate real-time information about what is happening on the plant floor, at the loading dock or in transit. Without this information, the enterprise optimizes plans and schedules around the wrong constraints — and suffers missed deliveries and uses assets inefficiently. Strategic Guideline: For complex enterprises, successful SCM hinges on the enterprise's ability to create an IT architecture that passes data and business policy for each event between strategic planning, tactical planning and SCE systems. Measuring Performance The inability to get quick, intuitive snapshots of an enterprise's performance and brewing problems commonly frustrates managers. ERP reports can take a week to run and do not encourage drill-down analysis. Enterprises face a more acute problem if they run a hodgepodge of ERP, SCP and SCE systems, all with their own (often clunky) reporting tools. An emerging breed of Web-centric performance monitoring tools, based on Internet and data warehousing technology, can enable enterprises to track KPIs across heterogeneous environments. These tools let everyone in an enterprise view the status of KPIs and how they track against enterprise goals. As a result, enterprises can more easily establish a program of continuous improvement for the supply chain. These performance monitoring tools can also help spot performance anomalies and then provide drill-down to understand the causes so that the enterprise can take proactive measures. Creating a common set of supply chain measurements within an enterprise (or even within a community of trading partners) eliminates conflicting versions from different functional areas and fosters improved cross-functional co-operation. Enterprises gain the most value from performance monitoring applications by tying employees' evaluation and bonus criteria to KPI progress. Strategic Planning Assumption: Through 2005, enterprises that implement SCP applications with a continuous-improvement program will increase ROI by 40 percent during a five-year life cycle (0.7 probability). Integration Strategies Key Issue: How will SCM integration strategies change through 2005? An enterprise can view its business process as a hierarchy: strategy and analysis drive planning and optimization processes that oversee business processes that support business transactions. These levels of the business process work better or worse according to the level of integration that the enterprise has achieved (see Figure 6). For these business processes to operate more easily in concert, the supporting application systems must themselves integrate data and processes. Most enterprises include this internal integration (Stage 1) into their application plan. Increasingly, however, enterprises are embracing new business models — e.g., the virtual enterprise — in which trading partners perform key activities in a tightly synchronized fashion and assume much of the risk of bringing products and services to market as well as fulfilling orders. These forces require enterprises to focus their business processes and integration architectures more externally. To create an extended enterprise, the enterprise must also make its partner's processes visible and integrate them, not only at a transactional level, but also at a planning and analysis level. Enterprises that wish to participate in the emerging Stage 2 and Stage 3 business models must add a formal application interface layer to their IT architecture to build in the required flexibility for external integration and to control future integration costs. IS organizations will face the challenges of connecting back-office systems via extranets and of providing flexible, secured connectivity for long-term, strategic business relationships and short-term, opportunistic relationships. Through 2005, enterprises will increase their competitiveness by managing a portfolio of capabilities that they can reshape for each customer/product/channel relationship. The enterprise will constantly assemble and disassemble processes and systems to meet the needs of each relationship — i.e., the enterprise will need a recombinant business model. To profit most from meeting customers' changing needs, the enterprise will exploit the strengths of predefined and previously unknown suppliers, contract manufacturers, third-party logistics companies, distribution partners, and financial institutions. Enterprises that can rapidly configure new business models based on changing market dynamics will have a distinct advantage over enterprises lacking the technical and business knowledge to change business models dynamically. For instance, if a customer wants product A, it may automatically trigger a process with the enterprise's suppliers X, Y and Z; the enterprise may never have done business before with supplier Z and may never do business with it again. In this "consequential interoperability," the consequences of a business process trigger integration dynamically. Strategic Planning Assumption: Through 2005, enterprises that attempt to standardize processes with trading partners (rather than reconfigure processes based on supply chain variability) will operate at a cost disadvantage and will miss opportunities to enhance revenue (0.8 probability). The problem is that enterprises have not designed their systems for change or architected them to interoperate with suppliers and customers in real time as events warrant. Factors that hinder recombinant business models include: Disparate data models Disparate trading partner capabilities Disparate process models Semantic heterogeneity Integration as trading partner lock-in Proprietary "standards" Inertia and fear of change Competitiveness based on business process differences Point-to-point interfaces The following enable recombinant business models: Supply chain e-markets Uniform transport XML name spaces Standardized business objects Distributed object computing E-markets and Internet agents Common company and product identifiers Semantic standardization and reconciliation Consequential interoperability framework Supply chain e-markets (see Figure 7) can significantly help the enterprise enact a recombinant business model. Through the first half of 2001, a spate of supply chain e-markets will emerge run by the equivalent of shared-service providers. Rather than deliver a highly integrated suite of functions focused internally (e.g., ERP), these portals will deploy narrow functions across multiple businesses, regardless of location. These portals will typically use browser graphical user interfaces (although certain types of applications will use customized front-ends). To facilitate links with other application types, they will use message-broker middleware technology and have a service-oriented architecture. Most importantly, they will integrate with external systems from the inside out, rather than from the outside in. They will accommodate, rather than exclude, external data, processes and applications. Those seeking to sell supply chain e-markets will include value-added networks, channel masters, third-party logistics firms, wholesalers, IT vendors and systems integrators. The more-successful providers will evolve to become e-markets for specific supply chains by providing value-added information and business process outsourcing services on top of simple access to an enterprise application or shared community data. Strategic Planning Assumption: By 2004, supply chain e-markets, enabled by integration hub architectures, will become a commonly accepted alternative for in-house management of supply-chain information (0.7 probability). The wide and varied offerings include: Tradematrix.com from i2 Technologies and various partners (e.g., channel masters and third-party logistics firms) offers multidimensional trading partner communities. Initially, Tradematrix.com focuses on SCP collaboration, but i2 partners with other software vendors (e.g., RightWorks and viaLink) to provide expanded functions — e.g., in procurement, pricing and logistics. Bstreamz.com was announced by Manugistics in January 2000. MySAP.com from SAP integrates distributors, channel masters and other enterprises. This initiative emphasizes transactions and information exchange, but future plans include a focus on supply chain collaboration. Owens & Minor, a distributor of medical and surgical products, allows trading partners to analyze historical performance and connect with trading partners. Capstan for international trade software provides hosted software to handle import and export control and inventory visibility. General Motors TradeXchange offers procurement and hosted SCP solutions. Areas on Which to Focus Increasingly, the most senior level of the enterprise becomes involved in discussions on SCM strategies. Too often, however, these high-level initiatives focus on buying the "strategic application solution," with no appreciation for the complexity and immaturity of SCP and SCE. ERP vendors — often considered an enterprise's "strategic application vendor" — are engaged in catching up in SCP and SCE software functions. Again, enterprises must clearly understand that success with SCM depends on speed. Just as an enterprise's business success through 2005 will increasingly depend on its agility, the success of its SCM strategy will depend on how quickly it is implemented and on its ability to meet new business demands. Waiting for the "strategic enterprise vendor" to deliver generic SCP and SCE functions will ensure that an SCM strategy differentiates the enterprise competitively little (if at all). Enterprises seeking to gain business advantage through SCM processes must clearly identify where they must standardize their business processes and where they must differentiate those processes. They should assemble and manage their application portfolio accordingly. Enterprises should focus on the following basic principles: Connectivity: The enterprises should create an integration architecture for SCM — internally and externally. Agility: The enterprise should recognize that profitability depends above all on agility, which will require a new breed of systems that plan, monitor and react. It also requires rethinking supply chain structures. Profitability: The enterprise should use emerging tools for optimizing financial returns to make SCM programs key drivers of financial performance. Excerpts from Gartner's Strategic Analysis Report R-10-0274, 2 March 2000. Inside This Issue... Supply Chain Excellence through Inventory Visibility Measuring Collaborative Supply Chain Effectiveness Collaboration Lessens Semiconductor Supply Chain Swings The E-Business Philosophy: Supply Chain Management Will Sustain Profitability Tell Us What You Think! Entire contents © 2001 by Gartner, Inc. All rights reserved. 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