REACHING FOR NIRVANA
More and more companies are turning to supply chain management as a way to grow sales, but the challenges are getting harder.
By Justin Wood

Milan Belans knows just how it feels to be on a diet. "It's a never-ending battle," he grimaces. "You have to work at it constantly." Not that the trim 37-year-old is worried about his own weight. Instead he has a rather larger mission in mind: to tone up the global supply chains at Delphi, a US$28 billion-a-year maker of car batteries, catalytic converters, heating controls and other auto parts.

"We're introducing a new philosophy based on the concept of 'lean'," explains Belans, who is CFO of Delphi's Asia Pacific operations. "Lean is all about the elimination of waste." To that end, staff have spent the past three years stripping out cost from the firm's factories, improving inventory management, and rethinking how Delphi interacts with its customers and supply chain partners.

One important project has been to slash the company's long list of suppliers - from 5,000 in 2002 to around 800 today. Just as importantly, Delphi has tried to create richer, more collaborative relationships with those suppliers.

"The traditional approach to purchasing has been to hammer suppliers over cost as much as possible," notes Belans. "But we've taken a different approach. We want to work alongside them. We want to work together on projects to take out waste from across the supply chain." That means sharing in things like the cost and risk of investing in new technology. Equally, it means sharing the benefits. "Margins at both Delphi and our suppliers should improve together," says Belans.

And the purpose of all this activity? For one, it'll help boost Delphi's lackluster financial results of recent years. Just as importantly, though, Delphi believes that superior supply chain performance has an impact on the top line as well as the bottom line. In reviewing 2003, Alan Dawes, Delphi's overall CFO, told investors: "We reduced parts per million [defects] by 50 percent and our on-time delivery to OEM customers reached a new high of 99.2 percent. This level of performance is helping us win new business."

Strategic Weapon

The thinking at Delphi reflects a growing trend at many other companies around the world. While supply chain management was once thought of as a necessary evil, increasingly it's being regarded as a strategic weapon in the battle for growth. Of course, companies like US computer maker Dell and some of the Japanese car companies have been pioneering such thinking for a number of years. Increasingly, though, other companies are starting to follow their lead in giving supply chain efficiency the same attention as things like brand strength and product innovation.

A report released in October 2003 by Accenture, an IT consultancy, shows how important supply chain management can be. Produced together with Insead, the French business school, and Stanford University in the US, the report analyzed data from 636 companies around the world in 24 industries over the period from 1994 to 2000. The supply chain performance of each company was measured using three variables: inventory turns, cost of goods sold as a percentage of revenue, and return on assets. This was then compared with overall financial performance.

The results were clear. For the period of the study, the best 25 percent of supply chain performers increased their market capitalization by a compound annual growth rate (CAGR) of between 7 percent and 26 percent over and above the average found in their particular industry. Conversely, the bottom quartile of supply chain performers grew their market capitalization at a CAGR of between 2 percent and 5 percent below the industry average.

"Good supply chain management not only lowers costs and leads to better utilization of assets," says Jeff Russell, Accenture's head of supply chain consulting in Asia Pacific, "it also helps drive true top-line growth."

And yet, just as companies are paying closer attention to their supply chains, the challenges of managing them are getting ever harder. The globalization of sourcing and manufacturing is making supply chains longer and more complex than ever before. Demand is becoming more volatile and harder to predict, thanks to the growing power and speed of information in the hands of consumers and competitors alike. And product and technology life cycles are shortening. Figures from Dutch electronics giant Philips, for example, show that it took ten years for the worldwide VCR market to hit 20 million units, while the market for DVD players hit 50 million units in just five years.

Julia Fang has certainly noticed the increased pressure. As Asia Pacific head of tax and trade for US-based Agilent Technologies, a US$6 billion-a-year communications, semiconductors and life sciences company, Fang notes that: "Our supply chains change far more often now than in the past. The needs of our customers are changing much more rapidly." In years gone by, she adds, Agilent could expect a supply chain to last up to three years, but not any more. "Now we review our supply chains every quarter, sometimes every month," she states.

Nonetheless, Fang stresses the growing role of supply chain management in the company's financial success. "Our supply chain capabilities have become part of our sales program," she says. "A good supply chain brings us competitive advantage; it contributes to growing our revenues."

The Ties that Bind

So what are companies doing, both to manage the growing challenges as well as to steal a march on the competition?

One important trend is for companies to foster greater collaboration with their customers and suppliers. By working more closely with their partners and tying them into their business processes, just as Delphi is doing, companies are able to clear away some of the roadblocks that lead to production shortfalls, excess inventory, and other problems.

Take Venture Corporation, a Singapore-based contract designer and manufacturer of electronic goods such as printers for Hewlett-Packard and storage products for Iomega. Mark Wettasinghe, who oversees supply chain management at the S$3.2 billion-a-year (US$1.9 billion) company, has put in place several initiatives to encourage better collaboration. In particular, his most recent projects have centered on two web portals.

The first, which is shortly to go live, aims to improve the way that Venture designs its products. Essentially, the portal is a virtual workspace where engineers from Venture's offices all over the world can meet with the company's suppliers in real time. The idea is to seek greater input from Venture's suppliers in the design process so that, for example, new products can be made more cheaply, out of materials that will be available, and to better quality. "The platform has everything from design drawings to parts information to project management tools," enthuses Wettasinghe. "It lets people from all over the world work on the same documents at the same time."

The second portal, called iHub, concentrates on the transactional side of Venture's business. Once again, it connects Venture to its suppliers over the internet, but this time it provides them with demand information and forecasts released by Venture. It also gathers together all the firm's inventory information and sends out signals to suppliers when stock is needed, requesting them to acknowledge whether they can meet Venture's production schedules, and if not, asking them what's the best they can do."

Trucks, Sheds, and More Besides

A second trend in the bid to pump up supply chain efficiency is to outsource. Asia - and companies like Venture - have long been recipients of Western brands outsourcing their manufacturing. But now this trend is going even further. One increasingly popular area of outsourcing centers on the logistics side of the supply chain. While many companies already use a third party to handle warehousing and transportation, a growing number of companies are outsourcing even the overall management of their logistics networks.

One recent convert is America's Sun Microsystems, a US$11.2 billion-a-year network computing business. In December 2002, Sun signed a deal with logistics provider DHL to hand over the day-to-day management of all warehousing and distribution services in Asia Pacific for Sun's spare parts and repair service - thus replacing 15 logistics partners in the region with just one.

Central to the set-up - called SunCALL - is DHL's management of a Logistics Customer Service Center round-the-clock on behalf of Sun to coordinate the delivery of spare parts to Sun's field engineers and strategic partners. The deal is all part of Sun's commitment to "uncompromising customer service," says Brad Schultz, a senior manager in Sun's supply chain team. The aim is for DHL to fulfill Sun's promise to deliver parts and components within one hour to any of its customers in Asia, although customers can also sign up for a two-hour or four-hour service if they prefer.

"SunCALL creates customer value through world-class supply chain management," states Schultz. Significantly, the new deal has also improved Sun's supply chain cycle time for spares by more than 90 percent.

For their part, logistics providers are trying to push the boundaries of outsourcing wherever they can. As Paul Graham, Asia Pacific chief operating officer for contract logistics at Exel, a UK-based provider, notes: "We're getting more heavily involved in our customers' supply chains in areas away from the traditional warehousing and transportation." For example, he says, Exel now handles activities on behalf of its customers such as sub-assembly work, packaging, after-sales service, and repairs.

Frequently these jobs involve labor-intensive, variable work where customers don't want to invest in the required staff and facilities. For logistics providers like Exel, however, it's relatively easy to devote a corner of a warehouse and some part-time staff to managing tasks like country-specific warranty programs or repackaging items for special promotion campaigns. "Our customers get to keep headcount and assets off their books and have a more flexible cost structure," explains Graham.

Knowledge is Power

A third trend is to improve the flow of information across supply chains. For one, better information helps companies impose tighter control on the quantity and whereabouts of inventory. For another, it helps companies become more agile and responsive to changes in customer demand. As Andy Weber, Asia Pacific managing director of Kuehne & Nagel, a Swiss logistics company, notes: "Visibility is key to efficient supply chains."

Technology, of course, is central to improving information flows. The growing use of radio frequency ID tags to track the movement of products is a case in point (For RFID coverage, see "Dude, Where's My Printer?"). And software vendors are producing ever-more sophisticated tools to help manage supply chains. In March this year, for example, PeopleSoft released its Demand-Driven Manufacturing suite of products.

In a typical company, explains Paul Liddiatt, a director at PeopleSoft in Asia Pacific, sales and marketing teams make their forecasts, and everything that happens after that in the supply chain is a push process to meet those forecasts - often leading to waste if the forecasts are over-optimistic. In a demand-driven environment, however, the process becomes more pull than push. Forecasts are still needed, and raw materials must still be ordered ahead of time, but better information flows mean that manufacturing only occurs as and when the demand materializes.

"Raw materials in their raw condition are at their lowest cost and most flexible stage, whereas finished goods are at their highest cost and least flexible stage," Liddiatt explains. "Demand-driven manufacturing is about pulling materials through the supply chain without creating waste."

John Moran, leader of the supply chain practice in Asia for IBM, sees other ways that information is improving supply chain management. "Companies are paying much greater attention to different sales channels," he says. "CFOs especially are looking much more closely at the costs of different channels and measuring those costs against service levels and profitability. They want to know which customers they're making money out of.".

Laptops and Dress Shirts

One other trend that is reshaping supply chains and helping to boost their efficiency is the growing influence of customization. The case of Dell, which custom-builds laptop computers to order, is well known, but other companies are following suit. Hong Kong-based TAL Group, a privately held clothing manufacturer, is a good example. One of TAL's biggest lines is a range of dress shirts produced for US retail chains like JCPenney. American consumers who visit JCPenney's website can order a custom-made shirt, complete with personalized monogram, and have it delivered to their door within 14 days.

As soon as a customer fills out his collar size, choice of color, and other details on a webpage, the order appears instantly at TAL's factories in Hong Kong. The shirt is tailored to the required specifications and then collected by UPS, a logistics provider. The shirts are shipped in bulk to the US where they are unbundled and fed into UPS's small package business for individual delivery across the country.

Such arrangements represent the nirvana of instant, demand-driven supply chains, blending technology, outsourcing, and collaborative networks to eliminate waste almost completely. For Belans at Delphi, the diet continues.

Justin Wood is managing editor of CFO Asia based in Singapore