When the global recession hit last year, companies around the world found themselves stuck with inventory that suddenly stopped moving. Within days, the repercussions for cash flow started to become apparent. All that inventory meant lots of working capital was tied up in product —and was not available to pay the bills, says Rick Becks, senior vice president of E2open, a company that offers Web-hosted supply chain visibility tools.
Few could have predicted the extent and depth of the recession, but it's a good bet that companies that had good visibility across their supply chains —that could see actual orders, production, goods in transit, and so on —fared better than those that did not. As for the source of their advantage, it's a simple matter of exposure. The companies with the best visibility were less likely to have amassed vast stores of inventory as a hedge against uncertainty —demand fluctuations, forecasting errors, supplier failures, and the like. Visibility into their own and their suppliers' stocks gave them the confidence to keep global inventories as spare as possible.
The argument for the importance of supply chain visibility is hardly new, and technology that can provide it has been around for more than a decade. But the financial exposure created by the recession sheds new light on just how crucial visibility can be in managing risk.
The imperative to create a clear, near real-time view of the supply chain has only become more pressing over time. Professors Hau Lee of Stanford and Martin Christopher of the U.K.'s Cranfield School of Management argued in a 2004 paper in the International Journal of Physical Distribution & Logistics Management, that a number of forces were combining to make supply chains more vulnerable and turbulent. Demand in nearly every industrial sector was becoming more volatile, product life-cycles shorter, and competition more intense, they wrote in the article, "Mitigating Supply Chain Risk Through Improved Confidence." Supply chains had become more subject to disruption from external factors such as wars or strikes and internal factors like shifts in strategy. Lean practices that minimize inventory, the outsourcing of key components of the supply chain, and reliance on fewer suppliers across far-flung networks added to the risk.
That risk has only become greater. "I think it is clear that supply chain vulnerability has increased significantly in recent years," Christopher wrote in an e-mail reply to a DC VELOCITY query. "The reasons are partly to do with economic and geopolitical uncertainty, but mainly due to increased volatility and turbulence on both the demand side and the supply side. Everybody I meet tells me that it is much harder to run the business on the basis of a forecast and that long-range planning is a thing of the past. Instead, we have to build in the capability to react to the unexpected —this is what I believe resilience in a supply chain context is all about."
Nari Viswanathan, vice president and principal analyst for the Aberdeen Group's Supply Chain Management Practice and co-author of a supply chain visibility study published earlier this year, said in a recent interview that while supply chain managers may strive to shave inventories, improve data flows, and compress lead times, several factors are working against them. Fewer suppliers can mean greater risk of supply disruption. Geographic expansion across China, India, other parts of Asia, and Eastern Europe can extend lead times, which leads to greater amounts of inventory in the overall system, once again creating greater complexity and greater risk.
The risk spiral
Now, another development threatens to further complicate supply chains, and thus increase the need for visibility: Supply chains that once were one-way channels are fast becoming multi-directional as countries like China —perhaps China especially —rapidly develop a large consumer market.
Lee and Christopher argued back in 2004 that one of the keys to mitigating the risk caused by complex supply chains lay in developing end-to-end visibility. Visibility helps eliminate one of the major causes of supply chain volatility, what they called the risk spiral —i.e., if a participant in a supply chain lacks confidence in, say, when goods will arrive, the response may be to add safety stock, which in turn creates added pressure on production and extends lead times, resulting in a further erosion of confidence. The lack of confidence is exacerbated as increases in physical distance and the number of outsourced participants add time to material flow and reduce visibility of any participant in the supply chain to the activities of others.
"The key to improved supply chain visibility is shared information among supply chain members," they wrote. "If information between supply chain members is shared, its power increases significantly. This is because shared information reduces uncertainty and thus reduces the need for safety stock."
Christopher believes the need for stronger collaboration is greater than ever. "One of the paradoxes of the trend to outsourcing and offshoring is that whilst it may have reduced costs (although not always), it has tended to increase uncertainty through a loss of control and visibility," he contends. "Ultimately, I would argue that the two key elements in reducing uncertainty and increasing resilience are improved visibility and improved responsiveness —in other words, the ability to see things sooner and then to respond more quickly once that information is received. These things can only be achieved if we are able to have much higher levels of cooperative working across the supply chain."
Looking beyond the walls
In the Aberdeen study, "Integrated Demand-Supply Networks: Five Steps to Gaining Visibility and Control," Viswanathan and coauthor Viktoriya Sadlovska set out to identify processes and technologies businesses are using to gain better visibility —and thus control —across their supply chains. As any supply chain adds complexity by adding more tiers and extending across greater geography, the ability to manage it erodes, they argued. "This complexity has resulted in companies' gradually losing visibility and control over their networkwide supply chain operations and performance metrics," they wrote.
Viswanathan and Sadlovska, a research analyst in the practice, examined several factors —perfect order deliveries to customers and from suppliers, the cash conversion cycle, and accuracy of total landed cost forecasting —that they believe differentiate supply chain performance among companies. They concluded that best-in-class companies share several characteristics, most notably their process and technological capabilities, that enable them to look beyond the company's walls.
The enabling technology has developed rapidly. Today, a number of software-as-a-service (SaaS) offerings exist that can collect data in a wide variety of formats (everything from EDI to spreadsheets) and translate it into whatever form may be required. That's in response to demands from companies big and small. In the case of big companies, the need for electronic communication with partners was the driving force, says Becks of E2open "When we started the company up [in 2000], we worked with large global companies that had their supply chains strung across great distances," he says. "What they expressed to us then was that they were having a hard time controlling their supply chains because they were losing visibility that used to be within their firewall. They owned the inventory and the factories. When they started working with partners, they went back to the 20th century reliance on e-mail and faxes. They asked us to solve that problem. ... The breakthrough was ubiquitous access to the Internet."
At the other end of the spectrum are smaller companies that often are parts of large supply chains. For these companies, technical issues related to data formatting and transmission can be a source of frustration. "A problem they face is playing in the overall supply network with their neighbors," says Jim Burleigh, CEO of SmartTurn, a provider of Web-hosted warehouse management software targeted to small- and mid-sized companies. "Whatever data you have, someone is trying to aggregate." The problem is that different players —say, a Wal-Mart and a Target —set different rules for supplying the data. That increases the difficulty of providing visibility to all trading partners. "There are dozens of standards," says Burleigh. "That becomes problematic and costly."
Like Becks, he urges adoption of IT platforms (like his own) that can accept and translate data in a variety of forms. But he sees companies as slow to adopt such tools. "The average junior high student uses so much more communication technology than the average warehouse entity that it's laughable," he says.
Getting connected to offer global visibility among trading partners is just the beginning, of course. Although the technology to capture and monitor supply chain partners' data is a crucial first step, leading companies realize that they must use that information to make swift decisions, often altering production and distribution operations in response. As Viswanathan emphasized in a discussion of his report, it's not simply having visibility, but making the best use of it. "There is a difference between visibility and responsiveness," he says. "The leading-edge companies focus on responsiveness. They have tackled visibility. Not only do they have visibility, but they are able to take action."