Recapturing your supply chain data

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Recapturing your supply chain data
Outsourcing parts of the supply chain has disrupted the flow of critical data. Targeted IT investments can restore what‘s missing.
Aditya Pande, Ramesh Raman, and Vats Srivatsan
Web exclusive, March 2006
It has never been simple to manage the information that flows through a product supply chain. Companies must work closely with suppliers, logistics providers, distributors, and retailers to collect and manage information about customer demand, sales orders, distribution schedules, production planning, manufacturing, sourcing, and product design.
But this task has become even more complex because outsourcing has stretched supply chains around the globe (Exhibit 1). Companies not only buy more of their raw materials, components, design services, and manufacturing from far-flung third parties but also rely on contractors to coordinate the manufacture and movement of their goods.
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Both trends reduce costs, but in exchange, executives have given up something valuable: easy access to critical data—such as details about quality, supplies on hand, and manufacturing capacity—that could help raise productivity. For example, a computer hardware company‘s supply planner, trying to meet a spike in demand for certain products, needs capacity and inventory information from several components suppliers and several contract manufacturers, but the data may be locked up in the IT systems or spreadsheets of a dozen or more companies. Likewise, a manufacturer seeking to reduce warranty costs may want to connect data at the far ends of its supply chain, from field service technicians making repairs to components suppliers trying to keep their costs low.
Reconnecting the dots isn‘t easy, given the widening range of players in the supply chain and their divergent interests and incentives. But without access to accurate and timely data, companies will struggle to adapt their supply chain networks to support newer products, geographies, and changes in the supplier base. They also will find it burdensome to comply with regulatory requirements, such as Sarbanes-Oxley, as well as with international tax laws when they have fiscal responsibility for materials and transactions occurring beyond their organizational walls. Finally, if the supply chain is poorly integrated, the partners will duplicate their IT investments and business processes—reducing the efficiency of the whole chain.
Managing information flows
For insights into how to regain control over supply chain information, we looked at leading technology companies that have globalized significantly and outsourced their manufacturing and logistics over the past four or five years. Their experience suggests three important themes: tailor information flows according to demand and the type of product; reconsolidate supply chain data; and determine how closely to monitor critical information with each partner.
Fit information flows to supply chain types
Some data from the supply chain are more important than others, depending on the type of product. Companies must recognize the significance of this differentiation and focus their investments on IT systems that track and monitor information critical to each product‘s success. In high tech, we see four basic types of supply chains, which characterize other sectors as well (Exhibit 2).
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First are the supply chains for fashion products, such as Motorola‘s RAZR phone and Apple‘s iPod, which have short life cycles punctuated by quick, iterative design changes. For such products, effective supply chains help companies chase demand rapidly by providing information flows that promote rapid coordination between the designer and the suppliers, as well as a good view of the availability of components and manufacturing capabilities. What‘s more, good information feedback mechanisms from retailers and end customers make it possible to respond more quickly in the next iteration.
Highly engineered products, such as high-end routers and storage equipment, have longer life cycles (sometimes four or five years), but over this cycle there are more significant product design changes involving the assembly of complex configurations of materials. For these products, key information flows include order configuration management, visibility into supply and capacity across product lines, and the effective coordination of change-management information and decisions among designers, assemblers, and components suppliers (roles often undertaken by different players in the technology supply chain).
By contrast, a company selling commodities, such as PCs and low-end servers, needs to focus on information that helps it to reduce its costs and inventory continually. Information flows in the supply chain must offer transparency into key costs (and cost drivers) across the company and its partners, as well as high visibility into inventories along the supply chain.
Stable products, including electronic components for automobiles, are also cost sensitive, but they are locked in over longer contract periods and sometimes remain unchanged for a few years. Supply chain information should focus on details of costs and distribution. Of course, that information is less urgent than it is in other types of supply chains, especially those for fashion products.
Many companies manage several types of supply chains. A large consumer electronics company with a mix of fashion and commodity products, for example, should segment its supply chain system, since each kind of product involves a distinctive approach to planning supply chains. Inventory strategies and information flows must be managed differently across each of them, so the supply chain software must be sufficiently flexible to handle more than one type.
Consolidate critical information
Once managers have identified which types of information are critical, they can determine how to consolidate the relevant data for easy access. Each supply chain partner typically collects and monitors data at its stage of the process and then passes on information about volumes, prices, and dates for components and products. This approach still leaves behind a lot of critical cross-company information. A call center‘s data about which components fail most often, for example, can offer critical intelligence for product design and for supply chain teams negotiating the quality of components—both of which are in the early stages of the supply chain.
To gather vital information, companies must selectively invest in IT connections between their own systems—supply-chain-management software and enterprise-resource-planning (ERP) systems—and the systems of their suppliers.1 Companies should focus their spending on areas where it will have the maximum business impact. Two types of strategies tend to work well here: limited investments aimed at specific business problems (for example, information from customers and retailers about product failures) or efforts to work from the top down to understand how better supply chain information can help companies meet business goals such as reduced inventory or lower transportation costs.
Third parties (such as logistics providers) are also beginning to invest in these cross-company information connections for customers. A large computer maker, for example, relies on a logistics company to monitor information from 80 partners and to present a consolidated view of shipment and inventory information.
Bridging these gaps pays off. In one case, a leading enterprise-computing company started gathering better data from field services, which gave it information on the incidence of failures and their costs. By feeding that data to design teams, the company developed products that could be serviced and repaired more easily. The result: total costs over the product life cycle fell by 10 to 20 percent.
Develop capabilities to monitor information
Once these systems are in place, companies need to establish an effective way of monitoring information flows along the supply chain. Some policing issues are solely about capabilities: for example, do a company‘s partners have IT systems that can deliver critical data? If not, it may want to invest with its partners in the necessary systems.
Other issues relate to competing agendas. A high-margin OEM may view certain kinds of data as critical, for example, but price pressures may prevent its low-margin suppliers from making the necessary investments. Contracts can give such suppliers incentives to invest in the collection of the data or to satisfy the OEM‘s requirements in some other way.
Depending on the capabilities and competing agendas of the players, some relationships may be relatively autonomous while others require closer monitoring. Autonomy means that the lead company relies on the partner to manage the complexities of the intermediate information flow. The partner in such a relationship provides only end-performance metrics such as cost, delivery, and quality. Consider, for example, the relationship between Dell and Quanta Computer, an original-design manufacturer (ODM) that designs and manufactures laptops. Dell sets targets for cost, quality, and order fulfillment and then measures Quanta‘s performance against these goals; Quanta manages its own relationships with components suppliers.
Near the other end of the spectrum, one high-tech company has invested heavily in cost and quality systems that allow it to monitor transaction-level details at its contract manufacturers and components suppliers. Setting up such systems is expensive, but they help the company manage its performance more effectively. That is especially true when significant value is at stake (for example, if products have many quality issues that need to be tracked or traced to their roots), partner incentives are not aligned, or intermediate targets (such as the partners‘ daily inventory levels) are easy to set and monitor.
Implementing these changes
No doubt, as other industries rely more on outsourcing, thereby fragmenting their supply chain information, they will face the same pressures that high tech faces now. Companies will have to gain the support of their partners by creating either incentives for cooperation (through coinvestment, for example) or, in some cases, disincentives for partners that can‘t provide needed information. Internally, companies can do three things to help reconsolidate information flows.
Consider the entire supply chain
Although there are several companies in a typical supply chain, each company‘s IT system still functions as if it were independent. Rather than passing customer sales information straight through to suppliers, for instance, most players still have their IT systems and analysts carry out their own forecasting and materials-planning functions.
A solution may require a radical change of mindsets about collaboration with partners. Companies at the center of such a supply chain, together with their logistics and manufacturing partners, should look at the whole picture to determine where information flows should be reconnected to improve quality, supply, and sales: could customer-demand signals pass directly to components suppliers, for example, and how would that help the manufacturer meet demand? This kind of model would require a better information exchange between inventory levels and orders but would dramatically reduce the need for sophisticated forecasting at every stage in the chain.
Develop a cross-functional perspective
Performance metrics that are aligned with a functional or business unit reward managers for meeting the group‘s goals, even if doing so fails to improve performance across the whole business. A purchasing manager in a procurement group, for example, gets rewarded for selecting suppliers that can deliver lower unit costs and regular cost reductions, while in the manufacturing group an inventory planner is rewarded for keeping inventory low and order fill rates high. Both require suppliers that can provide a good information flow.
However, decisions to select a supplier are seldom coordinated to ensure that they optimize total end-to-end costs and delivery performance. In fact, these decisions are commonly driven by procurement organizations, without attention to delivery performance requirements. Instead, companies should consider their overall cost and delivery performance strategy when they determine their supply chain priorities. Partners should be selected because they can meet these broader goals. This approach calls for guidance from a senior executive—the CFO or chief operations officer—who can align incentives across functions and set up a governance process to ensure that they remain aligned on an ongoing basis.
Create a detailed scorecard
To help choose partners, companies can set up a cross-functional scorecard, including a broad range of metrics that not only reflect the needs that can help them achieve their larger goals but are also detailed enough to indicate areas ripe for improved performance. A company may, for example, be basing its choice of vendors on cost, quality, and delivery details. Within the cost category, the scorecard could shed more light by including the cost of after-sales service and the opportunity costs associated with stock shortages, not just the cost of an item. Similarly, delivery costs could be supplemented with information about safety stocks for inventory and manufacturing flexibility. Metrics for quality should include details on the root causes of defects and warranty costs, as well as the total costs of goods through their life cycle. One large technology company, for example, tracks detailed information about its installation service partners. This information includes variations in productivity across regions, customers, service requests, and even technicians so that the company can encourage and reward the partners offering the best performance.
Reassembling the information flow throughout supply chains won‘t be easy, given the players‘ different capabilities and misaligned incentives. But significant value is at stake, so it‘s worthwhile for manufacturers to invest in cooperation. Leading-edge companies that did so have reduced their inventories while enhancing their performance.
About the Authors
Aditya Pande is a consultant in McKinsey‘s global IT practice and specializes in operations. Ramesh Raman is a consultant in the supply chain practice. Vats Srivatsan, a principal in the global IT practice, advises high-tech companies on operations and technology issues. All three are based in Silicon Valley.
This article was first published in the Spring 2006 issue of McKinsey on IT.
Notes
1For information on getting the most from supply chain software, see Kishore Kanakamedala, Glenn Ramsdell, and Vats Srivatsan, "Getting supply chain software right," The McKinsey Quarterly, 2003 Number 1, pp. 78-85.
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