The Changing Concept of Supply Chain

Enterprises seek innovative ways to win in their chosen markets. In the long run, good strategies are rewarded and bad strategies are punished. The definition of "enterprise" and who wins (and loses) has changed as the nature of supply chains have evolved.

Today's industry captains are working at odds with 60 years of industrial evolution. The fundamental management practice that enabled the growth in the global economy is Taylorism. Frederick Taylor, the now infamous time and motion study practitioner, was the reason that explained the manufacturing success of Ford. As a result of breaking manufacturing processes down into logical components, and by specialization of the process at each independent stage, so our scientific view of Taylorism took hold.

Growth Factor

IT has been a major catalyst for productivity growth in the non-manufacturing and manufacturing industries. By storing and processing information in electronic form, productivity of enterprises has soared. The mix of nominal capital spending has changed as IT as evolved. Between 1951 and 2001 the ratio of nominal capital spending between IT (information processing, equipment, software and communications) and traditional industrial, transportation and other capital equipment changed from 17 percent to 55 percent (Source: Department of Commerce, BLS, Tanaka Capital Management.) At the same time, nominal GDP has grown from less than half a billion dollars in 1951 to $10 billion in 2001 (Source: Department of Commerce, Bureau of Economic Analysis).

Buying in Bulk

The bulk of software investment for business applications has focused until recent years on how the enterprise operates â" following the good teachings of Ford and Taylor. Departments were optimized, sometimes to the detriment of the holistic enterprise level. Enterprise Resource Planning (ERP) is the epitome of this cycle as the enterprise was assumed to be the center of the universe. ERP enabled an enterprise to centralize its operational control and support reporting of operations from departments up to the executive. ERP was the classic command and control model. Supply chain, despite its name, really started and ended within the enterprise.

A change began in the use of optimization and then collaboration. Several application vendors encoded complex algorithms inside their offerings, and enterprises used the solutions to optimize first their production schedules then their distribution plans, and more recently, the balancing of customer orders to supply. The most current use of this technology is now with retailers who are seeking optimal prices at times of seasonal markdown. However, all this optimization has for the most part failed to recognize that Taylorism is not the answer. Like the workings of the combustion engine, it is not the constituent parts that produce motion; it is the synergy that comes forth from effective coordination and synchronization of those parts. This is where supply chain management is headed.

Late in the 1990s innovative enterprises like Wal-Mart, Eastman Chemicals, P&G and others started to look at the connections between themselves and their trading partners. Through better alignment of business goals and objectives, with shared metrics and business processes, a new form of competitive performance was sought. This led to the recognition that though the term supply chain has the word "supply" in it, it is the connection between enterprises that would prove to be the next opportunity to increase competitive advantage. So the value chain was promoted â" the ability for an enterprise to work with strategic partners to compete collectively. Additionally, the early pioneers focused this discussion on strategic partners. However, as industry standards emerged, there is additional value to be extracted and cost to be eliminated in making all connections in the growing network more effective.

This new approach launched the hype around business-to-business collaboration. Collaboration provided a road map for enterprises to finally realize many of the business benefits sought after but not realized with industry efforts such as efficient consumer response, vendor management inventory, quick response and so on. What was significant however, and what made this wave of innovation slow to be adopted â" the application and technology needed to support multienterprise collaboration required unprecedented levels of industry standards to be developed. Technology was a barrier in the early days. Cultural issues and resistance to change are now emerging as major barriers as technology meets the requirements for multienterprise collaboration.

Changing Behavior

Behavior is hard to change â" though somewhat predictable. Entire value networks of buyers and sellers now collaborate on new product designs, product introductions, forecasts, promotions, transportation, load or capacity sharing, product retirements, and when the network fails, so do its members. In the next five to seven years, enterprises will see this evolution emerge.

The current economic downturn has led to a glut in business application software and has made it hard for innovation in IT to support the new concepts. The technology to support this will lead to trading grids or networks of partners who are able to connect and integrate business process with near real-time capabilities.

The Bottom Line

Enterprises will soon realize that relationships are the single most important segment in their supply chains. No amount of IT will change this. The more things change, the more they stay the same, to repeat an oft-used