If there were a surefire way to improve your company’s cash flow, reduce capital expenditures, make your customers happier, and ultimately boost your stock price, you’d invest in it, right? Sure–but then again, if you believed in such a magic bullet, you’d also buy swampland in Florida.
No technology, by itself, can perform that kind of magic. Yet, vendors claim that a new type of software can help deliver some or even all of the benefits listed above. The client/server software, variously called supply chain management (SCM) or finite planning software, helps companies figure out better ways to manufacture and distribute products, by tightly connecting the various links of the supply chain.
Some companies begin the process internally, linking together order entry, manufacturing plants, distribution, and shipping centers. Others extend the supply chain outward and link to their customers electronically, so that they can accurately forecast need and even automatically replenish their customers’ supplies. SCM software is helping some companies reduce inventory by as much as 40 percent and decrease customer lead time–which leads to better profitability, an enhanced reputation, and, ultimately, higher stock prices.
Just ask Frank Mellon. The affable director of manufacturing operations recently finished an 18-month implementation of I2, one of the four leading SCM software suites, at Herman Miller Inc., the Zeeland, Michigan, office-furniture manufacturer. As a result of using I2′s Rhythm planning software in its five plants, Herman Miller has already taken a week out of its inventory and sliced one to two weeks off its lead time to customers. By the end of its fiscal year, in June 1996, the company had increased cash flow to $124.5 million from the previous year’s meager $29.9 million. The causes: higher sales, increased profitability, and a reduction in capital expenditures, which dropped to $54.4 million from $63.3 million in fiscal 1995.
In the fourth quarter of 1996, the company shipped 44 percent of its sales directly to customers, compared with 24 percent in 1995, thanks to the logistical changes it made using I2. These improvements–which admittedly are only partially attributable to SCM software– made the company’s stock price soar; on March 18 of this year, the furniture maker announced a two-for-one stock split.
Herman Miller is still one of a relative handful of so-called bleeding-edge adopters of SCM software. Worldwide, makers of the decision-support tools sold $420 million worth of the software last year. But the small industry is on a skyward growth curve, asserts Beth Enslow, of Gartner Group. Enslow, who studies the integrated logistics market for the Stamford, Connecticut, information- technology advisory firm, predicts that SCM software sales will reach $700 million this year and zoom to $2 billion by the year 2000– a growth rate of 67 percent.
THE PROMISE OF SCM
For companies concerned about time-based competition, SCM software can be one of their most powerful weapons. It enables them to collaborate with suppliers and customers, forecast with greater accuracy, shorten product life cycles, and reduce inventories.
Beer maker Heineken USA, for instance, says it shrank the time it takes to move beer from brewery to retail shelves–from 10 to 12 weeks to less than 6–by using American Software’s Resource Chain Voyager, SCM software with an Internet component. Meanwhile, in Stratham, New Hampshire, footwear manufacturer The Timberland Co. hopes a recent implementation of four different modules from Manugistics will help it shorten planning cycles from monthly to weekly, to respond more quickly and flexibly to shifts in market demand.
Although it may be touted as brand-new, SCM software is an evolution of MRP (material requirements planning) and logistics systems, with interactivity thrown in. Using sophisticated modeling techniques and business rules, SCM software helps companies plan, source, make, and deliver products in cost- effective, integrated ways. Its functionality includes order and inventory management, demand planning and forecasting, deployment, distribution-center operations, and transportation management. (Not included are warehouse-management programs.)
The idea behind the software is to help companies provide “one-number” information to sales, purchasing, manufacturing, distribution, and transportation planners, so that various departments use the same data to achieve company goals. In contrast, most companies today follow a “stovepipe” model, in which sales, purchasing, manufacturing, and so on are separated from one another–and motivated, at times, by conflicting incentives. For example, a manufacturing plant compensated for generating high volumes has little motivation to produce small quantities of custom orders that might better satisfy sales, not to mention not saddling the company with excess inventory.
HERMAN MILLER’S STORY
Here’s how SCM software works at Herman Miller. The $1.3 billion company had been struggling with a typical problem in the furniture industry: when a customer orders office furniture, cubicle components, or storage systems, up to five different manufacturing plants may be needed to produce a single order. If a single plant lags in production, the order waits in warehouses, even if 90 percent of it has been completed in the other plants. It’s a planner’s nightmare, and a killer when it comes to inventory control and materials-handling costs.
That’s bad enough, but if the customer requests a change–say, of upholstery–the problems escalate. Using MRP software, it could take 48 hours just to tell the customer how long he’d have to wait for the changed order. And the simple upholstery change could throw the customer back to “time zero”– starting the waiting process all over again, as if he’d never ordered the furniture the first time. The problem: MRP and other traditional manufacturing planning methods are sequential in nature, meaning that a single change throws the entire process off.
Supply chain management software, on the other hand, helps managers plan simultaneous processes. It examines the constraints between plants, for instance, to help a company figure out how best to consolidate work and have it done simultaneously. If a plant goes down, SCM software can help a planner determine which other plant has the material and human resources to manufacture the product quickly and economically. It can help companies ship supplies cost-effectively, reroute manufacturing, dynamically determine lot sizes, and even find new distribution routes.
Today, to estimate shipment time for the customer who changes the upholstery color at the last minute, a Herman Miller materials planner plugs the new requirements into the I2 software, which determines which plant can make the changes and in how much time. The customer service rep can answer the customer in one phone call. That’s a big improvement from the “old days,” says Mellon. “In the old MRP or ERP [enterprise resource planning] model, you plug in those requirements and you hope. The actual response would come back in days–a single MRP explosion [the cascading of needs through all planning systems] takes eight hours for a plant. An I2 explosion takes a few minutes.”
It’s no small potatoes that this helps the company solve customer service problems in “real time,” says Mellon. But more important, he says, “what it really helped us do is figure out how can we use the limited capacity of our plants to serve the most customers possible. With ERP, you’ve got to require a fixed schedule; changes upset a planner to no end. But with I2, you become much more responsive, flexible, and adaptive. You can solve problems much later in the cycle, which allows you to keep a lot less work-in-process inventory and raw materials on hand–which saves a lot of money.”
Just how much? Quite a bit, no matter where you find the savings. Says Mellon, “We got a whole lot more capacity out of our plants this way. We’re not sure how much more, because we don’t know where the ceiling is yet, but we are probably running at 20 percent higher volumes with no significant capital investments to improve that capacity.” He adds proudly, “You delay capital investments that way, and you improve the use of those you have.”
SCM VS. ERP
In fact, one of the appeals of SCM is that when it comes to reengineering your business processes, which this enterprisewide software helps you do, the investment is relatively reasonable: $1 million or $2 million for a typical implementation in a Fortune 500 company. It can be rolled out in 6 to 12 months, says Gartner Group’s Enslow, and typically achieves return on investment in only three quarters. That’s a long shot from a Fortune 500 ERP implementation, which can cost $10 million to $40 million and take 3 to 4 years to implement. Such an implementation may not provide a payback for 5 to 10 years, says Enslow.
That’s not to say that one is better than the other; ideally, they work together, with SCM nested inside an ERP system like SAP’s R3. (In fact, SAP and other ERP software from the likes of Oracle and Baan now have formal partnerships with many of the SCM companies, to ensure that the two software products are compatible and that data are consistent.) ERP, too, works on a one-number theory, linking data from order entry to manufacturing to accounts payable. Where it differs from SCM, however, is that it transacts processes, typically replacing old mainframe back-office systems. SCM, in contrast, is a decision- support tool: it uses the ERP data to help answer what-if questions. Says Mellon, “SCM is the brain; ERP is the strong body. You need both to have a total solution.”
Herman Miller is now in negotiations with an ERP vendor for an enterprisewide system, but Mellon believes the company did the right thing by buying SCM software first. “Herman Miller has a very high need for its operating units to be interdependent,” he says, referring to the need to get the company’s manufacturing plants working together seamlessly. “If we had rushed into ERP right away, we probably would have automated plants before understanding what was going on between them.”
Still, the question of which software to implement first plagues many companies and can slow down adoption of both technologies. Some companies, like Mott’s North America, the Cadbury-Schweppes Plc subsidiary that makes applesauce and other foods and beverages, went the ERP route first. Mott’s just completed a rollout of R/3, done to replace aging mainframe systems and get the entire company to use clean and consistent data. Now that it’s replaced the backbone of its financial and manufacturing systems, says senior vice president of finance Audrey Solnit, it’s time to look at making further inventory reductions by introducing SCM software.
The list of SCM software vendors that Mott’s is examining is the short list for many companies. It includes the four leading suite vendors: Manugistics; I2; American Software’s SCM division, Logility; and PeopleSoft’s Red Pepper. (A fifth vendor of a full suite, Chesapeake Decision Sciences, in New Providence, New Jersey, has clients in the process chemical and semiconductor industries.) Growth is so hot right now for integrated suites of planning software that the industry is already beginning to consolidate via acquisitions and partnering.
“We expect that the stand-alone vendors will have an increasingly hard time having a viable market and that we’ll see increasing consolidation,” says Enslow. She adds that ERP vendors like Peoplesoft, SAP, and Oracle “will either build, acquire, or partner to gain SCM options.”
And for good reason. Mott’s will base its choice of SCM software on the compatibility between the software and its ERP software, R/3. The Stamford, Connecticut, company has learned lessons from its migration to R/3, which began in 1994. “You can’t separate the supply chain from the financial piece of the business,” says vice president of logistics Chris Young. “The fact that we have an enterprise system now means we’re sharing common data. If you look at a [legacy financial system], where we typically got it wrong was in the interfaces between those packages. The data wasn’t in real time.”
Because of the company’s new one-number orientation, the partnership between the SCM vendor and SAP is the single most important criterion Mott’s will use when it chooses SCM software, say Solnit and Young. “If we get an upgrade from SAP or from a third-party vendor, I do not want to be in a position where they are pointing fingers at why the software broke down yesterday,” says Young. “I can’t wait two days for someone to fix it while they argue over whose problem it was.”
NO PAIN, NO GAIN
Mott’s concerns are well-founded. Like ERP, SCM software doesn’t come without some pain. The biggest issue holding back the growth of SCM, says Enslow, is a lack of skills on the part of implementers and users, the latter typically planners who need significant amounts of training both in the software and in the theory of constraints. CFOs considering investing in SCM should be aware that if they spend $200,000 on software licenses, they could spend as much as $200,000 to $400,000 on implementation services and another $200,000 on training.
Some companies are making the investment work by moving ahead in modules. Often, says Enslow, a company will start with a component such as demand planning, spending, for instance, $300,000. After recouping its investment in the first 18 months, it funds the next SCM phase or even an ERP implementation, she says.
That’s much the way Herman Miller’s Mellon approached the challenge of persuading management to invest more than $1 million in a new way of doing business. He knew management wouldn’t agree to a wholesale implementation of unproven software. Modules were necessary, if only to convince the company that the software would work. “If we had to build critical mass by training a lot of people and getting a lot of understanding about it, we probably couldn’t have gotten enough yeses,” he says. “You’ve got to start with some little wins.”
Mellon worked with I2 to get one plant up and running fast. “We trained 10 to 12 people in one plant, got them to be really good at it, implemented the software there, and they started getting good results,” says Mellon. “That created a giant pull from the organization.”
Herman Miller still has a ways to go. In April, the company finished rollouts to its five plants, but it had yet to implement a multisite planner. When that’s finished, says Mellon, he expects to shave another week off inventory and lead time. “We’re already getting a lot of bang for the buck,” he says. “When we finish, we’ll get a lot more.”