The Super-efficient Company Class 5: IT Enabled Supply Chain Mgmt
Michael Hammer Case Summary by: Charles Hong
Main Takeaways
Main Reason to implement Inter-company System
Many companies became very efficient within the companies. However, Cross-Company processes are not coordinated. A vast number of activities end up being duplicated. The same information is entered repeatedly in different systems. The same forms are filled out and passed around multiple times. Scores of employees are assigned to manage the cumbersome interactions between companies. Though this inefficiencies are hidden in the accounting system, which tracks only what happened within your own walls, the cost are real, and they are large. Efficiency ends up at the edge of a company. Here are some companies to break down the corporate walls to maximize the efficiency through its supply chain and collaboration with other companies which don’t have any conflict of interest. Streamlining intercompany process is a next frontier of efficiency.
More in-depth Summary
Tearing Down Wall (p. 215)
Geon, a Chemical company, shows the example of uncoordinated inter-company process and great reward of the integrating the processes.
Geon was a vertically integrated business. In the mid-1990s Geon focused its energies on breaking down the walls between its units to reduce costs and create greater values for customers by implementing ERP to integrate and simplify the core business. The percentage of order shipped on time soared. Complaint almost vanished. Geon’s cost dropped by tens of millions dollars, and its working capital fell form more than 16% of sales t less than 14%.
However, after deciding to focus on entirely on the compounds side of business, which is high value adding activity of Geon, Geon divested its VCM and resins operations to a joint venture with OxyVinyls. It became its primary supplier of materials. Though it was strategically sound, it caused disaster in operations. The work was no longer coordinated. Information was no longer shared, and overhead and duplication were reintroduced. Data had to be entered twice, resulting in an 8% error rate on orders. Time to process orders jumped as communication became formal and interfaces are more complex. On the production side, as Geon and OxyVinyls became less aware of each other’s inventories, shipment and level of demand, their manufacturing process became more irregular. Its inventories increased 15%, its working capital increased 12%, and its order fulfillment cycle time tripled.
Finally, two companies decided to tightly integrate their forecasting process. Right after Geon calculated its forecast based on the information from customers, it transmitted the forecast to OxyVinyls through internet. OxyVinyls incorporated it to forecast for its resins and monomers. Ordering fulfillment process became tight. Geon translated the material it needed from OxyVinyls within 24 hours of receiving orders and transmitted automatically to OxyVinyls. Later, Geon integrated its process with its customers. It automatically checks how much of its compounds a customer has in stock. When customers’ inventories go down below the agreed-upon level, Geon automatically sends replenishments and cutting out many traditional stock checking and ordering activities. Through Geon’s efforts, the processes of 3 sides have been integrated and now all managed as a single process across the boundaries of the corporation. Payoffs are as follows; Geon’s error rates in placing order became 0% from 8%. Its order-fulfillment cycle time has fallen back to its earlier level, and its inventories reduced 15%. Its labor coast has been fallen as no-value-adding work has been eliminated.
Relocating Work (p. 216)
IT is not a solution to many business integrations. It is glue to combine and work as one. More important innovation is the change in the way people think and work. Even though the concept of supply and chain integration has been around for some time now, companies have had trouble making it a reality because they have viewed it as merely a technological challenge rather than as a process and management challenge. If you can discover new and better ways to work, you can shift activities across the corporate boundaries even though it is officially your customers’ responsibility.
Here is the example with IBM. IBM is using this approach to manage customers’ orders. In 1998, IBM estimated that it spent $233 to handle each order. The overhead was caused by the wall separating its customers and IBM. Most of this cost incurred during the process to place order. IBM integrated its order fulfillment process with its customers’ procurement process. Customers do most of the ordering process. It is win-win strategy since IBM reduces its cost and customers get the work done correctly. IBM reseller can reduce its inventories 30%. It reduces its channel inventory. IBM shifted its ordering process to the hand of its customers.
On the other hand, Since IBM’s corporate customers’ use standardized configuration, IBM limits the number of configuration the employees of corporate customers can order. IBM reduced the error rates caused by corporate customers’ order. It was about 50% by ordering wrong configuration. It helped to reduce the time and coast to clean up the mess result from the inaccurate orders.
Simplifying Supply Chains (p.218)
HP has taken more aggressive step in supply chain integration by restructuring work in cross-company processes. HP has outsourced much of its manufacturing to contract producers, and they buy the case of HP monitors from injection molders. The molders buy its material from plastic compound producers, which buy their compound from resin maker.
It is very complicated process, and HP has no idea who is the suppliers of the raw material for its monitors. It was very hard to meet the market demand in time. HP lost its timing to supply the computer monitors in time. Timing is very critical in computer business. For example, the order specification is changed on average 4 times in the process before it is completely filled to respond the shift in market demand. And the disparity in scale between the participants in supply chain was also problems. HP decided to assume the responsibility to work all the participant work together. HP set up a computer system to share information among all the participants. HP’s procurement dept. manages the entire process, monitoring performance of the upstream suppliers, and helping disputes relating to payments, and keeping supply and demand in balance.
The integrated process has enhanced the performance of the supply chain. HP’s order instantaneously passes down through the chain, allowing everyone to react quickly. Since HP deals with resin suppliers directly, it provided resin suppliers aggregated order with single large bill. For resin suppliers, it gets the simplicity and security of dealing with one large customers rather than a host of small one.
Scale of Disparity
From Coordination to Collaboration (p. 219)
“If you and I supply to the same customer with different products, we are not competitors, then who are we?”
Collaboration between General Mill and Land O’Lakes.
General Mill (GM), consumer packaged goods company, led the industry in squeezing cost out of its supply chain. However, the company leader realized that they would have t move beyond the wall of its company to find new cost saving opportunity. First idea was to find a new approach to the distribution of the refrigerated products. Usually, a refrigerated truck laden with Yoplait leaves the GM warehouse with less than a full load. Truck had to make many stops to unload. When there was problem on the way to supermarkets, such as accident and traffic, the truck often could not make its delivery on time to the final supermarket. GM had to deal with frustrated supermarket and lost sales.
GM realized that it could solve the problem by integrating its distribution process with another company. GM found Land O’Lake (LOL), a butter maker. LOL had any conflict of interest with GM. Two companies agreed to combine their distribution network, giving them the scale necessary for high efficiency. Today, GM yogurt and LOL butter ride in the same truck on their way to the same supermarkets.
With combined process, GM trucks go out much fuller than before. Since they are delivering more products to each supermarket, the y make fewer stops and suffer fewer delays. With lower cost and higher customer satisfaction, two companies are planning to integrate their order-taking and billing process as well. They are cosuppliers.
Some companies in Chicago area are now sharing the warehouse space to reduce the cost since 82% of warehouse space is being used. US Trucking industries also try to minimize cost by merging their logistic process-reducing the number of trucks returning empty. Any given time, 20% of nation’s truck are traveling empty, raising cost for both suppliers and truckers.
Make it Happen (p. 221) - How to implement inter-company system.
1. Scoping
· Identify the appropriate business process to redesign
· The process should offer substantial opportunities to enhance overall performance, and it should already be operating at peak internal efficiency.
· Select a partner
· The partner should have a strong interest in the initiative; be experienced with internal process redesign; make decisions quickly; and have a collaborative culture.
2. Organizing
· Establish an executive steering committee
- Steering committee should convene early and should include leaders from both companies. The committee should define each company’s investments, roles, and share of benefits; establish procedures for resolving disputes; and establish performance measures and goals.
· Convene a design team
- The design team should have between 6 and 12 members committed full-time to the project. The team should include members from both companies and should include experts in existing process, in processing redesign, and in change management.
3. Redesigning
· Design the new, integrated process in a way that fulfills performance goals.
Principles are as follows:
- The final customers come first.
- The entire process should be designed as a unit
- No activity (i.e. data entry) should be performed more than once.
- Work should be done by whoever is in the best position to do it.
- The entire process should operate with one database.
4. Implementing
· Roll out the new process
- The process rollout should occur in clearly defined stages, it should focus on achieving benefits early, and it should move quickly to maintain momentum.
· Communicate
- Communication should occur regularly, reach everyone in both companies, emphasize the rationale and expected benefits of the project, and define expectations for every employee.
Case Discussion / Digest Questions
N/A
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