Rapid response

Sudden, unexpected events play havoc with supply chains – a lesson that Ericsson, the Swedish telecommunications equipment company, learnt to its cost in 2000.

In March of that year, a lightning strike in New Mexico caused a fire at a Philips semiconductor plant – a key source of microchips used by Ericsson in its mobile phones. With the Philips plant closed down for six weeks, Ericsson's carefully honed production plans were thrown into disarray. Lost sales amounted to some $400 million, and the company's share of the competitive mobile phone market fell away drastically. Ericsson later cited the fire as a contributory factor in its withdrawal from the mobile handset market.

A lightning strike may be a rare occurrence, but manufacturers regularly deal with unexpected events, or 'exceptions', such as strikes, breakdowns, materials shortages, and unanticipated surges in demand. Moreover, as manufacturing, distribution and retailing organisations increasingly rely on collaborative supply chains, using networks of partners in order to design, build and deliver products, the negative impact of supply chain 'exceptions' is potentially heightened (see box, The impact of supply chain exceptions).

What is needed, say supply chain experts, are systems that alert users when exceptions occur, that provide a framework for appropriate corrective action, and inform users of the likely 'knock-on' effects of those actions. In short, they must effectively bridge the gap between the carefully planned expectation and the volatile reality of a supply chain process.

Most installed supply chain management software applications are not currently capable of doing this. They focus primarily on the creation of manufacturing plans and schedules, but fail to address deviations between planned and actual activity in the supply chain, (although planning tools specialists such as Manugistics and i2 Technologies are increasingly introducing event management capabilities into their products).

Automotive manufacturer Nissan, for example, uses planning and optimisation tools from software components supplier Ilog at its Sunderland, UK plant. Using Ilog's technology, Nissan creates plans that enable it to make efficient use of its assembly lines, and to forecast the likely effects of increasing or decreasing output on existing manufacturing capacity, says Michael Simpson, production controller at Nissan UK. But what Nissan does not have in place, he adds, are tools that enable it to respond to unexpected events in a real-time, reactive manner; its planning software tools are designed for forecasting optimum situations, not coping with unexpected events.

The shortcomings of advance planning and scheduling tools have given rise to the emergence of a new category of supply chain applications: supply chain event management (SCEM) software. "Exception-based management is becoming a much more critical capability across the supply chain," observed analysts at IT market research company AMR Research in early 2001. "Supply chain velocity, and the resulting need for micro-level, real-time event and exception information, will drive the market for SCEM. While significant investments continue through the optimisation phases (for example, supply chain planning), [these tools] are not capable of the quick response necessary for day-to-day, let alone hour-to-hour exception management," they explain.

"Perfect planning is no use if something goes wrong in the supply chain," concedes Christophe Gasc, UK managing director of Ilog. "Organisations need systems that keep them informed of delays or exceptions on a real-time basis, and


The impact of supply chain exceptions

Supply chain exceptions typically result in three negative outcomes for businesses, says Navi Radjou, an analyst at market research company Forrester Research.

First, he says, exceptions can hamper a manufacturer's ability to balance supply and demand. As a result, it may lose opportunities to ramp up production plans fast enough. An example: In 2000, a shortage of graphics chips for the Sony Playstation 2 games console meant that the company shipped around 50% fewer units than planned in the US market.

Alternatively, it may fail to wind down production plans and component orders in the face of unanticipated drops in demand. In 2001, for example, Cisco was forced to write-off over $2 billion in inventory and purchase commitments after failing to anticipate the downturn in the worldwide telecommunications industry.

A second negative outcome of supply chain exceptions can be the high cost of correcting them. In the absence of a formal process to deal with exceptions, most manufacturers switch into 'firefighting' mode, dealing with problems on a case-by-case, ad-hoc basis. This diverts valuable time and resources from day-to-day operations, and forces manufacturers to stockpile more inventory than they need in order to cover themselves against unexpected events.

Third, the 'firefighting' approach to exceptions leads to further, undesirable 'knock-on' effects. In this mode, manufacturers or distributors tackle only the symptoms, rather than the root cause, of an exception.

"Facing an upward demand swing, a PC maker may lack the time to do a root-cause analysis on what actually caused that demand increase. Instead, its reflex may be to tackle the symptoms – inventory shortfall – by ramping up capacity and expediting shipments to its retailers. A root-cause analysis would have revealed that marketing doesn't communicate promotion plans in advance to production managers," says Radjou.

Moreover, managers may be oblivious to the negative side-effects of their corrective actions: "For instance, if the PC maker overreacts to every single order increase by pushing all assembly lines to operate at 100% capacity, its shop-floor equipment could break down – just when its demand ratchets to an all-time high."



that enable them to adjust future planning parameters."

With this in mind, Ilog is positioning its 'business rules' components as SCEM tools. "While traditional supply chain applications take care of long and short-term planning, SCEM handles ‘immediate' planning, adjusting plans and creating new ones to accommodate changing conditions," says Gasc.

RHM Foodservice (RHMFS), for example, uses event management and alerting technology from UK-based software company Categoric Software in order to keep employees informed by email of situations that need real-time remedies. The company, which provides food products to catering organisations, needs its sales and finance employees to know immediately when products are proving hard to shift, when stock levels are low, when invoices need to be adjusted, and when customer orders are overdue, explains Toby Barber, IT manager at RHMFS.

Before implementing Categoric's applications, he says, "managers had to spend ages poring over massive, paper-based stock reports, trying to identify when, why and how exceptions had occurred." Now, he says, they receive an automated email alert as soon as the software identifies an exception. RHMFS is currently experimenting with issuing mobile phone SMS (short message service) alerts to exceptions to sales employees on the move.

Similarly, supermarket chain Sainsbury's has implemented event management applications from Eqos that keep track of on-shelf availability levels, customer returns, stock turns, and uptake of promotions. The software alerts managers when they exceed or fall short of preset parameters. "In retail, sophistication of response is everything. Supermarkets have traditionally battled it out on margins, but increasingly, the real battleground will be their ability to respond to customer buying trends and product availability," says Mike Quinn, CEO of Eqos. "The beauty of supply chain event management is that it doesn't just give managers information – it enables them to specify what reports and alerts they want, how they want to receive them, and when."

SCEM tools, claim executives at SCEM specialist Vigilance, are, "generating business excitement because of the tangible, immediate and sizable dollar benefits created by identifying remedy alternatives." But the SCEM market is immature and populated by a host of companies from different technological backgrounds.

For example, a slew of start-ups have sprung up in the SCEM market in recent years, including Vigilance, Trilion, Eventra, Categoric and Sourceree, while another supplier, Viewlocity, has re-positioned itself from being a supplier of integration middleware tools to being an SCEM specialist.

Meanwhile, other suppliers in the integration tools market, notably webMethods and SeeBeyond, are marketing their integration hubs and associated business process management tools as the underlying foundations for an SCEM system. They are able to do this because messages from one system to another are read as they pass through their hubs.

In addition, leading supply chain management companies, such as Manugistics and i2 Technologies in supply chain planning, and Descartes Systems and Manhattan Associates in supply chain execution, are starting to embed event management capabilities in their products.

Finally, the larger vendors of enterprise application software are also extending into event management. PeopleSoft, for example, has partnered with SCEM software specialist Vigilance, while Oracle licenses business rules components from Ilog and embeds them in its Advance Planning and Scheduling product. Similarly, SAP, JD Edwards and QAD all provide manufacturing customers with some event management capabilities.

"SCEM from this source is particularly suitable because the integration with the ERP system has already been made, reducing integration costs and time to return on investment," say analysts at AMR Research.

This is a compelling prospect: integration is the biggest technological challenge facing any organisation that plans to implement SCEM technology, since the data that 'feeds' an SCEM system resides in a wide range of enterprise systems, including financial, manufacturing, supply chain, sales and customer service applications.

Arguably, the biggest challenge is not technical, but business-focused: the identification of parameters that make an event 'exceptional' and the translation of these into the business rules that underpin event management technologies.

Mike Frandsen, general manager of supply chain products at PeopleSoft, says that, through the company's alliance with Vigilance, it plans to initially tackle three event management scenarios for its customers: notifying manufacturing staff when component supplies will be late, in order that manufacturing schedules can be altered; informing customer service staff of late deliveries, so that they can warn customers of the delays; and alerting field service employees to problems at important customer sites, so that they can schedule a visit.

The need for managers to identify particular 'pain points' is why many choose to implement SCEM systems with the help of a consultancy with specific vertical market expertise, such as Aspen Technology in the energy sector, explains Thorgeir Einarsson, chief executive at Categoric.

"These rules are hard to define. What is 'late' for component deliveries? One minute or one day? You have to work out acceptable limits, and who needs to be informed' when those limits are crossed. To manage in real-time, you have to have a pretty good idea of the problems your organisations continually comes up against, and how they are currently tackled," he says.

Supply chain event management (SCEM) products support a range of response-oriented business processes.

According to Nigel Montgomery, an analyst at market research company AMR Research, they include the following:

SCEM provides ongoing information about supply chain processes, workflows and events, including the current status of inventories, orders, shipments, production, and supply.

SCEM helps to support real-time exception management through alert messaging, which proactively warns a decision-maker if an action must be taken or if a trend is emerging.

SCEM supports decision-making by assessing what will happen if specific actions occur, or recommends that an action be taken based on optimisation methods and trend analysis.

SCEM enables a decision-maker to change a previous process, such as diverting a shipment or expediting an order. Control also extends to the automation of actions to augment or replace human intervention.

SCEM provides measurements, often key performance indicators (KPIs) and metrics, for assessing how well the supply chain performs.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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