Transparent dealings

“There are two major reasons for adopting cutting-edge technology,” says Anand Moodliar, general manager of the national operations centre for Spoornet, the rail unit of South African logistics company Transnet. “You want to be the best of the best, or your pants are on fire. We had a burning platform.”

Following its emergence from the Apartheid regime in 1994, the South African economy faced significant challenges. Many native industries were based in the export of natural resources, with 18% of GDP coming from logistics (the European and US average is 10%). But international sanctions, a lack of foreign investment and a high cost of capital meant its infrastructure had been neglected.

While South Africa’s economy grew by 25% in the subsequent decade, investment in the fixed transport network actually declined further. It was only when overseas markets such as China really began to explode that the gaps were exposed: Poor rail links were impeding productive capacity increases.

Government-owned Transnet handles over 200 million tonnes of rail, pipeline and port freight every year. But by 2003, Moodliar says many customers were “gatvol” with Spoornet – a South African term politely translated as ‘fed up’.

The rail infrastructure could not meet rising demand and a lack of communication and cooperation were further compounding the problem. Spoornet, which plays a similar role to the UK’s Network Rail but also owns rolling stock, realised that to address its problems it needed to examine its entire extended supply chain. Customers were invited in to iron out ways of reducing the cost of doing business. “As our production processes are intertwined with our customers’ processes, operational excellence could only be achieved with collaboration,” says Moodliar.

The ethical imperative

Sportswear giant Nike recently confounded its critics by releasing details of labour conditions in 569 of the 830 factories around the world where all of its goods are produced. While it admitted that not all stood up to the standards of working hours, fair wages and employee rights it might have liked, it was the first step in countering persistent allegations of using sweatshop labour.

Nike competes in an industry where brand is of primary importance; such criticism can be damaging. It is also unusual in having a ‘virtual supply chain’ – where all its manufacturing is outsourced – which makes providing the requisite visibility a serious challenge.

With over one-quarter of consumers claiming to have boycotted products for being socially irresponsible, ethical and environmental considerations are adding impetus to supply chain visibility projects for manufacturers and retailers. Many see corporate social responsibility (CSR) as a means of competitive differentiation.

Technology is enabling these companies to automate validation of where products come from and what materials they contain – a process previously too labour-intensive to be cost effective, particularly in countries where legal standards and factory conditions do not match those of North America and Europe. Relevant systems include unique identifiers, such as RFID, feeding into product data management, document management, reporting tools and web-based collaboration.

Recent UK health scares around food dies Sudan 1 and Para Red are examples of what can go wrong when components are not properly tracked. Many companies simply did not know if their products contained the offending chemicals, due to a lack of communication with suppliers more than one link down the chain.

While ethical sourcing is only starting to impact supply chain management, the issue of dealing with hazardous materials poses a more immediate threat – even if many companies are still to realise it. AMR Research has predicted that high-tech companies will have to invest $3 million extra in their IT systems to cope with EU regulations such as the Restriction of Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE).

Although WEEE and RoHS come in to force in 2006, they are still not getting the attention that regulations threatening to incarcerate senior management deserve, says AMR’s Eric Karofsky. “Unfortunately, executives will only finally pay attention to RoHS and WEEE when their negligent actions put them on the front page of the business newspapers,” he warns.

While the principles of ethical trade are perceived to conflict with those of just-in-time delivery, says Teresa Fabian, senior manager at PricewaterhouseCoopers’ sustainable business division, “green compliance” need not be a burden. It can encourage good business practices, such as improved product quality and safety; RFID is already helping drug companies combat counterfeiting.

But Fabian admits that the supply chain is one of the most difficult areas to apply CSR policies to. IT is often at a standing start in this area: when auditing a FTSE 250 client, she was handed not electronic records but a bulging folder of loosely bound papers. “If you do a lot of ethical audits, they can produce 20 to 40 pages of information, but it is not management information,” she says. This makes it hard to measure improvement or to influence buying decisions.

“RFID can help with visibility and traceability, but how do you integrate that data?” she asks. “Most of my clients have a simple [Microsoft] Access database for the CSR team but a different one for the financial supply chain. IT could enable a company to get a balanced scorecard picture of supplier performance but even in FTSE 100 companies very few could do that today.”

Negotiations were based on the ‘four Ts’ of collaboration: trust, between all stakeholders; timing, to expose the available opportunities; transparency, as planning could only be effective if everyone shared their strategic intents; and technology, to “hardcode that visibility into the core of each company’s processes and have everyone planning with the same data”.

Because Spoornet had to balance the differing demands of many customers using its fixed infrastructure and assets, it took the lead role in coordinating collaboration – unusual for a carrier. Frank, open discussions began on sensitive boardroom-level issues, not just transactional concerns.

To get the entire supply chain operating effectively companies had to make sacrifices, accepting that certain parts would be sub-optimal. For example, the carrier had to change schedules to match customer requirements; suppliers had to ensure that they had teams ready around the clock to off-load stock.

This pushed costs to end-point processes, reducing the need for costly asset investment in the infrastructure between.

The technology component of that was provided by supply chain specialist i2, whose Freight Matrix software was hosted by local firm eFreight on a pay-as-you-go basis, to spread the huge costs of the transportation management system and avoid potential ownership disputes between stakeholders. It ensured there was “one indisputable version of the truth”, says Moodliar, so that all stakeholders were working from the same data. In effect, a “glass pipe” supply chain was created, enabling all players to track the movement and whereabouts of their freight at all times.

Closed loop

The Spoornet story clearly illustrates the advantages that cross-organisational visibility can bring to every link in a supply chain. Whether in logistics, manufacturing or retail, this combination of processes and technology can enable ‘closed-loop’ planning based on real-time supply and demand data, and then further planning using execution information.

The resulting increases in efficiency, speed-to-market and responsiveness to customers and partners can make a supply chain a strategic asset rather than a cost.

Spoornet improved its overall performance, increased customer service levels and improved visibility.

“If you want one measure of the state of European supply chains, it’s inventory,” says analyst Guy Dunkerley of AMR Research. “Our own research has shown that the leaders compared to the laggards have 50% less inventory, 20% more perfect orders and have got lower costs equivalent to 5% of total revenue.”

While most supply chain projects have historically focused on product and finance, the missing element is data, says consultant David Smith of systems integrators Capgemini. Data needs to be shared and synchronised – sometimes even in real time – for the sort of efficiencies described by AMR. As with the common IT complaint, supply chain links must start to look beyond their own silo. “You don’t save any money by putting things in a warehouse efficiently,” Smith notes.

But not every supply chain has the same universal pressures bearing on it as South Africa’s transport network, and not every company is equal in that chain. Large, influential companies can demand suppliers fall in with their demands. This has its own challenges, ensuring that smaller, innovative suppliers have systems that are mature enough to fit the requirements.

But the real problem is for smaller companies, who struggle to persuade their suppliers or customers to share the sort of data they need for more advanced planning. Rob Scholtz, who is in charge of group planning and fulfilment at PG Bison, a provider of logistics and panel products such as flat-pack components to the furniture and building industries, says his company is too small to enforce the sort of cooperation that supply chain gurus propose.

“Collaboration in our industry is very difficult because we are a minnow in terms of raw material purchasing,” he says. “When we buy from the big European paper manufacturers we probably buy one-tenth of what everyone else buys. We can’t really collaborate. We could love to collaborate more, but the opportunity for us is, how clever can we be in that inbound supply chain, in terms of taking a bit of lead time out, or can we buy differently?”

Imbalances in supply and demand can cause similar problems. “Being minnows and too much demand can stop collaboration in its tracks,” says Scholtz. So PG Bison concentrates more on collaborating with customers than suppliers, building on the relationships cemented with an existing real-time ecommerce site to get rolling demand forecasts, and by watching its inventory.

Even if data is shared, there is the issue of reliability. “Right now data accuracy is so bad that visibility is no use,” warns Gartner analyst Dwight Klappich. Automating decisions based on bad data can have disastrous consequences.

“When people are doing it manually they don’t care about the accuracy and the cleanliness of the data,” says Stan Hankins, director of integrated supply chain solution delivery at IBM. “So you then go and automate something and you’re relying on a particular data field or data source, and the system thinks it’s ok. Even if you test it, it will pass because the format is ok.”

IBM encountered the problem of inaccurate data when it overhauled its own supply and fulfilment systems. “[We discovered] we were sending orders to China [for products] that should be built in Mexico,” says Hankins.

It is here that much-hyped RFID technology can make a real difference. By transmitting information via radio waves from product to management system, these tags can automate the provision of information on what and where the goods are at all times. “RFID could eliminate data transcription or quality issues, for instance in countries where employees are not literate,” says Klappich.

“You’re not going to get a lot of money out of RFID by seeing it as a replacement to the barcode,” says Capgemini’s Smith. “The use of tags and readers only gives you a cost – the value is in what you do with the data they provide.” The difference RFID provides is one of timeliness and granularity.

Smith says that global data synchronisation (GDS) technology can allow companies to share static data, such as price and description of product, then blend it with real-time status information from RFID to make sure it arrives when and where it is needed. This can enable modification of orders in progress as levels of supply and demand change.

Other technological components of supply chain visibility can include an electronic data interchange (EDI) for transferring data between different companies, web portals for partners to provide updates to each other, resolution workflows and rules engines, and reporting tools to filter alerts and enable management by exception, says Razat Gaurav, transportation solutions executive at i2.

All this underlying technology can be expensive, and predicting return-on- investment is difficult because so much depends on how much value each company puts on the ability to plan effectively.

But Theo Quick, senior consultant with LogicaCMG, says that in well-balanced supply chains the costs can be spread across all of the parties in the chain: “[So] wherever I am within the supply chain, I only have to talk to people above or below me in that chain – I don’t need to know everything. So as long as the standards are in place to interrogate beneath me and that then ripples down, you have that integrated supply chain with that visibility.”

Even without complex and costly high-level integration, this increased visibility can be “the cornerstone for any future process performance”, says Harri Vesa, manager for marketing business planning and processes at paper supplier UPM.

“You cannot start improving unless you know where you are.”

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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Supply chain management