by Keith Carruthers MBA, SCMP

Welcome to Strategic Sourcing International's blog on Supply Chain Management. It is our intention to provide information on the topic of Supply Chain Management that we hope you enjoy, find useful, or at least find somewhat entertaining. Feel free to provide us with any feedback you may have. For more information on our organization, please visit our website through the link listed on this page. Enjoy!

Monday, May 21, 2007

ERP implementation is about process

Enterprise Resource Planning systems have exploded in popularity in recent years as organizations try to gain control over their businesses, realizing that to truly succeed, they need to view the business holistically, as an integrated system, focusing on the sum of the parts.
These systems bring with them obvious complexity, as the organization moves towards setting up one common database of data, to be drawn on by all areas of the business. Understandibly, this change in technology structure brings with it huge potential savings, including but not limited to:
- elimination of duplication of data storage, work tasks, etc
- everyone focusing and using one source of data
- improved security features
- Greater access to real time information, often not requiring the extra work to turn the data into information
Although these gains are significant, the greatest gains are often non-technology related, as the business streamlines it't business processes during project implementation.
This all sounds great and if so, what would keep companies from moving into the ERP generation?
If we set aside the staggering cost of these systems (which will naturally limit small companies from making this technology change), implementation failure rates are absolutely staggering. Some quote them to be in the 70% - 80% range. This not only results in wasted financial resources, but can effectively shut a business down, causing irreparable harm to the business' relationship with its customers.
So why then do companies so often fail at implementation? The biggest reason is their mistaken perception that these implementation projects are all about technology. They are not, they are about a change in the companies fundamental business processes, a process I like to refer to as a "corporate heart transplant". These companies are in effect changing most things about the way they conduct their business. As a result, there is often a large amount of new tasks to be done, tasks that are not often seen as a direct benefit to the person doing the extra work, but are absolutely essential when looking at the big picture for the organization. Therefore, change management becomes a critical success factor in the project, one that is often overlooked by the companies entering this huge change.
In summary, I think it is important to go into the ERP world with one's eyes wide opened. Despite the huge risk to the business by failing at ERP implementation, the potential benefits to the business are astronomical, and can often yield a quick competitive advantage once implementation is complete.
Keith Carruthers, May 21, 2007

Saturday, May 5, 2007

Do stockless inventories save money?

During a recent academic class I was participating in, a discussion took place regarding differences between traditional manufacturing systems, just-in-time inventory systems, and stockless inventory systems. This discussion was focused on the idea that although companies can save money going from traditional manufacturing systems to just-in-time systems (basically by pushing the responsibility for storing materials back to the suppliers), they could actually achieve even more savings by moving to a stockless inventory system.

In a traditional manufacturing system, inventory exists at the suppier, in the manufacturer's raw material warehouse, and on the shop floor. Moving to a just-in-time system would reduce the amount of inventory at the manufacturer's warehouse, but simply push it back to the supplier. Under stockless inventory systems, it would reduce the manufacturers inventory even further by eliminating inventories to an even lower level throughout the manufacturers organization, again by pushing the inventory back to the supplier. These apparent savings, however, can be very misleading.

Lean manufacturing systems (which is basically what we are referring to when we discuss JIT and stockless inventory systems) are much more than simply "pushing inventory back on suppliers". Although if one takes a narrow view of their organization, they will "perceive" gains by saving required square footage to warehouse goods, and costs of carrying the inventory. (Although I believe the gains mentioned above are not real and only perceived, there are other associated benefits such as the reduced cycle times illustrated below, but this is only a fraction of the total gains available by looking at the entire supply chain on a more holistic level).

Why would these savings not be real and only percieved? The reason lies in the fact that the costs in question have not been eliminated, but simply pushed back to the supplier. This forces the supplier to build these costs into the price they are charging you.

The real benefits in these systems are to use lean technologies and world class supply chain management strategies to eliminate the need for these inventories altogether, thereby removing the cost from the entire supply chain. This will result in efficiencies for all supply chain members, reduce overall costs, and allow members of this supply chain to achieve a competitive advantage over others in the industry.

A great example of these types of gains are the supply chain management systems used by WalMart, in which generation of stock replenishment comes directly from the POP systems used at the cash register. This allows for real time accurate data, allowing for quicker more accurate decisions, which in turn reduces the amount of forecast uncertainty thereby reducing the amount of inventory required (by both Walmart and their suppliers) to meet the demands of the customers.

Keith Carruthers, May 5, 2007