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Gray and Lopker

By Chris Gray and Pam Lopker

In an industry where cooperation is critical and supply chain efficiency determines success, an e-business strategy based on lean techniques is the only way to stay competitive.

For nearly a century, the focus in automotive manufacturing was on improving assembly and inventory efficiencies. But times have changed. Today, distribution bottlenecks are as feared as manufacturing bottlenecks were a decade ago. This new focus on the supply chain has changed the way successful organizations do business.

When staying competitive means staying lean, smart manufacturers are making the most of e-business. Before long, everyone who wants to survive will have to do the same.

As you may know, there’s more to e-Business than industry exchanges, selling over the Internet, reverse auctions, and sourcing of indirect materials and supplies.  Effective e-Business is a spectrum of activities that touch every core business process: marketing and sales, resource and capacity planning, inventory replenishment, manufacturing process flow, billing and accounting, direct material procurement, supplier relationships, engineering and supplier collaboration. It’s the way to make the entire supply chain a competitive weapon.  

Fortunately the automotive industry is, in general, better prepared than many other industries to take full advantage of e-Business potential.  Even those suppliers not already involved in e-Business know that closer customer/supplier collaboration is the future of the industry. 

E-business is the way the industry will do business tomorrow, and participation will not be a matter of choice. How well each organization fares in this new environment will depend on how it prepares, starting right now.

Here are some common sense pointers for making e-Business efforts pay off:  

1. Collaborate to survive

The foundation of e-Business is collaboration -- up, down and across the supply chain.  Those who get serious about collaborating with their distribution channels, their suppliers, their engineering partners and all the members of their extended supply chain, and who are prepared to ensure profitability for all trading partners in the value process, will reap the benefits of competitive advantage.  Those who don't will fall further and further behind.  

The vision of any company’s competitive future must include successful partnerships and profitable supply chain partners. 

2. Implement supply chain replenishment and delivery processes now -- not later.

Those who reap the rewards of larger market share and competitive advantage will be those who think about their manufacturing, supply chain and delivery processes first – before implementing new systems. One of the great disappointments of the just-in-time revolution was that most companies focused on just-in-time supply rather than just-in-time production.  The result: a shift of work-in-process inventory to the next tier suppliers, and from that tier to the next.  But the anticipated benefits – better flow within each individual enterprise, better flow across the entire supply chain, and massive inventory, lead time, and cost reductions – have been elusive. 

The business case for lean manufacturing is proven. For those who have not begun to implement lean manufacturing processes, now is the time. For those committed to lean practices in their own factories but still working with suppliers operating traditional “batch and queue” operations, it’s time to help those suppliers see the light. In addition to continuous flow inside the four walls of the factory and among trading partners, it’s essential to have continuous flow between sites.  Unless and until everything is integrated, the lean, efficient areas are no more than islands of flow in a sea of waste. 

3. Create a Perfect Pull mechanism ACROSS the supply chain

In their book, Lean Thinking, Womack and Jones ask, “How can you tie all the parts of a whole value stream together when they can’t be conducted in one continuous-flow cell in one room?”  The answer, of course, is to implement pull systems that can signal replenishment based on “customer synchronous” demand.  Back across the supply chain, from process to process to process, the basic logic is: “sell one, buy one” and “ship one, make one.” 

It would be ideal to implement visual signals across the entire supply chain. Within the four walls of a plant, it’s possible to encourage lean manufacturing with mechanisms such as KANBAN cards, KANBAN squares, containers that empty to signal need for replenishment, and andon signaling. But for the purpose of signaling a distant trading partner, such mechanisms may not be practical or even possible. 

The good news is that another kind of “visual signaling” across the supply chain is possible using information systems with fairly simple replenishment logic and messaging techniques. The basic idea is to establish inventory buffers at appropriate points across the supply chain, along with the replenishment quantities (KANBANs) required.  Replenishment can be based entirely on actual consumption downstream in the chain; when one KANBAN has been used, a signal can be generated to replenish the inventory. Depending on the source, the signal may be a purchase order (“buy one KANBAN”), a transfer from another location, or a manufacturing authorization (“make one KANBAN”).  Depending on how far the organization has progressed on its way to a lean supply chain, one KANBAN may be a single unit, a box, pallet, or truckload. 

In a lean manufacturing environment, efficient inventory buffers compensate for demand fluctuations and non-continuous supply processes. Depending upon how responsibilities for replenishment are divided, these inventory buffers can be either the organization’s internal responsibility or the supplier’s responsibility.

Real-time monitoring and messaging are crucial to implementing perfect pulls across a multi-tiered supply chain.  With the right logic in place, it’s possible to operate an entire system as if it were one continuous flow-cell in one room. 

 4. Don’t assume planning is old-fashioned

Inventory doesn't make itself, and resources don't appear out of thin air. A visual factory is a good thing, and a visual supply chains is even better.  But linked processes and synchronized production work only when there is material available to pull through the chain, and when there is sufficient capacity to make the volume required.  That’s why it is essential to have functioning planning processes like: 

  • Sales and operations planning applied to the supply chain, linked to appropriate capacity planning techniques.

  • Master scheduling at key points across the supply chain.

  • Effective material planning techniques, either in detail or in aggregate, depending on the processes.  

  • Supplier scheduling. 

5. Share when possible, shield when necessary

Information sharing and collaboration are key to deriving maximum value from the supply chain.  However, certain proprietary information constitutes the only bargaining power that suppliers have with their trading partners. The only way to keep products from becoming commodities is to protect their engineering content – the bills of material, process, and cost information.  In other words, in every supplier-customer relationship there is certain information that must be shielded. 

It seems obvious that internal, proprietary engineering content will not, and in fact should not, be shared. Pure self-interest will keep this information shielded from customers and out of “centralized” information system processes.  This need to shield information has special implications for centralized supply chain management and supply chain planning approaches. 

In the “shared” model of centralized supply chain management that large public exchanges advocate, each and every supply chain partner must use the same system for most, if not all, supply chain functions. Typically this means that each supplier must share their proprietary data, and then either: 

1.   Replace their existing enterprise software with the dominant supply chain partner’s choice of software,

or

2.    Add an additional layer of software functionality that may duplicate enterprise functions already in place, while incurring increased costs in the process. 

Because most suppliers participate in at least one and often in many supply chains, the shared model raises problems. It’s difficult to choose an appropriate system, to get everyone to agree, and to cope with the multiple packages, with similar functionality, that may be needed to interface with the various supply chains.

There’s also the question of how to deal with products and materials that are common across multiple supply chains. Should there be separate planning and signaling processes for each dominant customer supply chain? How should existing inventories be allocated to different customers and supply chain planning processes? Although in theory there are advantages in the ability to rapidly reflect schedule changes back through the supply chain in this approach, there are serious practical problems in scaling this kind of centralized application across a single large supply chain, not to mention the problems of dealing with multiple supply chains. 

In the “shielded,” or collaborative, supply chain management model, each supply chain partner can retain their enterprise systems and can do as much or as little planning as they choose. If they choose to do detailed material planning, or if they’ve been able to create a lean manufacturing environment with repetitive production, this information can be used to drive the supply chain resource planning activities for all suppliers.  Internal planning remains under the control of internal systems and only the appropriate demands are passed across to suppliers. These suppliers can, in turn, do their internal planning and pass demand on to the next tier. 

In the future, many companies choosing to use a collaborative model will likely decide to implement a mixed mode, neither totally centralized nor totally decentralized.  For example, when an interior systems integrator uses just-in-time sequenced manufacturing, it may make sense to set a single planning approach above the plant-specific data and simply eliminate all other site-specific planning.  Since the same company owns all the configuration and process data, there is no issue with “giving away the corporate jewels.”  And the single planning mechanism makes it possible to drive schedule changes across a large portion of the supply chain as rapidly as possible. 

Where this kind of integrated planning and execution makes sense, it depends upon a software architecture that separates the base information from the application itself.  The diagram illustrates the structure for retaining existing systems and enterprise information.

6. Focus e-Procurement on value, and bring the highest value functions online first

The big payoff in purchasing is in direct materials, which typically accounts for more than 50 percent of product cost. Direct materials typically are either highly engineered or high volume, and typically not commodities.  Companies that focus their purchasing efforts on buying office supplies and MRO materials more efficiently are not focusing where the most money can be saved. Smart companies implement the functions that give them the "biggest bang for the buck" first and fastest.  

The coming wave of e-Procurement, specifically focused on direct materials, committed relationships, and supplier scheduling and releasing, will be private trading exchanges. Successful organizations need them, now, not later.  

7. Make the most of your IT investments

One of the promises the major software suppliers have made during the last ten years has been "enterprise-wide" integration of all business processes.  One system. Standardized software and uniform business processes.

Few companies have fully realized the benefits.  Rapid consolidation of the automotive supplier community as a result of mergers and acquisitions has only compounded the problem.  Larger companies have found themselves saddled with more systems, not fewer.  Because software packages did not fit all companies equally well, each division ended up with its own "tailored version."

It’s not possible, or practical, to get rid of plant specific systems. They’re still essential for basic information maintenance such as inventory records, bills of material, and process data; for master scheduling and material planning, at least as we’ve known it in the past; and for things like plant and process monitoring. What’s needed is a way to interface all the separate plant level systems to accomplish important cross-enterprise or cross-supply-chain functions like centralized order management (“one face to the customer”) and interplant signaling and synchronization.  Forcing all sites to the same system is impractical. 

The solution is a complete rethinking and architectural redesign of the way applications interact with enterprise data. In future systems, many key applications – planning, order processing, release management – will be “disconnected” from the basic enterprise information maintained in company systems.  Instead of being part of the basic transaction systems that are plant specific, these key applications will be elevated to the supply chain level. Basing essential supply chain management functions on the data that is already maintained by site-specific enterprise allows companies to retain existing software and minimizes the cost of making changes.

Recent advances in information system technologies have made it possible to develop object-oriented supply chain management software built around messaging middleware, and designed to work with plug-in messaging objects to any ERP or host database system.  As a result, there is now a new breed of software that creates Private Trading Exchanges. Some of these new software products are designed to help businesses solve their supply chain synchronization problems without forcing them into replacing all their base enterprise transaction systems. 

8. Prepare to make e-Business work

Although the technology exists to support e-Business effectively, it takes more than good software to make e-Business successful. Before making the transition, companies need to ask themselves a few critical questions:

  • Are we really willing to do what is necessary to make e-Business work - even if it means focusing on internal processes first? 
  • Are we willing to make an investment in people and relationships at least equal to any possible software investment?  
  • Are we willing to put time into equipping our people to really run the business in a different way? 
  • Are we willing to invest executive time in understanding what kinds of transformations we can reasonably make?  

9. Start your engines, and race to win.

Today, global automotive supply chains are in a race for leadership, and sometimes for survival. The winners will be networked enterprises that can integrate, align, and collaborate across their entire value process better, and more profitably, than anyone else. 

For individual suppliers, the only way to break away from the pack right now is to focus on incorporating methods and systems that contribute to a “continuous-flow” supply chain.  That’s why, from now on, the companies that stay in the race will be those that know how to make the most of E-business. 

Information systems exist to make the e-Business transition possible. But it’s not just about systems. Only when the rest of the components for success are in place will E-Business pay off. Winning with e-Business means being committed to collaboration, planning, judicious sharing of information, and making the most of human resources.

Staying lean and competitive is an ongoing process. But whatever the future brings, e-Business will remain an essential for staying in the race. And those who employ it well, starting now, are the ones who will lead the pack.