Information management

• What types of information flow through a supply chain?

• Some technologies you should be aware of

• E-commerce and new technology– This changes everything!– This changes nothing!– This changes something – but we are not sure

what?

The Health care Supply Chain

• Look at the first reading – Health care in the USA if fragmented, expensive and error prone. – Much of the waste and many of the errors could be

eliminated if there were better system wide flows of data.

• A good example of “quality is free”• Everything proposed here is already done in most other supply

chains• Lots of resistance because of lots of local optimization and a

massive lack of trust between chain members

– Funny thing- we tried to do the same thing with cows when I was at KSU – for the same reasons and with similar issues

The fix is seemingly a technology one

• Most of the changes will be in systems and processes

• This is why so many people think IT systems are the key to SCM

• And that is why we will talk about them today and maybe next week?

• But – without the human elements the most elegant system is useless.

Information flows

• Go back to the last class. What kind of data needs to flow in our model supply chain?

Operational information in a supply chain

• Demand forecasts – aggregate and disaggregate (Volvo story in reading)

• Inventory– How much / where / when / etcetera

• Customer orders– Due date, design, pricing, etcetera

• Production and delivery schedules– All members of the chain

• Financial flows – who owes what to whom?

Strategic information flows

• New product / service development. Design, materials choices and so on

• Responding to exceptional events / crisis• Creating the plans for the above• Facility locations • Ecetera.

An operational example – demand forecasts

• CFAR – collaborative forecasting and replenishment. In many retail settings (think Wal-Mart not The Gap) the retailer can not forecast on their own – create forecasts with suppliers based on– Real time sales data– Marketing plans – both tiers– Overall market forecasts – both tiers

• Useless unless we also know– Production and shipping schedules for entire chain

• Combined much more robust planning tools

Why is getting this data hard?

• When you negotiate do you want to tell a customer that:– You have plenty of capacity and can get the job done

fast?– You have had shipping delays from suppliers– Etcetera

• Do you want to tell a supplier that:– You need as much of their product / service as you can

get or that you have stock outs ? – Do you want a supplier to know you are having a great

year?

A strategic example– new product / service development

• Traditional design processes• Concurrent processes

– DFM /DFE / DFX

• What are the benefits of this increased involvement ?

• What are the potential pitfalls / costs ?• What is it going to take to make this happen on a

regular basis across your chain?

Increased information sharing

• The foundation of most SCM improvement efforts is speeding and or increasing information flow.

• Usually across functions and chain members

• We have all sorts of cool new technologies to do this

• None of that matters until the chain members have incentives to do this (and of course trust)

You should be aware of:

• ERP / enterprise systems• EDI – electronic data interchange• CFAR• Concurrent design – ESI• The bar code scanner / reader

– Considered by the some the most important technology of the 20th century – now it is RFID

• CRM – customer relationship management• Auction technology – especially reverse auctions

What is happening right now?

• Many experts on SCM claim that new information technologies (especially web based technologies) are the key to optimization.

• Think hard about this– What is really new?

– Can technology compensate for poor management

– Would you rather have the best systems or the best strategy (properly executed)?

E-commerce – is this a revolution?

• EDI has existed in some form for 30 years• The revolution – if there is one- comes from the

web.• A typical non-web based EDI system was used to

allow members of a supply chain communicate with each other in real time and without paper. It required:– A large investment in software – usually produced by

the buyer and forced upon suppliers

– Dedicated hardware to run the software

What is different today continued• EDI systems were then

– Expensive– Proprietary – Wal-Mart’s system did not use the same

technology as K-Mart’s- to supply to both required two investments. This was typical

– It was a big deal when the automakers went to a standard EDI system – so a supplier only had to invest once.

• Lower costs for suppliers• Increased number on system – note if much les than 100%

value was very limited

– EDI systems had very high start-up costs, high fixed costs, and were not generally adapted by all members of a supply chain.

So what has changed?

• Almost all e-commerce is done using internet platforms – which means what? – First a number of companies who invested in

proprietary systems in the middle 90’s wasted a lot of cash

– The hardware a supplier needs is a PC with a modem– The only software they need is a browser– So the set-up costs for the supplier are almost nothing

and they can be on multiple networks. – The buyer ends up with an entire supply base using the

tools removing the need for a paper bound system (yet I still meet plenty of people placing orders via fax) – Note my gift certificate from Colorado Cyclist.

Other changes

• From a supply chain perspective the Web is the big change but other technology matters as well– Processing speeds - yield management / Yellow Freight– Storage capabilities – this is huge for data mining and mass

customization– ERP systems that actually work – often run on the web now– RFID, satellite links for trucks and ships and other real time

communication– Flexibility of production systems because of computer controls

• Nissan (most productive car plant in the world) can make 4 models on their Symrna Tennessee line with no set-up times to change models

• Bottom line- more information flowing to more people at higher speeds

The “revolution” from a SCM perspective

• From the articles I would ague there are 4 or 5 themes all based on the ubiquity of the net (note many of these themes were sounded over EDI and never happened)

1. Through exchanges and auctions the net gives us the power to lower prices

2. Lower purchasing costs are one of many ways we can reduce the costs of our present process

3. If we just improve the present process we will not be able to really leverage the net to its fullest

4. The new processes will create 2 classes of suppliers5. You need a strategy - even more now than in the past

Lets start with the most hyped stuff

• The internet is going to lower prices– B to B exchanges and auction sites

• How do auction cites work? – Savings are often 20-30%

• Are they universal?– Requires a very precise RFQ– Requires many available suppliers– Requires a willingness to have a transaction based

relationship

Can new technology do more than just lower prices?

• Krispy Kreme – Electronic ordering system

• If order quantities change dramatically it queries the manager– Did you mean 50 or 5?

• When bad items are shipped managers can place orders for instant replenishment

• Far fewer errors

Jet Blue

• Paperless cockpit• All pilots have a laptop with

– Most up to date flight manuals

– Faster searches – no out of date information

– Faster turn time on the ground

Lower costs

• These example are typical e-commerce information sharing examples.

• They involve the reduction of non-value adding tasks – all of them would make a JIT / Lean proponent happy– Reducing wasted resources in the supply chain.

• None of this will lead to a long term competitive advantage.

Competitive advantage

• All of the previous examples showed ways to:– Reduce prices and hopefully costs

– Decrease lead times

– Increase the likelihood that the right inventory is being held

– Teach customers more about a product (or service) or how to service it

– Etc.

• So why doesn’t this create competitive advantage?

Long term CA continued

• Is auction technology available to everyone?• Is web based communication available to

everyone? • Is the expertise to make this work becoming easier

to access?• I would argue the answer to all of these questions

is yes.

To gain a CA from information technology

• So far most of the processes we have talked about changing using e-commerce / IT are the non-core parts of our supply chain.– We improve communication

– We reduce inventory

– Etc.

– But we do not fundamentally change what we make or how we do it- we are making an existing process as good as it can be.

Key point

• The internet and other investments in IT can make our existing processes more efficient

• But to gain a real long term competitive advantage ala Dell (15 years?) you need to change processes as well.

One area of real promise from e-commerce is

• Creating all new process to allow for true “mass customization”

– Mass customizers reap the benefits of economies of scale while giving customers some level of customization- lower cost linked with higher prices

• This is limited- recent research – full customization increases production costs and lead times – ATO no trade-off.

• Note level of customization has no statistical influence on cost or time in marketing or service.

• Dell is probably the best example of this – note they were doing it before the web- that just made it easier for them

– Taco Bell is Mark’s favorite example

Lets examine a specific supply chain - cars

• The auto industry has had EDI for 20 years. They have moved suppliers to the web. They are using web auctions. They have an average of a 60 day supply of cars in the USA – yet they rarely have the car you want on a lot– Most let you search dealers inventory to see if you can

find what you want– This is still a push system– The costs of this inventory are humongous – and the

costs are also inflated because people will not pay as much for a car that is close to what they want as a car that is exactly what they want.

What has to change?

• The real problem is not finding out what consumers want- it is making it.

• But car makers are JIT what is the problem?– Harley is JIT and does mass customization.

• Lead time is measured in many months• Customers willing to wait

– Car companies have a much more complex product– Customers less willing to wait

• Still the real issue is the way a car is made – Smart Car concept. – BMW – 12 days Europe- 24 days USA

Examples of leveraging new technology

• Some companies who have changed their processes or created all new processes– ChemStation.com – rapidly commoditizing as VMI

– Dell

– E-bay

– Plagerism.com

– Amazon.com

– Text book publishing?

– Education without a campus?

Lets step back - a supplier perspective

• Prices reduced – and buyers have full access to pricing information

• If your product or service can be described by a RFQ with no uncertainty everything but price becomes an order qualifier.

• So companies are going to end up in 1 of 2 categories- things bought on price and things bought for other reasons.– It does not take a genius to figure out that if you are in

the price only category that competition will be brutal and margins will be minimal

Edison’s Curse

• Gary Hamel’s article is perhaps the best thing on new information technologies I have read.

• Starts with electrification at the start of the 20th century.– Consumers- lower prices

– Makers of generation equipment – large profits

– Electricity distributors – lots of cash at first and then competition increased and they made less

– Industrial companies – much more efficient but no more profitable

E- commerce equivalents

• Consumers – lower prices

• Makers of internet hardware (routers, servers and the like) – think Cisco– Until every company has this stuff they are going to continue to

grow – the last few years created expectations that were too high - but in the long term someone is going to make this stuff – but eventually they will become GE power systems

• Distributors – ASP’s, Portals and the like – already starting to look less attractive

• Industrial companies- more efficient but not more profitable

Electricity to e-commerce

• Most companies became much more efficient with the advent of electric power – but no more profitable- why?

• Hamel predicts the same thing with e-commerce– Costs will go down considerably due to increased

efficiency

– Increased information will also lower costs - he notes that many industries are premised on imperfect information – this is bad for me

– But for most companies these two things do not equal increased profits

Hamel’s key point

• “Any company that plans to make money from “e” must have a web strategy that creates unique value for customers, confers unique advantages in delivering that value, and is tough to copy”

• This changes nothing.

Conclusions

• The web is EDI for everyone

• Prices will fall – probably a great deal

• Suppliers of commodities will get caught in a low price trap –with prices constantly falling. This will reduce the costs of all goods and services.– From a supply chain perspective our chain will be much more

efficient – but so will all other chains

• Competitive advantage will come from– Using the web to create a new product or service (or creating a

new way of delivering an existing product or service)

– Having a way to create a long term competitive advantage.