Hour 8: Open Systems

Supply Chain supportLean Manufacturing

Supply Chains

• Collections of organizations working together– Raw materials – products – retail– Old manufacturing: vertical integration– Military logistics– Now appropriate for e-business

Vertical Integration

• Closely coordinate supply chain internally– Steel, petroleum

• Open form: not one owner group– Automobiles

• Can tie computer systems together in similar manner– ERP provides detailed data needed for close

coordination

Supply Chain Advantages

• Competitive advantage– Cost

• Production efficiencies– Value

• Logistic efficiencies• Coordinated advertising• Large scale service

ERP Motivations

• Supply chain relationships provide– Improved interactions & communications– With suppliers & customers

• Mabert et al. [2000]: – 20% of manufacturers surveyed had supply

chain extensions to ERP– 25% more planned to

ERP Restrictions

• Internally focused ERP can constrain supply chain coordination (Davenport [2000])– Long-run ERP need for supply chain– In short-run, ERP a hindrance to supply chain

(Bowersox et al. [1999])• ERP systems provide integrated information

– Unless all units use the same system, a barrier to communication

System Openness

• Supply chains require open systems• Original ERP assumed a small number of

users accessing system– Seat pricing mechanism encouraged

Organizational OpennessExtended Enterprise

Cooperative Enterprise

Traditional Company

Profile Agile Lean Profit focus

Strategy Adaptive Value maximizing Cost minimizing

Goal Emphasis Flexibility Effectiveness Efficiency

Operations Collaborative, open

Selective sharing Limited sharing

Planning Joint performance measure

From push to pull Push

Relationships Extended alliances Qualified relationships

Limited sharing

Technology Linked Selected SCM No ERP link

Advanced Planning Systems

• Computer technology makes supply chain capable of dealing with demand uncertainty– Forecasting– Inventory reduction– Optimized transportation costs

• Advanced planning systems use operational data to analyze material flows in supply chain– Use historical demand for forecasts– Easy to collect data– Dynamic nature makes long-range forecasting difficult

Advanced Planning System Providers

i2ManugisticsNumetrixCAPS logisticsBAAN SCM components

J.D. Edwards SCM components

Oracle 11i

PeopleSoft Enterprise Performance Management

SAP SAP APO

ERP Vendor Response

• mySAP.com an open, collaborative system– Integrates SAP & non-SAP software

• SAP APO – supports forecasting, scheduling, other logistics

activities• PeopleSoft: Enterprise Performance Management• JDEdwards

– products for planning & execution• Oracle’s 11i Advanced Planning & Scheduling

On-Line MarketplacesManetti [2001]

TARGET MARKETVertical Deep & narrow product accessMultivertical Multiple vertical sitesHorizontal Broader, more extensive linkageTRANSACTION METHODAuction based Exchange for simultaneous bidsFuture contract variants For risk reductionPure auction systems To establish prices for buyersReverse auctions To establish prices for sellersMetacatalogs Reduce search costsMall-based Access multiple suppliers at single site

Lean Manufacturing

• Toyota bundle of techniques from 1950s• Common supply chain philosophy

– Cut waste by eliminating activities that don’t add value• Continuous product flows without bottlenecks

– Produce to order • (demand pull, not supply push)

– Emphasize quality

ERP & Lean Manufacturing• Initial ERP applications did little for efficiency

– Complex bills of material– Inefficient workflows– Unnecessary data collection

• Efforts by ERP vendors to support lean manufacturing– Not all manufacturers were convinced

• Lean manufacturing features– Demand smoothing– Kanban replenishment calculation– Exception reporting

Discrete Manufacturing Lean Business Strategies

Bradford et al. [2001]

Build-to-stock Customer orders filled from existing finished goods inventory

Configure-to-order Products assembled to order from pre-built components

Assemble-to-order Batch formulated to fill specific order from pre-built components

Engineer-to-order Each order designed to customer specifications

Continuous Manufacturing Lean Business Strategies

Bradford et al. [2001]

Make-to-Stock Customer orders filled from existing inventory

Configure-to-Order

Batches mixed in common, packaged & processed for specific orders

Make-to-Order Batch formulated to specific order

Key TrendsAkkermans et al. (2003)

1. Further integration of suppliers & customers

2. Focus on ERP system flexibility3. Mass customization

• Standard interfaces across chain

ERP & Hershey’s Supply Chain

Stedman [1999]Osterland [2000]Songini [2000]

History

• 1997 Hershey’s adopted a $110 million ERP system– SAP R/3– Siebel CRM– Manugistics logistics package

• To replace many legacy systems• Original 4 year project

– Compressed to 30 months to precede Y2K– July 1999 three months behind schedule– Adopted big-bang approach to beat deadline

Hershey Business

• Very seasonal– Halloween, Thanksgiving

• Sept 1997 serious order processing & shipping problems– Shipping delays– Sent incomplete deliveries– Delivery time formerly 5 days, with ERP 12 days– Sales revenue dropped 12% from prior year– Inventory piled up at Hershey warehouses

Problem Diagnosis

• Attempted ERP implementation in supply chain environment– That can be done– Confounding factors

• During peak season• Tried to do too much as once• Complexity from CRM & Logistics Planning add-

ons• Time pressure

Supply Chain & ERP

• Can be done• Hershey’s was a bleeding edge pioneer• Hershey’s seems to have solved problems

Trends in ERP

Expected benefitsConclusions

Expected Benefits from ERPMabert et al. (2000); Olhager & Selldin (2003)

1-not at all; 5-to a great extent

ERP Performance US SwedenQuicker information response time 3.51 3.81Increased interaction across enterprise 3.49 3.55Improved order management 3.25 3.37Decreased financial close cycle 3.17 3.36Improved customer interaction 2.92 2.87Improved on-time delivery 2.83 2.82Improved supplier interaction 2.81 2.78Lowered inventories 2.70 2.60Improved cash management 2.64 2.57Reduced operating costs 2.32 2.74

Benefits from ERPMabert et al. (2000); Olhager & Selldin (2003)

1-not at all; 5-to a great extent

Area Benefitting US SwedenInformation availability 3.77 3.74Integration of operations/processes 3.61 3.42Information quality 3.37 3.31Inventory management 3.18 2.99Financial management 3.11 2.98Supplier management/procurement 2.99 2.94Customer responsiveness/flexibility 2.67 2.95Decreased IT cost 2.06 2.05Personnel management 1.94 2.06

Lessons Learned

• ERP implementation projects problematic• Variety of ways to implement• Benefit assessment problematic• Different ways to design ERP

– Customization of vendors popular• Many enhancements available• Supply chain opportunities

– Requires open systems

Summary

• Vertical integration historically used to make supply chains efficient

• Today supply chain efficiency gained by linking specialists across organizations

• ERP initially focused on integrating internal operations– High investment, rigid procedures barriers to supply chains– Trends more supportive

• Advanced Planning Systems• Vendor software• Lean manufacturing support