How supply chain management got that way

Given the poor growth performance of supply chain planning (SCP) vendors the last few years—and the much better performance of supply chain execution (SCE) vendors—one could wonder whether planning's day has passed, eclipsed by a more nimble approach to intractable supply chain problems.

But

For one thing, advanced planning is now embedded in most major ERP systems, masking at least some of the technology's real gains.

Something has changed though, when it comes to planning and execution.

Based on greater availability of real-time information, an approach is evolving that more freely mixes planning modes with minute-to-minute execution decisions.

Supply chain planning is the generic term for software applications used by manufacturers to decide what products to build and when to build them, based on forecasts, current orders in hand, and availability of needed resources. Supply chain planning, unlike material resources planning, allows for plan generation based on multiple constraints simultaneously.

A key issue for supply chain planning has been the amount of time it takes to extract the needed data from the enterprise and other systems, send it over the network, deposit it in the planning model, run the simulation, and return the results.

With recent technology advances, this limitation is being overcome. Users cite examples where the time it takes to do a "solve" is reduced from hours to as little as 30 minutes. Thus, the model is more closely synchronized to the supply chain reality, allowing simulation to be run within the decision-making horizon.

"Planning is still very relevant today," says Jeff Woods, an analyst with Stamford, Conn.-based Gartner Group . "What we're seeing is not the end of planning, but definitely the increasing importance of execution technology."

And some are actually approaching the "balance point" from the opposite direction.

Cooper Tire and Rubber Co. , Finley, Ohio, in 2002, partnered with i2 Technologies for nearly its entire supply chain management suite.

"In the past we haven't done a good job at planning," says Bob Sager, program manager for Cooper Tire's supply chain operations. "We've done a very good job at execution with systems we developed. But today, our business is so complex it's impossible to rely on execution alone."

Necessary but insufficient

Like any type planning, SCP is driven by the forecast, or what Greg Aimi of Boston-based AMR Research more bluntly characterizes as "guesswork."

"It's complex," says Aimi, "and only as good as the data entered. There are companies that have made good use of it, but it's not for the faint of heart."

Many complain that it's "too-too:" too complex, costly, time-consuming to implement, and noisy—given the welter of data competing for value in calculations.

"Some of those attacks are fair," says Andrew Zoldan, VP of product and solution management for SCP vendor Manugistics . "But it's a young market. You need to cut people a break. We're at the beginning of a journey. There are likely to be false starts and project overruns. Ten years ago, people thought planning would augment ERP and be sufficient. Companies are beginning to understand that planning isn't completely sufficient. You have to make plans and then execute on them."

Supply chain execution is a relatively new application niche, with origins in warehouse and distribution management. As vendors have built out their offerings, it has come to include transportation, distributed order, and event management. Where SCP time horizons are weeks, months, and quarters, SCE is more real-time, dealing in hours and minutes.

SCE is still largely tactical and distribution-centric, with loose ties to manufacturing through purchase orders, rather than tightly hooked in to work orders and work-in-process tracking. But SCE touches on manufacturing with postponement strategies, where distribution centers complete semifinished goods to customer orders, requiring rudimentary bills of material.

In sharp contrast to the SCP market travails, supply chain execution vendors Manhattan Associates and RedPrairie both saw revenues jump in 2003. Manhattan Associates, recently described by AMR's Bruce Richardson as the "most profitable and best run" SCM company, brought in $197 million, netting a 14-percent annual increase; and RedPrairie, much smaller but pegged a comer, saw license revenues jump 44 percent, with total revenues topping $72 million.

If not now, when?

The convergence of several factors fuels the heat in the execution market. Key among these is the realization that no matter how slick a plan you have, you must ensure greater responsiveness and flexibility against supply chain vulnerabilities. Globalization and dramatic events such as 9/11 and the West Coast dock strike only reinforce this basic insight.

"One event can trigger so many others in the supply chain," says Prashant Bhatia, director of product management for Manhattan Associates. Given the inevitable occurrence of unplanned, disruptive events, "You have to focus more on execution capability. How am I going to optimize all resources in my supply chain—including trading partners, from source to consumption—to meet current customer demand?"

This is especially true on the transportation side, says Robert Ferrari, director of supply chain business development for SAP . "Companies are more aware of the need to be proactive around contingencies, knowing as quickly as possible how to manage disruptions."

Transportation costs are rising due in part to increasing regulation and higher fuel costs. SCE provides greater last-minute flexibility in cross-docking, third-party logistics, and postponement.

Additionally, and perhaps most important, interest in SCE is heating up due to increased emphasis on providing what Gartner analyst Chad Eschinger refers to as "visibility of goods in motion," and greater emphasis on more market-facing, demand-driven strategies for cost-effectively optimizing profit opportunity with customers.

"There has been a change in focus from trying to figure out the big picture—looking away from optimizing production assets, plants, and machinery and instead toward focusing on the customer," AMR's Aimi says. "A demand-driven supply network addresses how to optimize opportunity for profit."

SCP/SCE convergence

One word defining the landscape change in the supply chain management is convergence . Analysts and vendors top to bottom agree there will be greater convergence between planning and execution.

For example, at its recent user conference, Manhattan Associates announced incorporation of "predictive" technologies into some of its solutions. Manugistics and i2 Technologies have transportation management solutions.

"How do you make your execution and your plan come together? How do you make your plan happen? You need analysis for why there is deviation from plan, and a set of levers that can bring execution into alignment," says Pallab Chatterjee, president of solution operations for i2.

"There's been a disconnect between [planning and execution] in the past," says Mike Dempsey, strategy leader for RedPrairie. Increasingly, he adds, companies "will be planning while they're executing, and executing while they're planning."

Aimi of AMR describes it as "tightening up the time frame," where both planning and execution are more event-based. This will enable companies, he says, to more assertively shape demand with promotions and discounts.

The multimillion-dollar question is, who will control the convergence?

ERP vendors argue companies want suites, top to bottom, from one vendor. SCP vendors argue that ERP vendors don't have an appropriate model; and that SCE isn't truly a separate niche capable of sustaining those vendors. SCE suppliers say they're the only ones looking bottom-up at the supply chain with sufficient hands-on expertise to make it happen.

It's certain everyone will attempt to enlarge their footprints, point to strengths, and minimize weaknesses. ERP vendors likely will succeed with their installed bases, where requirements are not too complex, providing sufficient functionality—and promising more. SCP vendors likely will play both ends against the middle, provide strong services, and argue domain expertise and size. Everyone agrees there will be consolidation of SCE vendors, especially in the warehouse management space, given the fragmented nature of the space. Partnering will be to everyone's advantage in the short term. And everyone will be dependent on continuing economic recovery.