Welcome Guest. | Log In| Register | Membership Benefits

Intelligent Enterprise

Better Insight for Business Decisions

Home
Digital Library
Events
RSS | Newsletters
Webcasts

January 14, 2002

The Evolution of Supply Chain Technologies

Reducing complexity and increasing probability of successful supply chain implementation

Ram Reddy

The aftermath of the Sept. 11th terrorist attacks has had a grave impact on companies and their supply chains (locally and globally). In addition to just-in-time inventory, a new term has become popular: just-in-case inventory, which accounts for supply chain disruptions. To address these issues, this column will cover the evolution of supply chain management (SCM) technologies prior to Sept. 11th, and the second installment will discuss the impact of Sept. 11th on their continued evolution.

LESS IS MORE — THE TREND TOWARD MODULARIZATION

Increasingly, the SCM trend is to move away from tightly integrated technologies that provide a wide range of functionality and features to modular applications with a narrow focus. The aim here is two-fold: to reduce the implementation risk and increase the customer base that can afford the lower-priced modules. SCM technology vendors listened to their customers and learned that a major factor that inhibited successful implementation of prior technologies was the complexity involved in installing a fully integrated system.

Increasingly, SCM technology modules are priced to attract companies that couldn't previously afford fully integrated packages. Similarly, CRM suites are becoming modular with a corresponding drop in prices. To successfully move beyond sales force automation functionality, CRM requires integration with processes and features in the supply chain. Conversely, certain supply chain practices need access to functionality provided in the CRM modules. These needs point to an evolutionary path where various categories of application software like SCM and CRM as we know them today will blend and cross categories.

Especially in tough economic times, enterprises will assemble their own customer service and supply chain processes, supported by modular technologies. Portal technologies will continue to evolve and provide an incremental technology infrastructure to glue these modules together. Portal technology infrastructure will also increasingly become the gateway to virtually integrate (not outsource) companies providing services that aren't part of the manufacturing process.

FROM SUPPLY CHAINS TO VIRTUAL INTEGRATION

To distinguish between virtual integration (VI) and outsourcing, it's necessary to understand vertical integration. Vertical integration came into vogue at the start of the industrial revolution. In the past, the parent company owned activities across the supply chain to ensure reliability of raw materials and resources. Consider the example of tire manufacturers. They not only owned rubber plantations but also the shipping companies and intermediate sap processors to ensure a steady supply of raw materials. Manufacturer-owned tire stores were the norm. Vertically integrating the activities from the rubber plantation to the tire showroom ensured control and predictability in operating the manufacturing plant at an optimum level. Vertical integration, however, inhibited the competitive flexibility of the enterprise and increased its capital costs. These problems led to the natural evolution of the enterprise divesting itself of vertically integrated upstream and downstream functions.

The modern enterprise still has vertically integrated functions. However, these functions come at the cost of reduced competitive flexibility. Virtually integrating these functions is one way to improve competitive flexibility without loosing the benefits of vertical integration.

OUTSOURCING IS DIFFERENT

Outsourcing differs from VI because it's typically an arms-length transaction, involving a commodity, product, or service with standard features. Consider outsourced payroll processing — the interaction with internal systems within the company is standardized. By contrast, VI functions tend to have integrated processes within the company. Business processes of the virtually integrated supplier would appear to be customized to the company and would perform as an employee of the company. As a company moves from vertical to VI, a department that previously belonged to the company can become a supplier linked by an integration infrastructure.