CONCEPTS BEHIND SUPPLY CHAIN MATURITY

a supply chain maturity model is used to describe the typical
progression, through which a firm evolves on its way to the most desired
advanced level of implementation. Many firms in many countries have used this
model to understand the logical progression of a supply chain effort. The model
is also useful to calibrate a firm�s position as it moves forward and to determine
to what level of progress the company should aspire, especially when the model
is extended to the various business functions. Implicit in the use of the model
is the understanding that a firm must progress through the levels, none of which
can be skipped, although some firms might have business units with footprints
in various levels at the same time.
To begin, a firm typically launches its supply chain effort by bringing
whatever existing improvement effort is being pursued under an umbrella type
of orientation focused on the end-to-end processing that constitutes the
organization�s supply chain. In this first level of the progression, the firm begins
to focus on functional processes, particularly sourcing and logistics. In addition
to using these two areas of attention to gather early improvement and quick
profit gains, a secondary goal is to bring enterprise integration into focus as an
objective � within the organization. That means most companies find, as they
begin integrating their existing improvement efforts with the overall attention
to supply chain, that there is a substantial amount of internal resistance to any
type of information sharing or best practice integration inside the four walls of
the business. The so-called stovepipe or silo mentality is a serious reality for
companies starting into the supply chain evolution.
As will be documented, there generally are significant savings generated
during this first part of the evolution. Supply bases are reduced through techniques
designed to segregate suppliers, based on categories of purchase, amount
of purchase, quality, and factors of importance to the firm. With a lesser number
of sources providing larger volumes, prices are reduced and added features
introduced into the relationship. Typical benefits add one or two points of profit,
because the amount of total purchases is often as much as 40 to 50% or more
of the costs of goods or services sold.
Concurrently, most firms begin paying serious attention to how purchased
goods are brought into the supply chain processing, how material and supplies
are handled internally, and how finished products and goods are delivered to
the next company in the linked processing. That means a focus is brought to
inbound freight, internal material processing and manufacture, outbound freight,
and the warehousing and delivery mechanisms necessary to support the logistics
system. In the first level, the bulk of concern is brought to bear on internal
processing and outbound freight. Inbound freight is generally held for later
attention. There is a typical resistance to considering turning any part of the
freight handling over to other parties, but as a firm completes this level, there
is generally some form of outside help brought in to take responsibility for at
least a portion of the transportation function. Most firms find one-half to a full
percent of profit here, as they reduce the cost per mile for transportation, begin
reducing warehouse space to what is actually needed, and transfer ownership
of some or all of the assets involved to a third party adept at combining load
requirements over the accumulated asset base for more effective utilization.
There is not much more to the first level, other than the fact that many firms
begin looking for a model to guide the effort, with most selecting the SCOR�
model, endorsed by the Supply-Chain Council. From our experiences, most
businesses modify that model to suit their needs and introduce other features
of importance to their particular industry. Virtually all have used the model
described in Figure 1.1 to track their progress to higher levels of accomplishment.
Detailed discussions of the various levels we are considering can be found
in Advanced Supply Chain Management by Poirier (1999) and E-Supply Chain
by Poirier and Bauer (2000).
In level 2, the business continues on its intra-enterprise track, but now the
focus moves to attaining some degree of optimization across the internal processing
occurring within the four walls of the business. Sourcing and logistics
move to a higher level as the firm begins more intense work with the key
suppliers and transportation providers. Planning, as accented by the SCOR�
model, becomes an important effort. A supply chain infrastructure begins to
appear during this level, usually with a professional supply chain manager being
introduced to the organization.
Since planning now assumes importance, order management takes on relevance
as a key factor. Unfortunately, virtually every study we have conducted
in this area unearths a problem with the data. As orders, both with suppliers
for purchased goods and services and with customers for finished products and
services, are analyzed, we typically find that 30 to 40% contain one or more
errors. This range may seem high, but when the analysis is extended to determining
how the orders are placed or received, we find that most companies still
rely heavily on telephone, facsimile, and mail for order entry and order processing.
In spite of the amount of order management that has moved to electronic
data interchange and e-commerce, the overwhelming amount of order processing
is still done in a manual fashion, with many implicit errors. Establishing
an order system that eliminates these errors and mistakes is crucial to introducing
a planning system that has any degree of reliability and becomes a requisite
for level 2 progress.
As planning is pursued, some form of sales and operations planning (S&OP)
is generally introduced to require the firm to have a formal process for analyzing
the orders, the production process steps, and the final delivery to customers.
Forecast accuracy becomes an internal issue, as we find that most level 1 firms
operate in an area of about 40% or less forecast accuracy. With the application
of special algorithms or mathematical models, that figure might rise to about
50% in level 2. As S&OP matures, and key customers become involved in the
level 3 processing, the accuracy of the demand information improves and firms
do move as high as 60% accuracy. These general ranges are not absolute, but
are based on our experiences with numerous firms across many industries.

In the second level, companies also turn their attention to the matter of
inventory management. Much effort is expended to reduce the amount of cash
tied up in inventories, so a one-time improvement can be made to working
capital, and the annual carrying costs of excess inventories are reduced. Our
experience shows, however, that some of the improvements made are real, while
much of the effort results in a sort of shell-game maneuver. This means we find
that a large amount of the inventory is simply moved upstream � toward
obliging suppliers � rather than taken out of the supply chain. Results of many
studies have indicated that firms did, indeed, remove a significant amount of
inventory during their level 2 efforts, but much of it was absorbed by suppliers
willing to hold the inventory until needed or to retain ownership until the point
of actual use. Assuming the suppliers are smart enough to cover their carrying
costs in the total price for the delivered supplies, it becomes a game of moving
the assets and costs, rather than eliminating the need for extra inventory and
safety stock.
Toward the conclusion of level 2, a supply chain organization will be firmly
established, with a designated leader. Collaboration between this leader and the
information technology group, and particularly the chief information officer,
will be emerging. Internal resistance to cooperative effort will be subdued. The
firm will be leveraging its full buying, manufacturing, storage, and delivery
capacity across all business units, and there will be an intranet of information
sharing at work, to supply the various functions and parts of the business with
vital data on the processing taking place. Transportation management systems
and warehouse management systems will be appearing as the practitioners begin
to apply technology as an enabler to the desired process improvement. As
indicated in the figure, most firms are still working on level 2 improvements
in today�s markets.
A cultural barrier exists between levels 1 and 2, as indicated by the brick
wall in the figure. Most businesses are very comfortable continuing to work on
internal excellence, particularly the never-ending quest for cost reduction. They
resist outside help as an indictment that they do not have the internal expertise
to solve each and every supply chain issue or problem encountered. Many also
resist references to best practices that could be viewed and adopted outside of
their four walls, and they especially oppose sharing any information that is
considered proprietary with any external sources, even if it could lead to further
improvement. Overcoming this barrier takes a forceful hand at the top of the
organization and generally comes when one business unit leader takes a part
of the firm into level 3 and beyond, proving the value of working collaboratively.
A final requirement for completing this level is to form an alliance between the
supply chain organization and the information technology group, so there is a
joint effort to improve processing and to bring the necessary enabling
technology into play.