Now, new technology is achieving the advantages of vertical supply chains without the costs.
To understand the advantages of virtual verticality and why it is key to the next generation of supply chain management, it's important to look at what was desirable about a vertical supply chain, and what disadvantages drove supply chains toward the horizontal model.
In the vertical supply chain that was the rule in the early 20th century, a typical manufacturing company owned the assets required for acquiring and processing raw material into a finished product. Most often, these firms delivered the finished product directly to the waiting customer. Take, for example, a tire manufacturer. Typically, it owned the rubber plantations and facilities where the sap was converted into a product used in the tire factories. It also owned the ships, the overland transportation and the warehouses on the docks. This single ownership created a vertical supply chain, lock-solid in its reliability for getting rubber to the factories. Once manufactured, the tires were sold through companyowned and operated stores.
Because the manufacturer had its finger in every upstream and downstream activity, it had total supply chain control. But a vertically integrated company like this paid a huge price for control. The depth of investment necessary to run each link in the chain meant there was less likelihood of extra financial resources for new product development. And the time and energy it took to run all the activities—managing the rubber plantation labor, the shipping firms, the warehouse and overland transportation— meant attention was diverted from designing and manufacturing tires as efficiently as possible.
The shift from vertical to horizontal
As the century progressed, most manufacturers divested themselves of non-core upstream and downstream activities. Shipping, warehousing and transportation services were contracted from specialists. Dealers and distributors handled the downstream activities for the manufacturer. In short, the supply chain shifted from vertical to horizontal.
Organizations focused on performing their core activities as efficiently as possible. Information began to take the place of assets. This new way of doing business became important in the early 1950s, when the first commercial computers were delivered. Coordinating the easy flow of goods and services in the supply chain using the unprecedented power of computers increased efficiencies many-fold.
As information technology advanced, and client-server architecture took the place of the mainframe, the use of computers proliferated exponentially. PCs became as ubiquitous as the clipboard had been. Information systems could now enhance operational efficiencies and controls in functional areas.
Management innovation marked the 1980s with Total Quality Management and continuous process improvement. Michael E. Porter's innovative concept of the value chain spurred companies to look at their value-adding activities, such as logistics, production, sales and marketing and support. Add to the equation the introduction of Stern, Stewart & Co.'s economic value-added approach and discounted cash flow, and companies began seeking ways to cut assets and improve valuation in the stock markets. This focus on value sparked the outsourcing trend as a way to reduce capital-draining assets.
New technology enabled shorter cycle times
In conjunction with these new management strategies, materials resource planning tools (MRP and MRP II) were developed that enabled companies for the first time to compute material requirements based on what was needed to achieve sales forecasts. Just-in-time inventory further helped organizations offload assets and decrease inventory. The expanded use of electronic data interchange (EDI) helped shorten cycle time even more by integrating trading partners through shared networks. Enterprise resource planning (ERP) systems helped integrate supply chain transactions with the enterprise. Advanced planning systems (APS) addressed the shortcomings of MRP and ERP through functional optimization, resulting in dramatic improvements in supply chain efficiency and productivity. Based on the theory of constraints, APS allowed accurate supply chain modeling and rapid concurrent planning—leading to the design of specific data models and planning engines.
Enter the World Wide Web and another exponential advancement in supply chain management. Though heralded as an unprecedented panacea for commerce, the Internet lost face with many when the dot-com bust came. But visionaries were quick to note that it wasn't the beginning of the end for e-commerce, but rather the end of the beginning. The bust signaled the experimental stage was over.
Starting with point-to-point and two-way communication, partner portals and expanded opportunities for partner collaboration, the Internet also linked trading partners. The horizontal supply chain became integrated and tightly coupled. Efficiencies began approaching the upstream predictability present in the vertical supply chains of old, yet without the extra assets.
The technology now exists to take time-based competition to a level it has never been.
The next evolutionary step lay in using these technological advances to manage business processes. MRP, ERP and APS became part of the most revolutionary aspect of supply chain management in the last century: business process management. The key to managing the supply chain had more to do with controlling process than with chasing new software solutions. Although numerous tools and solutions were developed to leverage new technology, what was lacking was an approach to leverage the new tools. It was no longer enough to have supply chain data locked into unmalleable business processes, spread across heterogeneous systems.
Rising customer expectations drive innovation
Besides the growing complexity of managing the links in a global, horizontal supply chain, rising customer expectations, due to improved customer satisfaction, drove innovation. The lightning speed of processors and the “get-it-now� nature of the Internet have raised consumer expectations to a level where only the swiftest and most agile can compete. The New Economy has been replaced by the Now Economy, as Max More said in The Real-Time Enterprise's foreword.
In the next generation of supply chain management, the business process is beginning to be recognized for what it truly is: a living system that must change in response to the world around it. And now the tools and systems for sensing and reacting in real time are at hand. For the first time ever, the technology exists to take time-based competition to a level it has never been.
Using extensible markup language (XML),Web services and service-oriented architecture (SOA), supply chains can move at the speed of business, not the speed of software development. Hallmarking the next generation is a new tier on the IT stack, a single platform that can leverage vertical solutions, third-party applications, ERP systems, legacy systems, componentized services and common platforms. That platform is under development now at leading software companies in the supply chain space. At i2 it exists today as the i2 Agile Business Process Platform.
by Hiten Varia
Hiten Varia is i2's Chief Customer Officer and Executive Vice President of its Greater Asia-Pacific Business Unit. For more information, contact supply_chain_leader@i2.com. |
