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Complex supply chains are hard to understand, improve, and manage because complexity obstructs the line of sight needed to identify what is and what is not working. The costs and risks of complexity are highest when companies integrate their processes and systems with those of their customers and suppliers. When effective supply chain management is dependent on managing beyond your company s borders, each process, data element, and system must be clearly defined and agreed to. And if your internal processes, data, and systems are complex or convoluted, the likelihood of your being able to reach consensus with your supply chain partners is greatly reduced. Simplicity is the solution. But before we see how this complexity can be simplified, let s examine the different drivers of complexity. We see four:
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Supply chain configuration Product and service proliferation Process and information systems inconsistency Overautomation
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Strategic Supply Chain Management
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Supply Chain Configuration
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The first source of complexity is your supply chain configuration how you ve structured your network of physical assets and distributed activities within that network. The decisions you make to support your channel strategy, operations strategy, and other components of your supply chain strategy can lead to complex supply chain configurations. And complex configurations drive process complexity. Do you have a large number of order-entry desks, warehouses, factories, engineering centers, and other physical locations Are you trying to manage too many customer and supplier relationships directly Each location and relationship is another node in the supply chain that must be designed and managed. Consider how Alcatel Enterprise, Europe s largest provider of business voice and data Internet Protocol (IP) servers, simplified its supply chain configuration for business advantage. In the late 1990s, Alcatel management realized that the market for its products business handsets and PBXs was maturing. The company had to find a way to improve customer service without increasing costs. Alcatel wanted to provide faster transactions with better traceability while reducing inventory levels and eliminating the need for multiple suppliers across different geographic regions.4 For Alcatel, the answer was to adopt a cost-based supply chain strategy with a much simpler supply chain configuration; in its case, this meant outsourcing supply chain operations not considered core competencies. Many of these activities were part of the deliver process getting equipment to customers, having it installed, and then initiating service. The company decided to move most sales, installation, and service activities to its channel partners, resulting in the percentage of indirect sales growing from 25 percent in 2001 to 95 percent in 2002. In addition, Alcatel worked on simplifying the interactions with channel partners, creating an extranet, the Alcatel Business Partner Web site, that sharply reduced order-management costs by replacing electronic data interchange (EDI), fax, and mail orders with self-service processes. Alcatel used the move to indirect sales as an opportunity to streamline physical distribution of its products around the world. The company managed a huge number of logistics service providers more than 30 in Europe alone. This complexity made it difficult to measure and improve supply chain performance, so it decided to move all final packaging and distribution from internal operations to a fourth-party logistics provider (4PL). Alcatel chose UPS Logistics, and UPS now manages relationships
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CHAPTER 2 Core Discipline 2: Develop an End-to-End Process Architecture
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with logistics specialists covering such operations as kitting, storage, inspection, final tests, picking and packing, and customer delivery.5 Alcatel Enterprise created four standard processes to guide UPS and to ensure integration with its manufacturing, sourcing, and sales departments. Instead of producing to stock based on forecasts, Alcatel used demand frequency, volume, and item value to design differentiated processes that minimized inventory risks while meeting service requirements:
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Configure to order applies to telephones with documentation, cables, accessories, etc. Build to customer order applies to complete systems (chassis and boards) built and integrated per customer order and requirements. Pick to order applies to high-volume printed circuit boards (PCBs). Purchase to consumer order applies to high-value peripherals procured from external suppliers.
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As a result of these changes, customer delivery-to-commit-date performance improved from 65 percent in 1999 to 95 percent in 2001, whereas total supply chain costs declined from 5.8 to 5.1 percent of revenue.6
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