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The Perfect Order: Achieving the Holy Grail of "perfect orders" involves more than just
plugging data into software. Companies must also restructure their supply chain
processes from end to end.
Patton, Susannah
CIO v18n20 pp: 38-44
Aug 1, 2005
Abstract:
Out of stock. Whether referring to semiconductor chips or potato chips,
these are dreaded words for those in charge of far-flung and increasingly
complex supply chains. In Qualcomm's case, the company not only missed an
opportunity to significantly boost revenue but also was forced to
reevaluate the way it did business. Since a period of panic which lasted
for most of 2004, CIO Norm Fjeldheim and his colleagues at Qualcomm have
reorganized the supply chain so that they won't get caught by surprise
again. AMR Research says the payoff for companies with high rates of
perfect orders - those that are complete, in the right place, undamaged and
on-time - can be substantial. To get to this Holy Grail of order
fulfillment, however, takes more than plugging data into software programs.
In fact, companies that want to achieve and then maintain high perfect
order rates may have to restructure their supply chain processes from end
to end.
Text:
In late 2003, Qualcomm's CIO Norm Fjeldheim started seeing signs that
the demand for cellular phone chips was rising much faster than expected.
Consumers around the world were snatching up cell phones at an
unprecedented rate, and manufacturers of the popular handsets were
scrambling for more chips. For Qualcomm, which sells chips to the cellular
industry, the unexpected cell phone frenzy hit its supply chain where it
was most vulnerable. "Our customers were not getting everything they asked
for," says Fjeldheim, noting that demand for the chips rose 37 percent in
one year. "We could not increase our supply, and some deliveries just
weren't possible."
Since that period of panic (which lasted for most of 2004), Fjeldheim
and his colleagues at Qualcomm have reorganized the supply chain so that
© 2005 Dialog, a Thomson business
they won't get caught by surprise again. Company officials are bringing
supply chain, finance, IT, and sales and marketing together for regular
demand-planning sessions. And the company is trying to increase the
flexibility of its supply chain by working with multiple suppliers, rather
than single suppliers, to build a set of chips. It has also started sharing
more information (via Web connections and file downloads) with its 10 chip
makers. Should there be another unforeseen spike in demand, Qualcomm will
be better able to shift production back and forth between suppliers, if
necessary. So far, Qualcomm, which ships 140 million chips per year to cell
phone manufacturers such as Samsung and Motorola, has improved its on-time
product delivery rate--which had fallen below the 90 percent level during
the chip shortage--to 96 percent, a high rate in an industry grappling with
shorter lead times for its products than many other manufacturers.
AMR Research says the payoff for companies with high rates of "perfect
orders"--those that are complete, in the right place, undamaged and
on-time--can be substantial. AMR recently ranked the world's top supply
chains (see "Top 10 Supply Chains," this page). Companies that ranked
high--such as Dell, Nokia and Procter & Gamble--carry less inventory,
have shorter cash-to-cash cycle times and are more profitable. A 3 percent
improvement in perfect order fulfillment translates to a 1 percent increase
in profits, AMR says, while a 10 percent increase means an additional 50
cents in earnings per share. (Qualcomm, with revenue of $4.9 billion in
2004, is too small to make it onto AMR's list, but the company qualifies as
a top supply chain because of its ability to effectively collaborate with
handset makers and cell phone service providers, says Kevin O'Marah, a
supply chain analyst at AMR.)
To get to this Holy Grail of order fulfillment, however, takes more than
plugging data into software programs. In fact, companies that want to
achieve and then maintain high perfect order rates may have to restructure
their supply chain processes from end to end. They have to build systems
that connect them in real-time to both suppliers and customers, thus
enabling the development of tighter relationships with both parties. They
have to feed information from customers back to suppliers and get a clear
forecast of customer demand. And internally, they have to improve long-term
demand visibility through constant collaboration between supply chain
leaders and the sales and marketing departments.
Striving for perfect orders can be costly. In order to get the most from
investments in supply chain technology and processes, companies need to
take a targeted and gradual approach. "If you don't first determine where
the gaps are in your supply chain, you might be shooting blindly," says
AMR's Debra Hofman. In fact, for some companies--for example, those that
make commodity parts such as ball bearings or other items that can be
stored cheaply--the cost of striving for perfect orders may not be worth it.
O'Connell and others stress that companies must first revamp their
business processes and then choose the technologies that support those new
processes. "Getting our supply chain in order is 75 percent process and 25
percent tools and technologies," Fjeldheim says.
In Pursuit of Perfection
In the past, when a retail customer saw that a product was missing from
the shelf, the retailer would check his back-office inventory and the
distribution center. If necessary, he would then place an order with
P&G, where someone would look at inventory levels to see how quickly
she could get a shipment of Tide to the retailer's distribution center.
Then, based on the historical sales data, P&G would contact suppliers
for needed ingredients and packaging materials to avoid a repeat
out-of-stock experience.
The problem with P&G's old supply chain model was that replenishment
of empty shelves could take several weeks, or even months at times. "Now,
because we provide information to our suppliers on a daily basis, they
understand what is happening and can replenish shelves right away,"
Arlequeeuw says.
P&G's demand forecast, while still not 100 percent perfect, comes
closer to delivering accurate orders because it contains information about
what is happening on store shelves on a daily basis-- information that is
ultimately transferred to suppliers. The goal, says Arlequeeuw, is to have
enough flexibility in the supply chain so that plants can produce for
tomorrow what was sold the week before.
Five years ago, the company's on-time fill for vendor orders at its
distribution centers had sunk to between 30 percent and 40 percent. Now,
they are at 80 percent, and Smith attributes the increase to the company's
ability to quickly share sales information with suppliers. Every night, the
company electronically polls all of its 390 stores for sales, updates the
in-store replenishment systems and, with that data, projects sales and
orders. West Marine sends the aggregated forecast data to its vendors via
automated e-mail. Every Monday, the company sends in-stock reports to 200
suppliers. Then, with a year's worth of data, it creates an annual
forecast, runs order calculations for distribution centers and sends its
order forecast to suppliers. On a quarterly basis, company officials
measure the accuracy of vendor orders.
"As you improve your perfect order rate, you squeeze losses-- such as
extra inventory and wrong quantities shipped--out of the system," says
P&G's Arlequeeuw. "What we're seeing is that perfect order can lower
your costs if you do it right."
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