4
Integration Process

Integrating a supply chain is an incremental process, with priority typically given to the highest potential returns on investment. Based on strategies, needs, and potential returns, different priorities and approaches may be assigned to the supply chains of different segments of a business. The integration process can be expensive and is, in many respects, an exercise in resource allocation.

Many companies adopt an approach that begins at home and gradually works outward through the supply chain. The first step is to make in-house improvements, such as inventory reductions that can reduce working capital, warehousing, and transportation costs. An analysis of in-bound logistics can often reveal opportunities for savings. From there, the integration effort expands outward.

This chapter begins with the topic of supplier selection, introduces approaches to integration, discusses management of the integration process, and identifies management tools that are becoming available to support this effort. The factors critical to success are then identified, and metrics for evaluating progress and performance are suggested.

SUPPLIER SELECTION AND DEVELOPMENT

Supplier selection, development, and integration is a strategic initiative that is undertaken as a part of a company's overall competitive strategy. This strategic approach to outsourcing combines internal core competencies with externally available capabilities and technologies in an attempt to maximize overall corporate and supply chain



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Surviving Supply Chain Integration: Strategies for Small Manufacturers 4 Integration Process Integrating a supply chain is an incremental process, with priority typically given to the highest potential returns on investment. Based on strategies, needs, and potential returns, different priorities and approaches may be assigned to the supply chains of different segments of a business. The integration process can be expensive and is, in many respects, an exercise in resource allocation. Many companies adopt an approach that begins at home and gradually works outward through the supply chain. The first step is to make in-house improvements, such as inventory reductions that can reduce working capital, warehousing, and transportation costs. An analysis of in-bound logistics can often reveal opportunities for savings. From there, the integration effort expands outward. This chapter begins with the topic of supplier selection, introduces approaches to integration, discusses management of the integration process, and identifies management tools that are becoming available to support this effort. The factors critical to success are then identified, and metrics for evaluating progress and performance are suggested. SUPPLIER SELECTION AND DEVELOPMENT Supplier selection, development, and integration is a strategic initiative that is undertaken as a part of a company's overall competitive strategy. This strategic approach to outsourcing combines internal core competencies with externally available capabilities and technologies in an attempt to maximize overall corporate and supply chain

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Surviving Supply Chain Integration: Strategies for Small Manufacturers competitiveness. To achieve these objectives a company must first determine its current and future capability, technology, and capacity needs, map them against its current capabilities, and then assess whether the resulting gaps can best be filled through internal development, acquisitions, or outside suppliers. If the decision is made to use outside suppliers, the next step involves a worldwide search for competitive suppliers based on the identified capability needs. Company needs should be mapped against the capabilities of potential suppliers. Performance metrics should be established at this stage as a means of assessing candidates and tracking future supplier performance. Suppliers should be carefully selected because the company's commitment, in many cases, will be to a long-term, intimate business relationship. Although some suppliers are selected over other qualified suppliers based on the need to fill government-mandated quotas, most are selected based on combinations of the following factors: a track record of demonstrated cost competitiveness and on-time delivery possession of proprietary capabilities demonstrated management capabilities customer support and logistics capabilities in-depth quality performance willingness to develop jointly seamless processes and eliminate non-value-added activities at the interfaces between customer and supplier compatible corporate cultures demonstrated financial strength and profitability competitive technology and process capabilities demonstrated compliance with government regulations senior management interest in achieving a sustainable competitive advantage for the supply chain willingness to share benefits achieved through supply chain integration After the pool of potential suppliers has been reduced by a preliminary assessment, the remaining candidates should be subjected to in depth, on-site risk assessments conducted by a cross-functional team to identify strengths, weaknesses, and deficiencies. Following the final selection, a joint program should be initiated to solve supplier problems, eliminate deficiencies, and establish an open relationship that includes timely feedback and information sharing. This program should include ongoing, systematic supplier development and integration, including joint projects, training, inventory coordination, incentives, and penalties.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Links should be established with second-tier and third-tier suppliers; their key capabilities should be mapped; and their deficiencies should be identified and addressed. Investments in targeted supplier development and integration can result in substantial reductions in product development and order cycle times, as well as improvements in quality and on-time delivery. Substantial benefits can be realized by including suppliers in the product design process, which may involve new and uncomfortable relationships for many companies. Overcoming these problems will require strong executive support and employee training. Strong, active supplier roles and open sharing of information on the development team will be essential for achieving project goals. Concerns about protecting proprietary information can be addressed by formal confidentiality or nondisclosure agreements. With increased reliance on sole-source suppliers and expanded levels of supply chain integration, the pressure on each supply chain participant to consistently meet its commitments increases. Replacing unreliable members of highly integrated supply chains and rebuilding required levels of trust and knowledge can be an expensive and painful process. INTEGRATION BY FUNCTION Many companies approach integration on a function-by-function basis, focusing first on functions for which integration offers the highest returns. Although the focus differs from industry to industry, inventories, procurement, inbound logistics, manufacturing operations, and distribution of products and services are the functions most frequently integrated. All-inclusive approaches encompass functions ranging from raw materials extraction through manufacturing and distribution to the customer and back. A ''closed loop" approach includes asset stripping and the rework or recycling of products returned by customers. A well integrated supply chain must be open to "functional shiftability" (i.e., the assignment of functional responsibility to members of the supply chain best positioned to perform those functions at the lowest overall cost or in the shortest cycle time). Realignment of such activities within the supply chain should be reflected in a commensurate shift in benefits and risks. INTEGRATION BY PROCESS The effort required to identify key functional activities and their interrelationships has caused many companies to change from integrating and managing supply chains by functions to integrating and managing

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Surviving Supply Chain Integration: Strategies for Small Manufacturers them by process (process management). These companies typically use a business process architecture to analyze processes and supply chain relationships in successive levels of detail. Viewing the supply chain as a set of integrated process capabilities rather than as separate corporations and functions can provide critical insights that can be used to improve performance. In this way, complex activities can be coordinated to great advantage between functions and redundant or non-value-added activities, such as administrative or multiple entries, can be eliminated. Integration is most beneficial when it occurs across multiple processes that have significant effects on supply chain performance, such as information technology, marketing, and finance. Integration across multiple processes can enable customization of the supply chain according to delivery channels, manufacturing requirements, or market segments. CRITICAL SUCCESS FACTORS The following factors are critical for successful supply chain integration (Agility Reports, 1997): organizational buy-in, including full commitment by management a clear understanding and articulation of identifiable benefits for all parties adaptability and openness to changes in work design and organizational structure, consistent with agreed-upon levels of process integration effective use of appropriate technologies for communications, data exchange, and product development compatibility with the strategic vision of the enterprise One of the most critical factors is organizational buy-in. Employee responses to integration efforts often range from indifference to antagonism Managers may attempt to "protect their turf," and organizational in-fighting is not uncommon. To some extent these responses are predictable aspects of human nature. In anticipation of resistance to organizational change, supply chain participants should plan the integration process carefully. First, baseline relationships and processes should be mapped out in detail, an important, but time-consuming process. Second, the system of rewards and sanctions should be modified so that it is congruent with the proposed changes and consistent for all participants, both inside and outside of the corporation. Third, integration should begin on a small scale, using a cross-functional team under the leadership of a process champion, with participants from both customers and suppliers. It can be helpful to

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Surviving Supply Chain Integration: Strategies for Small Manufacturers separate the team from everyday operations to increase the chances of early success and minimize disruption of nonparticipants until the new approaches have been thoroughly validated. Customer and supplier personnel should be co-located at each other's sites, if possible, to facilitate process integration and communication. METRICS Participants in a supply chain are unlikely to achieve their collective goals unless their performance measures (metrics) and incentives are aligned. Hence, metrics and incentives must be clearly and carefully defined, mutually agreed-upon, and monitored by all participants. Participants should be held accountable for some of each others performance measures. To date, very few companies have succeeded in assessing the performance of their supply chains as a whole. Nevertheless, performance should be measured both on a highly aggregated basis and within specific segments. Although specific metrics must be tailored to the circumstances, the following metrics can be used for high-level assessments: profitability total sales decision response time (the time required to make and implement key decisions throughout the chain) return on investment return on assets technology (the status of and ability to deploy value-enhancing technologies) product development time (the elapsed time from concept through initial delivery) shared risk (the extent of risk minimization and sharing throughout the chain) market share planning (the extent to which both strategic and short-range planning are performed in a coordinated and cooperative manner throughout the chain) quality (effective planning for and delivery of quality products, including appropriate measurement of results by all participants) customer satisfaction waste (reductions in scrap, rework, waste, and pollutants from the supply chain and plans for further reductions and recycling) transparency (the extent that participants are aware of activities throughout the supply chain)

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Detail metrics should be selected for monitoring key functions, processes, and capabilities throughout the chain. Each participant's detail metrics should roll up to an overall measure of supply chain performance. The roll-up should be designed to show how each participant in the supply chain contributes to overall performance. Otherwise, individual firms may take unilateral action to improve their financial or competitive position, which may compromise the performance of the supply chain as a whole. Although detail metrics differ from industry to industry, the ones listed below, which are often used by large corporations to monitor their internal operations, should be considered. General: time to market (the speed at which the organization identifies and delivers new products to the marketplace) inventory levels and capacity utilization market to collection (the speed with which receivables are converted to cash) customer services (measures of after-market support to customers) management for results (the efficiency and effectiveness of management) infrastructure (the up-time and efficacy of information systems, training, and other support processes) return to available (measures of velocity, asset utilization, costs and revenue generated from reworking the product in the returns channel) Delivery: delivery-to-commitment date (measures of meeting commitments) lead time (customer waiting period) faultless installations (installation errors; customer call-backs) faultless invoices (error rates in processing invoices) forecast accuracy (accuracy in predicting market demand) customer inquiry resolution time (elapsed time to resolve customer inquiries) Flexibility and responsiveness: response time (measures of the responsiveness of supply chain processes or functions) productivity flexibility (measures of productivity changes as a function of market demand) replanning cycle (time required to create and implement modified production plans)

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Surviving Supply Chain Integration: Strategies for Small Manufacturers release-to-ship date (elapsed time between release of new or modified products and their shipment to customers) materials lead time (elapsed time between placement of an order and receipt of materials) Logistics: logistics cost (product distribution costs) obsolescence (reduction in inventory value due to expiration of shelf life or changes in technology) warranty costs (rework, repair, replacement, shipment, and legal costs associated with defective products delivered to customers) Asset management: cash-to-cash cycle (elapsed time between payment for goods and services used to produce the product and receipt of payment from the customer) inventory days of supply (inventory levels divided by average quantity used or shipped per day) inventory aging (measures of elapsed time that perishable or potentially obsolete goods remain in inventory) days of sales outstanding (accounts receivable divided by average daily sales) asset turns (frequency of inventory replenishment per year) ship-to-invoice cycle (delay in billing customer after product shipment) Standards developed by associations and governing bodies provide a common language for communications, which can be used to increase awareness of supply chain performance. Standard techniques, such as statistical process control (SPC), can be useful for monitoring individual processes. However, although certification and conformance to standards is important, they are not always sufficient for measuring some aspects of supply chain performance. Benchmarking is another technique that can be used for measuring, understanding, and communicating the dynamics of supply chain performance. A detailed discussion of benchmarking in integrated supply chains may be found in Chapter 13 of Robert Camp's book, Business Process Benchmarking (1995). Recommendation. Small and medium-sized manufacturing enterprises (SMEs), as participants in supply chains and as integrators of their own supply chains, should study the process of supply chain integration. Based on a thorough analysis, each participant should then develop an

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Surviving Supply Chain Integration: Strategies for Small Manufacturers internal business case for participating in particular supply chains and decide, in conformance with formal supply chain agreements and the needs of the chain, the extent to which they will integrate with their customers and suppliers. Recommendation. Small and medium-sized manufacturing enterprises should use benchmarks and metrics to monitor supply chain performance. Metrics and incentives or penalties should be carefully aligned to encourage optimal supply chain performance. However, because collecting, reporting, and analyzing data is expensive, supply chain participants should select only the metrics required to meet their needs, monitor and analyze the data carefully, and, most importantly, follow through with appropriate action to improve performance.

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