the manufacturing industry’s war against complexity

7/28/2019 The Manufacturing Industrys War Against Complexity

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The Manufacturing Industrys

War Against ComplexityThe Battle to Manage Customization in the Supply ChainSteve KeiferVP Product & Industry MarketingSeptember 2010

A GXS White Paper for the Active Business


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Gaining Competitive Advantage throgh Sppy Chain

The Top 500 companies in the world continue to get bigger and bigger as they grow

through mergers, acquisitions and international expansion. There is a book entitled the

Rule o Three by Jagdish Sheth and Rajenda Sisodia, in which the authors postulated that

every industry converges to three large players once it reaches a certain state o maturity.

Competitive markets evolve by a natural selection process that avors the strongest, most

ecient companies. The Rule o Three certainly seems to be applicable in numerous

industry sectors and geographies around the world. Consider the US automotive marketin which the Big 3 OEMs o Ford, Chrysler and GM have maintained top rankings or

decades. In the Japanese electronics market Toshiba, Hitachi and Mitsubishi enjoy the

greatest market share. In the global PC market, HP, Lenovo and Dell account or a signi-

cant percentage o revenues.

Whether each market has converged to three leaders or not can be debated, but there is no

question that many markets have consolidated to a handul o very large corporations. As

the operations o these large companies grow larger so does their quest or efciency. Over

the past decade retailers and manuacturers amongst the top 500 have aggressively pursued

supply chain optimization in order to maximize their fnancial perormance. Large organiza-tions have redesigned their business models to become more responsive to changing market

conditions (demand-driven); to lower operating costs or supply chain processes; and to

outsource non-core unctions to specialized third parties. Numerous innovations in process,

partners and technology have enabled a new generation o supply chain efciencies:

ProcessLarge companies have embraced demand-driven supply chain processes

such as vendor managed inventory, warehouse cross-docking and late-stage post-

ponement. Companies have also optimized their nancial supply chains with pro-

cesses such as evaluated receipts settlement and early payment discounting.

PartnersLarge companies have outsourced unctions to specialized service provid-

ers that provide economies-o-scale, cost advantages or process excellence that is

not easily attainable in-house. Examples o these service providers include contract

manuacturers, reight orwarders, original design manuacturers, third party logistic

providers and ourth party logistics providers.

TechnoogyLarge companies have capitalized on the cost savings and perormance

eciencies to be gained by new technologies. Examples include B2B e-commerce

initiatives such as collaborative demand planning, data synchronization, electronic

product codes, e-invoicing and XML messaging. Strategic investments have also

been placed in enterprise applications or supply chain planning; transportation

management and service parts planning.

Demand-driven supply chain processes, specialized outsourcing providers and B2B e-com-

merce technologies can be implemented by any large company. But, not all large com-

panies execute on these initiatives in the same way. In act, increasingly large companies

increasingly view their competitive advantage as being derived rom how they uniquely

manage their supply chains. Dierentiation comes rom designing the best combination o

partners, processes and technologies to maximize supply chain eciency. The choices that

an individual company makes regarding:

2 The Manufacturing Industrys War Against ComplexityA GXS White Pape


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Theserviceproviderstobeincludedinanetworkofpartners

Thetechnologyplatformsthatareimplemented

Theadvancedsupplychainprocessesthatareadopted

Directly aect the competitive advantage it enjoys in the marketplace.

Figre 1: Competition throgh Process and ServiceSource: SCM World 2010 Enhancing Customer-Centric Supply Chains

Consider the ollowing examples:

Wa-Martdierentiated its supply chain with the use o regional distribution cen-

ters, cross-docking, everyday low prices and most recently the use o technologies

such as RFID.

Toyotadierentiated its supply chain with Just-In-Time (JIT) manuacturing andstrong supplier relationship management.

Dedierentiated its supply chain with direct-to-consumer sales and build-to-order

manuacturing models as well as its online storeront technologies.

GEdierentiated its supply chain model with Six Sigma to improve quality as well

as through early technology investments in EDI and e-marketplaces.

Zaradierentiates its supply chain with a vertically integrated approach that allows

or rapid introduction o new products and low inventory turns.

Micro-Management Sppy Chain Stye

Once a set o best practices (vendor managed inventory, cross-docking, late-stage postpone-

ment) is identifed and an optimal set o technologies (collaborative demand planning, data

synchronization, radio requency identifcation) is selected, large companies will then insti-

tutionalize the practice across the business. O course, defning standardized processes or

sales orecasting, materials management, inventory management, warehouse management,

The Manufacturing Industrys War Against Complexity 3A GXS White Paper

Increasingy Companies like Ors Wi Compete as Mch

Throgh Sperior Processes and Service Sotions asThrogh Sperior Prodcts.

Strongly Agree

Agree

Disagree

Strongly Disagree

0% 20%10% 60%50%40%30%


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and invoice processing requires the active participation o suppliers. For large corporations,

supplier participation is rarely an issue. Most large buying-organizations have considerable

leverage over their community o vendors. In act, buyers can usually dictate very avorable

terms and conditions when negotiating with suppliers. In recent years there has been a trend

towards large customers pushing suppliers to carry bigger inventory reserves, accept longer

payment terms and provide aster lead times. Furthermore, large buyers have been more

rigorously micro-managing the details o their own unique supply chain processes. Buyers ar

strictly enorcing consistent execution o guidelines or order ulfllment including product

packaging, shipment labeling and carrier routing. Major retailers and manuacturers now

have compliance policies that provide detailed guidelines or suppliers on:

Theallowabletimeframesforacknowledgingapurchaseorder

Thethresholdsforreplenishinginventory(ifthesupplierisresponsibleformanaging

Thetransportationprovidertouseforless-than-truckloadorfull-truckloadshipmen

ThecontentsoftheAdvancedShipmentNoticeEDIdocument

Thetimeframesforadvancednoticationofincomingshipments(i.e.ASNdelivery)

Thesequenceinwhichtoloadthegoodsonatruck

Thetypesofshipmentlabelingtechnologyusedtext,barcodeorRFID

Thelocationtoafxtheshipmentlabelsonthecontainerorcasesofgoods

Thescenariosunderwhichshipmentscanbeconsolidatedorsplitup Thescenariosunderwhichsupplierscanoverorundership

ThescenariosunderwhichasuppliercansubstituteoneSKUorpartnumberfor

another

Theacceptabletimewindowsfordeliveryofashipment

Thetypesofpackagingmaterialsandpalletstouse

Thedataeldstoplaceonaninvoice

No Margin for Error

Why such an obsessive ocus on seemingly minor details about supply chain processes?

The answer is that the process and approach taken or supply chain management providescompetitive advantage. Techniques such as Vendor Managed Inventory, Cross-Docking,

and Evaluated Receipts Settlement, which dierentiate supply chain perormance, cannot

be implemented without a rigorous ocus on process execution. O course, there is also

a signicant cost advantage to be gained rom consistent execution o standardized best

practices.

Large companies have little choice but to design or very high levels o eciency in distribu

tion centers, manuacturing plants and back oce support centers. A large multi-national

retailer can process 50M boxes per distribution centers each year. A top tier automotive

OEM can assemble 5M vehicles in their various manuacturing plants each year, each com-

prised o thousands o individual parts. When the standard process is not ollowed, costly

exceptions arise. Not only do the exceptions drive cost, but they may also impact product

availability, customer service and revenue potential. Consequently, todays hyper-competitiv

supply chains are designed or 99% automated fow through o materials and product rom

the supplier to the plant, the warehouse or the store. However, when exceptions occur the

rate may decline to 98% or 97% o automation. The extra labor required or even a 1% de



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cline can be signicant when you consider the scale o the buyers operations or the volume

o products being processed.

Consider the impact o exceptions in the receiving process o a retail distribution center. I a

reight carrier arrives a ew hours ater the expected delivery timerame, then the warehouse

may not be staed to immediately process it. The warehouse sta may be occupied with

other shipments. I arrives later in the day then a shit may have ended recently decreasing

the size o the team on site. The costs increase signifcantly in a cross-docking scenario.

Figre 2: Cross Docking

When inbound reight arrives late, the outbound carrier that was scheduled to pick up

and transport the goods to the nal destination may have to sit idly or several hours. I

a truckload o goods arrives without a corresponding ASN, the warehouse manager must

invest time to research the order and inspect the contents. I the barcode label on a case

item is not readable, then the receiving manager may need to break down the pallet to

identiy its contents and destination. Similar challenges occur with cases that do not have

the label axed to the correct corner o the box. In such a scenario, the automated readeron a warehouse conveyor belt will not capture its identity. Each o these exceptions can

add costs and complexities. Individually, the exceptions may be $50-$250, but multiplied

across the millions o shipments which occur each year, the impacts are quite signicant.

Consequently, todays supply chain leaders do not allow much margin or error.

The War against Compexity

The optimization o supply chain partnerships, processes and technologies is a key ac-

tor in providing competitive advantage or large retailers and manuacturers. However,

or the suppliers who sell to and sell through these large organizations, the eect has

been anything but supply chain optimization. In act, these suppliers are aced with morecustomization as they struggle to comply with the unique support services requested rom

their largest accounts. No two customers approach supply chain optimization in the same

way. Consequently, suppliers are orced to support a myriad o dierent order orecasting,

ulllment and logistics processes and a wide variety o technology standards or visibility,

collaboration and synchronization. These manuacturers are in a battle against the growing

complexity in their demand chains.


Inbound Freight Outbound Freight

Cross-Dock Across Distribtion Center


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Consider how the supply chain optimization decisions made by large buyers aect the

operations o their suppliers. For each business process in the supply chain, suppliers are

orced to support multiple dierent models.


Process

Products

Replenishment

Packaging

Shipping

Invoicing

Large accounts may request customized adaptations or congurations of products to

meet their specic needs. Suppliers must now catalog, price and package additional

SKUs and part numbers. Manufacturers must forecast sales and manage separate

inventories for these custom products to meet customer expectations about product

availability. Separate customer support processes may be required for each SKU as well.

Some customers use a traditional order management model in which the buyer

generates a purchase order based upon production or sales forecasts. Increasingly,

large customers are requesting suppliers to manage inventories to reduce carrying

costs. There are numerous variations of the Vendor Managed Inventory (VMI) model

including consignment, kanban, schedule assignment and scan-based trading. No

two customers implement VMI models exactly the same. The consumption data that

is supplied, the thresholds which trigger replenishment and the performance mea-

surement criteria utilized will vary by customer. Large manufacturers serving a diverse

group of customers will need to support several different replenishment models.

Some customers will prefer to have goods delivered to their own distribution center,

while others may prefer shipments delivered directly to a retail store or manufactur-ing plant. Increasingly customers are requesting shipment of goods directly to the

end-customer in order to minimize inventory. Such drop-ship models are becoming

increasingly popular in B2C e-Commerce models as it avoids the carrying costs of

retailers holding inventory. Regardless of where the product is shipped, most custom-

ers will specify the freight carrier to be used. Large buyers insist on their preferred

carriers as they have negotiated bulk discounts for the freight services. The result is

that large manufacturers serving a diverse group of customers will need to support

several different logistics models.

For nished goods, which the buyer will forward onto a store or end-customer,

large buyers are seeking to minimize handling costs. Buyers prefer the products be

packaged, labeled and tagged in whatever format is required for the nal sale. For

drop-ship models, customers will provide packaging materials with their name

and logo that are used to ship goods to the end-customer. For warehouse deliverymodels, large buyers are increasingly utilizing cross-docking models. Goods arrive

in the warehouse palletized for shipment to individual stores. The pallets are then

simply transferred across the warehouse, each being routed to outbound carriers that

will deliver the goods to their nal destination. The concept of Floor-Ready Merchan-

dise requires that suppliers ticket, label and package the individual units within a

shipment such that they are immediately ready for display on the retail oor. Large

manufacturers serving a diverse group of customers will need to support several dif-

ferent packaging models.

Most customers have the supplier submit an invoice for goods or services rendered.

Other customers prefer to self-bill using an evaluated receipts settlement that

calculates charges based upon the actual goods received. Some companies prefer

consolidated billings across operating companies, while others prefer department-

level billing. Some customers will offer early-payments to suppliers in exchange for adiscount against the invoice. The early payments can be funded from surplus cash on

the customers balance sheet or via a third party factoring company or banks supply

chain nance program. Large manufacturers serving a diverse group of customers will

need to support several different invoicing models.

Description of Complexity


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O course, there are some commonalities in business processes within industry sub-sectors.

However, in each industry sub-sector there are typically two, i not three, dominant models

in existence. Toyota runs their plants very dierently than GM. Wal-Mart runs their

distribution centers very dierently than Target. Dell runs their demand orecasting model

very dierently than Lenovo. Consequently, suppliers must support two to three dier-

ent technologies or each process to satisy customer demands. The variability in customer

requirements leads to signicant additional complexity or manuacturers.

Figre 3: Mtipe Modes Exist for Sppy Chain Processes

The same types o challenges exist with the technologies selected by the customer.

Each buyer selects an optimal set o standards and models or exchanging data.

The result is that suppliers are orced to support multiple dierent B2B e-commerce

models.


Process

Payments Some customers will pay only via check, which is popular in selected countries such

as the US and France. Others will pay via Electronic Funds Transfer (EFT). There

are several permutations of EFT. Wire transfers enable exchange of funds in a few

minutes. Automated Clearinghouse (ACH) transactions take 1-2 days. ACH transactions

can be debits or credits. A credit transfer can be proactively issued by the customer

to the suppliers account. Alternatively a debit transfer is initiated by the supplier to

deduct from the customers account. An emerging new payment model is commercial

cards (e.g. P-Cards). Large manufacturers serving a diverse group of customers will

need to support several different payment models.

Description of Complexity

PrchasingProcess

Shipping &Receiving

InvoicingProcess

Buyer or SupplierGenerated Orders

Distributed OrderManagement toMultiple ERPs

Vendor ManagedInventory

Consignment

Pay On Scan &Scan Based Trading

Ship to FactoryGate, Warehouse,

Store, Plant

Drop Ship toCustomer

Specified DeliveryWindows &Notification Period

Item, Case orContainer LevelLabeling withRFID, Barcode

Supplier GeneratedInvoice or BuyerSelf-Billing

Early PaymentDiscounts orSupply Chain

Finance

ConsolidatedInvoicing

Department LevelBilling

PaymentTerms

Open Account orLetter of Credit

Check, ACH, P-Cardor Wire Transfer

Credit or DebitTransfer

ConsolidatedPayments Options


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Technology

Product Catalog

Demand Forecasting

Procurement

Shipment Status

Shipment Labeling

Electronic Invoicing

Electronic Payments

Numerous e-commerce standards exist for direct sharing of catalog data including

the Global Data Synchronization Network (GDSN), EDI, PIES and cXML. The most

popular methods for sharing product catalog data are not standardized at all, but

rather manual data entry into vendor portals and e-mailing of spreadsheets. The

technology standards can be used to introduce new products, discontinue retired

products and change existing products. Most suppliers will need to support two

or more of the technology approaches for catalog publishing along with manual

processing of un-automated transactions.

Sharing Point-Of-Sale (POS) data is a popular technique for improving demand

forecast accuracy in the retail industry. Within industrial sectors such as high

tech, automotive and aerospace, consumption is often communicated in terms of

inventory positions. POS and inventory data can be shared via specialized SaaS

applications, EDI or XML messages, vendor portals or spreadsheets. The amount

of data, frequency of exchange and level of accuracy for the demand data will

vary by customer.

For direct materials, Purchase Orders (POs) are exchanged using e-commerce

standards such as EDI and XML. Changes to POs are far less automated. In fact,

most companies that send XML or EDI based POs, handle changes or cancella-

tions via manual methods such as e-mail or phone conversation. With VMI mod-

els a reverse ow occurs in which the supplier sends a recommended purchase

order to the buyer. For low volume, infrequent purchases some large customersmay prefer to use the suppliers B2B order management portal or via punchout

from the buyers e-procurement system.

Most customers prefer to receive an Advanced Shipment Notice (ASN) for inbound

product ow, but the implementation can vary considerably from customer-to-

customer. Customers will have different timeframes for receiving the ASN such as

24 hours in advance or by midnight on delivery date. Furthermore, customers will

have rules about how ASNs can be utilized. Can a single ASN be used to notify

of shipments to two different addresses? Can items from two separate purchase

orders to be consolidated into a single ASN?

Customers prefer to have incoming goods labeled with auto-identication tech-

nology to expedite receiving, tracking and re-routing of shipments. Labels can

be applied only at the pallet level or at the case and item level as well. Labelsmay be human-readable text-only formats, barcodes or electronic product code

(RFID tags) or combinations of all three. Suppliers must afx the barcode labels

in specic places on the containers depending upon the customers warehouse

conguration.

Historically, large companies have preferred to receive e-invoices directly from

suppliers in EDI or XML format. In recent years there has been a rise in the use

of Electronic Invoice Presentment and Payment (EIPP) portals. With self-billing

models a reverse ow of the invoice occurs as it is sent from buyer to the sup-

plier. Customers often have different approaches to managing deductions and

chargebacks. Highly automated accounts may send debit and credit advices via

EDI while others will use e-mail or the phone.

All funds transfers will occur through the banking system. However, the informa-tion about which invoices were paid and which deductions were taken may travel

via several different routes. Some customers will share the remittance advice

directly with a supplier via EDI. Others will post remittance data to a portal. Some

will share remittance details via the banking network. In other words the data

ows along with the debit or credit transfer/automated clearinghouse transaction.

Complexity Challenge


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There is certainly some commonality in the technology models used with industry sub-

sectors. However, in each industry sub-sector there are typically two, i not three, dominant

models in existence. Consequently, suppliers must support two to three dierent technolo-

gies or each process to satisy customer demands. The variability in customer requirements

leads to signicant additional complexity or manuacturers.

Figre 4: Mtipe Modes Exist for Information Sharing

Fast Moving Consmer Goods Case Stdy

Throughout the 1990s and early part o the new century a variety o new store ormats

were introduced to the retail industry. In addition to the long-standing grocery, drugand mass merchant channels, rapid expansion o new club, dollar and specialty ormats

emerged. The new warehouse, club and dollar chains, seeking a dierentiated mer-

chandise mix to draw consumers to their stores, encouraged suppliers to create exclu-

sive product and packaging options unique to their stores. Examples o unique product

congurations include multi-packs (same item in bulk), variety packs (mix o favors o

same item) and club sizes (packaging o complementary, but dierent items). Extensive

customization o services occurred as well. Responding to retailer needs, Consumer

Packaged Goods (CPG) companies began to oer specialized pallet congurations,

Vendor Managed Inventory and dedicated in-store support.

In 2006, the Grocery Manuacturers o America (GMA) enlisted management consult-ing rm Booz Allen & Hamilton to perorm a study entitled Creating Value through

CustomizationWinning through Shel-Centered Collaboration. Participants

included retailers such as CVS Pharmacy, Meijer, Publix, Rite Aid and Target as well as

CPGmanufacturerssuchasClorox,GeneralMills,Kraft,KimberlyClark,Nestleand

Sara Lee. The study results provide excellent insights into the level o customization


CuSTOMER

SuPPlIERS

SppierPortas

EDINetworks

Data Sync(GDSN)

SaaSVendors

SpreadsheetVia Emai

Direct DataExchange(AS2, FTP)

Compliance GuidesVendor Setup

Importer Guidelines

Purchase OrderShip Notice

Invoice

New ItemAttribute CHange

Discontinue Item

CPFRVMI/Consignment

Supply Chain VIsibility

Sale ForecastPoint of Sale

Product Catalog

Point of SalePurchase Order

Ship Notice


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in the CPG and retail supply chain. Over hal the manuacturers surveyed supported

unique sizes, customized display units or multi-packs. However, customization o

services (versus products) was even higher. Over hal o surveyed suppliers supported

services such as customized inventory management, pre-mixed pallets, specialized han-

dling, collaborative planning, unique routes or special pallets (Figure xx below).

Over 1/3 o manuacturers stated that customized products represented more than

10% o sales. Forty percent o manuacturers stated that customized supply chainservices are now provided or accounts representing more than hal o their sales.

While these statistics are noteworthy, perhaps more interesting is that rate o change

in customization programs.

Figre 5: Prodct and Service Cstomization in CPG

Source: Grocery Manufacturers Association 2006

Approximately 70% o manuacturers stated that customization o both products and

services had risen substantially over the past 3 years. Furthermore, approximately 90%

o manuacturers orecasted that customization would continue to increase in the next

2-3 years.

The GMA study ound that despite the signicant investment ocus by both retailers

and manuacturers, approximately hal o all customized products and services ail to

create value. Why?

One reason is that all this customization has created an enormous new source of additionalcomplexity for both manufacturers and retailers, particularly as the varieties

of customization continue to multiply. Many manufacturers now receive hundreds (some,

even thousands) of requests for customization each year...


Prodct CstomizationPercentage of Manufacturers Pursuing

Services CstomizationPercentage of Manufacturers Pursuing

Unique Size

Display Unit

Multi-Packs

UniqueFormulation

Bundle In Items

Graphics &Labeling

0% 25% 100%75%50%

InventoryManagement

Pre-Mixed Pallets

Special Handling

CollaborativePlanning

Unique Routes

Special Pellets

DedicatedIn-Store Support

0% 25% 100%75%50%


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Compexity in Manfactring

Customer-driven customization o products and services is just one battle line in the larger

war against complexity that manuacturers are engaged in.

Prodct ProiferationManufacturersaresupportingmoreSKUsandpartnumbers

each year in an attempt to provide highly targeted oerings to specic market seg-

ments or individual customers. Consumer markets, in particular, are becoming more

and more subdivided as the mass market transitions into a complex web o nichesegments.

Internationa ExpansionMost large manuacturers have initiatives to expand sales

outside o home markets. Some are ocused gaining additional market share in the

highly developed economies o North America and Western Europe. Others are

ocused on emerging markets such as Brazil, Russia, India and China.

Goba SorcingSourcing o raw materials, component parts or nished goods in-

creasingly is ocused upon vendors in low cost geographies. Most manuacturers have

relocated or built new production capacity in regions such as Southeast Asia, Central

America or Eastern Europe.

Offshore EngineeringOshore is not limited to just production, but also research,

development and engineering unctions. Multi-national corporations are seeking to

tap the millions o talented engineers graduating rom universities in Russia, China

and India.

Extensive OtsorcingManuacturers have outsourced unctions such as produc-

tion to contract manuacturers, atermarket service to 3rd party logistics providers

and product engineering to original design manuacturers.

Figre 6: The War Against Compexity


Manfactrer

ProductProliferation

GlobalSourcing

OffshoreEngineering

ServiceCustomization

InternationalExpansion


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There have been numerous studies by major consulting organizations on the eect

complexity has to a manuacturers operations. For instance, Deloitte Research published

a report entitled Mastering Complexity in Global Manuacturing in 2003. The report

states that:

Manufacturers seeking to exploit global markets, supply chain and engineering opportunities

are hitting an invisible but nonetheless debilitating wall: mounting complexity across the

value chain.

Deloitte ound that a small group o manuacturers, which had been able to overcome the

challenges o complexity, were achieving superior nancial returns as compared to their

peer group.

While most companies struggle to put the pieces together, a small group of manufacturers have

excelled amid the complexity. These complexity masters, as we call them, are being rewarded

handsomely.

More recently in July 2010, Boston Consulting Group (BCG) published a report entitled

Mastering ComplexityCapture the Hidden Opportunity. BCG stated that

The trend toward product customization allows customers to have it their way, but wreaks

havoc on production schedules and inventory management.

On the specic topic o customization, BCG stated that

Product variety can be a competitive differentiator, but it requires more designers and engi-

neers, more components and raw materials, more changeovers in production lines, higher inven-

tory levels, more plant and equipment, and more people to market, support and manage the

product and customer portfolios. Many of these costs are indirect and not readily apparent.

Boeings 787 Dreamliner project oers an excellent example o the complexity todays lead-

ing manuacturers conront. Design and production have been outsourced to a network

o suppliers in Italy, Japan, US and other countries around the world. The overwhelming

complexity associated with the model has been a key actor in product launch delays.

Appare, Footwear and Genera Merchandise Case Stdy

To ensure consistent execution o preerred supply chain processes, the general mer-

chandise and department store sector o the US retail industry has created a sophisti-

cated system o perormance incentives or suppliers. The perormance management

system maniests itsel in the orm o retailer compliance guides, which outline detailed

rules or logistics and order ulllment activities. These guides are designed to ensure

that processes such as Floor Ready Merchandise and Cross Docking can be executed

consistently in high volume distribution centers. Unortunately, one o the key chal-

lenges is that there is very little consistency between the retailers on the specic metrics



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being tracked. The lack o consistency creates signicant complexity or manuacturers

each o which may have 75 to 100 dierent retail customers each with dierent types

o rules. The ability to comply with retailer-specic rules is quite challenging or even

the largest suppliers.

The Vendor Compliance Federation (VCF) perormed a study in 2006 o the com-

pliance guides being utilized by 30+ retailers. Consistency in measurement criteria

typically simplies processes or suppliers. However, even in the case o consistentperormance measurements, diering interpretations o the results leads to urther

complexity. For example, the most requent deduction category was late shipment

utilized by 85% o the retailers. However, there is widespread disagreement on how

to measure whether a shipment is late. The Warehouse Education Research Council

(WERC) conducted a study in the spring o 2005 to understand how companies mea-

sured On Time Delivery to warehouses and distribution centers. 42.7% believed that

On Time Delivery means product delivered on the requested day. But the remainder

o survey participants cited more specic windows:

16.8%statedontimeisonorbeforetheappointedtime

15.9%statedontimeisontheagreeduponday

11.2%statedontimeis+30minutesfromtheappointedtime

9.1%statedontimeis+1hourfromtheappointedtime

4.3%statedontimeis+15minutesfromtheappointedtime

Another dimension which compounds the challenges associated with deductions is

the act that retailers make changes to the compliance guides. Some chains update the

rules every 3-5 years. However, others publish changes 10-12 times per year. Some re-

tailers will send proactive e-mail notications to the supplier community while others

will more passively post changes to a PDF on their vendor portal. In either scenario,

suppliers must invest time to regularly monitor retailer communications and web sites

or changes.

CstomizationA We-Kept Secret

I customization is such a major issue, why isnt there more discussion about it? The impact

o customization is a well-kept secret in most industries. For example, you will not read

much about the customization challenges companies ace with their demand chains in the

media. That is because no supplier wants to talk publicly about the issues. Who wants to

go on record complaining about their largest accounts?

Furthermore, the large corporations causing the customization seem to have a blissul ig-norance about the ramications o their approach. You wont meet a supply chain executive

which thinks o their operations as customized. The buyer, o course, has the perspective

that they are improving eciency in the supply chain by standardizing with best practices.

But unortunately, no two companies standardize in the same way. As a result, what one

company considers standard is viewed as custom by another. The situation is unlikely to

change. I all companies used the exact same technology, partners and processes then how



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would one gain competitive advantage over another? Perhaps most ironic, is that most large

manuacturers which struggle with customization on the sell-side o their business are driv-

ing the same types o customization challenges into their supplier base on the buy-side o

their business.

Another question to consider is that i customization is such an issue in the demand chain

or manuacturers then why is there not more backlash against customers? The answer is

that suppliers, no matter how large, rarely have the bargaining power in a relationship.

There was a time 20-30 years ago when suppliers in the industries such as Fast MovingConsumer Goods, Apparel & Footwear, Industrial Manuacturing, Medical & Surgical

Products had considerable market power. In act, the manuacturers would typically drive

supply chain initiatives with a goal to achieve urther eciencies. However, the balance o

power has shited in most cases.

Consider the ollowing three examples:

RetaiLarge chains such as Wal-Mart, Carreour, Tesco, Metro, Home Depot and

Macys have the power in todays retail industry due to their extraordinary size and

salesvolume.EvenlargesupplierssuchasProcter&Gamble,Nestle,Unilever,Kraft

Nike and VF will go to great lengths to meet the customized needs o customers. AtomotiveLarge OEMs such as GM, Ford, Renault, Volkswagen, Toyota and

Hyundai have the power in todays automotive industry as brands have merged and

consolidated into massive holding companies. Large auto suppliers such as Bosch,

Denso, Continental, Magna, Delphi and Faurecia each develop highly custom-

ized support processes or their large customers. In act, many have co-located their

plants in proximity to the OEM sites.

High TechLarge OEMs such as Cisco, HP, Dell, IBM, Apple, Sony and LG have

the power in todays high tech industry. As inormation technology has exploded

in the past 20 years, these rms have grown both organically and inorganically to

become some o the worlds largest brands. Component suppliers and contractmanuacturers such as Intel, Seagate, Flextronics, Hon Hai and Samsung perorm

extensive customization to support large accounts.

The buyer-dominance that leads to supply chain customization is not omnipresent. The

phenomenon is most acute in market segments where signicant industry consolidation

has occurred. The diagram below illustrates several examples o buyer-dominated sectors.



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Figre 7: Manfactring Segments with a Consoidated Cstomer Base

However, there are numerous sectors in which the buy-side o the industry remains highly

ragmented. For example, most auto dealerships around the world are small and medium

businesses, which are largely driven by the strategies o the OEMs (the suppliers). Many o

the hospitals in the US are small and medium businesses, whose supply chains are con-trolled by a powerul group o health care distributors and medical device manuacturers.

Much o the computer and networking equipment sold around the world occurs through

Value-Added-Resellers (VARs) and specialized distributors.

The Se-Side ViewCompeting for Differentiation

Historically, companies have viewed dierentiation and competitive advantage as coming

rom product eatures or pricing advantages. However, sustainable dierentiation based

upon eature, price or perormance has become signicantly more challenging in the past

decade.

Competing on price has become equally challenging as low-cost manuacturing cen-

ters emerged in Central America, Eastern Europe and the Pacic Rim. There is always a

cheaper source o materials, parts or nished products. In most market segments, low-cost

private label or generic versions o products are widely available at extremely competitive

prices. The Internet provided new levels o transparency to pricing or B2B purchases.

Technologies such as reverse auctions and electronic marketplaces enabled purchasing

managers to seek out low-cost materials and nished goods rom a global base o suppliers.

Today, the advent o web 2.0 and mobile technologies is arming consumers with new levels

o pricing transparency and purchasing power. Consumers are using social platorms suchas Groupon or collective bargaining agreements with local merchants.

Apple is widely considered one o the most innovative companies in the world. Yet even

Apple cannot escape the threat o imminent commoditization and replication o their

intellectual property. Countereit versions o Apples recent iPhone 4 were released on the

streets o Shenzhen several weeks beore the ocial, authentic product was available in


AerospaceOEMs

AtomotiveTier 1

Sppiers

Hi TechOEMs

ConsmerProdctsBrands

Medica &Srgica

Sppiers

Tier 1+Suppliers

ContractManufacturers

ContractManufacturers

Materials &Part Suppliers

Tier 2+Suppliers

AirlineOperators

Distributors& Retailers

Retailers &Distributors

GPOs &Distributors

VehicleOEMs


16/18

the US. Shanzhai cloners developed a ake version o the iPad called the iPed which was

released shortly ater the commercial launch. Countereiters, however, are not the biggest

threat. In todays tear-down supply chain, hit products are quickly dissected by experts

who publish the entire conguration online. The level o transparency that exists in todays

market or product design combined with the agility o contract manuacturers to replicate

intellectual property, compromise even the most innovative companys ability to achieve

long-term dierentiation.

Neither mobile phones nor Apple are unique in their challenges with building sustainabledierentiation in products. Manuacturers in almost every market segment struggle to

avoid commoditization. Hundreds o new innovative new pharmaceuticals, ood products,

apparel designs, computing platorms, aerospace parts and automobile engine technologies

reach the market each year. Most o these new products are matched in eatures or peror-

mance by their competitors just a ew months later.

I your products are less dierentiated and your pricing can be undercut, how then do you

compete to gain more market share at your largest accounts? Many companies are turn-

ing towards dierentiation models based upon customer service. Excellence in service is

dicult to achieve and even harder to replicate. Suppliers have a signicant opportunityto provide customized services to their large customers that meet the specic needs o their

supply chains.

Dierentiation upon process excellence has become as important as dierentiation based

upon product eatures. A 2010, SCM World Study on Customer-Centric Supply Chains

ound that 95% respondents agreed that companies will compete as much through supe-

rior process and service solutions as through superior products.

You may be skeptical that a business ocused on manuacturing products would choose to

dierentiate itsel based upon process or service. I so then you have never spoken to a six

sigma proessional. Companies such as Motorola, Caterpillar and GE have been able todemonstrate remarkable improvements in quality, reliability and customer service through

Six Sigma implementations. Both process and service are increasingly critical to manu-

acturers. Why do product-oriented manuacturers care so much about service? Deloitte

recently published a study entitled The Service Revolution in Manuacturing Industries,

which stated that Manuacturers are looking or growth and prots in all corners o the

globe,buttheyoftenneglecttheverylargeopportunitiesmuchclosertohomeintheir

own service business. Service is important to manuacturers because it helps to:

Meetcustomerexpectationsformissioncriticalprocesses

Improveresistancetolow-costcompetitivethreatsandeconomicdownturns

Generatemoreprotsoverthelifecycleoftheproduct

To some manuacturers, the idea o service-led dierentiation is not new. Henry Ford, the

ather o mass production, stated A business absolutely devoted to service will have only

one worry about prots. They will be embarrassingly large.



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How to Master Compexity

There are two ways to view complexityas a challenge or as an opportunity. Manu-

acturers can take the view that the glass is hal empty. In other words, complexity is an

overwhelming challenge that burdens manuacturers with excessive costs. Alternatively,

manuacturers can take the view that the glass is hal ull. When one considers that all

manuacturers are challenged with the same needs to respond to complexity in their de-

mand chains, an opportunity or dierentiation emerges.

An increasing number o suppliers are turning challenge into opportunity. These leaders

are enlisting the help o specialized outsourcing providers and new technology platorms

to wage war against complexity. Those manuacturing companies which can master the

complexity in their demand chains will be the long-term winners in the marketplace.

Figre 8: Masters of CompexityNote: The idea of a Complexity Master is based upon concepts developed by Deloitte Research in their report entitled Mastering Complexity

in Global Manufacturing published in 2003.

Suppliers which can manage the complexity o their demand chains eectively will rank

the highest on perormance scorecards. These masters o complexity will enjoy higher

prot margins rom minimized deductions and chargebacks. They will be easier-to-do-

business-with leading to account growth, increased collaboration and more strategic

relationships with their largest accounts.

Those suppliers, which can utilize technologies such as B2B e-commerce to overcome the

challenges o customization, will be able to delight customers by servicing their unique

needs in a consistent manner. These leaders will not only enhance customer satisaction, but

also dierentiate themselves in the marketplace and grow revenues at their largest accounts.

Will your business be a master o complexity?


LOW HIGHTechnoogy CapacityLO

W

HIGH

ProcessFlexibility

Masters of Processwill excel in scenarios

with high processcustomization

Masters ofComplexity can turn

customization intoopportunity

Laggards willstruggle with

customer serviceand cost structure

Masters of Technologywill excel in scenarioswith high automation

potential


18/18

About GXS

GXS is a leading provider of B2B e-commerce solutions and operates the worlds largest and most expansive network of integrated business communities.

The companys software and services simplify and enhance businesses process integration and collaboration among networks of trading partners.

Organisations worldwide, including more than 75 percent of the Fortune 500, use GXS solutions to extend their supply ch ain networks, optimise product

launches, automate warehouse receiving, manage electronic payments and gain supply c hain visibility. Based in Gaithersburg, Maryland, GXS has opera-

tions and ofces around the world. For more information, see http://www.gxs.co.uk, http://blogs.gxs.com and http://twitter.com/gxs.

Copyright 2010 GXS, Inc. All Rights Reserved. November 2010 A

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the manufacturing industry’s war against complexity

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