Chapter 1 - Logistics & Supply Chain Technology
Things were far from sweet at Hershey Foods Corporation in 1999. Founded by Milton Hershey in 1894, Hershey is one of the world's largest manufacturers of chocolate and candy products, marketing such products as the Hershey Bar, Reese's Cups and Twizzlers.1 As befalls many companies, the lure to leverage technological change was strong for Hershey.
In 1997, CEO Kenneth Wolfe and his team had made the decision to embark on a four-year $112 million project to update and enhance their SAP AG R/3 enterprise resource planning (ERP) system. Simultaneously, the company planned to update their Siebel (now Oracle) customer relationship management (CRM) and Manugistics (now JDA) supply chain planning software, as well as deploying thousands of pieces of new computer hardware across their organization. Their goals included automation of their order management process, as well as shipments to their customers. A complex project, with inherent risk! By the summer of 1999, the project was already running several months behind.2
As Autumn 1999 approached, company leaders made the decision to accelerate the project, trimming it from 48 to just 30 months.3 Like many retailers and consumer products companies, Hershey's demand is seasonal, with a strong "peak" (surge in demand) during back-to-school, Halloween and Christmas. One of the cardinal rules in retail is to minimize-or-avoid any possible impacts to peak season. "Black Friday", the Friday following Thanksgiving is so-called not because of the brawls over low-priced TVs at stores, but because retails hope to go "into the black" (attain profitability) during this key peak activity.
Before long, Hershey began to feel the impact of their decision. First, the company found that they were leaving orders unprocessed. By the end of peak season, almost $100 million in orders had been lost, surrendered to competitors like Nestle and Mars. Second, the missed fulfillment wasn't due to unavailable inventory. More than adequate inventory was available to meet customer demand, and sat in Hershey's distribution centers, hidden by system glitches. Before the issues were addressed, Hershey realized a 29% increase in inventory levels and related carrying costs.
Ultimately, Hershey was able to address these issues, and by 2000's peak had largely rebounded. So, where did Hershey go wrong? In retrospect, there were several root causes. First, the timing was wrong. Not only was Hershey approach their peak season (as described above), but they were also embroiled in several other large technology projects. For example, companies across the globe were at that time working on "Year 2000/Y2K" remediation projects, concerned that systems would crash as we entered the new year. Second, Hershey's executives chose to shorten ("crash") the timeline on an already-complex project, shortening it from 48 to 30 months. While this can sometimes be the right decision, it also has the effect of causing project teams to rush, and potentially miss critical defects that might have otherwise been found through requirements-gathering, testing, and training. Third, the company chose to deploy several systems at once (SAP R/3, Manugistics & Siebel), dividing their talent pool, resources, and corporate attention. Finally, it wasn't until later in the project that Hershey engaged external integrators (Accenture and SAP) to bring their expertise to bear on the project.4,5
This cautionary tale is shared not to disparage Hershey; every year, hundreds of companies embark on technology projects (large and small) with varying degrees of success. And, undoubtedly, Hershey learned from the experience. Rather, the story is shared to illustrate the difficulty of successfully implementing complex technology projects. Whether it's due to lack of resources, inadequate planning, unclear requirements, or lack of alignment to corporate mission, vision and values, not every project meets with success. In this context, supply chains are also becoming increasingly complex, and as we will see, successfully navigating that complexity with technology is no less difficult.
This book is about how companies leverage technology in their supply chains for competitive advantage. We'll look at why companies seek (and should seek) to pursue technology; how companies use technology to design and optimize their supply chains; deep-dive specific types of logistics & supply chain technology; and then explore the impact that technology is having on our companies, economies & society, and what this might mean for the future.
Logistics and the Supply Chain
Throughout this book, we'll explore technology that touches the entire supply chain. Author John Gattorna defines the supply chain as "any combination of processes, functions, activities, relationships, and pathways along which products, services, information, and financial transactions move in and between enterprises. It also involves any and all movement of these from original producer to ultimate end-user or consumer."6 The supply chain, so described because it can be envisioned as a series of "links", begins and ends with the customer.
The supply chain management industry group, APICS, has developed a Supply Chain Operations Reference (SCOR) process reference model as a framework to describe and categorize key process areas within the supply chain. The framework also allows for the definition of key performance metrics in each process area; for example, perfect order fulfillment or cash-to-cash cycle time.7 See Table 1.1 for an overview of the six Level One SCOR Process Areas.
The Council of Supply Chain Management Professionals (CSCMP) defines logistics as "that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements".9 Looking at the SCOR model, we can see that logistics plays an important role in the Deliver processes. However, it also lives in Return (via reverse logistics), Enable (because logistics requires information and relies on relationships), and most likely to some extent in the other process areas.
A definition of logistics from APICS provides us with perhaps a better launching point for our discussion:
Logistics is getting the…
In the right quantity,
In the right condition,
To the right place,
At the right time,
To the right customer,
At the right price!10
This definition is valuable because it highlights the focus of the customer as the center of the supply chain. Companies such as Amazon and Walmart strive to get these seven things "right" in their battle for your business. It's the cost of doing business, not a luxury. The customer expects it.
These definitions have been shared to help pave the way for the rest of the book. Because logistics sometimes crosses SCOR Process Areas, our discussion may also. You may decide that a particular technology or example touches the broader realm of supply chain management, and it very well might.
Every company exists for a particular reason, strives to offer specific goods or services to their customers, and have unique strategic goals. As such, they have specific needs in terms of the technology, data, systems, and processes they need to support these goals. It is to this view we will now turn our discussion.
Technology and The Corporate Ethos
Tony Hsieh, the well-known founder of the e-commerce footwear company Zappos, has stated: "We're a service company that just happens to sell shoes."11 Starbucks CEO Howard Schultz stated at the 2015 CSCMP Annual Conference that Starbucks is in the business of "love and humanity"; coffee is just their conduit towards that goal.12 Whether it's shoes, coffee or yoga pants, every company has an ethos. The Merriam-Webster dictionary defines ethos as "the guiding beliefs of a person, group, or organization".13
A company's ethos is presented to its customers in the form of a mission statement. A mission statement is a declaration regarding the "purpose or goal of an organization."14 That is, it's a corporate statement as to why the company exists. For example, footwear giant Nike's mission statement is "To bring inspiration and innovation to every athlete in the world."15 A vision statement, by comparison, is an output of a company's mission and is a "vision" of what the future may look like if the company has met its mission. It's a picture of future success. Returning to the example of Amazon, the company feels it will have met its mission if it has reached its goal "To be earth's most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online."16
Woven within a company's mission & vision are its corporate values. Corporate values represent a working agreement among the company's employees, as well as between the company and its suppliers & customers, regarding behaviors and relationships in the realization of the mission & vision. As an example, the corporate values of the footwear retailer DSW, which are prominently posted on walls throughout their corporate offices, are "Passion, Accountability, Collaboration, and Humility".17 This serves as a constant reminder of the importance of these to DSW, and along with the company's mission and vision, helps to guide their goals and behaviors. They are also adaptable over time; for example, "Passion" was added to the company's stated values several years after the first three.18
Technology and Corporate Strategy
C-Level executives play a variety of roles in companies; from identifying and approving key investments, to corporate governance; from overall leadership and communication to defining corporate strategy. Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), Chief Information Officers (CIOs), and (more-and-more) Chief Supply Chain Officers (CSCOs) play a key role in taking corporate mission, vision and values; assessing them in the context of the needs & desires of investors, customers, suppliers and employees; and determining a strategic roadmap for the company.
Whether it be through traditional strategic planning processes, or through Lean planning models like Hoshin Kanri, the process of defining the company's several "big rocks" (key strategic initiatives or goals) will vary. In Hoshin, for example, the process of Nemawashi is used for "gaining acceptance and preapproval for a proposal by evaluating first the idea [strategic goal] and then the plan with management and stakeholders to get input, anticipate resistance, and align the proposed change with other perspectives and priorities in the organization."19 The process is also called Catchball, as a simultaneous top-down and bottom-up discussion causes the planning process to be "tossed back and forth like a ball".20 Throughout this process, the company's mission, vision & values are weighed against both goals and execution plans.
The result of the overall strategic planning process is multi-fold. At the executive level, the result is a long-term (often 3-to-5 year) strategic roadmap, outlining the company's key strategic initiatives. At the middle management level, the output is an operational plan. The operational plan usually has a shorter event horizon (1-to-3 years, for example), and is an effort by middle managers to determine the small number of operational goals & projects necessary to contribute to each overall strategic goal. At the supervisory and functional level, the output is a tactical plan. The tactical plan has an overall short timeframe (with pieces reflecting anywhere from daily standard work, to weekly, monthly or quarterly goals); its intent is to outline the frequent and often repeatable actions needed to meet the overall strategic plan. The entire planning process is a continuous and repeatable one; as corporate strategic goals change, the plan is updated and revisited.
It is perhaps useful to view the hierarchy of this planning process, as outlined above:
We are all susceptible to a great sales pitch, and corporate executives are not immune. Oftentimes, companies will purchase new technology simply because it seems "cool", or it seems valuable and they'll figure out later how to make use of it. Technology, however, is an enabler. It enables a company to meet its mission, vision, and strategic goals. A key takeaway is that, ideally, the investment in technology is best spent when a company makes the investment to meet a key strategic goal. Through this process, they have determined key strategic goals, identified through gap analysis what they're missing, and have identified investments and needed projects to meet their goals.
This is not to say that companies never buy technology for other reasons. For example, more-and-more companies are spinning up "Innovation Labs" or innovation departments, to explore the potential of new technology. Often, technology is also simply required to execute the day-to-day administrative operations of a company. Finally, the amount of data companies are attempting to deal with is growing at an exponential pace. Erik Brynjolfsson and Andrew McAfee from MIT, in their fascinating book "The Second Machine Age", state that "there were 2.7 zettabytes, or 2.7 sextillion bytes, of digital data in the world in 2012, almost half as much again as existed in 2011. And this data won’t just sit on disk drives; it’ll also move around. Cisco predicts that global Internet Protocol traffic will reach 1.3 zettabytes by 2016. That’s over 250 billion DVDs of information."21
Naturally, the supply chain and logistics functions play a critical role in 21st Century companies. Chief Supply Chain Officers (CSCOs) are charged with defining a complementary strategy to the overall corporate strategy, and in turn, to work with the Chief Information Officer (CIO) and other stakeholders in determining the right technology investments to deliver on that strategy. Accordingly, we can modify the previous "pyramid diagram" to show the role that technology plays in the supply chain:
Companies have limited resources: human, capital and physical. Therefore, corporate executives are charged with careful and deliberate consumption of those resources and are usually held accountable to returns-on-investments and meeting key hurdle rates. Research firm Gartner forecasts that companies will spend nearly $3.5 trillion USD on technology in 2016.22 We'll discuss this more in Chapter Two. For now, let's turn our attention to some key categories of technology, to broaden our discussion.
Categories of Systems
Technology can be defined as " a capability given by the practical application of knowledge."23 With respect to logistics and the supply chain, we'll look at technology in the realms of hardware (physical assets), software/systems (programs that run on computers to execute one or more functions), and data (facts or information used usually to calculate, analyze, or plan something). When doing so, it is useful to explore certain categories of systems, and we'll do so below. Note that the list is not exhaustive. In addition, some systems naturally fall into more than one category, and so the categories are not exclusive.24
Office Automation Systems (OAS)
If you're old enough, you'll remember a time when the daily functions of a business were executed primarily by typewriter, handwritten notes, and ledgers. The pace of business and the amount of data companies both generate and process require the automation of many of these daily routines. Office Automation Systems typically include packages like:
- Text and Image Processing Systems: Microsoft Word, Apple Pages, Google Docs.
- Spreadsheet Programs: Microsoft Excel, Apple Numbers, Google Sheets.
- Presentation Packages: Microsoft PowerPoint, Apple Keynote, Google Presentations.
- Personal Database and Note-Taking Systems: Evernote, Microsoft OneNote, Microsoft Outlook & Apple iCal's calendaring functions, etc.
While it seems amusing to include these technologies in our conversation, we cannot minimize the impact that these technologies have had on business (including the supply chain). With document processing, complex documents can be easily collaborated on, edited and changed, and immediately shared around the world. Spreadsheets allow us to perform complex calculations and assess key metrics. Presentation packages allow executives, managers, sales representatives, professors and students share thoughts and ideas. And calendaring applications allow us to manage our busy schedules.
The purpose of communication systems is to promote collaboration by facilitating the exchange of information. As the world "shrinks", teams become globally distributed, and the nature and amount of information shared become increasingly complex, this collaboration is essential. These communication systems take a variety of forms.
To facilitate meetings between parties that must meet at the same time, but cannot be physically co-located, teleconferencing enables such meetings. That teleconferencing can take the form of audio conferencing, wherein the parties can hear but not see each other. Hardware companies like Polycom and innovative apps like Mobile Day provide companies with the necessary tools for such collaboration. When parties need to see each other or share visual collateral, video conferencing is available to allow that interaction. Video conferencing requires some type of hardware (as simple as a desktop or laptop, or as complex as a Cisco video conferencing system), and some type of software package (one commonly used by both personal and professional users is Skype).
Critical to companies and universities is a category of communication system called groupware. Groupware allows groups or teams to share and collaborate on documents, communicate with one another, and enables workflow management. They may also include calendaring, messaging and basic project management functions. Today, a commonly used groupware package is Microsoft SharePoint. In the evolving world of mobile devices (and mobile teams), however, tools like Slack are growing in popularity. At the university level, learning management systems (LMS) such as Blackboard and Canvas (the engine behind The Ohio State University's Carmen system) help professors and students to collaborate through groupware.
Real-time communication is not always necessary, and technologies such as e-mail, voicemail, and fax can be used to communicate when in-person communication is either unnecessary or inconvenient. Benefits of e-mail include:
- The ability to send the same message to multiple recipients.
- Attaching documents.
- Authoring and sending messages at convenient times, or from convenient locations (including, now, from mobile devices).
E-mail has its detractors as well, though, and they will highlight deficiencies such as:
- It can be difficult to understand the intent of the author, or easy to misinterpret the "tone" of the message.
- E-mail messages can "live forever", and are easily shared, making maintaining privacy difficult.
- The average person receives over 120 e-mails per day.25 This makes it difficult to separate important messaging from the unimportant.
Transaction Processing Systems
Supply chain execution generates vast amounts of transactional data. Every movement of a product, every sales transaction with a customer, every electronic purchase order or invoice, generates critical data. Transaction processing systems (TPS) collect and store data about these transactions. In logistics and supply chain management:
- Warehouse management systems (WMS) like those from Manhattan Associates and High Jump, process transactions related to product receiving, quality audits, put-aways, let-downs, product picking, packing, and shipping. We’ll learn more about these systems in Chapter 5.
- Transportation management systems (TMS), including EyeFreight, Kewill, and FreightMaster give us visibility to key information on load planning, freight invoicing, optimized routes, and tender behavior. Transportation technology will be covered in Chapter 6.
- Point-of-Sale (POS) systems, the systems that sales associates use to tender your sale in a retail (brick-and-mortar) store, generate critical data about customer characteristics, and shopping behavior. They also perform key functions like credit card processing, providing product information to sales associates and customers, and enabling the execution of loyalty programs. Solution providers include NCR, Fujitsu, and with the proliferation of mobile devices, Square. Likewise, e-commerce platforms serve as TPS for the purchase of retail goods through digital channels ("clicks").
- Manufacturing executions systems (MES) are the heartbeat of a shop/manufacturing floor. MES systems like those from Wonderware and Rockwell, work in conjunction with plant floor equipment to capture data related to things like pieces manufactured, bills-of-material, overall equipment effectiveness (OEE), rework and scrap. We'll look at MES technology more in Chapter 8.
- Electronic Data Interchange (EDI) is a technology in which two parties utilize a standard document format, and the use digital technology to exchange critical business documents. Such documents might include purchase orders, invoices, advance ship notices and item information. Dating back as far as the late 1940s, EDI is still used today by retailers, manufacturers and government entities to share documents. Some benefits of EDI include the reduced impact of human error, scalability of volume, and direct interfacing to ERP systems. EDI is not without drawbacks, however, including frequent standard (format) changes and significant initial testing requirements.
Management, Logistics and Executive Information Systems
Management information systems (MIS) provide executives and managers critical data for managing the day-to-day operations of the organization. They provide information for monitoring performance, maintaining coordination, and providing background information about the organization's operations. Together, the company's leaders work with customers and suppliers to identify key performance indicators (KPIs) that are then available through reports, dashboards, and other visual tools. Executive information systems (EIS) add flexibility for a company's executives, by adding ad-hoc reporting and roll-ups and drill-downs that may not be possible in the "canned" reporting formats of an MIS. EIS systems may also include external information on competitors, and industry and market metrics. Logistics information systems (LIS) focus on the key functions of a company's logistics activities: distribution, transportation, fulfillment, reverse logistics activities, etc.
Decision Support Systems
Decision support systems (DSS) provide interactive tools to companies looking to analyze the current state, as well as to run what-if analysis. Whether it's through modeling, simulation, linear optimization or data mining & analysis, these tools are designed to be fed a source of data and use some sort of model to generate output. Tools such as Llamasoft's Supply Chain Guru can be used to model a company's supply chain (including manufacturing facilities, distribution points, customer locations, supplier factories, the company's items, inventory levels, etc.) and determine things like the right location and number of supply chain nodes, based on different criteria. This is a valuable way to test different scenarios and outcomes without physically making changes to the supply chain. In today's environment of Big Data (more on that later), it's also a useful means of turning vast amounts of data into business intelligence. We'll learn more about this in Chapter 9.
Enterprise systems serve the function of integrating the many functions of a business into a common system & platform. This allows the business to use common processes, a common data set, and common business definitions. Today, these systems exist as enterprise resource planning (ERP) systems. Chapter 4 covers ERP systems in more detail.
We could most likely devise other categories of technology. For example, there are broad collections of physical hardware (like conveyor, sortation systems, autonomous vehicles, and robotics); we'll take a look at these later. The increased connectivity of the world around us also means we have numerous examples of connected technology (especially as exemplified by the Internet of Things (IoT)). But the list above, primarily software-focused, gives us an idea of the sorts of business functionality that companies look toward software to acquire.
As companies look to meet their strategic goals through technology, they need to be planful and find ways to accomplish these goals with limited capital, people, and resources. The next chapter turns to a discussion of the importance of project management and planning.
It can be defined as "any combination of processes, functions, activities, relationships, and pathways along which products, services, information, and financial transactions move in and between enterprises."
It is the "part of the supply chain that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements."
Which of the following is not a Supply Chain Operations Reference (SCOR) Framework Level One Process?
It outlines, both for internal and external stakeholders, why a company exists.
Word processing, spreadsheet programs, presentation packages and note-taking systems are examples of which category of technology?
Transaction processing systems
Decision support systems
Office automation systems
Which of the following is a type of transaction processing systems (TPS)?
Point-of-sale (POS) systems
Electronic data interchange (EDI)
Transportation management system (TMS)
All of the above
What are the benefits of communication systems, like e-mail and video conferencing?
Can communicate with multiple people at once.
Removes barriers related to geography and location.
Allows for easier collaboration.
All of the above
One feature of a transaction processing system (TPS) that can be both a benefit and a drawback, is that such systems generate vast quantities of ___ .
Work for the Information Technology team
Which of the following is not a benefit of electronic data interchange (EDI)?
Reduces human errors
Scalability of volume
Significant testing requirements
Direct interfacing to ERP systems
Which of the following is a function of decision support systems (DSS)?
All of the above
Chapter One Endnotes
2. Koch, C. (2002). Supply Chain: Hershey's Bittersweet Lesson. Retrieved June 01, 2016, from http://www.cio.com/article/2440386/supply-chain-management/supply-chain---hershey-s-bittersweet-lesson.html
5. For a full treatment of this case study, explore references like Enterprise Integration by Sandone, Corbitt and Boykin (New York: John Wiley & Sons, 2001); and this case study by ICFAI.
6. John Gattorna, "Supply Chains Are The Business", Supply Chain Management Review, September 2006, 43.
7. "Supply Chain Operations Reference (SCOR) model: Overview - Version 10.0", Supply Chain Council/APICS, 2010, 9-10.
12. Starbucks’ Winning Blend: A Love for Their Employees and Their Supply Chain. (n.d.). Retrieved June 01, 2016, from http://testing2.lightmix.com/news-bytes/blog/126-starbucks-winning-blend-a-love-for-their-employees-and-their-supply-chain
18. For an interesting deep-dive on mission, vision and values, explore Sonia Keffer, Rule of Thumb: A Guide to Developing Mission, Vision, and Value Statements. Write Life, 2014.
20. Ibid., 95.
24. For simplicity of footnoting, the list as reviewed is borrowed from Alter, Steven. Information Systems: The Foundation of E-Business. 4th ed. Upper Saddle River: Prentice Hall, 2002. 179-190.