Building the glass house Computerworld Malaysia, October, 2002 ARE Malaysian organisations ready to take up the challenge of automating and streamlining their supply chains? According to a survey conducted by IDC, it was found that the implementation rate for supply chain management (SCM) applications is still relatively low (Refer to accompanying graphs). The pattern of penetration sees manufacturing and distribution as the traditional key investors in supply chain technology. The distribution sector leads with the highest implementation rate of 25 per cent, followed by manufacturing at 19 per cent. "The rate of adoption of best practices in supply chain logistics sadly lags behind the hype," says Yong Chee Kee, director of solutions, SnT Global. He says that while multnational companies (MNCs) are taking the lead, success at the SME level is slow. "There is resistance towards outsourcing and technology adoption, and small medium enterprises (SMEs) are also hampered by lack of skills and exposure to SCM," claims Yong. Due to government and vendor efforts to promote the benefits of supply chain, companies are showing more awareness. "Locally, companies are aware of the importance and benefits of SCM. They are seriously looking into the supply chain for operational efficiency and effectiveness," says Jeanie Yap, business consultant for SAP Malaysia. But the level of progress differs with each company. "Some customers are quite advanced in their projects and are currently working on collaborative projects with their suppliers, while others are just beginning to automate their supply chain," says Yap. Michael Cho, regional general manager for Exact Software agrees. "Of course there is existing interest in supply chain automation," says Cho. "There are many companies in Malaysia which have started automating their business with software. However, they remain a minority," he says. Many local organisations and mid-sized businesses are still only working with their first piece of enterprise software. "Quite a number of SMEs are at the stage of procuring their first financial software, or standardising their internal operations. There is some distance to cover before these companies move into full automation," says Cho. As for companies which have invested in enterprise resource planning (ERP) systems, a number of them are still in the process of obtaining full utilisation of their ERP systems. "In Malaysia, many companies have not realised their ERP application's full potential. Most businesses have only been using the financial applications in their ERP suites, period. But now, they are looking to take advantage of the manufacturing, supply chain planning, and execution modules," says John Soh, regional partner director for J.D. Edwards Asia Pacific. "While companies are no doubt interested in SCM planning, they may not be prepared to take advantage of it since they have yet to fully leverage their existing ERP systems," he says. At the same time, IT budget holdbacks have posed a barrier to companies overhauling their supply chain processes as they hunker down during the economic slowdown: "The current economic outlook has dampened the efforts to move fast into this supply chain direction," Yap confirms. "Asian companies have suffered greater impact from the downturn than their Western counterparts, mainly due to the large inventory build-up in their supply chains," says Ronnie Sabnani, regional industry manager with Intentia Asia Pacific. He says that in general, businesses in Asia have been slow to adopt key technologies such as ERP, SCM, CRM and e-business, although it is increasingly apparent that a backbone enterprise system is essential for survival. "Total supply chain visibility is critical-from forecasting, through to planning, manufacturing and distribution, all the way to order fulfilment," Sabnani emphasises. He says that businesses in Asia need to look towards a fully integrated collaborative solution. However, not all companies will adopt the approach of implementing all applications in the areas of ERP, SCM, CRM and e-business in one go. This is mainly due to budget constraints or organisations' natural resistance to change. "Most Asian businesses choose to adopt a more pragmatic approach. Such an approach allows them to develop a vision for the future and to progress towards a collaborative solution," says Sabnani. The Asian challenge Are companies in Malaysia ready to invest to improve their supply chain and logistics management? "Malaysia runs the risk of lagging behind. Even now, Malaysia lags behind neighbouring countries such as Thailand," warns John Talbot, CEO of Logistics Consulting Asia. According to him, the existence of active associations such as Efficient Consumer Response (ECR) in Thailand, which sets standards that are related to supply chains, allows manufacturers and retailers to coordinate their logistics, and drive costs out of the system. He observes that even companies in Indonesia, by virtue of the geographical archipelago nature of their supply line, take supply chain management more seriously than companies in Malaysia. "In their case, full road transportation is impossible so logistics becomes more difficult. They realise that the company will be in trouble if its supply chain issue is not addressed," he says. In this case, good supply chain systems can make or break a company. However in Malaysia, where road infrastructure is much better, companies are lulled into complacency in terms of managing their logistics. "Companies here hardly invest in supply chain technology. They may spend a great deal on ERP systems, but it is hard to combat the notion that money sunk into supply chain systems is wasted," says Talbot. He also observes that Malaysian companies are quite willing to invest significantly in ERP applications, under peer pressure. "However, this investment [in ERP applications] hasn't progressed into logistics execution," says Talbot. He says this is ironic because although many companies face logistic execution setbacks, they still do not focus their IT budget on this problem. A major challenge that defines the supply chain scenario in Asia is the diversity of its markets, and governing regulation. "In Asia, diversity is the norm rather than the exception," points out Chee Chong Hwa, CEO of KarenSoft Solutions. One example is the growing gap between developed economies such as Singapore, Hong Kong, Japan and South Korea; developing economies such as China, Indonesia, Malaysia, the Philippines, Thailand and Taiwan; and emerging economies such as Cambodia, India and Vietnam. "There are differences in customs duties, taxes, varying logistics and communications infrastructure, banking practices, and so on," says Chee. These disparities make the movement of goods within and across borders, difficult at best. In addition, companies have to deal with the challenge of supply chain network complexity. "Asian distribution channels are multi- layered," says Chee. This means that there can be three or four intermediaries between manufacturer and customer. By comparison, in the US and Europe, one or two intermediaries are the norm. "The result has been widespread duplication of supply chain infrastructures. This results in burdensome levels of network complexity," says Chee. In spite of the need for a more streamlined and cooperative approach among suppliers and manufacturers in this region, SCM systems face some cultural barriers in this region. According to Chee, trust is a major issue. "Trust is the foundation upon which information sharing and collaboration are built, but this remains a significant issue in Asia," says Chee. "At the same time, win-lose perspectives are commonplace, particularly when dealing with suppliers," he adds. For example, a survey by Accenture of 582 Asian companies found that many companies want their suppliers to be Internet-enabled. However, only a few of these companies plan to actually have such capabilities themselves. Evolving trends A major trend driving SCM evolution today is the relentless march towards globalisation. As companies source products from all over the world, moving their manufacturing to cheapest locations-whether it be in Asia or other parts of the world-and then export their products globally, the demands imposed on the supply chain process has increased. "Globalisation has rendered SCM more complex today," says Yong. "At the same time, e-commerce has revolutionised the front-end systems of order placement, sales and marketing." These new demands mean that companies must be able to move their products across international borders in the most efficient manner possible, for example through the form of collaborative transport and warehouse management. Yong believes that all successful companies of the future have to be, essentially, logistics experts. "Companies must not only be able to design and market products. They must also be able to source the components, build, move, store, pay for the manufacturing job, and deliver to the market. All this must be done on time, and at a competitive cost," Yong says. According to Yap, SCM solutions are evolving from a linear, sequential model to a highly adaptive one. "Traditional SCM solutions are designed for controlled conditions. They rely on the accurate forecasting of demand, but are in fact, quite disconnected from the actual demand," she explains. Decisions are made centrally, and changes typically take days, weeks, and sometimes, even months. But this is contrary to the business' needs. Companies need supply chains that must be adaptive and responsive to changes. "The faster a supply network can adapt to changes that occur across the extended supply chain, the more value that will be created," emphasises Yap. As supply chains evolve to be more flexible, adaptive and cost-effective, the whole concept of manufacturing is greatly impacted. Companies now are no longer limited to the traditional model of making the goods first, before selling them. By virtue of their tight grasp on the supply chain, companies can reduce their inventory to extremely low levels. "'Subzero' inventory is the holy grail that businesses are going for," explains Bryan Jamison, director of Southeast Asia for DHL Worldwide Express. "In this model, goods are manufactured, sold and paid for, even before the manufacturer has paid for the raw materials," says Jamison. He points to computer manufacturer Dell as an excellent example of how the concept of 'subzero' inventory can be achieved. The evolution towards this manufacturing model is apparent in very competitive high-tech high-value industries, particularly in the area of perishable goods. An example is electronic chips which become obsolete so fast that the manufacturer doesn't want to hold any inventory, explains Jamison. "Many companies make things before selling them, but the days of doing this is fast disappearing," says Jamison. The producers who are still clinging to traditional models in terms of how they juggle demand and supply, are the traditional fast moving consumer goods manufacturers (FMCG). "The FMCG manufacturers still adopt older models of manufacturing, in that they still make the goods before selling them," says Jamison. Implementation challenges One reason why local companies hold back investing in supply chain is because they are uncertain of the challenges faced in implementing a supply chain system. "There are no simple solutions in SCM. There is no quick fix," says Talbot. "SCM is not just about spending money, but going through the effort to get the whole team to coordinate in the long term," he explains. "SCM is not a quick pill. It's not a magic wand. It's hard work," he adds. As such companies should get on the learning curve as soon as possible because even if they make mistakes, they will be learning the ropes faster than their competitors. In many cases, there is a misalignment between IT, and logistic operations. "Logistics has the need, and IT has the solution, but there is no alignment between the two," says Talbot. In addition, many logistics managers are busy handling daily issues. "These are hard workers who work 14-hour days, trying to manage the warehouse. But they do not have training in using logistics information systems," says Talbot. He adds that there companies that put in a logistics execution system or a warehouse management system, and because of a lack of preparation, the system under-performs for a longer than projected period. "It will require significant intra-departmental cooperation to successfully implement a SCM project. As such, adequate representation from the various departments is crucial," says Chee. This is to ensure that intra-departmental processes and workflow, as well as individual departmental needs, are taken into account. "Doing this groundwork will go a long way to ensure eventual buy-in from the users," Chee says. He advocates that a SCM project team should comprise departmental heads from marketing, materials control, purchasing, production control, finance and document control. Sabnani also points out the importance of putting in proper infrastructure before embarking on a major SCM project. "The key to the success of SCM is not to try running before learning how to walk," he points out. He outlines the key components of a successful project as clear realistic goals, strong management and user support, strong vendor and in-house competency, and a solution that has a good functional fit to support the company's business. Integration blues According to Soh, a major challenge today with SCM systems is integrating products with the existing backend ERP. "A lot of companies have invested in fancy GUI-based products-which unfortunately are standalone planning stations. Data required by the execution systems are not able to flow into these planning systems, and the responsibility falls onto the user to integrate the systems," says Soh. "The cost of this integration can turn out to be many times more the cost of the original system, pushing up the total cost of ownership," he says. Soh advocates the purchase of integrated solutions to remove any eventual hidden costs. "Best-of-breed purchases are only good for companies that can invest in huge IT teams to take care of the necessary integration. But many companies in Malaysia prefer to focus on their core business and are not ready to invest in such teams," says Soh. The challenge pertains to the costs of a SCM project. When a SCM project is initiated, there is always the question of who should bear the costs of its implementation. "Both the customers and suppliers feel that they should not fork out anything," says Yap. She adds that until such issues can he resolved, the collaborative supply chain may remain a vision. Another common challenge is the sharing of data. In order to have accurate data for supply chain forecasts, frontline parties such as distributors and retailers have to be willing to share customer information. But if they feel that the information is proprietary to them and are unwilling to share, it will defeat the idea of collaboration. Ultimately, the success of a supply chain project depends on how well a company manages the manifold challenges that accompany a SCM implementation. "It is about managing the challenge of collaboration," says Cho. "Supply chain projects require the successful interaction between companies, so all parties within the chain need to participate, or the link of information will be broken and the gains in efficiencies will be lost. " He believes that after bringing the different entities into place, a final challenge emerges. "There has to be standardisation so that there is a reference that everyone can rely on," says Cho. This includes the classification and coding of items, procedures, format and the medium of communication. "For things to work, all parties need to speak a common "language"," Cho concludes. By Ang Bee Leng