Supply Chain Management: Its All About Relationships

Procurement, the ordering of raw materials and supplies, has the potential to save companies millions of dollars. According to Finalistic, an Atlanta consulting company, if an average Standard & Poors-listed company with $5 billion in revenue could reduce cost through better procurement by 5 percent, it could increase profits by $20 million. The network technology; namely, the Internet, is in place. When a customer places an order on the Internet, it starts a chain of reaction from all suppliers and manufacturers to fill that order. With the network technology in place, companies need only manage the relationships that go into these savings. Companies must open themselves up and share their sales forecasts, and manufacturing and inventory management systems. Traditionally, companies suppliers and manufacturers have had adversarial relationships rather than open ones. One company, Cisco, has taken a friendlier approach with its suppliers, and has modeled itself after the Japanese automakers enabling their suppliers rather than challenging them. Ciscos philosophy is that if it can help suppliers be more efficient, it too can be more efficient. Cisco, for example, operates an extranet to include suppliers on future product plans so suppliers can start to gear up for future orders. Cisco, which makes networking equipment, handles over 90 percent of orders over the Internet. Less than half of Cisco employees even touch an order. Incoming orders trigger alerts to suppliers that make components for that specific order. Throughout order assembly, Ciscos manufacturing system is checking to make sure all assembly processes are set up perfectly. The supply chain basically runs itself. According to AMR Research, Ciscos revenue was $713,000 per employee compared with the average $192,000 per employee of a Fortune 500 company in 1999. Cisco says its administrative overhead has gone from $100 per order to between $5 and $6 per order. With this sharing of information, ERP systems are more important than ever, according to Tim Lambeth, the Vanity Fair vice president of global finance. [ERP is] more critical than ever. If you are going to begin to collaborate with your suppliers, you will have to have real-time information available to them. If Wal-Mart wants to come into my system to place or track orders, it expects my system to tell it precisely what I can do and when I can do it. Lambeth states that companies who have not used theWeb for their supply chain management will soon be forced to by their customers. Supply chain management comes down to relationships. Communication between trading partners is critical. For example, Staples, the office supply chain, wanted to know why Hewlett-Packard required a 21-day lead time for orders. HP had believed that Staples required the 21-day lead time, when in fact neither company required it the parameter was some leftover decision from the days when purchasing agents cut deals. Now the two companies have a seven-day lead time for orders. Staples can hold less safety stock, has fewer stock-outs, and HP has reduced its order-to-cash cycle time. Staples shares a lot of information with its suppliers. In 2005, Staples set up a secure Web site where its suppliers can log on and view Staples supply chain metrics. The metrics act as a report card for each company, allowing for further communication with suppliers and thus improvement with the supply chain.

Question:

1. How can Fitter Snacker improve its relationships with its suppliers of raw

materials?

SCM and Its Critical Success Factors

For a supply chain management project to be successful, a company must achieve certain key factors. The Advisory Council at Information Week has put together a list of those key factors:

Business-driven strategy: The information system for managing the supply chain must focus on the customer, allowing the customer greater efficiencies in the process. The customer should find that ordering material from the vendor is now more efficient with the new system. The system is based on a complex business process model. When a vendor fulfills a customers order, many different business processes are at work to ensure quality products, timely deliveries, and good prices.

Management commitment: As with any IT project, top management must be committed to support the project; otherwise, the project is doomed to fail.

Supplier and partner expectation management: An SCM implementation requires change from all parties. A company implementing an SCM project must be prepared to work closely with both vendors and customers and manage that change from all angles.

Internal expectation management: Change management is especially important within a company. Personnel involved in a new system must be informed and trained to manage any anxiety they might experience in their job changes.

Learning period acceptance: Companies implementing SCM must accept that it takes a long time to fully realize the benefits of the system. SCM has the further benefit of driving business value. Simply put, SCM will help your companys bottom line by making it more efficient for customers to buy your product and for you to buy your suppliers products. In this way, your entire company will benefit and become more efficient. Implementing an SCM system without paying attention to the critical factors listed above will result in poor performance. In fact, a large percentage of companies that implement SCM are not satisfied. Forty-five percent of respondents to a Booz Allen Hamilton supply chain management survey report that their IT solutions are failing to meet expectations. SCM consultants often find that companies have unrealistic expectations of the technology. However, companies dealing in the service parts business (for example, Caterpillar Logistics and Ford Motor Company) are finding that SCM allows them to decrease inventory by between 10 and 30 percent, according to AMR Research Inc. Companies

must decide how their supply chains should be designed and run, and then use technology to implement those goals.

Questions:

1. Assume you were recently hired in an IT role at a large manufacturing company. Your first job is to convince the manufacturing manager that the implementation of an SCM system is feasible. Write a memo to that manager, highlighting advice on how to ensure the smooth implementation of such a system.

2. Outline the potential pitfalls that your company may encounter when implementing SCM.

Integrated Accounting at NB Power

In recent years, the Canadian government has made some changes to its energy market. As a result, NB Power, the electric utility company in New Brunswick, was divided into a holding company and four operating entitiesGeneration, Nuclear, Transmission, and Distribution and Customer Servicewhich were simply cost centers within NB Power prior to 2002. The company split the responsibility for managing revenues, expenses, and financial statements among the four operating companies. Intercompany transactions were a huge chore because the budgeting and forecasting were done outside the SAP system. Now, each unit handles budgeting and forecasting within SAP. All intercompany data are handled within the SAP system, which makes forecasting and other accounting chores much easier.

Question:

1. How does an intercompany transaction differ from an intracompany transaction in the field of accounting?

Sarbanes-Oxley Five Years Later

The Sarbanes-Oxley Act has been a part of doing business in the United States since 2002, and its impact is both widespread and unclear. A study by AMR Research has estimated the costs of compliance for U.S. business at $26 billion, while a controversial 2005 study conducted by Assistant Professor Ivy Zhang, then a graduate student, estimated the laws costs at a staggering $1.4 trillion. Other researchers claim the law has reduced investment in R&D and overall capital spending, and has led to an increase in the takeover of publicly traded companies by private-equity buyers (private firms do not have to comply with Sarbanes-Oxley requirements). No one argues that the law has been good for auditing firms, which is ironic given that the failure of auditors at Arthur Andersen contributed to the Enron collapse. As firms have strengthened their financial controls, many have had to restate their financial results1,403 firms did so in 2006. But as firms have improved in their ability to comply with the act, that number has been dropping. The costs of complying with the act are also coming down. According to a 2007 survey of 200 companies with average revenues of $6.8 billion, the typical cost of Section 404 compliance was $2.9 million in 2006, which was 23 percent lower than in 2005. Relaxed audit standards approved by the SEC in 2007 will allow a more pragmatic, common-sense auditing approach that may lower compliance fees by up to 50 percent.

Question:

1. Use the Internet to research the latest regulations surrounding the Sarbanes-Oxley Act.

Challenges in Hiring Talent

Talented workers are hard to come by. The average quality of a worker has declined by 10 percent since 2004, and the time it takes to hire a talented worker has gone from 37 days to 51 days, so HR departments must be vigilant in their recruiting efforts. Using an integrated system, such as an ERP system, helps HR departments identify and retain that rare talent. Seventy-five percent of managers surveyed by the Corporate Executive Board said that attracting and retaining talented workers was their top goal. The consulting firm McKinsey & Company groups jobs into three categories: transformational, transactional, and tacit. The first two job typesconverting raw materials into products and performing easily automated business eventsare shrinking compared to the tacit category, which requires a worker to have a high level of judgment. From 2000 to 2006, the number of jobs requiring a high level of judgment increased 2.5 times more than the transactional jobs, and three times compared with all jobs. Roughly 40 percent of U.S. employers now require workers with a high level of judgment. Furthermore, with baby boomers reaching retirement age, the consulting firm RHR International estimates that by 2012 the nations 500 largest companies will lose half of their top managers. Companies are trying to find ways to lure workers away from their current jobs. With downsizing a concern for many workers, employees are often eager to be lured away. To find candidates, companies will comb through lists of attendees at conferences, look for scientists who created new patents, or even buy information on the competition. Companies are also using corporate Web sites for recruiting. Surveys have shown that 95 percent of large companies in North America use their corporate Web sites for hiring. The sites often are connected to HCM software at the home office that screens resumes. The hiring of good employees is so vital to a companys success that HR managers are now commanding larger salaries. HR executives for Black & Decker, Home Depot, Viacom, and Timberland are among those companies five highest-paid employees.

Questions:

1. Why is the hiring process more crucial than ever for companies?

2. List some incentives, other than salary, that a company could use to encourage a prospective employee to accept a job offer.