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Integrated Value Chains: Your Roadmap

Value chains are today being perceived as the next logical step for enterprises in order to cut costs and increase ROI. What are value chains all about and how do they differ from supply chains?

Margins are down. Demand is up (if the price is right). So how do you deliver? For most products, selling price is rarely determined by the firm. It's usually determined by the market. What is determined and managed by the firm is the cost of the product leading to all the interesting financial measurements of profit, EPS and growth. The management of the supply chain is a critical concept of cost reduction. A value chain is a high level model of how businesses receive raw materials as input, add value to the raw materials through processes and sell finished products to customers. So how is it different from a supply chain?

A supply chain (SC) is the network that includes planning design, producing and delivering products and services. The extended supply chain includes processes from the suppliers' suppliers to the customers' customers. Supply Chain Management (SCM) is the visualization and the control of the movement of products and services from the point of origin to fulfillment while meeting the organizations market objectives.

The Value Chain (VC) is the expansion of the Supply Chain to include Demand Planning which includes the process of defining markets and customers' requirements, as well as defining, and capturing customer demand. The Global Value Chain (GVC) is the future stage seen in an integrated value chain where the aim is to optimize the businesses ability to move its business assets, including product transactions and information from their source of origin to their delivery. It is envisaged that in a GVC the end-to-end flow of those assets is made more efficient and customer responsive. The cost of inventory management, business process management, time management and money management is reduced.

Value Chains are today being seen as a major differentiating factor in a company. According to a research by Gartner Group, enterprises that implement value chain planning applications with a continuous improvement program are likely to increase ROI by 40 percent over a five-year lifecycle. Corporations need to continuously ask themselves questions about the organization, designing and management of efficient processes keeping in mind issues as shareholder value and returns, competition and margin pressures, mergers and acquisitions, shifts in cost and service structures, new markets and new products, customer requirements and demands, capacity constraints and sourcing and supplier requirements.

Traditional supply chains typically include individual business units, separate product lines and little communication or connectivity among individual parts of the business, much less with customers or suppliers, except via EDI or other limited processes. True connectivity is about being networked, which is about being at the point where your customer, your enterprise, your supplier and your employees are all linked. When a customer clicks in and conducts a transaction, its about the supplier knowing that there is an inventory to fill, the employee knowing that there is a customer relation to manage and the fulfillment center knowing that there is a delivery required.

The Technology Roadmap to Nirvana

Integrating disparate applications on the process and the data level is one of the greatest challenges in value chain integration. Usually various application categories exist within the enterprise. Enterprise Resource Planning exists for the processes like manufacturing, finance and distribution. On the shop floor applications exist in the category of Manufacturing Execution Systems, Control Systems and Manufacturing Operations Systems. Engineering applications exist such as Product Data Management and Component Management systems. Apart from these one might have Customer Relationship Management (CRM) and Knowledge Management (KM) applications. Usually the selection in each of these applications is purchased using the "best-of-breed" approach. However, these independent purchase decisions boomerang as the need to integrate and smoothen flow information increases.

Integration is then carried out through one of the three ways, or a combination of the three. Using the 'Point-to-Point' integration technique, specific applications can integrate with specific other applications when the vendor recognizes a demand for the integration. These are usually single integration between two applications of two vendors. As the number of applications to be integrated multiplies, the number of these integration multiplies geometrically. 'Data Transfer and Conversion' is the most common form of integration, the applications share common data by simple transfer of large amounts of common information. This information may share a common structure, or the integrating organization may create small bridging functions to force data compatibility. 'Third party translation tools' involves purchasing mapping and translation software that can map between the various native file formats.

Even more challenging is the concept of sharing data across enterprises. Issues of security, technology incompatibility, and trust abound. This problem is addressed by seeking cross industry or universal standards. Many industries have developed standards for data interchange, which suit the particular needs of the industry.

The macro perspective is all fine, but most CEOs still look for a true pathway to Value Chain Integration. Should a company look at Value Chain Integration if its basic supply chain structure is not in place? How can it influence partners, suppliers or customers who are either technologically illiterate or do not want to make the investment? There are other issues as well. If we knew the architectures, design standards, coding standards, and implementation processes of just one of our suppliers (customers or trading partners) we might be able to build an interface to them. However, that is heaven. Hell is when we have multiple points to connect, at different times, with different structures, coding and architectures and a veil of secrecy.

One way out of this quagmire is to have a strategic implementation guide for oneself. For instance have the complete picture drawn out with timelines of when to go into implementation. Paint this picture using assessments of mission critical logistics processes, customer requirements, costs, deployment issues, supplier capabilities, outsourcing opportunities, operation costs and competitor strategies.

Once the large picture is clear it is imperative to adopt standards that are open, scalable and accepted so that future trading partners, customers or suppliers can easily plug into your infrastructure when the possibility arises. RosettaNet is a non-profit consortium of major information technology, electronic components and semiconductor manufacturing companies working to create and implement industry-wide, open e-business process standards. These standards form a common e-business language, aligning processes between supply chain partners on a global basis. Late in 2000, RosettaNet formed a cross-industry working group to define business requirements for the informational Hub (iHub) multi-PIP scenario. The RosettaNet iHub Focused Process Team is evaluating existing RosettaNet standards to determine alignment with iHub requirements and proposing enhancements where appropriate. Member companies, including Cisco and its trading partners, will validate these standards through implementation. The iHub Focused Process Team includes representatives from Arrow Electronics, Avnet, Cisco, Manugistics,Motorola, Pricewaterhouse Coopers, STMicroelectronics, Viacore, and Xoriant.

The RosettaNet iHub is a multi-PIP scenario providing a framework for managing a collaborative and integrated supply chain. It may be leveraged by a private or public repository, where data is gathered and distributed for cross supply chain visibility or decision support. Companies representing different levels of the supply chain (such as OEMs, contract electronic manufacturers, component suppliers, distributors, and so on) may sponsor an individual iHub. An iHub may be scaled to meet the needs of companies of varying sizes, and each iHub owner may choose to use as few or as many PIPs as desired. The iHub framework supports both informational and transactional processes. One iHub may process all incoming data to identify demand and supply disconnects, support decision making, and generate reports; another may do all of the above as well as handle the exchange of goods and services. Alerts may be generated by an iHub owner and sent to relevant trading partners for action. The type of alert and method of generation are private processes proprietary to each iHub and outside the scope of RosettaNet, which focuses exclusively on public, inter-trading partner processes.

Object Management Group is another organisation helping organisations with technology specifications for concepts like the Integrated Value Chain. One of the technology goals is to remain open and flexible to support the changing objectives of business. The challenge arises when we are forced to confront a myriad of past, present and future technologies. Since we cannot dictate the architectures of our customers and suppliers, we must work with existing technologies and business processes. The specifications that OMG provides and continues to create cover the entire application integration and development process, so you can be sure open specifications are available to you from the time you gather your requirements until the time you deploy or integrate your applications. Proven specifications like the Unified Modeling Language (UML®), Meta Object Facility (MOF), CORBA®, CORBAservices, and Domain work together ensure the entire requirement, development and construction processes are covered instead of a single phase.

When keen on a reliable, scalable and standards based technology Cisco found its solution in eXtensible Markup Language or XML, which is gaining credibility in the business-to-business (B2B) arena for its flexibility. XML can be used to structure content for databases or to structure a transaction for file transfer. It also can be transformed into HTML for presentation on a Web page. This capability means that large quantities of supply chain data such as bills of material, MRP output, forecasts, and other critical files can be stored, forwarded, and presented using a common data model based on the XML tagging scheme. Simply put, XML is a way of describing data in a logical hierarchy using agreed-upon elements such as "<forecast>" or "<part-number>." With this approach, however, users must agree on what "<forecast>" means and how the data should be structured in this data element. XML standards bodies such as BizTalk, cXML, and RosettaNet are working to develop the syntax for XML that will streamline and enable B2B commerce using a standards-based approach. Both Cisco and Manugistics are members of RosettaNet and have been engaged in a number of XML projects to improve business processes for some time.

Critical Elements

As with implementing Enterprise Resource Planning systems firms who have partnered for these next generation ventures have learned lessons, critical for successful implementation. They are quite similar to earlier lessons. Strong executive sponsorship, having a vision and passion, the right team and open communication and collaboration are neither new nor easily remembered. Cisco set a new commandment of demanding data integrity from people participating in the program. Given the exponential consequences of having inaccurate data ricochet through the system, data integrity in any such system becomes critical.

Results? Take this for an example. Within the first day of launching eHub's pilot, the system discovered an exception between a contract manufacturer and a component supplier. A specific part needed by Jan. 15 was scheduled to be shipped four months later. eHub alerted the two companies involved and the situation was addressed immediately. The product was shipped on time, averting a potential "line down" situation. Finally, Phase 1 functionality includes enhanced performance reporting capabilities that enable Cisco to understand more clearly how the overall manufacturing supply chain is performing. Imagine that happening in your firm!

Karnvir Mundrey is a Business Development Manager with Plexus Technologies and can be contacted at karnvir@plexustech.net

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