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February 21, 2002

The Evolution of Supply Chain Technologies — Part 2

Companies must understand and prepare for the effect the global war on terrorism will have on their supply chains

Ram Reddy

Contrary to popular belief, practices such as just-in-time inventory management will not be replaced due to increased security at our borders stemming from the Sept. 11th attacks. Because of tightened security, companies with suppliers in Canada and Mexico have had their component and raw material shipments backed up at border checkpoints, causing cross-border shipping times to increase from a couple of hours to 24 to 48 hours. Similar delays occurred at shipping and airline freight unloading facilities. The war on terrorism will probably last for many years, according to most government officials and will greatly affect supply chains and their supporting technologies.

The first installment of this column ("The Evolution of Supply Chain Technologies," Jan. 14, 2002) highlighted the evolution of the supply chain prior to Sept. 11th and the move toward modularization of supply chain management (SCM) and CRM integrated application suites. Technology vendors were moving from tightly integrated enterprise and interenterprise suites to modular applications with a narrower focus because of functionality and the difficulty and costs of implementing complex, integrated suites with a broad range of features. Modular applications with a narrower focus not only reduce the implementation risks and costs, but also significantly increase the potential customer pool for software vendors by bringing in small- to medium-size companies that could not previously afford the price of integrated suites.

Supply chain technologies were primarily designed to reduce the friction in the flow of raw materials, components, and finished goods across the enterprise and its global supply chain without much thought to security concerns. This column attempts to answer the question: What is the impact of the global war on terrorism on the continued evolution of SCM technologies? This question is especially relevant given the volume of raw materials, components, and finished products that are imported and supported by supply chain technologies.

ADDING RESILIENCY TO EFFICIENCY

The biggest challenge going forward for SCM technologies is that, in addition to enabling efficient utilization of capital resources within a company, the technologies will now have to provide resiliency for the supporting supply chain. Resiliency refers to the ability of a company and its supply chain to recover from supply chain disruptions without going out of business. Disruptions caused by the war on terrorism will continue to be unpredictable and could depend on the medium chosen for subsequent terrorist attacks. Unfortunately, most vendors did not design existing SCM technologies with failures and disaster recovery in mind.

The new requirement for SCM technologies is the ability to bring back a company and its supply chains to normal operations after catastrophic disruptions — hence the addition of resiliency to efficiency. Companies will need to trade off between these two drivers. Luckily, SCM technology advances prior to the Sept. 11th attacks were on track to provide the elements needed for resiliency. A discussion of supply chain disruption issues will set the stage for evaluating how SCM technologies will provide resiliency.

ALTERNATE SOURCING, MANUFACTURING, AND DISTRIBUTION ISSUES

Disruptions caused by the war on terrorism will be quite different from pre-Sept. 11th disruptions that were typically addressed by increasing the "safety stock" of raw materials. Companies use raw material safety stock to tide over disruptions until regular supplies resume. Companies must consider the potential consequences of biological or nuclear contamination from terrorist attacks that could occur anywhere in the world. These forms of contamination may take months to clean up. Suppliers, manufacturers, and distributors in contaminated areas may take years to become viable trading partners again. In the interim, companies will need to quickly bring on replacements that can handle the necessary transaction load.

Bringing in new replacement partners isn't an easy task. The partner will need to make investments in IT infrastructure and change business processes to fit established norms among existing supply chain trading partners. This barrier, which makes doing business with established supply chains difficult, is called "technology lock-in." Supporting SCM technologies for a particular supply chain can effectively lock out new companies that do not have the same underlying technologies from joining the supply chain.