It's generally accepted that the goal of a streamlined supply chain is to reduce time to market. But this industry consensus is being challenged head on by a handful of innovators who believe instead that the focus should be on customer demand, first and last…and the reward is low inventory and a 15 point profit hike.

It's generally accepted that the goal of a streamlined supply chain is to reduce time to market. But this industry consensus is being challenged head on by a handful of innovators that are beginning to convert zeal into increased sales and expanding margins. And while some traditionalists might dismiss the 'upstarts' as an irrelevance, there's a growing body of opinion that regards them as pioneers in the vanguard of a new generation of manufacturers and retailers that will transform the industry.

"The new mantra for these innovators is 'time to consumer'," says Vicky Hyde of collaborative fashion software company Intentia. "So forget the notion that getting items on to shelves is the name of the game. It's not. The goal is to give the whole supply chain total visibility of consumer demand at all times. And to use a pull-based approach to planning," she advocates.

"With this approach material flow is synchronised through the supply chain to meet daily and weekly demand. And abandoned is the traditional batch-orientated approach which dictates that inventory has to be built up at different stages in the supply chain as a hedge against the unknown. That's what streamlining the supply chain is really all about."

Hyde explains that when she talks fashion, she includes apparel, footwear, textiles and accessories. And she argues that while each sector has its own particular issues and challenges, the common factor is a holistic, consumer-focused business model that subjugates all other considerations.

And she is almost evangelical in her belief that for relatively little investment in collaborative information technology, the industry can eradicate what she calls "supply chain blindness" and realise a high return on investment through reaping big business benefits.

"There are many prizes," she says. "Time to consumer can potentially be cut by up to a third. And burgeoning inventories which can remain dormant for weeks and sometimes months, and cost the industry billions of dollars annually, can be reduced by at least 50 per cent. As a result, cash flow is improved."

But Hyde goes further, claiming that the big win from a streamlined supply chain with 20:20 vision is profit margin enhanced potentially, she believes, by between ten and 15 points at both the gross and net level.

Hyde explains that the new demand-driven supply chains can rely on open, collaborative relationships to create flexibility and agility, because all participants - from the retailer and manufacturer down to the raw materials suppliers and sub-contractors - see consumer demand simultaneously and are able to respond to it almost instantly.

And she cites Mango and Zara as prime examples of the innovators others should follow. "They start with the consumer and work backwards through the supply chain. They have a pull-based approach with point-of-sale tied into every part of the chain. This creates an open environment and everyone focuses on fulfilling just one objective - consumer demand. And if demand fluctuates from one day to the next, the supply chain is sufficiently agile and flexible to respond immediately.

"It's not rocket science. It doesn't take much imagination to realise that by adopting a consumer-focused rather than a batch-orientated approach, stock volumes come down significantly. And as long as everyone has full visibility of forecasts and demand, the supply chain can respond quickly. That's why collaborative technology is needed to create information flow and stock visibility throughout the entire chain, and enable everyone to respond in unison."

Supply chain 75 per cent over-stocked
Hyde estimates that most traditional supply chains hold on average at least 75 per cent more stock than needed at any given time to offset the vagaries of demand. But she says this is the result of the batch order mentality where, for example 50,000 items are manufactured to cover an order, held in a central warehouse and called off in smaller lots. But she says that in a demand model inventory is spread over smaller multiple orders of, say 500 each to meet short term demand.

In her role as global solutions director for the fashion industry, Hyde sees many companies building large stock levels with an annual inventory turn of between one-and-a-half and two to guard against the vagaries of demand. But she says it's costing a fortune. "Depending on the line of merchandise, companies should be much more ambitious. Sweaters, for example, should be around three-and-a-half turns-a-year, men's trousers six to eight, and sportswear nine," she explains, adding that luxury items will be relatively low.

"When I talk to people in the apparel industry about this subject there's always a healthy dose of scepticism, and rightly so. But inventory is front-end loaded. It doesn't take much imagination to realise that potentially there are enormous savings to be made through collaborative working, getting visibility into the supply chain and introducing practices such as vendor-managed inventory (VMI) and collaborative planning forecasting and replenishment (CPFR)."

And Hyde says that in tackling these issues head on, manufacturers and retailers should learn from the successes and mistakes of other consumer goods industries such as automotive - itself the subject of an AMR Research Alert (The shell game that is automotive inventory management - Kevin Prouty and John Fontanella: October10 2001).

It said: "Slimming down to one to two days of component inventory from 15 to 20 days has removed billions of dollars from OEMs' (original equipment manufacturers') books. But the change has had little impact on inventory throughout the entire system. Component-level inventory is still more than $30 billion industry-wide. Finished inventory remains on average more than 55 days in the channel. The cost of maintaining inventory has remained the same: it's just shifted to suppliers."

Hyde says the lesson to be learned by the fashion industry from this example is to avoid a similar problem by tackling inventory management from a total supply chain perspective, which requires all parties to work together in partnership and share a common goal.

Effective replenishment a top priority
Hyde suggests that the argument in the apparel industry about being more open often raises the issue of trust. And she says manufacturers, suppliers and retailers need to be convinced about the benefits of working together collaboratively, and using information technology as the enabler.

And she maintains that if the majority in the industry wants to compete with the new thinkers, it needs to start making some radical changes, both in culture and mindset, and by embracing collaborative information technology. And other authoritative voices share this view.

In 1999,AMR Research said: "In retail today, the ability to exploit information technology increasingly defines a retailer's ability to succeed. The traditional approach to application technology infrastructure management is becoming a strategic liability. Retailers must improve their ability to integrate, collaborate and manage contracts with suppliers."

Two years later, it stated: "Retailers and manufacturers need to collaborate and streamline supply chain processes and improve end-to-end visibility.

"One of the top priorities for retailers and manufacturers is effective replenishment - supporting every shelf from the kiosk to the catalogue to the web. The collaborative supply chain provides unlimited value and meets top tier objectives. Collaborative planning forecasting and replenishment helps ensure accuracy, visibility and communication between retailers and suppliers to manage inventory and guarantee availability."

Hyde argues that these comments, while not aimed specifically at fashion, should nonetheless have strong resonance for the industry's manufacturers, distributors and suppliers, particularly given the pressure from consumers and retailers for more choice more often.

"These new demands have to be met through better decision-making, greater agility, flexibility and responsiveness at all stages," she says.

And she stresses that collaboration begins at home. "If purchasing and production are incapable of collaborating internally, there's little hope of successfully collaborating externally with customers and suppliers," she argues.

"Sadly, many organisations operate with isolated pockets of information because they have different information systems that are not integrated. And it's common for people within these organisations to be working with different and sometimes conflicting information. Departmental barriers have to be broken down and everyone working in sync, otherwise collaboration will be an impossible dream."

Industry innovator
Hyde says some retailers and manufacturers have started to look seriously at various ways to manage and maintain lower stock levels and reduce costs. And she cites one example, Intentia customer Delta Galil, the US$600 million global manufacturer of private label apparel. It includes names such as Marks & Spencer, DKNY, Hugo Boss, GAP, JC Penny, Wal-Mart and Victoria's Secret amongst its growing list of customers.

The company has been running VMI projects with two retailers, and is now pioneering a CPFR project with Britain's Marks & Spencer.

Director of logistics and processes, Coby Relis says the company has a new collaborative partnership with M&S. "We sit down and plan together," he says. "Both parties have a full view of sales and forecasts, and the supply chain. We challenge assumptions, discuss how demand requirements will impact manufacturing, and if necessary make modifications accordingly. We both look at the big picture and operate together with a shared goal. It's a win, win situation."

Relis believes the industry desperately needs more collaboration. "It needs to demonstrate a greater commitment to establishing full visibility for all partners along the whole supply chain in order to instil tighter and better management. There are too many blind spots with excess inventory that acts as a buffer against the unknown, and where problems suddenly appear but remain hidden until it's too late."

He says four years ago Delta began what his colleague, CIO Avi Pinhas described as a "mini technology revolution". And in partnership with Intentia has implemented a technology infrastructure to create what Pinhas calls a "virtual supply chain where there are no barriers to achieving the impossible".

Each month the company produces ten million pieces, each one containing an average of ten items. The production of each piece can involve movements through five different factories, crossing three borders before reaching the company's central warehouse for onward shipment to customers' distribution centres. And the complexity of the task is emphasised by the fact that the company employs 12,000 people, has around 40 production and logistics facilities in 20 countries, and more than 500 suppliers.

Relis says that inventory used to run at an average of eight to ten weeks, but the company is moving toward its aim of reducing that to four to five weeks. "The positive impact on cash flow and working capital will be significant," he says.

"We're creating clarity throughout our supply chain where everyone can see an order and the specifications from raw materials, through manufacture and distribution on to retail shelves. Clarity creates trust. It creates the flexibility we need to respond quickly, and it exposes problems at a much earlier stage which means they can be dealt with fast and effectively."

He concludes: "Collaboration really does work. People do have to be convinced and re-educated to be more open. But collaboration is the way forward, and we're already starting to get quantifiable benefits."

Web technology can "energise" smaller suppliers
Hyde knows of several more companies, large and small, that are beginning to take the same approach used by Delta Galil. "They're starting to look holistically at the entire supply chain process from a demand perspective, rather than attacking individual parts in their own right. Because in most there's little or no visibility between each stage, and no visibility of what's coming."

However, Hyde acknowledges that many supply chains are complex and populated by a preponderance of small suppliers and sub-contractors that often can't afford the investment in collaborative information technology. But she argues it's in the interests of the main manufacturer to use web technology as the method to "embrace and energise"' these smaller participants, cost effectively.

"In Europe, in particular, some companies are looking to create information portals to give suppliers access through a browser to information about purchase orders, supplier confirmation and labels, treating each one almost as if it were an in-house production unit," she explains. "So instead of communicating through hundreds of phone calls, e-mails and faxes, the information goes straight into the portal and into each company's system. Everyone has visibility and knows immediately if there are delays or problems, and can take action together.

"While this may appear to be a fairly basic application compared to some industries, it's an effective way of creating simple business benefits at relatively little cost." And she adds: "Eighty per cent of the time there are no problems with products. It's the 20 per cent that needs careful managing and action - or put another way, management by exception."

However, Hyde reiterates the need for companies to collaborate internally before venturing outside the organisation by implementing an integrated enterprise system. "Companies need a common transactional infrastructure that enables everyone to work with the same information at the same time, otherwise collaboration is impossible."

And the cost? Typically, the apparel industry looks at a return on investment of 12 months. But she believes this is unrealistic, and that the experience of many Intentia customers is an 18-month to two-year return on investment

Conclusion
Hyde says there is a lot of convincing to do to get the industry at large to change a mindset that historically has based decision-making on price alone, with little or no attention for supply chain value. And while price is important, she is adamant there are bigger prizes to be won.

"The imperative to effectively combat pressure on shrinking margins should," she maintains, "be incentive enough for apparel manufacturers to start embracing collaborative information technology with a greater sense of confidence and purpose.

"Streamlining the supply chain means the removal of unnecessary, non-value adding steps from the process in order to deliver goods to shops more frequently to meet the immediate demand, faster, at less cost and to the benefit of everyone. And if that means changing the supply chain to make it demand-led or less complex, and introducing more efficient processes, then it needs to be done," she concludes.