BUILDING STRONGER SUPPLY CHAINS

What will replace downsizing? Will it be innovation, growth, knowledge or some other magic word that quickly becomes a mantra and then, just as quickly, passes into oblivion?

Remember that corporate downsizing, which was often a product of the much-ballyhooed (and often disappointing) business-process re-engineering frenzy, has been shown to do little more than prop up the bottom line for a quarter or two.The American Management Association found that ''fewer than half the companies reporting job cuts since 1990 report an increase in operating profits.'' Even its originators have admitted that re-engineering fails 40 percent to 70 percent of the time.

Here's a thought. Why not replace downsizing with a difficult, multiyear effort that brings steady, slowly rising improvements in profit margins over three or four years? It may not be magic, but, when it comes to the complex, difficult world of global manufacturing, there is no magic.

However, improving the way you manage your total supply chain - the flow of product and information from the purchase of raw materials to the purchase by consumers - can have a major effect on your bottom line.

In a 1995 study of the pharmaceutical industry, A.T. Kearney Inc., experts in supply-chain management, reported that pharmaceutical companies that were leaders in supply-chain management had a return on earnings 18 percent higher than that of the other companies surveyed. Similar benefits have been realized in the apparel and grocery industries.

In the grocery industry, when the Wal-Mart and Kmart type supercenters began to change the old ground rules, retailers such as Giant Food, Kroger and Shaw's decided to band together to fight the inroads being made by these mass merchants and warehouse clubs.

They put in place an initiative called ''Efficient Consumer Response,'' which was aimed at creating a seamless, paperless flow of product and information from suppliers of raw material to consumers.

Current estimates are that the members of the industry will realize improvements in profits of $30 billion a year as a result.

Creating an effective, integrated supply chain takes doing a number of things at the same time. You must re-engineer your business processes and your back-office processes, as well as your manufacturing. And you must enhance your information-technology and communication-technology capability and then extend that electronic reach to your suppliers and customers.

Let's stop and look at what all this means. In its simplest terms, the supply chain is a series of steps that begins with the ordering and then delivery of raw materials to a manufacturer. The manufacturer makes a product that is then packaged, stored and finally shipped to customers. The customers, in turn, get the product into the hands of consumers.

Each step requires transportation of materials and, often, warehousing. And each step requires orders, invoices, bills of lading and so forth, which must be generated and sent from party to party.

The supply chain just described, however, is the physical supply chain.

Improving the processes involved in moving, manufacturing and shipping brings some benefits. Reducing the flow of paper that is involved in all those steps - by making it possible for orders to be placed and paid for electronically - brings additional benefits.

But the greatest benefits reside in managing the electronic supply chain that accompanies the physical flow of goods. For example, today bar coding and scanning devices at the cash register allow the collection of information about what customers are buying as they buy it.

Clothing stores such as Benetton and the Limited use this information to replace stock by arranging overnight shipment from nearby distribution centers or from other stores in which those items aren't selling. This information also allows them to see trends developing so that they can rapidly order more of an item in time to feed a fad.

A 10 percent improvement in efficiency in the supply chain in the chemical industry can have a 40 percent impact on profits. And in many industries, 30 percent to 50 percent of the cost structure is in the supply chain.

Some companies have become such strong believers that they are not only investing in total supply-chain management programs but are also pushing others in their industry to do the same to further magnify benefits. Procter & Gamble, which adopted Efficient Consumer Response principles in 1994 - cutting its customers' handling costs by $14 million in the process - is in the midst of implementing a new logistics operation. It requires customers to make changes in the way they receive their freight, in return for a price cut of about 10 cents on a case of goods.

The point is that supply-chain improvements really require compatible technology and industrywide cooperation aimed at putting in place standards for operations.

Companies that decide to turn to total, integrated supply-chain management are taking the time to carefully design their organizations, to make precise measurements and to buy the right ''fabric'' to improve their technology. As a result, their new clothes will be very visible in their bottom lines.

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