First the basics. A supply chain encompasses all the facilities, functions and activities involved in producing and delivering a product or service from suppliers to customers. It includes planning and managing supply and demand, acquiring materials, producing and scheduling the product or service, warehousing, inventory control and distribution, delivery and customer service.

Supply Chain Management (SCM) is about coordinating all these activities so that customers can be provided with prompt and reliable service of high-quality products at the least cost. Successful SCM in turn provides the company with clear competitive advantage. Richard Street, Business Development Manager of IBS Ltd., explains: "Today's business is no longer about my company versus my competitor, it's about my supply chain versus theirs."

The planning / execution balance

SCM software is meant to help enterprises run their supply chain more efficiently, with the goal of reducing inventory and cost by keeping demand and supply in better balance. The two main types of SCM software are planning applications (SCP) and execution applications (SCE). The debate over which is more important - planning or execution - is now old news. Today, SCM needs to marry planning with real-time execution, recognising that best execution is predicted on robust planning.

Nevertheless, many would say there is still a gap between planning and execution software functionality. Currently, most manufacturers manage these two phases with multiple systems. Planning applications coordinate long-to-medium-term activities, such as lining up resources and mapping production schedules to build and deliver the exact products customers are expected to buy over a period of days, weeks, or months.

Execution systems balance the multitude of tasks that must be performed as the ultimate delivery dates draw closer. These tasks include generating short-term production schedules, monitoring and controlling production equipment, tracking finished goods stored in warehouses, and arranging for goods to be transported to the customer's door (see diagram.)

The real-time enterprise

Manufacturers are now pressurizing software vendors to make it possible to pass data between planning and execution applications in near real-time. Fortunately, it is the Internet that is giving companies greater access to a wide range of execution-level data that wasn't available before. If harnessed, this newly available data can enable manufacturers to generate new production, inventory or distribution planning "on-the-fly" in response to unexpected events, creating what industry analysts refer to as a "real-time enterprise."

SCP software typically uses mathematical algorithms that analyse historical data along with input from customers and partners to create a demand forecast, which becomes the basis for a production plan. The software can also create a production schedule, taking into account the capacity of various plants and potential bottlenecks. In the event of a disruption to the schedule, such as a late delivery from a supplier or an equipment outage, the system can send alerts and suggest another plan. But is this really happening?

Globally businesses invest more than £11.6 billion a year on technology to improve their supply chain, yet a study from strategy and technology consultancy Booz Allen Hamilton says half of these companies are disappointed with the results.

Unfulfilled expectations

The most common reason for expectations not being met was an inability to forecast effectively (56%), followed by implementation issues and delays (48%) and unrealistic expectations about the impact of the technology (44%). Most efforts failed because they did not challenge the fundamental structure of the supply chain but instead tried to improve performance within existing limitations. Whereas the companies who did make gains opted to relocate factories or outsource non-core functions rather than simply install a new IT system.

So all in all, it has not been a happy time for companies that develop supply chain planning software. Companies such as SAP, Oracle, i2 and Manugistics have all reported declining sales, which can't just be blamed on the fact that companies have been generally spending less on IT. Another reason is almost certainly that supply chain applications are very complex and many high profile companies have reported problems getting them to work.

A 2003 report from AMR Research agrees that "although the economy has certainly exacerbated the downturn in the fortune of supply chain planning vendors, the immaturity of these applications had more to do with the current fate of this market segment." They cite data problems, complex models, lack of integration, plan timeliness, and user skills as all contributing to "poorer-than-expected results" from the sector.

AMR acknowledge that data accuracy and integration are not just obstacles for the SCP sector and that: "improving architectures of ERP systems and other strategic infrastructure will slowly lessen this problem. As enterprise applications vendors build their products on better integration frameworks that support industry standards such as XML and add native support for Advanced Planning and Scheduling (APS) technology, this problem will eventually go away."

Complexity

More problematic would seem to be model complexity and by implication user skills (or more precisely the lack of them!) A manufacturing supply chain can be incredibly complicated with many, many variables and nuances, which makes modeling these physical systems a pretty hard task. Increasing functionality to cope with this sort of environment, particularly a unique process element that might give one manufacturer a competitive advantage over another, increases complexity and difficulty in generating a plan that is both understandable and feasible.

AMR points to two ways of solving this problem. Firstly, SCP vendors, accepting that their products will more than likely be deployed in custom applications ie. purpose built models that can deal with all the unique aspects of a company's business processes, should provide the required design and customization services themselves. Alternatively, "second-generation" planning applications that use "closed-loop" processing to learn from prior plans are what's needed.

Current planning systems are criticised for not considering why a previous plan was not achieved. Without intervention from a planner, they take new data and the current plan and regenerate a new plan with all the same assumptions, even if the prior plan was a failure. The solution is a planning system that evaluates the success of the current plan and makes adaptive changes to correct for variability or poor modelling. This is "closed loop planning" but AMR reckons that real closed-loop SCP applications are still two to three years away, so the current reliance is on a degree of customization.

People issues

Equally problematic, however, are the people issues associated with this type of application. Christian Verstraete, VP of HP's Manufacturing Industries Practice, points out that it takes a major leap of faith for an experienced planner to believe that a computer program can produce a better plan than all his or her accumulated years of experience. Verstraete likens this to an experienced traveller not daring to believe that his satellite navigation system could possibly suggest a faster route than his finely honed instincts. Short of the old planning guard being replaced by a younger more technologically advanced individual, this is unlikely to change.

Closer to the goal?

That said, the last couple of years has seen the emergence of supply chain event management (SCEM) software. One commentator describes these packages as virtual supply chain monitors that typically connect to execution-level applications, and are programmed to send alarms when something happens that threatens to delay customer orders. As an isolated system sitting on top of execution systems, their value is doubtful. Afterall you may receive a lot of alarm messages but the real question is still what to do with them all.

The consensus is that SCEM is a feature that should be incorporated into a more comprehensive SCM package. Incorporating intelligent agent technology that watches both planning and execution-level systems and gains intelligence about how the supply chain should be working will mean that truly adaptive planning has arrived.