Last year, I attended a thought-provoking supply chain conference hosted by an industry analyst organization. The agenda was packed with interesting supply chain topics – cost-to-serve strategies, supply network optimization, S&OP integration, demand shaping tactics, etc. However, the event gave almost no attention to the foundation upon which advanced supply chain planning and execution strategies rest: supply chain integration.
Puzzling. Automated processing of supply chain transactions based on electronic data interchange standards and technologies makes it possible for even small and mid-sized businesses to process thousands of orders each day, accurately, at low cost, and with complete auditability. Without such automation, many companies, especially those with close-to-cost business models, would be unable to operate profitably. Yet supply chain integration is something we take for granted.
Understanding the Value of Automation
According to a 2014 Supply Chain Insights benchmark study of businesses with annual revenues of $250m or more, the majority of order-to-cash and procure-to-pay processes are not fully automated. Only “34% of [sales] orders are moving through the systems hands-free” (p. 7), and “36% of purchase orders are handled through EDI [electronic data interchange] without manual intervention” (p. 8). Another 39% of sales orders and 34% of purchase orders were found to be partially automated, still requiring some manual processing steps.
The study goes on to describe the heavy cost of not automating. “The cost of automation is $0.01–0.02 per order; however, the cost to NOT automate is $78 per order on average. As a result, many companies are having discussions on how to reduce pennies when they should be changing the conversation to save dollars. With the thousands of orders processed, this impact is significant and important” (p. 10).
Automating supply chain processes doesn’t just cut costs. The same automated processes capture and normalize data that is essential to forecasting, inventory planning, supply network design, service level agreement monitoring, and other high-value planning and operations activities. Automation is also essential to an increasing number of time-critical, low-latency business-to-business (B2B) interactions, such as responding to load tenders in transportation businesses and insurance eligibility inquiries in healthcare.
Finding High-value Automation Opportunities
Of course, hands-free automation isn’t always a practical option. Some manual processing is policy-driven, as when orders containing exceptional item quantities or order amounts are flagged for human approval.
And it can be cost-prohibitive to automate interactions with technologically challenged “Mom and Pop” trading partners. Vendor portals and business networks aid automation in such cases, provided they integrate with enterprise applications and data. Technologies for automating phone, email, and fax transactions can also help. But justifying the corresponding investment costs depends on the number and value of each kind of interaction.
Higher-value opportunities for hands-free automation lie with transactions that are only partially automated – for example, transactions that move between trading partners through automated communication channels but which still undergo manual processing. Mostly, these cases result from internal business and technology decisions that unintentionally thwart hands-free automation.
Recognizing Barriers to Hands-free Automation
Many self-imposed problems are traceable to supply chain integration strategy. Customer requirements are particularly important drivers when defining integration requirements and setting spending priorities, particularly for suppliers and intermediaries. But focusing too narrowly on meeting customer needs can lead to choices that make hands-free automation harder to achieve. For example:
• Defining customer connection and data movement objectives without adequate attention to internal synchronization and data integration requirements
• Using integration middleware that lacks support for end-to-end automation or needed transaction data formats
• Failing to replace outdated integration tools and programming that drive up costs, jeopardize onboarding schedules, and impede supply chain agility
• Outsourcing partner-facing integration to onboarding services that do not include last-mile integration with enterprise applications and data
These are just some of the sources of automation gaps. Once those gaps are in place, overcoming organizational inertia and competing for the budgets and resources needed to close them can be difficult and time-consuming. The best way to deal with automation gaps is to avoid them altogether, by giving equal weight to partner requirements and internal automation objectives.
How a business decides to close its automation gaps is as important as reaching the decision to do so. Sometimes the tools and resources needed are already at hand. When automation gaps are a result of a narrowly focused supply chain strategy, however, it is unlikely that the incumbent solution(s) supporting that strategy provide the process automation, data transformation, application integration, and other capabilities needed for supply chain process automation.
A natural tendency, especially in smaller businesses, is to leave limited legacy systems in place and acquire point solutions to provide missing capabilities. Given sufficient resources and time, integrating point solutions with existing solution infrastructure can work, for limited cases. But it also adds to skill deficits, introduces new points of failure, complicates administration, licensing, and maintenance, and impedes end-to-end visibility. Too often, this tactical accretion approach produces throw-away results that solve one problem while worsening others.
Like trading in an old car that needs major repairs, sometimes the only workable option is to replace a legacy EDI system or service with a modern supply chain integration solution. The good news is that today’s supply chain integration technology is far more capable and less costly than it was 5 or 10 years ago. The best available solutions also reduce switching costs, migration time, and partner onboarding time by 60 percent or more, compared to the best options available just a few years ago.
Automation of supply chain integration processes is both a key cost reduction strategy and the basis for advanced supply chain practices. It shortens transaction cycles, improves accuracy, visibility, and accountability, and increases business efficiency, scalability and agility. By automating just a dozen additional orders per day in a hands-free fashion, a business can justify the cost of a replacement solution.
What is most important to recognize is that achieving greater supply chain automation is under the control of your business. Regardless of supply chain position or role, every business has the power to overcome most obstacles to hands-free automation, without waiting for trading partners to take action.
This article was written by EXTOL’s VP of Product Strategy, Jim O’Leary, and appeared in a recent issue of Supply Chain Brain.