Logistics and the Extended Enterprise: Benchmarks and Best Practices for the Manufacturing Professional

Logistics and the Extended Enterprise: Benchmarks and Best Practices for the Manufacturing Professional

by Sandor Boyson, Thomas M. Corsi, Martin E. Dresner, Lisa H. Harrington

Logistics and the Extended Enterprise is the result of a four-year, $1 million research project devoted to the study of best practices in supply chain management—a necessity for companies that want to be competitive in a global business environment. Written by members of the University of Maryland's Supply Chain Management Center, this important book takes a


Logistics and the Extended Enterprise is the result of a four-year, $1 million research project devoted to the study of best practices in supply chain management—a necessity for companies that want to be competitive in a global business environment. Written by members of the University of Maryland's Supply Chain Management Center, this important book takes a first-of-its-kind look at supply chain and logistics/transportation management organization structure. It offers a paradigm for successfully implementing a global supply chain and explains the role logistics plays in enabling this approach.

The book answers the question of how organizations can best apply supply chain management practices to break down internal and external walls and become more effective extended enterprises, with a focus on lessons learned at some of the world's leading corporations. The authors gained first-hand insights into this subject through interviews, site visits, focus groups, and targeted surveys involving over 600 companies across a broad range of industries. This book summarizes their core research findings and conclusions, using case studies from such companies as Amoco, DuPont, Johnson & Johnson, UPS, Georgia Pacific, and others.

Logistics and the Extended Enterprise will provide the reader with both the conceptual and analytic tools necessary to manage a global supply chain and put a world-class logistics operation in place.

Editorial Reviews

Summarizes the findings of a four-year research project at the University of Maryland that studied how organizations can best apply supply chain management to break down internal and external walls and become more effective extended enterprises. The authors first present their framework of the best practices and strategies in logistics management. The second part provides a diagnostic instrument for preparing a baseline assessment of an organization's supply-chain practices, and a methodology to interpret the results for improvement. Annotation c. Book News, Inc., Portland, OR (booknew.com)

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LOGISTICS AND THE EXTENDED ENTERPRISE: Benchmarks And Best Practices For The Manufacturing Professional
Sandor Boyson

(NOTE: The Figures and/or Tables mentioned in this sample chapter do not appear on the web version.) Logistics/Supply-Chain Management: The Hub of the Extended Enterprise

Logistics/supply-chain management is the synchronized movement of inputs and outputs in the production and delivery of goods and services to the customer. In this integrative approach, a cross-functional senior management group coordinates physical and informational resources to optimize efficiency and effectiveness. It manages both the purchasing (or inputs) side of the resource stream, and the distribution (or outputs) side of the stream as a single integrated flow. This flow typically encompasses customer service, physical distribution, materials management, information management, and their related, highly complex subprocesses: order processing and order tracking, production planning and supplier management, purchasing, warehousing, transportation, and electronic supply-chain communications/payment systems. Taken together, total supply chain costs consume about 7 to 12 percent of corporate annual revenue across all industries. In one year alone (1997), U. S. corporations spent $862 billion on supply-chain activities, according to Cass Information Services' 1998 State of Logistics Report.
Today, senior executives in many industries are managing extraordinarily complex global supply chains that source raw materials from thousands of locations around the world and distribute finished products to thousands of other locations. Many of these executives have come to recognize that corporate capability in supply-chain management is an important lever of enterprise transformation. This critical coordination and value center can enable the enterprise to synchronize many simultaneously unfolding material and informational flows on a worldwide basis-and help the whole enterprise to contain costs through more efficient utilization of assets and greater overall productivity.
As a result, integrated supply-chain management is now at the epicenter of business transformation. It has been elevated to the position of a hub, a crosscutting communications and strategic control nexus encompassing the major functional areas of the organization and the extended enterprise. A recent survey conducted by the University of Maryland Supply Chain Management Center found that 20 percent of Fortune 500 companies now have chief logistics officers (CLOs) reporting directly to the CEO-clear evidence of this area's growing stature as a critical lever of corporate transformation.
Chief logistics officers (and the even more powerful next generation of vice presidents of supply chain that are succeeding them) are breaking down walls between internal functions or departments, as well as between the enterprise itself and key partners in the value chain (e.g., customers, distributors, suppliers, and carriers). The very term "extended enterprise" refers to breaking down a company's outer wall and extending its strategy, structure, and processes to its core partners. The goal is to get everyone in the extended enterprise onto a common platform of logistics transactions and information systems for greater interorganizational "seamlessness." This integration can result in significantly faster system response times to volatile changes in marketplace events and patterns of demand. By creating and managing a highly organized network of complementary companies across the supply chain, an extended enterprise can also rapidly build strategic effectiveness and wealth.
This chapter describes the evolution and characteristics of a well-designed, well-managed extended enterprise, and it reviews corporate experience in achieving progressively greater integration with internal departments, suppliers, distributors, and customers. In doing so, it provides a tool for assessing your own company's stage of supply-chain development. Finally, the chapter concludes with a discussion of future trends that will enable expanded integration and even greater competitive benefits.

While the extended enterprise model may seem revolutionary, major elements of it are not new at all. They hearken back over a century to another time of radical technological and economic change. In his 1922 text, The Industrial and Commercial Revolutions in Great Britain During the Nineteenth Century, L.C.A. Knowles described the role of logistics in wealth creation in ways startlingly similar to the situation today:
Mechanical and rapid transport (railways and steamships) not merely altered the relative value of nations and commodities but it promoted a commercial revolution in business organization. As traders could get goods swiftly and with absolute certainty, they no longer kept such huge stocks. They therefore needed less warehousing space and less credit from their bankers and were able to carry on business more economically.
This sounds very much like the just-in-time inventory management practiced today, just as Knowles' description of the telegraph-enabled extended supply chains of the late 1800s sounds much like today's emerging IT-enabled extended supply chains:
It is now possible to control world-wide interests as one great business undertaking. The result is the formation of combinations that make for efficiency in production and the control of waste. It is possible to specialize branch factories to a very high degree, and raw material bought in large quantities is bought cheaper and is easier and less costly to handle. These combinations can obtain lower railway rates for their large shipments. They are also able to distribute from the nearest place of business and so save the expense of long railroad hauls. Businesses of this magnitude, national and international in scope, could not be carried on without daily correspondence to keep the whole in touch. They are therefore dependent for their existence on telegraphs and telephones.
In the modern era, we can track the genesis of extended enterprise logistics to the early 1980s, when a new model of organization more appropriate for the hypercompetitive international marketplace began to surface. In the manufacturing sector, Japanese automobile makers began building factories with flexible automation capable of producing multiple types of products on the same production line. Instead of pushing large-volume, standardized production runs to reap economies of scale as was the common industrial practice in the West, Japanese firms engineered a lean and just-in-time manufacturing paradigm that sought big gains from economies of scope. The Japanese built fast-response production and logistics systems that could satisfy the pull of diverse and highly fluctuating international consumer demands.
A 1994 study by Nishiguchi found that Japanese auto manufacturers throughout the 1980s maintained inventory levels one-fifteenth the size of European auto manufacturers and one-quarter the size of U. S. auto manufacturers. They also used just-in-time deliveries with 12 and five times greater frequency respectively than European and U. S. auto makers.
Soon, lagging American car manufacturers began to emulate Japanese practice, ordering key suppliers to move within 50 miles of plants to create greater synchronization in production. General awareness rapidly increased in Corporate America, which rushed to establish new, more responsive business models that were highly integrated horizontally and vertically across internal departments and external suppliers.
More recently, Japanese and American auto companies have begun to extend this integration into the dealer-support end of their business, using electronic sales information to guide continual parts-replenishment strategies. Honda Corporation has led the way among Japanese multinationals by constructing an international logistics network that unites country-specific local car dealerships, regional parts warehouses, and corporate headquarters in Tokyo into a single information system. This approach enables the company to maintain extremely low inventory stocks and conduct its customer service operations on an extremely fast turnaround basis.
By the early 1990s, this new approach to management had spread well beyond Japan and beyond the manufacturing sector. Service hierarchies were also transforming themselves into flexible global networks through telecommunications and electronic links of all kinds with suppliers and customers. By the late 1990s, a great wave of manufacturing and service businesses were moving to "network" models of organization, and many companies were establishing corporate logistics/supply-chain management hubs to provide information, resources, and guidance to keep networks functioning on an optimal basis. For example, to leverage corporatewide relationships and support both internal and external operating units, Xerox created strategic shared-service hubs at corporate headquarters to support areas like purchasing and technology where economies of scale and knowledge still made a big difference.
Today, supply-chain management, with its tendency to span functional boundaries and interact with many internal and external players, has become the driving force in the effort to create the extended enterprise. The supply-chain organization acts as the body of the enterprise, generating the dynamic energy and direction needed for the extended-enterprise network to operate efficiently and exchange inputs and outputs within its systemwide borders. It also acts as the mind of the extended enterprise, with computer software tracking the expanding physical production/distribution network map and applying optimization principles to restructure and streamline the network. Finally, at a more profound level, the supply-chain organization acts as the corporate survival instinct, with physical and informational supply lines branching out to secure vital corporate inputs like underground roots searching out water.
Typically, the logistics/supply-chain organizational hub has capabilities in customer order management, intermodal and international transportation management, information/data networking across the supply chain with vendors and customers, and performance/metrics management. It sells its services to the operating business units, and the units contribute to the budget of the logistics shared service on a utilization basis. In return, the units get purchasing discounts, lower operating costs, and higher levels of service from outside logistics/supply-chain actors than they could attain by operating alone.
The greater synchronization of production, distribution, and customer order management activities often brings dramatic gains. Work in process and finished goods inventory are slashed; order-to-delivery cycle times are compressed. In fact, best-in-class leaders in supply-chain management can have a 50 percent cost advantage over median competitors. According to a 1997 supply chain benchmarking study, conducted by The Performance Measurement Group, a subsidiary of global management consulting firm Pittiglio Rabin Todd & McGrath (PRTM), best in class companies:

  • Enjoy an advantage in total supply chain management cost of 3-6 percent of revenue
  • Hold 50-80 percent less inventory than their competitors
  • Have a 40-65 percent advantage in cash-to-cash cycle time over average companies
"For a company with annual sales of $500 million and a 60 percent cost of sales, the difference between being at median in terms of [supply chain] performance and being in the top 20 percent is $44 million of available working capital," says PRTM director Mike Aghajanian.
What gives best-in-class companies these advantages? They have a holistic supply chain orientation, culture, and practices that allow them to see the entire set of activities from supply points to production points to warehouse/distribution points to the customer as one cross-functional, integrated process. Their constant priority is to eliminate handoff times and process disconnects across the supply chain.
Of course, firms do not attain best-in-class status overnight. The evolution many companies have experienced appears in the four stages of supply-chain evolution outlined in Figure 1.1. These stages of supply-chain management competency track the rise in stature, mission criticality, and reach of supply-chain management across and beyond the borders of the enterprise. (It is an extremely useful exercise to situate your own organization along this spectrum.)
Other supply-chain researchers also have documented this pattern of evolution. Masters and Pohlen provided a chronological context for this development, noting that management styles have changed over time. While functional management was the dominant mode of the 1960s through 1970s, the 1980s moved to internal integration and the 1990s to external integration. Thus, companies who manage logistics on a functional basis are still mired in the 1970s and are some 30 years behind current best practices. Those who manage logistics well across the enterprise but who neglect to manage extended-enterprise relationships with the same intensity and effectiveness are at least 10 years behind current best practice. Even those companies that are high performers with unified management approaches across the entire chain cannot afford to rest, because revolutionary economic and technological forces continue to accelerate the pace of change.

Full-spectrum visibility and real-time management of increasingly complex, high-velocity operations will be landmark practices of supply-chain management in the twenty-first century. These practices are already taking shape in organizations of all kinds.
For example, Ford Motor Company has opened its intranet to core suppliers so they can access real-time information on inventories in Ford plants and warehouses and engage in continual replenishment supply relationships. This intense logistics coordination is enabling suppliers to send a shipment of car seats packed so precisely that blue seats can be uncrated at the seat-installation station on the assembly line just as blue cars reach that station.
Or take the tactical control centers of the U. S. Army. At these centers, a logistician faces a wraparound 3D-control panel that provides "complete situational awareness." This panel shows the position of the tanks and soldiers on the battlefield. It shows-with total real-time visibility-supplies and material flowing into the frontlines of battle from regional theater locations and from staging areas around the world. It uses computer technology to locate additional suppliers instantly as needed and arrange new orders.
Using such state-of-the-art technology, the military is creating a network-centric global logistics environment characterized by unprecedented speed and agility. Perhaps this endeavor will spin off revolutionary new technologies and modes of management practice to the private sector in the years ahead. The military, which gave birth to the science of logistics in the Industrial Age, could well define the new supply-chain management paradigm of the Information Age.
We are only beginning to understand the revolutionary potential of these accelerating developments in supply-chain management. In fact, as we survey the millennial landscape, we can start to identify a whole series of converging forces and newly emerging capabilities that will surely shape the way extended-enterprise supply chains develop in the future. These include:

  • Total real-time connectivity among extended-enterprise partners and deployment of ultrafast global information exchange networks within an increasingly open standard operating environment based on Internet protocols.
  • A more holistic, systems-engineering and integration approach to value-chain management and more precise methods of costing and controlling transaction flows, such as activity-based costing and business process reengineering.
  • The rapid rise of single-source, global third-party logistics companies that manage entire supply chains.
  • The increased use of intermodal transportation for international and domestic shipping.
  • The growing availability of computer-based government trade facilitation systems that ease import/export movements and enhance corporate supply-chain visibility and seamlessness.
The following sections discuss how each of these critical trends will condition the growth of extended-enterprise logistics.
Total Connectivity
Information technology and telecommunications have catalyzed and accelerated the shift to the fully extended enterprise. The rise of corporate workgroup computing (e.g., PCs and LANs) led to high-performance work teams from the late 1980s to the early 1990s. In the mid-1990s, enterprisewide computing and the integration of key financial and operational databases led to more flexible internal structures. In the late 1990s, we have witnessed the rapid emergence of a seamless extended enterprise driven by leaps in information and telecommunications technologies.
In particular, the emergence of the Internet as the global information infrastructure backbone has accompanied the globalization of markets. It has given companies even greater tools for tightly orchestrating relationships across the entire value chain and creating strategic partnerships and operational linkages with a dynamic web of large and small firms spanning all continents. Internet-enabled shared information helps break down organization politics and functional fences, helping supply-chain alliance members develop a common understanding of the competitive environment. Presumably, all companies-suppliers, customers, and third parties-can benefit from a more open information flow by using the information to:
  • Reduce or eliminate unnecessary inventory
  • Improve their planning
  • Develop active rather than reactive operations
  • Smooth product flows
  • Trim cost
  • Improve service
These benefits will increase as the pace of the global knowledge revolution and the diffusion of technological infrastructure accelerate. The Internet's multimedia interface, the World Wide Web-and the growing pervasiveness of Web-enabled electronic commerce applications of all kinds-will certainly strengthen and become the strategic "anchor" forces in the global technological environment.
A 1998 White House report on electronic commerce describes the quickening pace of Web development and access in the United States.
The wait for broadband Internet access to households is measured in years not decades. Within the next five to 10 years, the vast majority of Americans should be able to interact with the Internet from their television sets, watch television on their PCs, and make telephone calls from both devices. These combined services will be brought to homes by satellite, wireless, microwave, television cable and telephone lines all interconnected in one overall system.
It would be incorrect to assume that Internet architecture is limited to North America or Europe. The New York Times reported recently that 10.48 percent of people in Hong Kong were already using the Internet; in Singapore, the estimate is 8.82 percent. In China, 50 Internet Service Providers are competing for an Internet user base that increased 1,150 percent in 1996 and 800 percent in 1997, according to the Mosaic Group. Even in the least-developed continent, Africa, the Internet is catching on quickly. The consensus of participants in a 1998 workshop sponsored by the World Bank was that, "spurred by the lower cost of communications and led by the private sector, the use of the Internet is growing rapidly in Africa."
On the supply side, major investments in international Internet connectivity are flooding the marketplace. For example, in March 1998, Level 3-a public company with a $10 billion market value-was launched to build a global fiber-optic communication network based entirely on Internet Protocol (IP) technology, a radical departure from the circuit-switching technology of traditional telecommunications companies. In addition, at least five global satellite networks representing $30 billion in investment and offering fixed broadband services as wireless complements to the terrestrial networks will be operational in the next five years. One such network, Space Way, plans to offer wireless high-speed data and Internet access for between $30 to $40 month, with expected customer equipment, including antennae and PC interface devices, to be priced at or below $1,000 per subscriber. Teledesic, a Bill Gates-backed project undertaken by Boeing Corporation, has the ambition to create an "Internet in the Sky" capable of significantly higher speeds than terrestrial Internets, by linking 840 low-earth-orbit satellites at a cost of $9 billion.
These technology trends point to the increasing availability of a truly global and pervasive information network that can be used for extraordinary supply-chain connectivity. Internet-enabled networks help organizations to attain a much closer alignment with their suppliers. Business-to-business transactions are in fact the most dynamic areas of growth on the World Wide Web.
Major companies have already led the way in creating Internet-enabled supply chains. General Electric (GE) now is linked to its 80,000 suppliers worldwide via an extranet. The company bought more than $1 billion of supplies through the Internet in 1997, a figure GE predicts will rise fivefold by 2000.
In the process of establishing these linkages, GE developed some tools it is now marketing commercially. TPN Register, a joint venture between GE Information Services (GEIS) and the Thomas Register of American Manufacturers, is an Internet-based electronic catalog and ordering system that enables desktop access for buyers to identify suppliers for maintenance and repair orders, spot buys, and unplanned buys. A GEIS companion product, TPNPost, allows buyers to prepare bid packages, select suppliers, and post packages to a secure Web site. It allows suppliers to receive initial bid packages, to prepare and post bids, and to conduct multiround bids online. Hewlett-Packard has claimed that using TPNPost enabled a 50 percent reduction in request-for-quotes processing time while achieving 100 percent data accuracy. GEIS itself claims that TPNPost enables its clients' procurement departments to prepare bids in hours rather than weeks, virtually to eliminate paper and postage costs, to save 10 to 20 percent on material costs, and to slash sourcing cycle times by 50 to 60 percent.
Most major enterprise resources planning vendors are scrambling to integrate Internet-enabled procurement into their products' functionality by the year 2000. For example, SAP's invoicing and transaction systems will link to Web-based procurement systems by 2000; and Oracle plans to release Web-enabled versions of its large-scale relational database products even earlier.
Despite the availability of more open Internet-enabled information-sharing architectures, one hard fact has become clear: Companies are finding that more and more business-critical information now resides outside their organizational control. "We are increasingly dependent on our trading partners of all types (vendors, carriers, logistics service providers, etc.)," explains Peter Stiles, president of Advantage Design, Chicago. "The information about their component of the supply chain exists in their computer systems, not ours."
The ideal supply-chain system, Stiles believes, would allow companies to create a plan, monitor its execution, and analyze the results and feedback to improve actions. Creating such visibility requires that companies obtain 100 percent of the necessary data across the supply chain and not just for isolated business functions. Supply-chain visibility requires being able to monitor the execution of the plan to determine if the plan is being actualized and to detect problems in time to take corrective action. This means analyzing performance-to-plan while the business process is taking place, and being able to analyze historical trends to improve the process over time.
In fact, pioneering companies have been realizing such benefits through integrated information systems for some time. State-of-the-art supply-chain information systems allow companies to track product through the extended supply-chain network, that is, tracking the transit of a product through brokers, ocean carriers, trucking companies, customer warehouses, and so on. This tracking is done on a product or stock keeping unit (SKU) level, not on a shipment level. "This means you can know at any time how many size 8 blue dresses are moving to your distribution center, and exactly where they are in the pipeline," notes John Williford, president of Menlo Logistics, a third-party logistics service provider. "Retail stores now regularly collect product depletion data from barcodes at the checkout counter, and send it back along the supply chain virtually on a real-time basis. This alerts every operating station in the supply chain to the fact that, sooner or later, they will be moving an item that a customer just bought. This phenomenon is rapidly eliminating investment in what was once known as safety stock."
Such global tracking is made possible by the development in the last three or four years of various technologies for tracing volume in each lane, and making informed transportation and logistics decisions. "It tells us what's coming by air and sea, with timed location and status information possible while product is in transit," explained one executive of a third-party logistics firm. "Information is much more specific than in the past. We're getting to the point where we know more about what's in the trailer as well as where that trailer is."
In striving to gain full-spectrum global supply-chain visibility and strategic control over the chain, companies are seeking to create a virtual process across all the functional islands-whether within the trading organization or among trading partners. Message dialogue (structured electronic conversations) between functional islands is an emerging concept to integrate the supply chain in a virtualcommunications process. Then, intelligent messaging allows companies to build an integrated execution monitor that receives messages from all sources, classifies them by event (e.g., production delays, late shipments, backorders, damages), and acts on events, most commonly in the form of notifications to either people or other computer systems. "The goal of intelligent messaging is to deliver decisionable information-information that makes a difference-to the right people as soon as possible so we can accelerate business processes," notes Peter Stiles.
A version of this next-generation decision-support system has already been prototyped by Digital Equipment Corporation. Its Global Supply Chain Model (GSCM) has been used to evaluate supply-chain options and plan production and distribution activities. It enabled DEC to lower its cumulative costs by $1 billion and reduce its assets by $400 million while increasing its output by 500 percent.
Holistic Supply-Chain Management Methods
"Too many corporations," says Bruce Westbrook, a consultant with Coopers & Lybrand (now Price Waterhouse, Coopers) in Cleveland, "create well-manicured, operationally efficient departments that have very little connection to other departments within the organization, or to other entities on the outside."
Typically, top management encourages this kind of segmentation and departmentalization because of its practice of viewing order processing, transportation, warehousing, inventory control, packaging, and related support activities as individual cost centers. Few executives take the time to analyze service costs incurred at the customer, product, or even channel level. However, senior executives' ability to manage supply-chain costs and therefore the profitability of a company is dependent on their ability to take a holistic approach to the company's operations. They must be concerned with how products are sourced, manufactured, bought, sold, moved, and merchandised, and ultimately whether customers are satisfied.
To achieve a holistic view, new activity-based costing approaches are important to relate these fragmented facts into meaningful, manageable performance measures. Income statements should reveal the impact of purchasing, materials requirements planning, and production scheduling and control on the cost of goods sold. In addition, it is important to create organizational and process links and seamless information within a corporation among marketing, sales, purchasing, finance, manufacturing, distribution, and transportation, as well as externally to customers, suppliers, carriers and retailers.
Global Third-Party Logistics Providers
Global logistics companies are now acting as systems integrators for major corporate clients, conducting elaborate, highly sequenced "milk runs" to pick up and deliver components and products with a whole host of suppliers and vendors on an international basis. These companies are serving as single-source logistics managers providing load pooling and freight consolidation, air and ocean freight forwarding and local drayage, customs brokerage, and warehousing and distribution. They establish real-time communications between customers, major carriers, and terminals to manage equipment and facilities efficiently and to smooth the peaks and valleys in demand and availability. In other words, they manage the entire global supply chain stretching to the final customers.
For example, a global corporation that produces and distributes personal computers and related products has created a partnership with a third-party logistics provider. This partnership effectively outsources the total global supply chain to the third party, which is responsible for planning and moving all parts, subassembly components, and finished goods between suppliers' facilities, the computer company's production sites, and customers' distribution centers. The computer company reports a high degree of satisfaction with the arrangement, which allows the company to:
  • Avoid sunk costs in information systems and ware-housing capacity.
  • Gain greater market leverage over ocean, air, and surface transport service providers and receive volume purchasing discounts through aggregating its shipment base with those of the provider's other clients.
  • Achieve greater flexibility in meeting the needs of customers through access to more diverse channels to the customer.
Such an arrangement would have been unthinkable only a few short years before. The third-party logistics industry has only recently flourished on a global basis, and moved its bases of operation far beyond the United States and Europe to other regions. For example, UPS has formed an alliance with a local third-party logistics firm in India to expand its theater of operations to that subcontinent and to offer its own international corporate clients better logistics management options.
The stature of the global third-party logistics industry will surely grow as it increasingly addresses the supply-chain integration challenges faced by globally expanding corporations from the Organization for Economic Cooperation and Development (OECD) as well as from emerging-market countries. Chapters 4 and 5 discuss outsourcing to third-party providers in greater detail and outline best practices in outsourcing selection and management.
High-Velocity Intermodalism
Intermodal transportation is rapidly becoming the major approach to international cargo transportation, with over 93 million 20-foot equivalent unit containers handled world-wide each year.
Some major companies have gotten quite proficient in managing the complex scheduling and efficient operational handoffs required to exploit new intermodal opportunities. For example, five times a week the Toyota Motor Company's auto assembly plant in Georgetown, Kentucky, receives just-in-time shipments of parts that were loaded onto containers in Japan, shipped as ocean freight across the Pacific, and then switched back to trains on the West Coast for delivery to Georgia. This is merely one intermodal supply flow in Toyota's global network spanning 35 manufacturing plants in 25 countries.
In the United States and Europe, intermodal development is a major strategic priority of government. The recently authorized Intermodal Surface Transportation Act in the United States will authorize billions of dollars over the next few years to help regions and states improve connections between modes as a catalyst for economic growth. We can anticipate more intensive portfolio-management approaches toward intermodal assets. Ports, air cargo resources, feeder road and rail systems, and professional services support resources increasingly will be managed as integrated interconnected systems from a strategic investment and operational deployment/maintenance perspective. These approaches will certainly help support continued efficiency of global supply chains.
Government Trade Facilitation Systems
New trade facilitation systems implemented by national governments have also supported the globalization of supply chains. Singapore is a vanguard example of this trend. Its trade-permitting process allows traders to fill out only a single electronic form. This form can be transmitted to the Trade Development Board's mainframe computer on a 24-hour basis. The mainframe then routes it electronically to 18 different agencies involved in trade permitting. Approvals are sent to a trader's electronic mailbox within 15 minutes. Estimated savings to traders from reduced paperwork have been $1 billion a year.
Mexico is another important example of these new, computer-based trading systems. Prior to massive reengineering, the trading and customs system in Mexico was highly centralized under the Directorate General of Customs, and traders faced long delays in the processing and clearing of merchandise. Computerization reduced the steps in the customs process from 12 to four, resulting in substantial process time reductions. By 1990, all major customs sites were electronically networked in a shared system. The results have been dramatic. For example, at Nuevo Laredo, the main trucking entry point from the United States, the number of operations handled daily went from 800 to 1200, and the normal processing time per transaction was sliced from three days to 20 minutes. Based on these results, the improvements represent an estimated annualized savings of more than U.S. $2 billion.
The U.S. Customs Service also is reengineering to facilitate trade in the twenty-first century. It has launched a reorganization to reduce headquarters staffing by about 600 positions (about one-third); reduce management layers from four to three by eliminating seven regions and 42 districts and replacing them with 20 management centers; redirecting people from headquarter, region, and district offices into operational field positions to enhance responsiveness to customers; and invest in information technology and the Customers Automated Commercial System (ACS). Marian Duntley, director, import services for DHL Worldwide Express, elaborated on the benefits of this new approach:
The most exciting thing with [Customs'] new system is remote filing, where we will be able to funnel all of that information that comes from overseas into a DHL processing center instead of having to process all of that data in different sites. Currently, we have six different sites where we process entry data. We'll be able to consolidate all of those into one or two processing centers and communicate directly with Customs on the entry process side-all the while utilizing a number of import gateways for the actual physical movement of the freight.

The combined effects of the above trends will be profound, and will surely accelerate the growth of logistics/supply-chain management as the organizational hub of the global extended enterprise. Based on these trends, we believe that managing the extended enterprise will increasingly focus on these three domains of best practice:

  • Physical network management, which seeks to exert strategic control over the physical distribution chain to the customer. It allows new efficiencies in the movement of goods and services both inside the enterprise and between the enterprise and its distribution and supply partners.
  • Information and knowledge network management, which seeks to exert strategic control over business-to-business and business-to-consumer transactions conducted via private value-added networks or the Internet. This domain aggressively uses dynamic knowledge management systems to better visualize supply chain flows, capture organizationwide learning about operations, and improve performance.
  • Computer-based infrastructure management, which seeks to acquire and capitalize on a more efficient and responsive regional, national, and international supply-chain support infrastructure to raise corporate total factor productivity. This domain includes highly automated government customs/cargo clearance systems and national EDI systems; hub/spoke intermodal transportation systems with more seamless handoffs between air, sea, and overland shipping modes; dispatch/routing/vehicle and traffic management systems; and shared assets such as public bonded warehouses or telecommunications/online network resources.
Companies that can manage these practices and domains in an integrated and effective way will continue to reap large benefits. Although forecasting the impacts of these practices over the next decade is a high-risk activity, we have nevertheless attempted a thought exercise with the objective of formulating a new chronology of supply-chain management that incorporates past, present, and future development phases into a continuum. Figure 1.2, beginning on page 26, depicts the evolution of supply-chain management best practices through the year 2010 to the fully extended enterprise model.

To create and manage an extended enterprise for competitive advantage, senior management must begin by addressing the challenges of segmenting and focusing the supplier base and establishing strategic partnerships. Key alliances include those with core materials and components suppliers, transportation suppliers, warehousing and distribution center service providers, and third-party logistics companies, who provide supply-chain system modeling and optimization strategies and management assistance packages to implement improvements. These relationships will form the bloodlines and oxygen flow of the extended enterprise.
Senior management must also focus attention on aggregating demand across all purchasing units into corporatewide buys, gaining marketplace leverage, centralizing negotiations with the universe of core materials suppliers and service providers, and extracting greater compliance with corporate supply-chain price, quality, and order/delivery cycle requirements. This is the beginning of the extended enterprise. Through these early alliances, companies learn how to cultivate relationships across the supply chain, exchange transaction data, and leap forward into valuable collaborative planning/forecasting across the chain.
The supply-chain management practices that this book elaborates can help companies develop the capabilities they will need to survive and prosper in the twenty-first century. Providing an overview of potential supply-chain improvements, Chapter 2 describes the best practices that have helped today's most successful extended enterprises achieve competitive superiority.

Meet the Author

DR. SANDOR BOYSON is a Research Professor at the University of Maryland's Robert H. Smith School of Business and Codirector at the University's newly formed Supply Chain Management Center. He directed the four-year research project on Logistics Best Practices for the U.S. Department of Energy involving the School's Logistics and Transportation faculty group. He has also served as the Associate Director for the Technology and Engineering Management Programs at the Graduate School of Management and Technology, University of Maryland. He is a founding and present editor of Technology Management and the author of two books as well as numerous articles.

DR. THOMAS M. CORSI is a Professor of Logistics and Transportation and Codirector of the Supply Chain Management Center at the University of Maryland. He was formerly Chairperson of the University's Logistics and Transportation Group.

DR. MARTIN E. DRESNER is an Associate Professor of Logistics and Transportation at the University of Maryland and an Associate Director of the Supply Chain Management Center.

LISA H. HARRINGTON is the president of Harrington Associates, a communications firm specializing in the areas of supply chain management, logistics, and operations management. She is a Senior Fellow at the Supply Chain Management Center, and a regular contributing editor to Industry Week and Transportation and Distribution magazines.

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