Trends-May 2006

While the avian flu virus is clearly wreaking havoc with the world’s bird population, and is being hyped as a potential deadly threat to human health and safety, it could also do a real number on the global supply chain, as a recent simulation by MIT’s Center for Transportation and Logistics illustrated.

In an “experimental theater” setting, a panel of employees from Intel, Arnold Communications, and EMC Corporation acted out a live simulation that showed Vaxxon—a fictional, publicly traded wireless phone manufacturer—responding to news that a worker at its contract manufacturing plant in China has died from the avian flu. The news comes just as the company is finishing production for the launch of its hot new SlimPhone 360.

Because Chinese health officials cannot determine if the virus has spread, the plant is quarantined. Production and distribution of the new phone fall off, threatening the timing of the launch and the company’s subsequent profits. And workers at Vaxxon’s U.S. port of entry and third-party kitting facility refuse to handle shipments for fear of contamination.

At the same time, a public relations nightmare blossoms as the media grabs hold of the story and Vaxxon becomes the public face of a potential pandemic.

Luckily, Vaxxon had advanced contingency/emergency response plans in place. As the news breaks, panel members acted as Vaxxon’s cross-functional emergency response team. HR immediately notifies employees and their families about the crisis; government affairs employees work with U.S. and Chinese officials on the quarantine status and shipping product out of China; and the communications team sets up a media command center.

The scenario was not without challenging snafus however, including one rogue Vaxxon engineer who left China for Hong Kong the day of the outbreak, then returned to Vaxxon’s U.S. headquarters, possibly carrying the infectious flu with him.

In addition, negative press associated with Vaxxon and consumer fears over tainted products lead to in-fighting among the emergency response team over whether to delay the launch and change the name of the SlimPhone product. Add to that an overzealous CEO who frequently disrupts the emergency response panel’s operations, and ultimately decides to cancel launch plans for the phone—a major bummer for an already bummed-out staff.

Where did the exercise rank on the believability scale? The audience—supply chain professionals from a variety of high-profile companies including Boston Scientific, Cisco Systems, ExxonMobil, and Gillette—reacted positively. In particular, attendees applauded the panel’s multidisciplinary nature.

“These situations impact all supply chain partners, so companies have to involve human resources, IT, transportation, and government affairs, as well as logistics, in emergency response planning or they are missing the boat,” says William Archer, global security director, Limited Brands.

He points to his company’s experience after Hurricane Katrina as an example.

The retailer, which lost 38 stores in the Gulf Coast area, relied heavily on its cross-functional emergency response team to get operations up and running and track down and support some 1,900 employees during the aftermath.

“Katrina was a mega-test of our contingency plans, which worked very well,” says Archer.

Tabletop testing exercises such as this simulation are crucial to succeeding during supply chain disruptions. “If you don’t test, there is no point in planning,” Archer says.

Not all companies have the time or resources to devote to such detailed emergency planning, however—a key point in the panel discussion that took place after the simulation.

While the crisis in this case was an avian flu outbreak, proper preparedness for supply chain disruptions of any kind is crucial.

Here are some suggestions that emerged from the simulation and discussion panel.

Tie emergency preparedness into other corporate goals. “Building flexibility into the supply chain gives companies the ability to respond to market demand fluctuations, regardless of whether or not they are caused by a catastrophe,” says Yossi Sheffi, discussion panel member and director of MIT’s Center for Transportation and Logistics.

Empower emergency response teams to make important decisions. “Often, senior executives feel the need to take over in emergency situations, even if they haven’t been properly trained,” says Sheffi. “This can hinder response efforts.”

Weigh long-term vs. short-term costs when deciding whether to use a single-source or multiple-source supplier strategy. Vaxxon’s Chinese manufacturing plant was the sole facility manufacturing its new phone, so the outbreak severely damaged its ability to produce and ship merchandise. But often, companies choose a sole supplier to achieve cost efficiencies and economies of scale.

“Using a sole supplier can be cheaper in the short run, but can end up being costly if things go wrong,” says Vaxxon “employee” Jim Holko, Intel’s security business programs manager.

Ultimately, the thought-provoking exercise raised more questions than answers, which is not surprising. Even a well-coordinated disaster simulation may not bear much resemblance to real life, when contingency plans struggle to hold up under the stress and strain of an impending disaster.

It’s doubtful, however, that anyone left the MIT simulation questioning the importance of preparing the supply chain for any number of unexpected disruptions.

JDA Software and Manugistics Merge

Continuing the M&A frenzy that has hit the logistics sector, Phoenix-based software provider JDA Software is acquiring Manugistics, a global provider of supply chain and revenue management solutions based in Rockville, Md.

The $211-million merger, which is expected to close in the second or third quarter of 2006, promises to bring advanced optimization solutions to retailers currently using JDA products, according to analysts. It also extends JDA’s reach further into the supply chain and sweetens its appeal to consumer goods manufacturers and wholesalers that relied on Manugistics’ price optimization and transportation management capabilities.

In addition, the deal has the potential for large-scale financial gains—based on last year’s financials, the combined company would have earned more than $390 million.

What does the merger mean for the logistics industry? It depends on where you fall within the supply chain, according to Lora Cecere, research director for Boston-based AMR Research.

“This is good news for retailers and wholesale distribution companies using Manugistics. JDA historically has great customer service and understands these verticals,” she says. “Manufacturers, however, should push JDA for answers on how it plans to support their industries.”

“How JDA will maintain its focus outside of the retail vertical market remains uncertain,” agrees John Cummings, senior vice president, i2, a Dallas-based software provider and JDA competitor. The merger leaves i2 as the last-standing best-of-breed supply chain specialist, Cummings points out.

In connection with this transaction, JDA secured a $50-million investment from Thomas Cressey, an enterprise software investor with some $2 billion in equity under management.

Demand for ‘On-Demand’ on the Rise

Though it started as a niche player, on-demand or software-as-a-service (SaaS) applications are gaining prominence in the supply chain.

In fact, a majority of logistics professionals responding to a recent Aberdeen Group study prefer on-demand applications—where software is provided to users through a network such as the Internet—to traditional supply chain management technology vendors.

The study, The On-Demand Tipping Point in the Supply Chain, finds more than 50 percent of respondents using or considering using on-demand or SaaS applications, particularly for externally facing processes with suppliers, customers, and transportation carriers. Only 5 percent of respondents prefer traditional SCM vendors, finds the study.

Why is on-demand in such high demand now? Because the software is hosted by a third party and boasts a “pay-as-you-go” billing structure, companies using SaaS applications can often minimize in-house IT requirements, and reduce costs associated with implementation. Current on-demand SCM users also report quick return on investment, and easy maintenance and upgrade possibilities, according to the study.

Other key takeaways from the Aberdeen report include:

• User adoption of on-demand SCM is spreading from supply chain leaders to laggards.
• CEOs and COOs at top supply chain performers are twice as likely to be supporters of the on-demand model.
• Above-average performers use more on-demand SCM, especially for transportation, visibility, data synchronization, and demand-supply synchronization.
• Data security and integration concerns are the top obstacles to adoption of SaaS applications.
• IT organizations can be barriers to on-demand adoption unless they adopt specific IT management strategies.