Information & Teamwork – Keys to Supply Chain Success

 By Mark K. Williams, CFPIM  mark.williams@att.net

Introduction

Success in business does not come easily.  A company must differentiate itself from others by developing a unique product or service.  The product or service must be brought to market in a manner that will allow for an adequate return on investment.  Of course a product or service that no one knows about is fairly useless, therefore the company must spend time and money educating its target audience as to the significance of its offering.   During this entire process, rivals are attempting to bring their own products to market while eliminating the competition.   It is no wonder that “survival of the fittest” is an accepted fact in the business world.  The firm that does not destroy its competitor may find itself on the lunch menu!

Managers in the competitive arena quickly come to the realization that it is the rare company that can do it all–develop products, manage all manufacturing and assembly from raw material to finished goods, distribute to an increasingly international customer base and ward off competitors both large and small.  Thus most managers focus their efforts on executing the company’s  “core competency:” what it believes it can do better than the competition.  However, if a manager chooses manufacturing as his/her niche, the need for the other activities–assembly, distribution, marketing–does not vanish.  Consequently, the manager looks for other companies that have specialized in these functions from which to purchase services.

This brings us to a quandary.  How can a company that is reared in a fiercely competitive environment suddenly combine forces with others?  How can it put down the sword and cooperate with other firms in order to get its product to market?  In other words, how can companies become part of a successful supply chain?

We will discuss how companies can use the principles of teamwork to become part of a supply chain success story.  In addition, we will present two techniques – information sharing and Vendor Managed Inventory (VMI) that can be used as tools to help manage the day-to-day activities within supply chain partnerships.

Teamwork Among Supply Chain Partners

It is an accepted fact in most corporations that providing training to and encouraging teamwork among their employees gives them a competitive advantage.[i]  Many of the characteristics shared by successful teams inside of a company are also key ingredients towards determining the success of supply chain partners.  These characteristics include:

·         open communication within the team

·         trust that fellow team members will not undercut the team

·         confidence in the competence and reliability of fellow team members

Let’s take a look at how each of these characteristics applies to supply chain partners.

Open Communication

In order for a supply chain partnership to succeed, it is critical that its members are able to communicate openly with each other.  As we shall discuss later in this article, supply chain partners have to provide critical and sensitive information to each other.  Information such as production schedules, engineering and design specifications, and cost and inventory data are commonly shared between partners in a successful supply chain.  If this information is not provided in a timely manner, or is not given accurately because of a fear that it may fall into the wrong hands, it will severely compromise the competitiveness of the entire supply chain.

In order to be effective, open communication must not be limited to the purchasing and sales departments of the supply chain partners.  When developing new products the various engineering units in each company must come together as a team in order to ensure maximum efficiency.  When attempting to streamline the invoice and payment cycle, the accounting departments of both companies must work together as one for maximum effectiveness.  The most effective supply chain partners keep all of their resources engaged in reducing costs and time to market.

Trust

Essential to the open communication between two companies of such sensitive information as cost data and production schedules is the explicit understanding that this information will not be shared outside of the immediate relationship without the prior permission of the supply chain partners.  After all, many direct competitors use the same suppliers and in order to openly share sensitive information with a supplier a company must have assurances that this information will not end up in the hands of a competitor.

Although it would be nice to be able to shake hands with  suppliers and “trust” that they will do the right thing, it is much safer to have a written agreement spelling out exactly what the right thing is.  Including a confidentiality clause in the agreement will make sure there are no misunderstandings later.  Spelling out who within each company will have access to cost data of the supply chain partner will alleviate the fear that a low level employee will go to work for a competitor and deliver of the cost data on a silver platter.  As Henry Kissinger once said, “Trust but Verify.”

Competence and Reliability

As a company works more closely with its supply chain partners, it will become more dependent on their ability to meet their commitments, including on-time delivery and cost containment.  A company will probably reduce its safety stock of material because its supplier is committed to fulfilling its needs.  Or a company may off load some of its inventory tracking and ordering responsibilities by adopting VMI, in which a supplier tracks and automatically replenishes a customers’ inventory.   This can prove disastrous if this supplier turns out to be unreliable and frequently late with deliveries. 

This is why customers place such a tremendous amount of effort during the development of a supply chain relationship into validating the competence of the supplier’s management team, the financial soundness of the organization, and long-term ability of the supplier to remain a reliable source.  It is not unusual for a customer to subject a potential key supplier to a Supplier Certification Review that lasts several months and touches virtually every part of the organization.  After all, a customer does not want to turn over a substantial part of its business to a company that goes bankrupt three months later!

Information And Schedule Sharing Among Supply Chain Partners

Once two companies agree to enter into a supplier chain relationship as partners, they must decide how to most efficiently share information.  After all, the sharing of information allows the supplier to eliminate the one activity that it is virtually guaranteed to get wrong—forecasting.  Since a forecast is just “an estimate of future demand,” [ii] and no one in the past few centuries has proven he could accurately predict the future (with the possible exception of Nostradamus), replacing a forecast with real customer information is often the first priority between supply chain partners. By replacing the forecast with actual customer data, a supplier can reduce inventory while simultaneously providing a higher level of on-time delivery to the customer.  The customer, now being able to rely on on-time deliveries from the supplier, is able to reduce safety stock of the goods that the supplier is furnishing.

Tips on Sharing the Schedule with Suppliers[iii]

If a company is on an MRP (Material Requirements Planning) or an ERP (Enterprise Resource Planning) system that generates requirements to the Purchasing Department, the requirements can be conveyed to the supplier fairly easily. 

·         Segregate the requirements by supplier.  This will serve as the basis of the information that will be transmitted to the supplier.

·         Determine how solid or fluid the quantities and items are within the time-fences.  For example, if quantities are frozen within the first two weeks but subject to 25-50 percent swings from weeks three to six, document this information so it can be discussed it with the supplier.

·         Meet with the supplier to review how the information is structured.  Keep in mind that MRP may be a foreign concept to some suppliers so in-depth training may be needed for them to understand how to use the information to help schedule their business.

·         The most effective schedule sharing agreements include a guarantee from the customer that once an item’s demand appears within an agreed upon frozen time-fence (such as two weeks), the supplier will purchase it.  Suppliers will not be nearly as reluctant to produce—and possibly customize—inventory for a customer who guarantees it will be purchased.

·         Review seasonal trends and abnormal events such as vacation shutdowns or special promotions with the supplier and obtain an agreement as to how these special events will be handled.

·         Finally, determine how often and in what form the schedule will be transmitted.  Should it be sent hourly, daily, weekly, or monthly?  Should it be communicated via mail, fax, EDI (electronic data interchange) or the internet?

Once these details are ironed out, a company can begin sharing its schedule with its supplier.  If the operation needs a standard, periodic delivery (such as every Tuesday at 10:00 am), a company has the opportunity to establish a supply chain relationship with a transportation provider.   By establishing regularly scheduled deliveries, a firm can ensure that all of the hard work expended by it and its supplier does not go to waste because the product is left sitting on a loading dock.  In addition, a company can make the most efficient use of its receiving employees by helping smooth out the peaks and valleys of incoming deliveries.

VMI––Responsibility Sharing Among Supply Chain Partners

Under Vendor Managed Inventory—VMI—suppliers actually take on the responsibility of managing their inventory throughout their customer’s supply chain.   This can take several forms.  The simplest form involves having the supplier visit the customer’s location at certain designated intervals (such as daily or weekly) and re-supplying the customers inventory to a predetermined level.  This has been common practice with office supplies and in the grocery industry for years. 

Another form of VMI includes the downloading of information directly from a customers’ cash registers into the supplier’s computer system via EDI or the Internet for analysis and determination of the specific inventory items and quantity to be re-supplied.  When most people think of VMI, this version comes to mind.

VMI is often coupled with consignment, which is “the process of a supplier placing goods at a customer location without receiving payment until after the goods are used or sold.”[iv]  When VMI is coupled with consignment, it is imperative that the supplier makes sure that the consigned inventory moves rapidly through the customer’s inventory.  Otherwise, the supplier can go bankrupt while the customer is sitting on large amounts of its inventory.  Customers are particularly fond of this arrangement because there is no better guarantee of on-time delivery than to have the goods sitting in their facility!

Another variation of VMI calls for the supplier to put one of its employees in a customers’ location to actually manage the replenishment of inventory.  The Bose corporation has done this for years under a program they call JIT II.[v]  Under this type of arrangement, the supplier monitors the inventory and places orders when needed.   In addition, the supplier will participate in strategy sessions such as new product introductions and promotions in order to coordinate a smooth, reliable supply of product.  Obviously, for this type of relationship to be profitable the two companies must transact a large volume of business.

In establishing a VMI relationship, particularly one in which the supplier will analyze the customer’s information and re-supply based on the analysis, several key elements must be in place.  The customer must be convinced that the supplier has a high degree of competence when performing the materials management function.  After all, would a customer likely agree to let a vendor with a 65 percent service level manage its inventory?  A partnering mindset accompanied by an environment of openness between the two parties is crucial.  Once a VMI program is established, customers certainly do not want to waste their time putting out competitive bids to make sure the supplier is honestly providing the product at a fair price.

The real key advantage of VMI is to replace the forecast—with all of its inherent inaccuracies—with hard data.  In the article “Integrating Vendor-Managed Inventory into Supply Chain Decision Making,” Mary Lou Fox  points out several of these advantages of VMI:

1.      Improved customer service.  By receiving timely information directly from cash registers, suppliers can better respond to customers’ inventory needs in terms of both quantity and location.

2.      Reduced demand uncertainty.  By constantly monitoring customers’ inventory and demand stream, the number of large, unexpected customer orders will dwindle, or disappear altogether. 

3.      Reduced inventory requirements.  By knowing exactly how much inventory the customer is carrying, a supplier’s own inventory requirements are reduced since the need for excess stock to buffer against uncertainty is reduced or eliminated.[vi]

Improved customer service, reduced inventory requirements and reduced demand uncertainty.  How many suppliers would dislike that combination?  However, reduced reliance on forecasting is only one benefit of VMI.  A second, and potentially more powerful benefit is the binding of the customer to the supplier.  Establishing a VMI relationship—particularly one that includes an Internet or EDI interface—takes a great deal of work.  Just ensuring the validity of the information traveling between the two different companies is a daunting task.  Once the relationship is established, most customers will be very reluctant to endure the amount of work needed to replace one supplier with another.

Conclusion

As the business world moves forward, there will be a greater emphasis in replacing inventory—which is expensive—with information, which is not.  The sharing of schedules, and implementation of such techniques as VMI, will permit supply chain partners to reduce or eliminate safety stock and other “just in case” inventories.  Thus, replacing inventory with information will lead to a real competitive advantage!

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