“Supply-chain Reaction”

Previously an issue for large manufacturers, supply chain management (SCM) is now a hot button for any business — regardless of its size or market sector.

SCM is about converting inputs into outputs, transforming raw materials or information into product and then delivering it to the next stage of the chain. It also involves customers — making sure that the finished product matches their demand.

Effective SCM can achieve three main benefits:

1. Reduced operating expenses.
2. Increased revenue growth.
3. Improved customer service.

But there’s a price to pay if you don’t pay attention. According to Georgia Tech researchers, supply-chain glitches can cause stock prices to plummet up to 20% (see sidebar).

Companies have traditionally practiced SCM to realize internal efficiencies, but today there’s a critical new twist — a holistic approach. Instead of just focusing on their individual link, companies need to strengthen the entire chain. In today’s competitive environment, margins are thinner, product life cycles are shorter and customers demand more choices. Companies must look beyond their internal operations to create efficiencies and value.

Collaboration is king

SCM strategies vary dramatically by company, market niche and industry. Yet there are some general guidelines to follow — with collaboration being the central theme.

Companies must work hand-in-hand with suppliers and treat them like family members instead of adversaries. For many firms, this will mean reducing the number of suppliers they work with and entering into long-term relationships.

"The good news is that even though technology plays an important role in supply-chain management, a lot of it is common sense," says John Meier, co-founder and chief technology officer of Freshwater Software, a Boulder, Colo.-based firm that manages and monitors Web environments. The firm has seen a 1,495% growth rate since 1999. "To get started, look at how you connect with suppliers. Write down all the steps you take to place an order, and then think about ways to make the process more efficient."

Examine steps that you can take to help partners become more efficient. This may require sending some of your team into suppliers’ facilities or forming joint teams.

If you don’t understand how your suppliers operate and what’s important to them, your internal improvements could backlash.

Example: Company A made cookies to sell to Company B, a retailer. To decrease packaging costs, Company A began to shrink-wrap cookies instead of using corrugated cartons. But the new packaging caused problems for Company B: It took more time to unwrap cookies, and there was more breakage in the retail setting. Even though Company A saved 25 cents per carton, Company B lost $1.

Internet power

The cornerstone of collaboration is sharing information: data about customer demand, production plans, current and future inventory levels, and capacity.

In previous decades, companies couldn’t talk to each other as efficiently, which forced planning and forecasting decisions into a vacuum. To ensure adequate inventory, one company might inflate an order to its supplier, who would jack up the order a bit more and so on — a problem known as the bullwhip effect. This distortion of demand takes a toll on everyone’s profit by creating oversupply.

The Internet has revolutionized the supply chain by making it faster, easier and cheaper to share data. Internet technology also allows a richer exchange. While electronic data interchange (EDI) allows companies to share information on a one-to-one basis, the Internet allows data to be shared among multiple companies. This is reshaping supply chains in a variety of ways:

• B2B electronic exchanges/hubs. Instead of using the phone or fax to get quotes and delivery times from individual suppliers, companies are turning to Web exchanges, which realize significant savings in procurement. Some industries are creating online exchanges to pioneer collaborative design, such as the Automotive Network Exchange (ANX).
• Collaborative planning and execution. Wal-Mart and other retailers are sharing point-of-sale information with suppliers to improve forecasting and replenishment. When inventory hits a certain level, suppliers automatically ship more product. Similarly, if the retailer wants to run a promotion, it alerts suppliers to ensure capacity is sufficient. This eliminates out-of-stock scenarios or excessive inventories, and it allows suppliers to optimize production and delivery.

Two important aspects to keep in mind:

1. Visibility. Partners need real-time information so there is time to react.
2. Agreement. Partners need to agree on what the data means and what to do about it. Otherwise, one supply partner might interpret the same data differently. Partners also need to agree on how to share gains.

Finding a framework

The first step in determining a supply-chain strategy is to examine how you’re meeting customer demand with your product or service.

For functional products that have longer life cycles but lower profit margins, your strategy will probably be focused on efficiency — reducing costs such as production, transportation and inventory storage. Innovative products with higher margins but shorter life cycles (fashion apparel, high-tech software) require a responsive approach, which makes it crucial to get an early read on sales numbers so you can react quickly.

Example: In computer circles where demand is uncertain and product life cycles are short, Dell takes a responsive approach and offers its customers a great deal of customization. To do this, it aggregates facilities and holds inventory in component form rather than as finished products, which lowers inventory costs and reduces purchasing headaches and risk.

In contrast, a grocery-store chain has less uncertainty; demand doesn’t change as rapidly. So grocery stores strive for efficiency and establish retail facilities on the neighborhood level.

If your company is trying to be efficient, select partners for low cost and quality. But if you’re taking a responsive approach, select supply-chain partners for their flexibility, speed and quality.

Problem in the supply chain? Watch stock value plummet Source: Dupree College of Management at Georgia Institute of Technology

A nimble network

Some of the biggest SCM payoffs come from slashing inventory, improving deliveries and compressing order-to-cash cycles.

Today proximity is a function of computing power and connectivity, which allows companies to develop new operational models and supply chains that offer maximum value to customers.

Take Tabin Corp., a Chicago-based provider of business-technology products and services. Tabin doesn’t buy from suppliers until the customer places an order.

This just-in-time buying model has sparked fast growth for Tabin. Founded in 1996, the company hit $30 million in revenues last year and expects to reach $100 million by 2002. What’s more, Tabin has been profitable from day one.

"With warehouses, your fixed costs are so high that it’s harder to roll with the sales cycles," says founder Joshua Tabin, who explains that selling technology products means dealing with increasing SK
Us — and shorter life cycles. "But with a virtual inventory, I can ramp up or down very quickly — it’s a much safer business."

Under a brick-and-mortar business model, growth would have been much slower. Tabin notes: "We would have had to use our capital for physical facilities and then replace them as the business grew." Tabin was able to remain in the same facility for four years before outgrowing it.

For Tabin’s customers, just-in-time buying speeds logistics and reduces transportation costs. "We ship same-day from 27 major cities. So if the customer is in Los Angeles, we try to distribute from a partner that has its warehouse in California," explains Tabin. "Customers appreciate the faster delivery and lower delivery costs."

Yet launching the business posed some initial challenges. The first hurdle was to develop a computer system to communicate with vendors. (Tabin has moved from daily downloads through EDI to live updates through the Internet that allow his firm to see costs and specific availability for vendor partners.)

Some final words

Sharing information is easier said than done. The first stumbling block is gaining trust with partners, which is one reason why you need to focus on long-term relationships with suppliers.

SCM also requires flexibility in your work force. Establishing cross-functional teams can be instrumental when working with partners and preventing promises that can’t be kept from being made.

Remember: As long as companies act as though they’re the only player in the supply chain, actions will backfire.

Writer: TJ Becker