Small Business Supply Management. Michael E. Smith, Ph.D. Western Carolina University 828/ ;

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1 Small Business Supply Management Michael E. Smith, Ph.D. Western Carolina University 828/ ; Lee Buddress, Ph.D., C.P.M. Portland State University ; 93 rd Annual International Supply Management Conference, May 2008 Abstract. Small businesses play a critical role in the economy, and are critical in the supply chains of many larger businesses, but in spite of this importance, there has been relatively little attention paid to how small businesses can implement supply chain management (SCM). This presentation is designed to help anyone working with or for small businesses understand the challenges that smaller organizations face in implementing SCM, and to provide them with best practices that can readily be adopted. Introduction. There are substantially more small businesses than larger organizations, and the small businesses both support the success of larger organizations and provide a disproportionate share of the innovation that drives economic development. If recent research (Kobe, 2007) regarding the importance of small businesses in the economy of the United States is to be believed, without small businesses, unemployment would be rampant, our trade deficit would balloon, new product development would stagnate, and many larger firms would falter in the face of inadequacy in their supply chains. In spite of this obvious importance, the vast majority of information about supply chain management (SCM) effectively ignores small organizations, and focuses instead on very large businesses (Norek, Gass, & Jorgenson, 2007). Further, to the extent that the value of SCM in small businesses has been addressed, the approach has often been to presume that smaller versions of practices that have been successful in large organizations should provide similar benefit to what has been found in larger businesses. Unfortunately, recent evidence suggests that such an approach ignores the unique challenges faced by small and medium sized enterprises (SMEs). Indeed, while SCM is seen as a business requirement, not a choice, this is increasingly seen as a realm where one size does NOT fit all (Norek, et al, 2007). Ultimately, SCM can and must be adopted by smaller businesses if they are to gain competitive advantage and remain viable. However, in adapting SCM practices for implementation in SMEs, attention must be directed to the resource limitations faced by such firms (Norek, et al, 2007; Williams, 2006). SMEs seeking to implement SCM face serious limitations with respect to limited capital to invest, limited administrative resources to devote to managing the implementation, and limitations in the number and scope of personnel that impact the time and expertise available for SCM activities. In this presentation, we present findings based upon a Nation-wide survey of Small Business Counselors employed by the Small Business Administration funded Small Business Development Centers in each of the 50 States. Based on the information provided by these counselors, who regularly consult with large numbers of small businesses, we describe the

2 current state of SCM in small enterprises, we present a number of SCM-related requirements that may impact the value realized by SMEs, and we present best practices that have been found to work for SMEs. What is the Current State of SCM in SMEs? The simple answer is that small businesses generally are not actively engaged in practices that contribute to SCM. Few firms actively practice SCM. Further, SCM is not generally included among the topics that small business counselors present in their efforts to support business success. However, on a positive note, many small business counselors recognize that SCM might be among the topics that would benefit small business. In fact, on average, counselors rated SCM as among the most important topics, following only basic financial training and marketing in ratings of importance. The challenge that many counselors face is that they only have limited understanding of SCM. With the development of expertise among counselors, there is potential for overcoming the most serious inhibitor of effective SCM implementation in SMEs that was identified. Lack of top management support and understanding appears to be a major impediment to progress in adopting SCM. With these findings in mind, we conclude that while SCM clearly can prove valuable for sustaining success in SMEs, there is a long distance to go in realizing this value. We believe that organizations like ISM have an important role to play in developing capacity for supporting small business implementation of SCM. What Must SCM in SMEs Accomplish? We now turn our attention to accomplishments that support SCM and would be useful to SMEs. Our research suggests that at a minimum SMEs need to develop means to: Forecast and plan requirements for longer time periods. A planning horizon that extends for a year or more would support a much more proactive managerial stance. Develop a market understanding that includes suppliers outside the local area or region. Enlarging the field from which potential suppliers might be cultivated increases leverage. Differentiate between smaller and larger requirements. By scaling sourcing strategies to the magnitude of the requirements, SMEs could better manage the most important activities. Devote resources to understanding supply systems beyond the first tier for those systems associated with larger requirements. Such understanding could support proactive management of risk and opportunities present in the second and third tiers. Develop long term agreements spanning a year or more for the largest requirements. Such longer-term agreements can serve to reduce uncertainty and create leverage with critical suppliers. Develop the capacity to share important information with contract suppliers. Such information can promote proactive SCM activities among critical suppliers, including management of capacity and supplier relationships.

3 Measure supplier performance, at least in the case of key suppliers. At a minimum, performance indicators should include on-time delivery, quality, and lead times. With experience, firms should develop means for allocating sourcing requirements in a manner that minimizes managerial activity directed to supplierbased disruptions. Requirements should be directed toward the best performers. Leverage performance measurement to actively manage the supply base for improved performance. SCM experience should represent a valuable asset to be leveraged in sustaining the success of the business. Any organization that develops the means described above should realize substantial benefit, and while this list may not represent all of the attributes that the reader might wish to see in a definition of SCM, we believe that this listing provides a reasonable threshold. With this in mind, we would like to suggest that any organization accomplishing the elements listed be regarded as having implemented SCM. The value of listing capabilities in terms of what should be accomplished is that means can be tailored to fit SMEs generally, and specifically adapted to any particular organization. In an attempt to provide some initial guidance, we now will describe some practices that have been applied with success in small businesses. Practices that Support Small Business SCM. If there was any doubt about the value of solid SCM practices for small businesses, that doubt should be dispelled by the finding that some small businesses have clearly found success in their SCM practices. One small business developed such expertise that it began to contract SCM for other small business in its region. Today, this is the business! While such reformulation of the business model may be exceptional, we did find numerous examples where groups of small businesses banded together in consortia that supported aggregation of spend and in at least one case, provided resources for bringing in experienced supply management personnel. In another case, public resources have been brought to bear with a regionally managed supply chain initiative. Clearly, bringing groups of small businesses together to increase leverage with suppliers and garner new resources may be particularly helpful in overcoming what might otherwise be an advantage held by larger organizations. To the extent that local and regional economic development groups might be able to facilitate and provide resources for such efforts, we believe that can be both useful and appropriate. Among small businesses, those with 150 employees or more seem to have a real advantage in implementing SCM. We found numerous examples of larger small businesses moving rapidly into SCM implementation following the hiring of a supply management professional. While it may be difficult to find the resources, given the resources expended in sourcing, the return on investments in personnel and skills may provide a healthy return for organizations that are able to make such investments. Some organizations have found an inexpensive way to develop resources by partnering with firms who have better systems. It appears that SCM has become the target of a number of mentoring relationships among firms. In this case, regional groups may find that they can provide valuable service as match-makers in such arrangements. Additionally, this may be a realm where an organization such as ISM can provide substantial service without excessive cost.

4 Limitation of the size of the supply base has been an important concern for large businesses, so it should not be surprising to find that this is important in the small business realm. Indeed, given resource constraints, it should be clear that a small business that wants to better manage the performance of its suppliers should utilize a limited number of suppliers. Some of our respondents reported that in their experience, the client businesses that utilized sole sourcing did a significantly better job of supply management than did those that utilized larger numbers. In any case, we would suggest that for a given commodity, small businesses should not use more than two suppliers. More suppliers bring increased costs in managing the suppliers without corresponding gains in performance (i.e., little return on the increased effort and costs, see Smith and Buddress, 2006). Small firms that are successful in implementing SCM include it in their strategic planning process. This helps move SCM into the awareness of leadership, supports implementation, and allows prioritization in terms of SCM activities. This also brings SCM into formal business processes. Formalization of SCM activities requires planning and formal systems. In spite of the resourceintensive nature of developing formal written procedures, this was an important part of success as identified in the study. Without such formality, the tendency in many small organizations is toward hap-hazard purchasing and a tactical focus. For small organizations engaged in manufacturing, a focus on just-in-time sourcing and lean manufacturing practices tends to drive a focus on improved sourcing that was not generally reported for service organizations. This focus seems often to include attention to forecasting and sharing information with suppliers. Among service-based firms, some franchises in the apparel and restaurant industries were reported to have systems that provided reliable forecasts, and to utilize the forecasts to avoid ordering more than could be sold. One respondent noted that experience suggested that the less sophisticated retailers often ended up with too much cash tied up in unsold inventory. Thus, borrowing successful practices from others, either through utilizing well documented approaches or by buying success packages incorporating sound practices appears to be one path that SMEs can pursue in finding useful SCM practices. Among practices that engender cooperation from suppliers, respondents to the survey highlighted a number of practices. Long term contracts help some businesses take relatively small periodic purchasing and negotiate better terms and conditions based upon the aggregated value of the combination of those periodic purchases. Timing of purchases can also have a powerful impact on how suppliers view the relationship. A number of firms were reported to have worked closely with their suppliers to purchase raw materials in slow periods to smooth the cash flow of the supplier in exchange for good prices. While this has the negative impact of potentially resulting in excess raw materials inventories, work to level production and time delivery may reduce the extent to which this is a problem. Further, this practice coupled with annual projection of inventory turns and aggregation may result in considerable leverage with suppliers, and may be particularly important to small suppliers. Among small suppliers, payment terms will always be important, but in a marketplace where the best suppliers can select the customers that they wish to serve, it should be clear that prompt payment can be critical to working with suppliers who can best meet our needs. Some

5 SMEs have developed a practice of paying very quickly (within 10 days in one reported case). Quick payment buys priority with the supplier in meeting the buying organization s needs, and leverage for negotiations. Conclusion. While the practices listed here have worked for some small businesses, it is rare that any given practice represents the best approach for all organizations. In some cases, the described practice might be readily adopted by an organization, in other cases, the approach might have to be modified to meet the needs of a given SME, and in still other cases, it might be necessary to recognize the benefits that a given practice provides in SCM for one organization, and then examine other ways to accomplish those benefits that better fit the needs of your organization. The critical issue is to recognize the value that SCM can provide for SMEs, recognize the SCM principles enumerated above, and then develop practices that deliver on the promise of the principles in a way that fits your organization. In the final analysis, there is tremendous variation in small businesses, and we anticipate that there will be similar variation in successful implementations of SCM in these businesses. REFERENCES Kobe, Kathryn. The Small Business Share of GDP, , Norek, Christopher D., Wesley Gass, and Thomas Jorgenson, SMB? You Can Transform our Supply Chain, Too. Supply Chain Management Review, March 2007, Vol. 11 Issue 2, pp Smith, Michael E. and Lee Buddress, How Many Suppliers? A Bayesian Perspective. 4th World-wide Research Symposium on Purchasing and Supply Chain Management. Institute for Supply Management and IPSERA. San Diego, CA, April 8, Williams, Sharon J., Managing and developing suppliers: can SCM be adopted by SMES? International Journal of Production Research, 2006, Vol. 44 Issue 18/19, pp