Supply Chain Performance: The Supplier s Role

Supply Chain Performance: The Supplier s Role March 2005 Industry Directions Inc. www.industrydirections.com Companies of all sizes are realizing that they no longer have complete control over their market success. This is because they rely heavily on the performance of their supply chain trading partners. Market-leading retailers and OEMs know this, and they are looking for partners that work to ensure their success. Many large companies are now insisting that their small and medium industrial suppliers help them improve supply chain cost, responsiveness and reliability. These market heavy weights are measuring suppliers performance against key indicators and giving preferred status to those who perform well. This puts pressure on many small and medium manufacturers. Those that have not invested heavily in supply chain management (SCM) practices or solutions beyond ERP to date are now driven to seriously consider making the investment. The business justification will rest on traditional cost savings and on revenue and customer compliance issues. Supply chain improvements will not only improve internal performance, but will also create benefits that will ripple through to customers and partners as well. Cost savings through reduced inventory levels, expediting, fulfillment and premium freight costs could allow a company to provider more favorable prices or terms to customers. Likewise, effective planning and execution can help companies and their customers adapt to the market s demand shifts. When the company can purchase, produce and distribute the right products to the right channels in the right quantities at the right time, both supplier and customer will increase revenue capture by channel and region. Compliments of The Supplier s Role in Supply Chain Performance Larger companies often issue mandates that simply force compliance, without offering smaller partners an active role in improving performance. This type of relationship fosters frustration and deep distrust. Further, it can put smaller firms in the precarious position of being manipulated into the red or being replaced by another supplier. To change the dynamics and give themselves a more powerful role, smaller suppliers need to differentiate themselves. This differentiator may be consistent zero defects, a patented or hard-to-find process critical to the customer s success, value added services, vendor managed inventory (VMI) contracts, or the highest delivery performance of any competitor. As those last two illustrate, active participant supply chain performance improvements can give even a small company more clout. Moving from being squeezed

Large Customer Small Supplier A: Small supplier crushed by customer demands Large Customer Small Supplier B: Small supplier acts as extension of customer Figure 1: A: Large customers often sit on and hurt their small suppliers. B: With sound business processes and adequate supply chain management software, small companies can improve performance and gain more leverage. to acting as an extension of the large company allows the smaller player to be much more effective. (Figure 1.) Sometimes, all it takes is opening up the discussion. One of the keys to successful supply chain performance improvement is cooperation and mutual decision making between trading partners. Companies that collaborate with customers in demand and replenishment planning have a better chance of meeting demand. Those who give accurate information may also gain visibility of customer requirements and inventory levels. This starts the improvement cycle, as the supplier can then reduce their own inventory stocks. By synchronizing operations with customers, the supply chain is more responsive to the marketplace with less waste. Identifying Performance Opportunities The more value a smaller manufacturer or distributor brings to the customer or supply chain heavyweight, the more flexible and mutually beneficial the relationships. The performance characteristics with the greatest value in a supply chain are accuracy, responsiveness, on time complete deliveries, reduction of inventory and mutual continuous improvement. Document and Process Accuracy Discrepancies in actual vs. planned or actual vs. documented order quantities, product specifications, promise dates and pricing cause disruptions in production, costly expediting, and countless hours disputing and settling charges. Unfortunately inaccuracies are common between supply chain parties. This is a result of manual processes, human error, miscommunication and limited checks and balances. Re-designing and automating supply chain processes and inter-company communication can reduce these errors. Supply Chain Responsiveness Inbound delays and shortages of material wreak havoc on production schedules, promotional effectiveness and revenues. Suppliers often struggle to produce enough of the right items at the time the customers need them because they cannot build in small lot sizes. This inflexibility stems from a make-to-stock production model and a management focus on equipment utilization measures. Even some companies that are more flexible cannot process demand changes quickly. The focus needs to shift to a build-to-demand model that better supports customers Lean and just-in-time (JIT) production lines. When the company cannot meet a demand shift, it needs an early detection system to avoid the problem or allow customer service or sales to alert customers of upcoming delays. Continuous Communications Supply chain responsiveness depends on frequent communication between suppliers and customers. Many buyers are frustrated when suppliers do not acknowledge their purchase orders, revised schedules, and order changes. Industry Directions Inc., 2005 2

This leaves customers wondering whether the order or request was received and what they can expect when the shipment of materials arrives. Customers administrative costs are high because they need to track down and resolve issues. If suppliers communicated better and with greater frequency, that would be avoidable. SCM applications can provide assistance with that process issue. Automated acknowledgement saves significant time, yet keeps the customer informed and efficient. Perfect Order Delivery Customers can t afford persistent shortages, errors and defects. They look for zero defects, 100% fill rate and 100% on time deliveries. Few companies have achieved these goals, but a growing number are getting very close. Everyone else must improve their operations to retain their best customers. Perfect delivery requires sound supply chain processes from start to finish from planning through production and execution. Best practice processes and integrated SCM applications can support that smooth operation. Vendor Managed Inventory Customers always want to carry less inventory. Originally, VMI just shifted ownership of inventory in customer facilities onto the backs of suppliers. Now, customers are opening the kimono online and providing visibility into their operations and inventory levels. This can lead to a real win-win situation. The benefit to customers is the ability to reduce the cost of inbound inventory stores and shortages on their lines. The benefit to suppliers is the ability to plan more accurately based on real demand and thus significantly reduce their own finished goods inventory. Coordinated Continuous Improvement Improvement in one part of the supply chain may not pay off if other parts of the chain can t keep up. Companies have learned this the hard way. They may achieve Lean production in their plants, but if suppliers don t deliver the right parts at the right time, production stoppages often result. There are countless opportunities to reduce waste and costs while improving product innovation, customer experience, quality and throughput. Continuous improvement requires trust, joint processes, common data points, shared data access and mutually viable metrics. Accuracy Response Supply Chain Value-Add Continuous Comms. Perfect Orders Coordinated Continuous Improvement VMI Figure 2: Suppliers who are aiming for more leverage need to provide maximum performance to customers. Customers gain value from accuracy, responsiveness, communications, perfect orders and VMI. All of these can be improved in sync with customers over time. Supply chain performance skyrockets when suppliers are in sync with customers, supporting their production requirements on a JIT basis, providing notification of shipment and visibility to order status and item location, responding quickly to requests, and supporting VMI/Kanban programs. All of these characteristics add up to solid support for customers performance programs. (Figure 2.) The increased performance comes from all of the programs and achievements such as accurate documents, perfect orders and VMI. Trust and Industry Directions Inc., 2005 3

visibility are essential to all of these activities, founded on continuous communications. And coordinated continuous improvement as supply chain partners comes about when both parties recognize the value of the relationship and work to gain the most leverage in the market together. They create a win-win situation. Improving Supplier Performance Some companies have made it their mission to become the best supplier to do business with and improve operational performance. This generally involves making changes in contracts, processes and information technology. Contract Changes: Spot purchase orders come and go. There is no formal agreement to continue doing business together or any guarantee of additional orders. Blanket order contracts, on the other hand, offer an annual or volume-based commitment. These commitments have the potential to facilitate closer relationships, which in turn can lead to collaborative decision making, mutually beneficial VMI programs, and access to information needed to improve internal sales & operations planning. Contracts may require the supplier to be ready to commit to a certain service level and other metrics or suffer penalties but the visibility and trust gained in return can pay off handsomely. Process Changes: Clearly, automating a process that hasn t been redesigned to support new business objectives, supply chain models and performance goals is likely to fail. Suppliers striving to increase their performance in the supply chain are rethinking how they do business, where the non value-add activities take place, and how they can synchronize their activities with customers. These process changes are often needed to leverage newer technologies and supply chain applications. They also create opportunities to work closely with customers. Technology Changes: Information technology plays a significant role in supporting contract and process changes. The Internet has made it financially viable to integrate operations internally and electronically share information with trading partners externally. In addition, application solutions once built for and sold to larger manufacturers have become easier to purchase, implement and maintain. Not only have prices come down, but more solutions have been designed to specifically meet the needs of midsize and smaller companies. Critical Supply Chain Applications For many companies, ERP is not adequate to improve supply chain performance. They need systems that help them forecast more accurately and use data available from customers to create that forecast. They also need to plan production and promise orders based on real-world constraints, and they need systems support to execute flawlessly. Supply Chain Management (SCM) applications are available that fit smaller companies needs, and they can provide a competitive advantage to those who use them effectively. Industry Directions Inc., 2005 4

Demand Planning Planning Production Planning & Scheduling (APS) External Collaboration Internal Transportation Management (TMS) Execution Warehouse Management (WMS) Figure 3: Supply Chain Management includes planning, execution and collaboration. In standard make-to-stock environments, demand planning and WMS may be top priority. Lean needs demand planning. High mix production may require APS for order promising and collaboration to allocate capacity profitably. SCM projects also can illustrate where business processes, contracts, and metrics may need to change for maximum performance. After ERP, the solutions that most suppliers consider to improve their supply chain performance are demand planning, advanced planning and scheduling, supply chain execution and collaboration. (Figure 3.) These applications are available from ERP providers as well as providers either of a single focused application or a suite of SCM software. Demand Planning Studies have repeatedly shown that forecast accuracy is one of the biggest drivers of supply chain and financial success. It is also one of the more challenging aspects of running a manufacturing company. Today demand planning software options are widely available for small and midsize suppliers. The vendors include Demand Works, i2 Technologies, Logility and SSA. Most of the solutions are configurable for consolidating and analyzing changing market demands as they occur not just a statistical forecast based on history. Asking customers for more accurate and timely demand information to feed the demand plan can help open up communications with customers. Advanced Planning & Scheduling (APS) Whether scheduling the plant, making order promises or planning production requirements across multiple sites, constraint-based planning and scheduling (referred to as advanced planning and scheduling) is one of the best ways to dynamically adapt to changing customer demands and production resources. These APS systems differ from the production planning in traditional ERP in that they consider actual capacity of resources and timing of material availability in the calculations. Finite scheduling has been most commonly deployed by smaller manufacturers during the past ten years, but the need for more accurate promise dates is driving more companies to consider real-time ATP engines from APS vendors Aspen Technology, i2 Technologies, Logility, Manugistics, SSA and Viewlocity and from SCE vendors IMI, Manhattan Associates and Yantra. Supply Chain Execution (SCE) Accurate, efficient order fulfillment is also challenging for most suppliers, particularly when customers are constantly changing their order line items, quantities and dates. Warehousing operations must be flexible and highly responsive to customer changes. Customers also value services such as VMI, Kanban replenishment, labeling, RFID compliance, kitting and de-kitting, and immediate notification of any problems. Warehouse management systems from IBS, i2 Technologies, IMI, Logility, Manhattan Associates, SSA, Viewlocity and Yantra support these capabilities and can generally meet the requirements of suppliers. Industry Directions Inc., 2005 5

Internal & External Collaboration Collaborating on a decision requires a common definition and understanding of the situation, scope, activities and metrics. This is why collaboration is difficult and has taken years to develop between trading partners. As customers force the issue for collaborative forecasting, planning and replenishment, a growing number of suppliers are striving for internal collaboration to establish a one-number sales and operations plan. This involves reconciling and driving departmental plans to a single set of numbers or a company goal based on a common sales and operating plan. It also leads to more confidence in the collaborative planning process with customers. Becoming the Strong Link in the Chain To differentiate themselves, smaller companies must do more than agree to the large customers demands. They must perform well through accuracy, responsiveness, communications, perfect orders and VMI. Doing all of this in a way that is both costeffective and able to improve over time will require new processes, contracts and technology for most companies. All of this is now in reach. Smaller manufacturers may not call the shots, but they do have an opportunity to play a vital role in their supply chains. A simple definition of good supply chain performance is to get the right product to the right place at the right time at the lowest cost. Those suppliers that develop the processes and systems to support that performance goal will be more highly valued and be treated as a premium partner in the network. From this position, small companies can get better visibility from customers to serve them more effectively. What is good for the supply chain becomes good for the company. Costs will go down and revenues will go up as supply chain performance improves. Even in the face of fierce competition, suppliers who participate fully and collaborate effectively will be valued and trusted partners. Smaller suppliers can be the big difference in supply chain performance. Industry Directions Inc., 2005 6