Supply Chain

Unless you’ve been sleeping in a cave for the past fifteen years, you already know a little bit about the benefits of supply chain technology. However in case you need a recap, I am here to help. Presented below are some of my thoughts regarding supply chain technology.

Supply chain solutions are now well-proven and readily available to virtually all companies. In the years to come I predict that there will be an unprecedented explosion in supply chain automation throughout the United States and as well as the rest of the world. I further predict that many of those who fail to embrace supply chain technologies will ultimately be left behind.

Wal-Mart Sets the Standard for Supply Chain Automation

Over the past twenty years, we’ve seen dramatic improvements in accounting system supply chain technology – so dramatic in fact that those who do it well are able to dominate their competition and drive them out of business. Consider Wal-Mart for example. In the early eighties, Wal-Mart placed heavy emphasis on developing and implementing tight supply chain solutions which has catapulted them not only to the top of the retail channel – but into the history books. Consider this example:

Let’s assume that you purchase a flashlight at Wal-Mart. The cash register reads the bar code price tag and reportedly within fourteen seconds, the Wal-Mart central warehouse is notified that the Wal-Mart retail store needs a new flashlight for the shelf to replenish the purchased item. Further, the manufacturer is also notified that the Wal-Mart central warehouse needs a new flashlight. Even the raw material suppliers are notified that the manufacturer now needs a little more raw materials (plastic housing, switch, light bulb, etc), and so it goes – all the way up the supply chain. (Sometimes just for fun, I like to let the Wal-Mart cashier ring up an item, then I wait fifteen seconds, then I tell the cashier that I changed my mind – I no longer want the item. I have no idea what impact this has on Wal-Mart’s supply chain, but it gives me a great feeling of power.)

Wal-Mart’s legendary supply chain technology has allowed them to break the three-day barrier that some economists in the eighties felt was largely unbreakable. In other words, Wal-Mart is often able to replenish items on the Wal-Mart shelf in less than three days – not from the central warehouse to the shelf, but from the manufacturer to the shelf. With quick and reliable 2-day turn around, Wal-Mart is able to maintain lower levels of inventory and still meet customer demand. These lower inventory levels result in either a reduced floor plan with lower carrying costs and lower interest expense – or a greater diversity of products on the store shelves. (ie: With faster replenishment, Wal-Mart can get away with carrying just 5 toasters instead of 10, thereby freeing up more shelf space for those George Foreman Hamburger cookers.)

Additionally, because Wal-Mart is better able to order inventory on demand, the company is in a better position to meet customer demand. Today’s fads (pet rocks, crazy bones, Pokemon cards, etc) are tomorrow’s obsolete inventory. Wal-Mart’s superior supply chain technology allows the company to better avoid carrying an oversupply of fad items. Consider that just twenty years ago, J C Penny’s was ordering goods 90 days ahead of arrival, making the ordering process mostly guess work trying to determine if a particular leisure suit would still be in style by the time it hit the shelves. This was such a big problem that an entire industry emerged to address this problem. Companies such as T. J. Max emerged to take obsolete inventory off the hands of companies that over-ordered and move it through deeply discounted outlets.

To fully appreciate the benefits Wal-Mart reaps from its’ superior supply chain solution, consider the traditional labor and paper approach, which is still employed by millions on companies today. Without and automated supply chain, an employee must make a periodic physical inventory count – usually using a clipboard and inventory report. Later, the actual quantities on-hand are then compared to the target quantity levels in the back office to flush out the re-order quantity. From there, employees fill out purchase orders and phones them into the central warehouse – all the while generating expenses for labor costs, paper supplies, and even the long distance phone call. Inefficiencies are a certainty. On many occasions, employees placing orders via the telephone are placed on hold for several minutes, costing valuable time. Eventually the purchase order details are read aloud to the order taker at the central warehouse – a very inefficient process by today’s standards. Even in the event that a fax machine is used, there are great inefficiencies there as well. Fax machines are sometimes temporarily unavailable as other documents are sent or received. Fax machines can also feed documents poorly on the originating side, or run out of paper on the recipient’s end. Once received, faxes can sit for hours or days before they are processed. As processed, faxed data can be inaccurately entered into the system due to illegible documents or keystroke errors. And so it goes down the supply chain from one supplier to the next supplier – the same inefficient process costing many days of turn around time, many hours in labor costs, and much higher risks of errors.

As a real life example, consider my personal supply chain experience, which is actually quite comical:

“In 1994 I built a new house in Atlanta, Georgia and installed a personal fax machine in my basement. Almost immediately I began receiving internal fax orders from a large national heating and air conditioning company called Pameco. I was very concerned that their important purchase orders, service requests and administrative documents were not reaching the proper recipients. For several years, I made diligent efforts to contact the parties who had faxed me in error to inform them of the problem. In each case I then forwarded the errant faxes to their proper destination. I estimate that this actually cost me several hundred dollars in long distance charges, not to mention my time, paper and toner. After a while, I grew tired of Pameco’s intrusive faxes.  They continuously gobbled up my fax paper and prevented me from receiving my own faxes properly.”

“Eventually I tried other tactics in an attempt to get Pameco’s attention. At times I used WinFax Pro to send their faxes back to their senders 1,000 times. Sometimes I inserted nice messages, sometimes they were not so subtle. On other occasions, I called Pameco employees and read them their social security numbers, their salary levels, and intimate details of their employee reviews. Finally, in 2000, I talked to a person who was able to help identify and resolve the problem. Apparently if you dialed an internal fax number from the Pameco phone book, and you mistakenly matched the prefix on line 4 with the number on line 5 – you got my fax number by mistake. To solve the problem the Pameco representative I talked to inserted a blank line between each fax number and finally, this seemed to take care of the problem.

Looking back on the 7-year ordeal, I am amazed how many internal errors were generated by Pameco’s errant faxes. These orders were for thousands of dollars and for years I simply threw them in the trash can with no further notice to Pameco. I can only imagine that these mistakes cost the company tens of thousands of dollars over the years, if not a whole lot more. “

Today millions of companies transact hundreds of millions of transactions each day using the same in-efficient hand written, faxed-in method I just described. It is easy to imagine that many of these companies are suffering from same problems described above – improperly dialed phone numbers, illegible orders, inherent keypunching errors, time delays, and the list goes on. Even those companies who are operating their supply chains manually without losing orders are still suffering from expensive labor and a slower turning inventory ordering process.

Automating Your Supply Chain Technology

The first step in implementing an automated supply chain is to establish a connection between the supplier’s and customer’s accounting systems. This requirement used to represent an enormous barrier. Prior to the widespread adoption of the Internet (1995 or so), companies were basically forced to lease a dedicated line from the phone company at very high costs typically ranging from $75,000 to $250,000 annually. This barrier alone made automated supply chain solutions out of the reach of most companies. Today, the Internet easily meets this need for a nominal cost – especially since most companies have already established high-speed connections to the Internet. Chances are very good that your company can automate its’ supply chain using your existing Internet connection.

The second step to automating your supply chain is to make sure that your accounting software system can communicate with your supplier’s accounting system. If we all used the same accounting system, this would be easy. This is because the information contained on the typical purchase order is the exact same information contained on the typical sales order. Your purchase order that you intend to send to your supplier contains the customer name and address, shipping address, terms, shipping method, and detailed information regarding the inventory (or services) being ordered. Once you have created this PO in your system, it should be a relatively easy process to send it directly into your trusted supplier’s system. In this manner, your supplier does not need to re-enter the information – the electronic transaction is posted in the blink of an eye – virtually without error and without the need for human intervention.

The only problem with this scenario is that we don’t all use the same accounting system – a given customer may use MAS 90 while the supplier uses Navision Attain. Therefore, a supplier’s Attain system will not be able to read and interpret the data from the customer’s purchase order as produced by MAS 90.  To resolve this problem, intermediary companies arose more than a decade ago to address this issue. Companies like Harbinger acted as an intermediary (also referred to frequently as an electronic bridge), receiving PO’s from one customer, translating the data into a new format, then sending that revised PO to the supplier – all still in the blink of an eye. In this case, Harbinger tact’s on a nominal sur-charge (for example 20 cents a transaction). This solution is commonly referred to as Electronic Data Interchange (EDI). EDI represents a well-proven approach to linking together dis-similar systems to achieve an automated supply chain.

Selected EDI Solution Providers:

·           Microsoft BizTalk Server Solutions
·           GE Global Exchange Services at www.gegxs.com
·           Edict at www.groceryec.com or www.retailec.com
·           ICCnet at www.icc.net
·           Quick Response Services (QRS) at www.qrs.com
·           Sterling Commerce at www.stercomm.com
·           Tradewinds at www.tradewindec.com 

Direct Supply Chain Solutions

EDI solutions have proliferated for more than a decade, however newer solutions that are easier to use and less-expensive have also emerged. Specifically, accounting software vendors have started building in functionality that allows dis-similar systems to talk directly to one another. For example, Navision Software has built in functionality to the Navision Attain product that allows it to interact directly with other well-known products such as SAP R/3 and R/4 software.

Other initiatives, such as XBRL, have been launched in recent years to make e-commerce available to small businesses. You can read my comments about XBRL here: http://www.asaresearch.com/ecommerce/xbrl.htm

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