Chain Reaction

Jun 01, 2001 9:30 PM  By

Paper-driven processes invariably push up operating costs

Many catalog companies don’t even realize they have a supply chain, or if they do, it’s a one-dimensional view. Multichannel marketers, on the other hand, are much more aware of supply chains and their management. To the extent that having a Web presence makes a catalog company a multichannel marketer, catalog companies are likely to become increasingly sensitive to supply chain issues.

Until recently, bringing coherence and automation to a supply chain meant implementing electronic data interchange (EDI). Because of the considerable expense and bureaucratic administration involved in using EDI, however, it has been employed almost exclusively by large catalog companies, and then only with the company’s largest suppliers.

Unfortunately, the “80-20” rule applies to the supply chain as accurately as anywhere else. In this case, 20% of a company’s suppliers account for 80% of the merchandise it sells. Accordingly, 80% of a company’s suppliers are not likely to have been set up for EDI, necessitating considerable resources to maintain paper-driven business processes for doing business with them.

Paper-driven processes invariably push up operating costs and squeeze profit margins. This provides a strong incentive to find viable strategies to achieve complete electronic connectivity for all vendors.

The supply side

For their part, suppliers have their own internal business processes and operational constraints. They too are concerned about using their resources cost-effectively.

Installing and running an EDI environment has been a relatively costly proposition. Firms have needed to first invest in their own hardware and software solutions and then pay for ongoing management expenses. Large suppliers can readily cost-justify their efforts not only to streamline internal operations, but also to expand their business activities with their best customers. They usually have the flexibility to add staff to their existing IT organizations to properly maintain their EDI initiatives.

Small and medium-sized enterprises (SMEs), however, have steadily resisted spending the substantial sums required to electronically enable their routine business transactions. By and large, these suppliers are squeezed on their profit margins and continually need to optimize their cash flows. They have neither the financial resources to invest in the technical infrastructure nor the IT management staff to operate the electronic systems. Moreover, they participate in multiple supply chains and sell to various buying organizations, each of which has its own business rules and standard operating procedures. Suppliers do not want to invest in separate systems simply to satisfy the requirements of specific buyers.

Until relatively recently, SMEs have had few feasible opportunities for realizing the direct business benefits of supply chain connectivity. With faxes, telephones, and ordinary hard copy mail deliveries as their standard means of doing business, these firms have had little incentive for connecting electronically with key buying organizations.

Web-based technologies are forcing SMEs to reconsider some of those assumptions, however. The widespread use of the Web in business environments is leading to new options for improving business-to-business communication, coordination, and collaboration. Buyers and suppliers can readily exchange business documents with one another over the Internet — and they can do it by using real collaboration tools and platforms, not just by replacing faxes with e-mail.

With the rapid deployment of a ubiquitous information-sharing infrastructure, end-to-end supply chain connectivity is becoming an increasingly practical reality. The up-front investments are relatively modest. The minimum requirements are an ordinary personal computer capable of running a Web browser and a dial-up connection to a local Internet service provider (ISP).

SMEs are not limited to using a Web browser simply to view electronic forms on a Web page. Internet-enabled e-business services can accomplish much more. For instance, they can support a connection between one firm’s inventory control system and another’s logistics scheduling environment. Nor are these interconnected business applications limited to the exchange of purchase orders and invoices; they can be expanded to include catalog information, price changes, shipping schedules, and many other structured business activities.

Tough sell

Creating seamless sets of electronic connections between a buying organization and all of its suppliers poses both technical and management challenges.

Set-up: A buying organization first needs to work with its suppliers to enable the exchange of specific electronic documents through predefined links. Enabling the supply chain requires up-front definitions of business processes followed by a testing program to ensure that operational systems work as expected.

A buyer needs first to define the forms that suppliers will use, specify the methods by which they will be transmitted and confirmed, and ensure that the suppliers’ enterprise applications can process the electronic information correctly and provide the required replies.

Ongoing support: Once the electronic links are in place, companies need to manage their ongoing relationships, a step that often includes the introduction of new operating procedures to adapt to changes within business environments.

In addition, companies continually try to enhance their established business processes. For example, a buying organization might decide to add an additional approval step when processing large invoices (above a predefined dollar threshold) and require suppliers to complete additional fields on an electronic form. Suppliers, in turn, need to be able to contact knowledgeable support specialists who can answer detailed questions about the changes in the process.

If smaller suppliers cannot handle by themselves all of the technical challenges, they can outsource the implementation to companies such as Sterling Commerce (www.sterlingcommerce.com) or SPS Commerce (www.spscommerce.com), which focus their expertise in enabling smaller trading partners through hosted supply chain management.

A many-layered thing

Supply chain management is not simply a cut-and-dried process of cutting purchase orders, accepting receipts, and paying invoices. All kinds of adjustments add layers of complication to many of the sequential links in the supply chain.

For instance, a buyer may decide to modify an order based on revised data about inventory in stock or other considerations, and will send the supplier a purchase order change request. Before shipping goods, the supplier has to adjust for changes to an existing order.

Alternatively, a supplier may not have all the ordered goods in stock and partially fulfill the shipment when requested, sending the back-ordered items at a later date. Thus, a buying organization must continually check its receivables against its current orders and resolve discrepancies as they occur.

What makes things even more difficult operationally beyond separately managing order status information is that a company often does not know when items purchased are going to arrive at the warehouse. Individual suppliers, in turn, must match goods ordered against partial shipments and changes, as well as continually track the items in transit against those shipped and invoiced. These tasks are labor-intensive and unnecessarily time-consuming.

Finally, buyers and suppliers must each invest considerable staff time and money resolving the inevitable discrepancies that occur on a case-by-case basis.

A buying organization, however, can remove substantial costs from its business operations (and thereby improve the overall efficiency of its supply chain) by closely tracking its outstanding orders and by paying suppliers only for goods received.

Suppliers, in turn, can expedite supply chain processes by automatically correlating shipments with purchase orders, notifying a buying organization when specific goods are shipped, and alerting designated distribution centers or retail locations to their pending arrival.

Another, sometimes missing, link in the supply chain is shipping information. Buyers need to be able to match suppliers’ shipments accurately with their orders and receipts on an ongoing basis. Suppliers, in turn, can expedite logistics by notifying buyers when they have shipped the goods requested by a specific purchase order. Electronic connections are required to convey this kind of logistics information in a timely and cost-effective fashion.

Making advances

One of the mainstays of an “enabled” supply chain is advanced ship notices, or ASNs. These are documents that suppliers generate in response to buyers’ specifications. ASNs describe the contents of individual shipments, together with purchase order information and other data elements required by the buyer, in advance of their arrival at their specified destinations.

A buying organization can automatically track the flow of shipments into its inventory control system without having to log receivables on an item-by-item basis, match invoices with purchase orders, or manually reenter data from hard-copy documents As a result, a buying organization can effectively streamline its receiving operations and subsequently introduce a seamless business process.

To be more precise, when suppliers ship goods, they provide the package-level detail of individual shipments on the ASN. When a buying organization receives the shipment, it can automatically match the incoming package with the ASN (usually using a bar code-scanned label), and thus electronically transfer the receivables data into its internal inventory control and accounting systems.

With ASNs, suppliers can connect their shipments with buyers’ business processes electronically, substantially improve the overall efficiency of the supply chain, and strengthen relationships with buying organizations. ASNs are also helpful in preparing detailed, comprehensive vendor “report cards” that measure the accuracy, timeliness, and quality of each vendor in delivering merchandise.

You don’t absolutely have to have an electronically enabled supply chain to use ASNs, but they only add to the layers of expensive paperwork otherwise.

Ernie Schell is president of Marketing Systems Analysis, Inc. He can be reached by phone at (215) 396-0660, by fax at (215) 396-0696, and by e-mail at ernie@schell.com.