Reprinted from GLOBAL LOGISTICS & SUPPLY CHAIN STRATEGIES, November, 2004
More Than a Buzzword: Collaboration Is the Key to
High-Performing Supply Chains
Excessive use of the word has made collaboration a tired concept in the minds of many. But not with these manufacturers, vendors, and industry experts.
Collaboration. It could be the most overused word in supply-chain management today. Companies doing routine business deals claim to be "collaborating"; so do partners swapping the most basic data. No wonder the term has lost much of its meaning. But the best supply-chain performers don't settle for buzzwords. They're deeply involved in relationships that call for tight links between partners. It's an environment where information flows freely in both directions. Where manufacturers, distributors and retailers respond quickly to changing business conditions. And customer service—another tired phrase—is paramount.
Collaboration can take many forms. It can flow in either direction—upstream to suppliers, or downstream to customers. What true collaborative relationships have in common is a level of trust and data sharing that would be unthinkable under a traditional corporate structure. Managers tend jealously to guard information, not only from outsiders but also from others in the same company. Collaboration requires a leap of faith among individuals and organizations. Here are 10 best practices from those who have taken that leap, and have seen big rewards as a result.
1. Know your customer's service requirements from the start.
Companies might think they know what they're getting into when they sign a contract. But a surprising number of details are often left to chance, or completely ignored. They only draw attention when things go wrong.
DSC Logistics, a third-party logistics provider based in Des Plaines, Ill., spends a lot of time documenting a new customer's needs in areas such as order cycles, returns management, inbound carrier notification and packaging specifications. "One of the greatest reasons why [supply-chain] integrations are not successful is that requirements are not defined up front," says Ken Heller, DSC's vice president of new operations development.
Heller recommends the creation of a detailed process map, along with the listing of all documents and possible glitches. Top managers tend to reject the possibility of things going wrong, he says, while shipping clerks may be more knowledgeable about how supply chains really work at the operational level.
DSC recently took on logistics for the food-service business of consumer-products giant Unilever. The deal involves managing shipments to many of the nation's largest fast-food chains. Heller says DSC worked closely with the client's customer-service and inventory-planning teams to assess its strict requirements. Such an effort can also be the basis for detailed reporting and performance measurement of the vendor, he says.
Management consultant Rick Hoole, a director of PRTM in Waltham, Mass., calls for creation of a joint service agreement (JSA) separate from the basic contract between a company and its service provider. The JSA drills down into the processes by which the vendor will carry out the customer's wishes, he says. It's focused on day-to-day concerns over metrics, workflow and parties communications between partners. While not a legally binding document, a JSA nevertheless can head off misunderstandings and promote collaboration, Hoole says.
2. Focus on internal collaboration.
Often the toughest part of forging a collaborative supply chain isn't in the links between independent partners—it's getting a company's internal departments to cooperate. For all the talk of "silo busting," the walls between functions remain solidly in place at many businesses. Texas Instruments, having worked hard to link up with buyers of its semiconductors, is only now turning its attention to internal collaboration, says supply-chain manager Michael Senecal. "There are all sorts of opportunities to eliminate redundant tasks," he says. The goal is to improve visibility of product and data within the organization, and ensure that all departments are working from the same set of numbers.
In what Senecal terms a two-year project, Texas Instruments is taking steps toward creating a single data repository, with a unified vision of demand across short- , medium- and long-term planning horizons. "We're all using the same base data," he says. "That in itself is a huge improvement." The next phase is to model all internal businesses within one planning engine. Finance and operations managers of the company's five manufacturing units have chosen Senecal to orchestrate their processes in a coherent fashion.
A crucial step toward internal collaboration is determining who "owns" bits of information throughout the company, says Russ Henry, senior vice president of marketing with Velosel Corp., a Santa Clara, Calif.- based vendor of software for collaborative product data management. Individual departments often won't take responsibility for the data that they nominally control, covering such elements as price, shipping conditions and product dimensions. By creating an atmosphere of accountability, companies can move toward the establishment of a product information management repository, with complete and accurate data, Henry says.
3. Shorten your planning horizons, to respond more quickly to change.
Texas Instruments is slashing the lead time for committing to set quantities of custom-made product. In the past, it would ship based on quarterly numbers, and lock in orders at the beginning of each quarter. Now it wants to set up a monthly sales and operations planning (S&OP) process. And, through better collaboration with customers, it's delaying final decisions until the end of a quarter. The result, says Senecal, should be a steep reduction in excess product in the pipeline.
He believes the company could eventually run its S&OP process on a weekly frequency. For now, however, it's aiming at a monthly process. The plan will allow Texas Instruments to do a better job of running vendor managed inventory programs on behalf of customers, while eliminating unneeded materials. That's especially crucial in an industry where products can change on a dime. In the wireless sector, where Texas Instruments serves such companies as Nokia, Ericsson and Motorola, models shift in a matter of months. And the pace of change is picking up, so that Texas Instruments' old 12- to 15-week planning horizon is no longer adequate. Senecal says the company is communicating electronically with its own suppliers, to make them equally flexible.
The quality of long-term planning rests on short-term information, notes Pete Rector, senior vice president of 3PL Genco Distribution System in Pittsburgh, Pa. Genco employs day-to-day transactional data to perform network analyses of its clients' supply chains. The process helps companies determine where to position inventory and manufacturing plans. Genco is currently performing such an analysis for the surface transportation needs of the U.S. Department of Defense. "We believe we can take a lot of time and cost out," says Rector.
4. Improve the quality and completeness of product information.
Henry calls this effort "a cornerstone for effective collaboration." Retailers and their suppliers must strive to synchronize information flow. The consumer products division of Wyeth Laboratories Inc. has developed a means of ensuring good data, Henry says. But the task is becoming tougher, as companies are forced to track additional items, such as country of origin and proper storage temperature. The risk of exchanging incomplete or poor data rises at a corresponding pace.
Analysts estimate that anywhere from 30 percent to 50 percent of data within corporate systems is incorrect. Those errors can no longer be ignored, or chalked up to the cost of doing business, Henry says. Profit margins in the retail and consumer-products industries are too thin to tolerate mistakes.
Heller says companies should maximize their use of electronic communications to ensure the greatest degree of automation possible. The fewer the faxes and manual entries, the fewer the errors, he says. In addition, production systems must be fed updated information frequently. Many companies demand fresh data every few hours. But they need to synchronize the frequency of their systems with those of electronic data interchange (EDI) transmissions, to avoid an update lag in parts of the system.
5. Take control of the upstream flow.
Solectron Corp., the big contract manufacturer of high-tech products, consolidates shipments from various suppliers to cut costs and better control the flow of product into its manufacturing facilities. The move was taken to counter an increase in the number of inbound shipments and average weight per shipment, trends that were pushing up supply-chain costs, says Jim Molzon, vice president of customer fulfillment and logistics.
Solectron set up regional consolidation centers to receive inbound items and redirect them to plants. A consolidation point in Dallas, for example, feeds the Solectron plant in Guadalajara, Mexico. Solectron can make fewer and larger shipments, lowering its transportation expense. In the process, it has cut the number of inbound entries to just 50 a month, compared with the original level of between 500 and 1,000.
Consolidation allows Genco to save money through the greater use of cost-efficient truckload carriers, says Rector. At the same time, it must ensure that shipments arrive at destination within the narrow delivery windows dictated by retailers. The recent crunch in carrier and equipment availability has made that task even tougher. As a 3PL, Genco can draw from multiple customers to build truckloads and attract the business of quality carriers, Rector says.
Collaboration with upstream suppliers can extend beyond transportation. Hoole says large companies can use their buying power to cut their suppliers' cost of raw materials. In cases where both parties are buying the same items, the larger, downstream partner can negotiate volume rates with a common supplier. The same strategy can be employed for procuring trucking and other transportation modes, he says.
6. Create a supplier portal dedicated to logistics.
Web-based portals in the business-to-business sector got off to a shaky start. At the outset, suppliers viewed the technology as little more than a means of beating down their prices. More recently, however, portals have emerged as a tool for collaboration, with benefits to suppliers and buyers alike. Greg Aimi, director of supply-chain research with AMR Research, recommends creation of a dedicated information system, using portal technology, to track orders, shipments and inventory on a real-time basis. He cites the case of a Texas-based retailer with 350 stores and nearly 2,500 suppliers that was receiving notices of product availability by fax. An on-line system took over the function, feeding data directly into the retailer's logistics system. The retailer could then perform an optimization routine to determine the best means of moving product into its distribution center. Suppliers, in turn, could access the system to track orders and determine precisely when a carrier was coming to pick up the shipment. As a result, they could better orchestrate their warehouses and dock doors. "There was quite a bit of money saved," says Aimi.
Retailer-built portals can be of particular value to small and medium-sized suppliers, says Henry. They are able to reduce the time required to enter data into the system, while improving the accuracy of that data as well. One customer of Velosel, a supplier of consumer health items to Wal-Mart Stores, has had great success in boosting the efficiency of its relationship. Despite Wal-Mart's obsession with price, the retailing giant is the supplier's highest-margin customer, Henry notes.
7. Manage data exchange through exception based processes.
A typical relationship between retailer and supplier could involve millions of transactions a year. One retailer received 42,000 items from Procter & Gamble alone, Henry notes. Checking each one isn't feasible, but retailers and suppliers can collaborate on ensuring data quality through exception-based management. Major retail players such as Target and Safeway have embraced such systems, in conjunction with the Global Data Synchronization Network (GDSN), a centralized registry for product data exchanged by manufacturers and retailers. Only those items that fall outside of pre-set definitions are flagged for attention. Procter & Gamble, for example, might decide to change the height of packaging for its Charmin brand of toilet tissue. The detail falls outside the retailer's acceptance parameters and is noted as a volume or dimension change.
It's equally important that partners follow through on changes through regular meetings and updates, says Heller. Often they can devise ways to save money on shipping or packaging. One customer of DSC had 12 items to a case, but the retailer was ordering in multiples of 10. The retailer changed its practice to conform to the way items were packaged, saving money in the process. A regular schedule of meetings – monthly at the operational level, quarterly for higher management, once or twice a year for those at the top – can uncover such discrepancies. "Both parties want to make sure they're aligned from a strategic perspective," says Heller.
8. Practice collaborative assortment planning.
This is one of several concepts to have grown out of efforts by the Voluntary Inter-industry Commerce Standards Association (VICS), developer of the process known as Collaborative Planning, Forecasting and Replenishment (CPFR). In collaborative assortment planning, retailers and suppliers work closely together to coordinate key merchandising decisions, according to Matt Johnson, chief technology officer of Syncra Systems in Waltham, Mass. Together they come up with an assortment plan, yielding a purchase order which details style, color and size of individual apparel items. The order is then shared prior to the product appearing on the market, and supports final buying decisions by the partners.
Liz Claiborne Inc., the $3bn maker of branded fashion apparel, has successfully implemented a collaborative assortment-planning project with customers such as Federated Department Stores. Together they assess consumer-buying patterns, and match them to the needs and layouts of individual stores. Results include improved fill rates, a better assortment of product on the sales floor, a two- to three-week reduction in order capture cycle time, and better margins for the retailer. Other VICS efforts in connection with CPFR, according to Johnson, include collaboration on retail promotions, store replenishment and standardized data exchange for high-tech products under the RosettaNet venture.
9. Take a greater role in order fulfillment on behalf of your downstream customers.
Solectron has extended its services further along the supply chain, says Molzon. To drive down stock levels, touch points and standing inventory, it has begun performing fulfillment duties for original equipment manufacturer (OEM) customers. It can even ship product direct to the OEM's customer, bypassing the middle stage altogether. As more manufacturing occurs offshore, particularly in Asia, it becomes more important to take time out of the production and logistics process, Molzon says.
Increasingly, Solectron is fashioning itself as an "end-to-end" provider of manufactured product, serving end users such as consumer retailers and businesses. Even single orders can be moved in this fashion, Molzon says, with shipments sent in the name of the OEM. Solectron might end up charging more for its services, but the total landed cost of the product is lower, with manufacturers cutting expenses related to inventory, financing and obsolete goods.
Other major contract manufacturers have embarked on similar efforts to expand their range of services in collaboration with OEMs. "It requires a bit of infrastructure, and a logistics network to do it well," says Molzon. "But you've got to play full tilt, not go halfway."
10. Jump down the chain to get a more accurate forecast of demand.
Call it an "anti-collaboration" measure if you like, but some manufacturers aren't content with receiving forecasts from their immediate customers. A Tier 2 supplier of electronics components, for example, might go directly to the OEM, bypassing the Tier 1 partner, for a more accurate forecast of actual demand, says Hoole.
The problem, he says, is that Tier 2 suppliers typically are turning out product for multiple customers, whose collective forecast tends to be overly optimistic. Relying solely on the wisdom of the Tier 1 suppliers, who are constantly final ghting for market share and want the fl exibility to scale up production at a moment's notice, the Tier 2 provider is likely to be stuck with excess inventory. So it seeks a more realistic appraisal from the entity that is one more link down the chain.
Hoole says collective Tier 1 forecasts can be 15 percent to 20 percent too high. Yet Tier 1 companies only pay for what they actually draw from their suppliers' hubs, so it's the Tier 2s who are left holding the bag. They're forced to seek collaboration at another level— even if it means bypassing a highly valued supply-chain partner.
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