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Supply Chain Performance:

The Suppliers Role


Executive Brief
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
markets 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.
The Suppliers Role in Supply Chain Performance

Compliments of

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 customers 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

SUPPLY CHAIN PERFORMANCE: THE SUPPLIERS ROLE

Executive Brief

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.

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.

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

SUPPLY CHAIN PERFORMANCE: THE SUPPLIERS ROLE

Executive Brief

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 cant 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 cant keep up. Companies have learned this the
hard way. They may achieve Lean production in their plants, but if suppliers dont 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.
Supply Chain Value-Add

Accuracy

Response

Continuous
Comms.

Perfect
Orders

VMI

Coordinated Continuous Improvement

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.

Industry Directions Inc., 2005

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

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Executive Brief

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 hasnt 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

SUPPLY CHAIN PERFORMANCE: THE SUPPLIERS ROLE

SCM projects also can illustrate where business processes,


contracts, and metrics may need to change for maximum
performance.

External

Collaboration
Internal
Transportation
Management
(TMS)

Demand
Planning

Execution

Planning
Production
Planning &
Scheduling
(APS)

Executive Brief

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.

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

SUPPLY CHAIN PERFORMANCE: THE SUPPLIERS ROLE

Executive Brief

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