Distribution Supply Chain Management


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Using EDI and ERP plus APS can increase productivity and decrease overall costs.

Mel Smith

Philip Wintermyer

Suppliers continue to forge strong links in the value chain by adding new functions and processes. Many of these companies believe that their efforts at efficiency have tapped all the distribution value that the supply chain has to offer. They could not be further from the truth.

Efficient distribution, the largest cost function in the supply chain after raw materials are purchased, affects the productivity and profitability of every link in the chain. Collecting distribution data in the most efficient and economical method possible, and sharing that information with manufacturing partners should be a mission-critical activity for every electronic distributor.

Sharing distribution information enhances the integration, sequencing and synchronization of supply-chain activities. According to the global supply chain management consulting firm Ernst & Young, efficient distribution management will "supercharge" the supply chain by cutting costs, reducing inventories and improving decision making.1

As one of the most efficient methods of disseminating distribution data, electronic data interchange (EDI) continues to streamline internal processes, enabling them to work better with external processes. When combined with powerful new enterprise resource planning (ERP) systems, advanced planning and scheduling (APS) programs, and the instantaneous communication of the Internet, company intranets and supply-chain-partner extranets, distributors have a powerful front- and back-end tool for implementing supply-chain logistics.

This article demonstrates how electronic communication of distribution data enables products to flow seamlessly from supplier to distributor to OEM or contract manufacturer (CM). Specific examples of the financial benefits of supply chain management and EDI for OEMs and their partners will be provided. Also included are functional descriptions of ERP, APS and warehouse management software packages.

Distribution Market Driven by Economics, Competition

The electronic distribution, or interconnect, passive and electromechanical (IPE), industry will remember 1999 as the year when product development cycles shriveled from weeks to days to hours, average selling prices plummeted, and widely fluctuating market supply and demand created a vicious roller coaster of ramp ups and layoffs. In an attempt to speed production while decreasing costs, OEMs, CMs and suppliers are still looking for ways to improve the flow of supply-chain information with electronic communication.

Often called "trigger-point planning," more companies rely on various forms of electronic communication to keep up with events that let them know when it`s time to "pull the trigger" on a supply-chain function. For example, OEMs such as 3Com and Hewlett-Packard (HP), CMs such as Solectron and Celestica, and distributors as varied as Kent Electronics Corp. and Ingram Micro routinely use the Web to monitor real-time data from customers, suppliers and channel partners.2

The electronic distribution industry, in particular, has become the master of the supply chain, facilitated not only by electronic communication, but also by a commonality of language. For example, OEMs and their manufacturing partners use the same definition of yield - cycle time and capacity utilization - enabling them to effectively communicate their needs to each other and to their suppliers clearly and coherently. To gain a competitive advantage, electronic distributors must be just as concerned with and informed about manufacturing issues as their customers are. By doing so, they can become an indispensable contributor of value-added services to the supply chain.

Supply Chain Management Trims OEM Costs

Supply chain management plays a critical role in improving profitability. At the Aspect Development Summit held last year in Palm Springs, Calif., industry observers estimated that companies could shave costs amounting to 5 to 6 percent of revenue by managing the supply chain as an integrated process. For example, because purchased goods (e.g., maintenance/repair and operating supplies [MRO], as well as critical-production goods) represent 50 to 80 percent of the expense base for most corporations, lowering those related costs could reduce purchasing costs by 5 percent and produce a 50 percent gain in profit. To achieve a similar gain through more traditional methods, sales would have to be increased by 50 percent, or labor costs decreased by 20 percent.3

An even greater impact can be realized by employing supply-chain practices during product development and using software solutions to make it easier for engineers to choose parts on the approved-vendor lists. Companies that have focused on this portion of the supply chain have trimmed millions from their overall costs with the help of various software solutions.

For example, 3Com Corp. recently implemented a complex set of supply chain management software tools. An immediate result was a $10 million savings on purchase price variance (PPV) - the difference between what is actually paid for a part and the price standard the company periodically establishes. The company also cut $6 million in connector spending and improved its inventory-management activities.

Similar results were seen at HP. Primarily by using proprietary information systems and third-party software suites, the company reduced its parts-selection process 100 fold while sharpening its competitive edge, in part because of a 10 to 15 percent price advantage with suppliers.3

Celestica was one of the first CMs to embrace the unified supply chain concept with its suppliers and distributors. By negotiating quarterly with its suppliers based on worldwide supply requirements, the company saves 5 to 15 percent per quarter, depending on the commodity. Distributors and suppliers also benefit from this arrangement, as they no longer have to negotiate with each of the company`s locations.4

The compressed supply chain was squeezed even further when Solectron Corp. entered into a strategic alliance with Ingram Micro Inc. Acting on behalf of their OEM customers, resellers place orders with Ingram Micro, which sends the orders to the nearest of 11 global alliance assembly facil- ities. From there the units are built, tested and shipped within 48 hours, untouched by the hands of the manufacturer and reseller. The arrangement enables vendors to continue using the distribution channel as their sales force, while taking advantage of a CM`s configure-to-order capabilities.5

For electronic distributors, this alliance illustrates the importance of becoming part of the supply-chain solution. When distributors create an environment where OEMs, CMs and resellers are encouraged to select parts from preferred suppliers, the distributor strengthens its relationships with its supply base and can collaborate in real time on projects with its customers. This supply-chain efficiency cannot be achieved without an investment in the enabling technology.

EDI Reduces Lead Times, Cuts Costs, Strengthens Supply Chain

EDI has reduced costs and improved efficiency in large corporations for more than two decades. For example, Hyundai Electronics America uses EDI to automatically refill its just-in-time hubs without any sales or marketing intervention. The company estimates that EDI technology has reduced its transaction time by 75 percent in the last 18 months alone.6

Up until now, implementation was considered too costly and time-consuming for all but the largest distributors. However, the reduced costs of computing hardware, software and telecommunications, combined with EDI`s enabling effects on the supply chain and wealth of user benefits, has increased this software application`s popularity in the last few years.

EDI is the electronic interchange of the data content of a document (i.e., a purchase order, invoice or forecast). Pure EDI differs from e-mail in that the electronic exchange of information requires no human intervention. Put simply, EDI is about doing business and carrying out supply-chain transactions electronically. EDI can be used for almost all paper-based communication.

EDI standards define the techniques for structuring data into the electronic message equivalents of paper-based documents. Standardized methods for describing the components that make up a distribution document include product code, price, name, address, etc. EDI software then translates the messages as they move from standard to internal formats and vice versa, or in best cases, directly to the application software.

EDI is actually a complex process in which data must be extracted from a computer system, translated into a transmittable format, transmitted electronically, translated or interpreted by the receiving computer, and downloaded into the appropriate computer application.

Consequently, implementing an EDI system is a major undertaking. First, a project team must be formed to analyze and prioritize the internal and external flow of information generated by both automatic and manual procedures and processes. Next, key customers must be identified and ranked in terms of order quantity, value, etc., as these customers will be encouraged to join the EDI system. Any existing EDI systems being used by customers must also be considered.

With this information, the cost of implementing an EDI system can be assessed. Once a budget is set, EDI vendors can be investigated and a pilot implementation coordinated with selected customers. The distributor and its customers must all agree on the requirements for software, communications and standards. A pilot program must be developed and run, after which all parties can assess the results and suggest improvements. It is important that the final EDI system have the flexibility and bandwidth to adapt to new business partners and upgraded functions.

Although the planning and implementation phase can be challenging, many software vendors are capable of guiding the distributor through each phase. In any case, most companies, both large and mid-sized, find the return on investment (ROI) impressive and the benefits of EDI well worth the effort. For example, EDI eliminates the need to reenter data from paper documents, preventing clerical errors. Considering that an estimated 70 percent of all computer input has previously been output from another computer, and that each reentry of data is a potential source of error, this is a significant advantage. In addition, the cost of processing an electronic requisition is about one-tenth the cost of handling its paper equivalent. These savings can be passed on to customers, providing a competitive advantage for the distributor.

Transmitting invoice data and payments over EDI also improves cash flow and increases working capital. Plus, the database built from EDI transactions is an invaluable source of market research and strategic planning information. Finally, for electronic distributors with global operations, or for those wishing to become world-class organizations, EDI simplifies import or export transactions by automatically submitting customs declaration documents. This greatly expedites the distribution process for global companies.

Probably one of the most important benefits for distributors looking to improve their supply chain management processes is that EDI systems shorten the lead-time between order receipt and fulfillment. When scheduling information is transmitted with ordering data, OEMs can plan production more accurately and reduce stock inventories, costs and time-to-market. Strategically, being able to shorten time-to-market helps distributors win new business and retain existing OEM customers. In addition, distributors and other supply-chain partners linked by EDI are inevitably drawn into a closer working relationship.7

Case Study: II Morrow/Kent EDI Program

In 1995, II Morrow decided to upgrade its purchasing functions from a labor-intensive, paper-based transaction system to an EDI system. Kent Components assisted in the company`s initial EDI setup by becoming their first trading partner. The new information system was implemented in less than seven months, with no team member spending more than 10 hours per week working on the project.

After deducting expenses of approximately $8,900 for hardware, software and network connections, the total savings for 1996 surpassed $200,000. In addition, new prices were negotiated on the parts identified as EDI-capable, reducing material costs by approximately $99,000, a 4.4 percent saving.

Administrative time spent creating and sending purchase orders was reduced from 60 hours per week to 20 hours, representing an annual savings of $83,200 or 33 percent of the purchasing departments budget for buyers. Suppliers also realized similar reductions in the administrative time needed to handle purchase orders and passed these savings on to the customer.

Before implementing EDI, the company had an average front-end purchase order processing time of 60 days - the industry standard for manufacturing companies. After EDI systems were up and running, it was able to reduce the front-end purchase order processing time to an average of 43 days. This reduction enabled the company to be more competitive and responsive to market changes. In addition, material lead times were reduced and inventory turns increased, which freed up valuable inventory storage space.

Production inventory turn times were also reduced, from six weeks down to 10 days; work-in-process inventory reduced from three weeks down to one day; and finished goods inventory reduced from three to six days down to three days. In addition, as a direct result of their improved supplier relationships, expediting costs for the EDI parts were reduced from approximately 12.5 hours per week to nearly zero. This produced $27,000 annual savings on expediting costs. (For other areas demonstrating measured improvement from the EDI implementation, see Table 1.)

Expressed as a percentage of the total inventory value, total carrying costs were 20 to 40 percent. These costs can be broken down as follows: 12 to 20 percent of opportunity cost of invested funds, 2 to 4 percent of insurance costs, 1 to 3 percent of property taxes, 1 to 3 percent of storage costs, and 4 to 10 percent of obsolescence and deterioration.

The bottom line results of implementing EDI were savings in all areas exceeding $209,000.8

ERP Plus APS, WMS Helps Distributors

ERP systems generate material plans and keep track of on-hand inventory. ERP evolved from the internally focused material requirements planning (MRP) systems and used to be the exclusive domain of OEMs and CMs. In today`s competitive market, with all companies in the supply chain so closely linked to each other`s success, ERP information that once was important only to an internal manufacturing audience is now essential for distributors and suppliers, as well. Consequently, ERP software is undergoing another transformation, with many ERP vendors now designing their software to interface with or contain APS technology.

APS models and balances a wide range of constraints in near-real time for supply chain management. ERP plus APS rapidly checks both material and capacity, providing realistic promise dates. With APS, distributors can help OEMs and CMs determine if new products can be built to specification, how much they will cost and when they can be delivered to market. Although APS`s short-term factory scheduling capabilities may hold the most promise for supply-chain improvement, the application can also be used to generate component distribution plans for a 12-month window.

Although ERP and APS do require a significant investment of time and resources to implement, AMR Research, a Boston-based analyst firm, calculates that a $100 million company with four inventory turns would only need a 3 percent reduction in inventory to achieve a one-year payback on a $500,000 APS investment.9

As an integral part of the product-driven supply chain, distributors must be aware of their customer`s business objectives, core competencies and limitations. Manufacturers want to know that their distribution partners understand the importance of time-to-market and budget control. In addition, distributors can benefit from the customer relationship management, sales-force automation, better planning and logistics, and the data analysis support that ERP plus APS offers.

The growing complexity of supply-chain logistics has some ERP vendors also touting integrated warehouse management systems (WMS) as an ERP feature. Advanced WMS does much more than just identify which items in what quantities are in what location at which facility. Today`s sophisticated WMS programs also use logic and rules to perform complex picking and put-away operations. Advanced capabilities in warehousing and logistics, service parts warehousing and distribution, and manufacturing material/components management can lead to an 80 to 90 percent improvement in a company`s capital, inventory investments and operating expenses.11

Summary

National specialty distributors must continue to explore ways to add value to the supply chain to differentiate their services and remain competitive. An obvious strategy is to offer superior service through the implementation of software applications that can improve supply-chain efficiency, such as EDI, APS and WMS. However, to be optimally effective, this strategy requires that the information gathered from these new software programs be immediately available to a worldwide customer base. Using electric communication media, including Internet, intranet and extranet connections, can help achieve this goal. By "infopartnering" with its customers, distributors will again become the driving force in the supply chain.

REFERENCES

1 Gene Tyndall, Christopher Gopal, Wolfgang Partsch and John Kamauff, Supercharging Supply Chains, John Wiley & Sons, 1998.

2 David Diamond, "Special Report: Hold On Tight: Trends to Watch in 1999," Electronic Business Today, December 1998.

3 Jennifer Baljko, "Summit Highlights Increase Savings From Supply Chain Integration," Electronic Buyers News, April 30, 1999.

4 Susan Scheck, "Celestica Overhauls Its Supply Chain," Electronic Business News, September 28, 1998.

5 Jennifer Baljko, "Solectron Formalizes Supply Chain Strategy," Electronic Business News, June 23, 1999.

6 John Klimestiver, "Logistics: Where the Rubber Meets the Road," Electronic Business News, October 15, 1998.

7 Chris Nelson, "The ABCs of EDI" EDI Awareness, The EDI Awareness Centre for Wales, 1996.

8 Donald Dobler, David Burt and Lamar Lee, Purchasing & Materials Management Text & Cases, Fifth Edition EDI Program Case Study, McGraw-Hill Publishing Co., 1990.

9 Roberto Michel, "The Middle Looks Outward: Duralam, Nalley Fine Foods, Wescast, Others, Push ERP to Handle Supply Chain Pains," Manufacturing Systems, January 1999.

10 Roy L Harmon, Reinventing the Warehouse: World Class Distribution Logistics, Free Press, 1993.

11 Andre J. Martin, Infopartnering: The Ultimate Strategy for Achieving Efficient Consumer Response (Executive Breakthrough), Oliver Wight Publishers, 1995.

MEL SMITH, general manager, SMD Programs, and PHILIP WINTERMYER, manager of advanced technology, may be contacted at Kent Electronics Corp., 7433 Harwin Dr., Houston, TX 77036; (713) 954-8473; Fax: (713) 975-3615; Web site: www.kentelec.com.

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