Rethinking Supplier Automation: 5 Keys to Maximizing Profits

July 22, 2010
Coupled with solid workflow and business intelligence, supply-side data automation can produce a formidable base that increases sales and competitive advantage.

We all know the corporate mantra of 2010: Cut Costs in the Supply Chain. Whereas most companies focus on customer automation, it is actually supplier data automation that harbors a hundred times more potential to increase profit and -- most importantly -- sales.

The key is seeing beyond obvious measures such as basic EDI. Yes, automating data flow between trading partners provides value. But, letting that data work smarter for your company and your suppliers, can unlock the benefit of traditional EDI. Coupled with solid workflow and business intelligence, supply-side data automation can produce a formidable base that increases sales and competitive advantage. This article explores five keys to mastering a new generation of supplier automation and using each to not only reduce costs and free up scarce resources, but also increase sales volume and profit.

Avoid the 80/20 Trap

What's the financial impact of 100% supplier automation with supply chain workflow and business intelligence? In two separate industry studies we have calculated a 50% increase in net profit on the Income Statement with just four basic EDI transaction sets. For example, just automating the advance ship notice in goods receiving can save a $400M company over $400,000 per year. And that's just one transaction in one area of the company. The substantial impact on retained earnings on the Balance Sheet enables companies to reduce debt to earnings ratio and allocate assets to fund growth and expansion. That's a lot of bang for buck.

In general, the cost of not automating 100% can cost up to 15% of the invoiced product. Companies make a big mistake when they set their sights on going electronic with only 80% of their suppliers or the "Top 10". Because it's the other 20% of your non-automated suppliers that cost 80% of the time and effort of your staff, not to mention the introduction of errors, and lack of visibility in the process. That 80-20 trap leeches profits from five critical departments: customer service, operations, procurement, logistics and accounting.

If you're a company who has already invested good money in some level of data automation with your customers, you probably already have the technology to take it out to your suppliers, with very little process change or software investment. We typically find that medium-sized companies have ten to twenty times the suppliers as they have customers. So the technology investment you've made for 20 customers will serve you well for your 200-400 suppliers. Your ERP and EDI systems are in place and ready to serve you again.

From a practical standpoint, with many companies on a hiring freeze, all departments need to do more with less these days. And most companies that are picking up sales are hesitant to increase more resources to accommodate those sales. So the cost of not automating can cause a crippling effect. On the other hand, 100% automation can enable companies to grow substantially while maintaining the same resources, and turn out ahead in the long run.

Make it Affordable and Beneficial for Suppliers

Our customers tell us that their primary barrier to 100% supplier automation are the suppliers themselves; most companies supply from a wide range of companies, all of whom have vastly different levels of technology sophistication. Your supplier automation initiative must work for your multi-billion dollar suppliers and your mom and pop companies alike. And, it needs to be more than a "thou shalt" edict.

In the past, EDI automation simply wasn't affordable to smaller companies (the typical cost for EDI automation is $40K). Because of this, companies would encourage their suppliers to go the "Web Portal" route, requiring the small supplier to manually log in to a website to upload and download their data. The problem with this archaic solution is that it benefits the supplier not at all; it does not provide the automation that EDI is known for, and in fact it often doubles or triples their workload. EDI is profitable when it can automatically integrate to existing ERP or Accounting systems, and eliminate any need for manual entry or redundancy.

Aim to recommend cost-effective automated solutions, not manual-intensive Web solutions, that truly benefit the supplier -- providing true automation, elimination of manual processes, and workflow benefits -- at a price that any company can afford. We find that even very small suppliers spend an unnecessary amount of time on data entry. For example, most sales executives at non-automated companies spend at least 50% of their day manually entering orders. Imagine the benefit your supplier will gain when their sales people have an extra 4 hours a day to sell.

Beware the Middleman

Another unnecessary, and completely avoidable, cost, for both you and your supplier, are the recurring monthly fees charged by Value Added Networks (VANs) or other such middle party service providers.

There are two types of middle party service providers or "middlemen." One is the industry-specific "marketplace" that is focused on one particular market sector, such as food or apparel. These agencies may provide aggregated data catalogs that buyer and seller can mutually access. The second are very large cross-industry VANs (Value Add Network -- but don't let the name fool you, as there is not a lot of value offered there). Both types of providers make the majority of their revenue on transaction fees, by charging a fee -- to the buyer and seller -- for every kilocharacter of data that is moved.

In the past, there were two reasons for middle parties. Firstly, they provided a level of security that was not available previously. Secondly, they provided a community that can be accessed through a common "Web Portal" -- which, as discussed above, does not add value to the smaller supplier.

Today, companies of all sizes can have the same level of security, information, validation and non-repudiation by using AS2, which is the very technology that many of these large middle brokers are using. AS2 (Applicability Statement 2) is a stable communication platform -- used frequently by middle brokers -- that provides a highly secured method of data exchange through the internet. When used to directly connect to your suppliers, companies can eliminate tens of thousands of dollars each month.

Make Supply Chain Data Actionable

But data automation alone only takes you so far. EDI may carve costs out of your supply chain, but it won't help increase Sales. For this, companies are wise to use supplier data to invoke event driven, alert-based workflow, to react in "mid-stream" of supply chain events, and therefore produce a more favorable outcome for sales and production. This type of business intelligence can enable a tremendous competitive advantage to sales and operations.

For example, data received from suppliers can alert sales in real-time to visibility to supplier capacity, so that a different supplier might be used, or sales can shift the expectation of the customer, or sales can suggest an alternative product to their customer. The benefit of this is avoidance of a lost sale, as well as the opportunity to cross-sell additional items. Or perhaps the regional sales manager wants an alert sent to his blackberry on all orders over $1M.

Production can use data to measure late shipments or percentage fill rate, and send proactive alerts when levels drop below acceptable criteria. This enables better management of inventory and demand planning.

Accounting can prevent the transmission of wrong data, and thus avoid "bad" data clogging systems. A common example of this on the customer side is that when an invoice is sent with an incorrect item SKU or price, it can delay payment on the invoice and produce bad relations between buyer and seller. Proactive workflow can prevent that invoice from being sent, and require the supplier to correct the invoice first, before sending.

Trading partners can provide visibility to inventory of stock, which provides alerts or reminders that trigger people or systems to perform specific activities or functions.

Measure and Respond

Automating with suppliers provides a rich platform to assure that suppliers are meeting Service Level Agreements. Automated Scorecarding provides valuable, objective measurement of targets, which enables strategic decision-making. It also enables your supplier to know in real-time just how they are doing, so that they can react proactively to small issues before they become large problems. Business Intelligence provides valuable dashboards to management that enables better Forecasting and Demand Planning -- all focused at one thing: having the right product, at the right place, at the right time.

Business Intelligence gives the holistic picture, based on your data and your trading partner's data combined. The key to maximizing supplier automation is in using this data to proactively affect the outcome of supply chain events. Just as the whole is greater than the sum of its parts, so it is with supply chain: when trading partner data is combined and viewed as a whole, the result is powerful visibility, profitable actions, and increased sales -- a whole that is a hundred times more effective than simply automating.

Marlo Brooke is founder and president of Avatar Partners, a developer of Value Chain Technology Solutions, software that helps companies Automate and Integrate with Supplier Communities.

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