Supply-Chain Strategies

Sept. 21, 1998
Let the information flow.

Recognizing a need to improve efficiency while reducing response times and inventory levels in multicompany product pipelines, many manufacturers have begun to establish tighter bonds with key suppliers. And they're deploying advanced information technologies, including web-based applications, to share more information and work toward "collaborative" relationships.

It is a trend that will intensify in the years ahead, believes Ernst & Young's Gopal, who coauthored Supercharging Supply Chains: New Ways to Increase Value Through Global Operational Excellence (1998, John Wiley & Sons). "In the near future, it is supply chains that will compete -- not companies," Gopal tells IW. "That means they will need very tight linkage in the flow of both material and information. More to the point, companies rely on their suppliers to a considerable extent. And supply chains will be only as strong as the weakest member."

Today's attitudes toward partnering with suppliers represent a significant shift from the past -- when manufacturers typically played one supplier against another, looking for the lowest possible price, and were reluctant to share information about future needs and future product plans. In the auto industry, for example, contracts with suppliers "were typically drawn up only for short periods, and manufacturers would often shift their orders to lower-cost suppliers at short notice," recounts MIT's Lester in The Productive Edge. "This meant that the suppliers had little incentive to invest their own funds in improving productivity."

Such arms-length relationships in the U.S. put American carmakers at a disadvantage against Japanese competitors, who were reaping productivity and quality benefits by working closely with their suppliers.

Today, however, many U.S. companies appreciate the value of building partnerships with the firms that provide their parts and materials. They're more inclined to sign long-term contracts, and they evaluate suppliers on the total contribution they make, not just the unit price they charge. Often they get key suppliers involved early in product-design-and-development efforts.

Sharing Plans

"We bring the supplier in very early -- at a stage where it is able to significantly influence a design," says Jose Mejia, vice president-worldwide supply management group at Bay Networks. "Once a new-product concept has been approved -- with a set of deliverables -- the supplier automatically assumes a set of objectives linked to the product, including cost targets, quality levels, and the number of 'wows' -- things that will surprise customers. . . . We hold our suppliers accountable for meeting the objectives that we have to meet for a product."

About 80% of the content of Bay Networks' products comes from supplier firms. "It is clear that that has to be managed carefully. And we can learn a lot from our key supplier partners," Mejia says.

To cultivate closer working relationships with firms on its "preferred supplier" list, Bay Networks has created an Advisory Council program for high-level executives from the supplier companies. "We share any and all strategic programs and any issues that we have -- and we explain what we propose to do about those issues." The high-tech company also conducts small-group "listening sessions" with suppliers, who are invited to comment on issues that are important to them. "We wanted our suppliers to be able to critique us -- because that can keep you humble. It forces you to do some soul-searching," Mejia says. "And we've learned a lot from the listening sessions. They allow suppliers to get very involved in the development of our organization."

The Santa Clara firm also has introduced a program called SAVE -- which stands for "supplier added-value efforts" -- to solicit supplier suggestions for cost reduction and quality improvement. Supported by a Web-based system for entering and tracking suggestions, the SAVE program has been generating some 600 ideas a quarter and yielded about $12 million in savings in its first year. Cost savings are split with the participating supplier firms; however, the suppliers have the option of forgoing those dollars "in exchange for additional business," Mejia notes.

Bay Networks also uses a Web-based application to share forecast information with its preferred suppliers -- which typically deliver parts to the contract electronics manufacturing firms that handle about 90% of Bay's actual production work. "We need to make sure the suppliers are getting knowledge of what is happening in the marketplace at the same time that we do," Mejia says. "We want to allow them to see what products are selling, where they are selling -- and provide a breakdown to the component level." Providing that information, he notes, gives suppliers the ability to react faster. "It helps to assure the availability of components when we need them," he adds. "A year and a half ago, I used to spend a significant amount of my time doing things like trying to expedite shipments from suppliers. But these days, I hardly ever spend time expediting parts."


Web-based systems are becoming "crucial" to supply-chain management, contends Ernst & Young's Gopal. "Web-based technology allows the sharing of information, not just one-to-one, but one-to-many -- and even many-to-many," he points out.

It is not simply a case of providing access to a Web site, Gopal says, but creating "extranets" where key customers and suppliers have access to "virtual private networks" that enable collaborative planning, forecasting, and replenishment. "It is like traditional one-to-one customer/supplier scheduling, but now it has gone to one-to-many -- and the supplier can turn around and do the same thing with all of its suppliers. It is basically linking the entire supply chain," the Ernst & Young executive points out.

"You need more than a browser to do this. You need software that is distributed across the supply chain -- software based on Web technology." In part because of the new technology -- and decisions on which suppliers will be given access -- a "bipolar" system is evolving, Gopal suggests. "A lot of suppliers will still be treated as arms-length bidders. But a few key suppliers will become long-term partners. Even the big companies don't have the ability to engage in partnership relations with a large number of supplier firms."

Three levels of relationships -- transactional, information sharing, and collaborative -- are possible within the framework of business-to-business electronic commerce, notes a recent AMR Research report on supply-chain management.

Transactional relationships include the use of EDI to automate such things as purchase orders and invoices. At the information-sharing level, firms might exchange production schedules or details on the status of orders. At the highest level -- collaboration -- "information is not just exchanged and transmitted, but it is also jointly developed by the buyer with the seller," the AMR report notes.

"Generally this information deals with future product plans and needs. . . . However, unlike an information-sharing relationship, information is not shared on an FYI-basis, since either trading partner may change it until both parties agree." Collaboration is "the highest form of e-commerce as it involves joint planning and plan execution," the report notes. But while companies are beginning to evaluate the concept as a means of synchronizing supply-chain operations, "few if any companies have effectively collaborated on a routine basis."

Logistics Visibility

C.H. Robinson Co., an Eden Prairie, Minn.-based third-party logistics provider, had collaborative relationships in mind when it teamed up with Transview Corp. to develop new software to improve visibility of logistics activity throughout the supply chain. Dubbed "ClearView," the system uses an extranet approach to provide access to real-time information for all shipment events, from purchase order to delivery, says C.H. Robinson, which offers multimodal transportation services and logistics solutions.

"ClearView is Internet-based rather than Web-based," notes Jennifer Amys, the firm's chief information officer. ""It uses 'push' technology. If an event occurs that affects the criteria a user has selected for notification, the system will push the information to you, real-time." For example, if a truck is late in arriving at a pickup point "the people who need to know that will be informed by the system -- enabling them to reschedule production work or reschedule the time that warehouse employees need to arrive on the job.

"It gives you more leadtime to do proactive planning," Amys says. "In today's manufacturing environment, which often relies on just-in-time delivery, it is very important to have knowledge of potential problems in time to be able to react."

Users of the system don't have to log on to a Web site to access critical information, she explains. Notices will automatically "pop up" on the user's desktop computer when a triggering event occurs. The C.H. Robinson system, which was recently pilot-tested, will have a direct interface with customers' systems.

The goal in creating ClearView was to "find a way for all participants in the value chain to execute collaboratively, thereby improving both the speed and accuracy of information," Amys says. "The data are entered once and then used everywhere." Initially, ClearView will simply track the shipment status of goods and materials; but eventually its capability might be extended to include reporting on the status of orders in production. "That would require creating a 'handshake' between ClearView and the manufacturers' systems," Amys notes.

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