Lean Supply Chain and Logistics Management, page 15
Electronic Data Interchange (EDI)
The first tool to discuss is EDI, which enables companies to exchange documents used in intercompany processes, such as purchase orders and invoices, in a structured electronic format easily processed by computers. This helps to automate and streamline business by eliminating or simplifying clerical tasks, speeding information transfer, reducing data errors, and eliminating business processes.
EDI standards have been developed over the years, independent of software and technology. There are standards for various activities. For example, in the United States, ANSI ASCI X12 is the standard used with specific formats for purchase orders (assigned an identifying number of 850) and invoices (810).
EDI has been successfully used in some specific industries, such as retail, and in some larger companies since the 1980s, but it has not been widely adopted by many small- to medium-sized enterprises. The primary barriers to widespread acceptance of EDI have been the costs of implementation and of communication, which are frequently accomplished using value-added networks (VANs). These costs are generally too high for companies (or “trading partners” as they are called) that do not conduct large numbers of EDI transactions.
Web-Based EDI
In recent years, Web-based Internet EDI has emerged, providing valued-added functions traditionally provided by EDI over VANs. However, most EDI transactions are still handled by VANs. Web-based EDI allows a company to work with its suppliers without having to implement a complex EDI infrastructure. Simply put, Web-based EDI lets small- to medium-sized businesses receive, create, send, and manage electronic documents using just a Web browser.
In fact, according to Robert L. Sheier in the “Internet EDI Grows Up,” Walmart announced that “it would do electronic data interchange (EDI) with suppliers over the web instead of using value-added networks (VAN), it was a signal that EDI over the web is ready for heavy-duty corporate use after years of development….it requires customers to do some of the work the VAN used to do, such as making sure the proper person is notified if a purchase order or invoice doesn’t get through. However, if customers can cost-effectively become their own VANs and choose the right web EDI tools, the savings can be compelling.” [Sheier, 2003]
A surprising fact pointed out in the Laudon and Traver text E-Commerce (Prentice-Hall, 2009) is that business-to-business e-commerce, which is primarily driven by EDI, is the largest form of e-commerce with over $3.8 trillion in transactions in the United States in 2008. This compares with the relatively small, but rapidly growing business-to-consumer e-commerce (the one we arere more familiar with) at only $255 billion in 2008. [Laudon and Traver, 2009]
EDI has the obvious waste reduction benefit of fewer errors because of less people keying and rekeying information, as well as the element of reduced time to communicate and interpret the data, thereby shortening cycle times and ultimately the order-to-cash cycle.
It also reduces the technological bottleneck of different systems trying to “talk” to each other in different languages. EDI standards enable them to all talk in the same language leaving less room for interpretation and error.
EDI also enables quick response (QR), efficient consumer response (ECR) and collaborative planning, forecasting, and replenishment (CPFR).
E-Commerce
Beyond EDI, the ever-increasing use of the Internet for transacting business is helping to transform the supply chain. Thanks to e-commerce, the consumer now has the upper-hand, leading to more and more mass customization and true demand-pull. In addition to quality and cost, responsiveness and flexibility are paramount in this new world.
According to the book Enterprise E-Commerce by Peter Fingar et al., “an e-commerce platform allows an enterprise to extend supply chain automation to its suppliers’ suppliers and its customers’ customers, forming dynamic trading networks: end-to-end supply grids containing real-time business process facilities and shared data warehouses of information for decision support…” and that “multi-divisional companies typically operate multiple supply chain management systems to handle multiple plants and distribution channels… Value chains are being made into multiple-path, multiple-node value Webs. An extended SCM system can allow traditional, tightly linked systems to share information across channels and provide new opportunities for optimization across multiple, external supply chains.” [Fingar et al, 2000]
E-Commerce and Small- to Medium-Sized Enterprises
E-commerce also positively affects small- to medium-sized enterprises (SMEs), putting them on more equal footing as the “big guys.” Fingar et al. also point out that
…small to medium enterprises represent a whole new world of potential suppliers that can be tapped as a result of the Internet smashing the barriers of cost and complexity of traditional EDI-based systems. Supply, demand, and production planning and logistics can be optimized by extending automation opportunities to SME suppliers. Even the smallest SME will likely have access to a fax machine and a web browser. Because these simple touch points can be reached by the web, SCM business processes can be extended to virtually any SME, anywhere, anytime…” concluding that “…in the future, supply chains will function as a real-time business ecosystem. The richness and low cost of the Internet makes it possible to add new collaboration links with existing suppliers—and their suppliers—for forecasting, logistics, replenishment, bidding and ordering. A given supplier may participate in multiple supply chains, and integrating information from them can give the supplier a consolidated information base for planning and operations. Collaborations can be ongoing or ad hoc in response to market events and conditions” and that “…customer-facing applications come online they must be integrated with the extended supply chain management systems. Ultimately, as such applications go live, the results can be customer-centered supply chain management…” [Fingar et al., 2000]
So it is not hard to see that increased use of e-commerce, in general, can make your supply and demand chain more efficient, flexible, and responsive—that is, it helps to reduce waste.
QR, ECR, and CPFR
Business collaboration has increased significantly in the past 20 years with the advent of EDI, the Internet, and sophisticated supply chain planning (SCP) tools. Each of these tools can help companies to minimize waste in their processes as well as their customer and supplier’s processes.
Efficient Consumer Response
Efficient consumer response (ECR) began in the grocery industry in the 1990s. It involves trade and industry groups working toward making the grocery sector more responsive to consumer demand, while trying to reduce costs from the supply chain.
I was involved in ECR in the early 1990s with Church & Dwight, Arm & Hammer Division and their clients, H.E. Butt, a Texas-based grocery chain and then Wakefern (also known as ShopRite), a New Jersey–based grocery chain. We used a combination of EDI and PC-based forecasting and replenishment software to import customer data such as POS (point of sale) at the retail level, and on-hand inventory, shipments, and open purchase orders at their distribution center locations. All of this was to ensure that our company’s products were always available at the retail locations. Basically, we used this information to place H.E. Butt’s and Wakefern’s orders for them, saving that expense, while improving inventory turns in their DCs and on-shelf availability of our products on their shelves (all potential sources of waste).
Initially, this added cost to us to operate the ECR process, but it eventually helped us to improve our own sales forecasts and inventory location placement as the actual POS demand was fairly steady and predictable. If a supplier can manage to get a “critical mass” of volume on an ECR system (e.g., top-20 customers), and integrate it with their internal planning processes, they should be able to minimize the bullwhip effect by having smoother, more accurate forecasts.
Quick Response
Another form of collaboration, which was pretty much identical to our ECR program, quick response (QR) was implemented initially by the apparel industry in the 1980s. QR, a program developed by textile and apparel manufacturers and retailers in the 1980s used various strategies to reduce inventory levels, improve merchandise quality, increase worker productivity, increase inventory turnover, and reduce merchandise markdowns and inventory costs. QR gathers data about consumer preferences with a goal of integrating the information into production schedules. QR is driven by POS data. Using technology such as EDI, the data is communicated upstream to influence planning decisions as a response to what consumers demand. The net result of QR is that textile mills, apparel manufacturers, and retailers collaborate to response efficiently to consumer demand.
Again, while at Arm & Hammer, we started a QR program with Kmart. This one did not start as smoothly, as one of the results of this type of program—smaller shipments more often—was not anticipated (surprisingly) by Kmart. The net result was that they had a long line of less-than-truckload (LTL) carriers lined up at their DCs. Eventually, Kmart got smarter and narrowed the program down to their top vendors, thereby alleviating the problem to some degree.
However, in the end, the same, positive benefits resulted for both the manufacturer and retailer using QR as were found for ECR, such as:
Improved forecasts ultimately resulting in better retail shelf presence (i.e., less stockouts)
Higher inventory turns and order fill rates
Lower ordering costs
ECR versus QR
According to a 2002 study at the MIT Center for Transportation and Logistics, entitled “The Value of CPFR,” ECR is “focused on category management (enhancing the effectiveness of the demand creation and satisfaction process through better promotions, new product introductions and store assortment); product replenishment with high consumer service and low inventories; and the development of enabling technologies.” [Sheffi, 2002]
QR “continually meet[s] changing requirements of a competitive market place, which promotes responsiveness to consumer demand, encourages business partnerships, makes effective use of resources and shortens the business cycle throughout the chain from raw materials to consumer.” [Sheffi, 2002]
The study found that: “both of the ECR and QR initiatives were slowly adopted across the respective industries that spawned them. They did help change attitudes and create the realization that companies must look beyond their own boundaries to achieve high level of customer service and low costs. The collaborative aspect of these processes, however, were never implemented as originally envisioned on a large scale, mainly due to the cultural difficulties associated with collaborative management and the lack of scalable software.” [Sheffi, 2002]
Collaborative Planning, Forecasting, and Replenishment
Collaborative planning, forecasting, and replenishment (CPFR) is a more detailed and comprehensive type of relationship than QR and ECR. In the 1990s, the Uniform Code Council (UCC) created a formal approach to the CPFR concept with a nine-step model that involves trading partners establishing a joint business plan after which a collaborative planning process develops a joint sales forecast, followed by a corresponding replenishment forecast.
Even CPFR has failed to scale with many manufacturers and retailers. They still seem to be focused on the larger customer/supplier relationships. There may be many reasons for this, the greatest of which is that there is somewhat of a disconnect between manufacturers and retailers. It is not easy to balance retail replenishment requirements with manufacturer’s production and shipping requirements.
An AMR Research study in 2001 (“Beyond CPFR: Collaboration Comes of Age”) showed some of the positive benefits of early CPFR adopters including, for retail:
Store stock rate improvements of 2 to 8 percent
Inventory reductions of 10 to 40 percent
Higher sales of 5 to 20 percent
Lower logistics costs of 3 to 4 percent
The same study found manufacturing benefits, such as:
Inventory reductions of 10 to 40 percent
Replenishment cycle improvements of 12 to 30 percent
Sales increases of 2 to 10 percent
Customer service improvements of 5 to 10 percent
There is no doubt that there is a lot more collaboration going on between manufacturers and retailers today, thanks, in part, to better, less expensive technology, but there is still a way to go to get to that critical mass where it really pays off for both parties.
Vendor-Managed Inventory
Another, similar, form of collaboration is vendor-managed inventory or (VMI), which focuses more on a more efficient, leaner form of parts and supply replenishment. A typical VMI process involves a supplier automatically replenishing their customer’s parts or supplies. To do this, greater visibility is required on the part of the vendor, usually via a communication tool, such as EDI, or a more “low-tech” way such as regular visits to the customer’s facility (this form of VMI has actually been around for over 50 years…think of the snack vendor who visits the local convenience store and fills the racks and leaves an invoice behind).
Based upon mutually agreed-upon replenishment points (kanban systems are great for this), the vendor automatically replenishes inventory at a customer’s facility. This greater visibility into the customer’s inventory and possibly production schedule usually leads to better inventory turns and less stockouts. On the part of the customer, while they are giving up some responsibility and control, they are also reducing costs by not having to check inventory and place orders, in addition to the previously mentioned benefit of improved inventory turns and less stockouts.
Value Stream Map for a VMI Program
Figure 13.1 shows an example of a VSM for a proposed parts VMI program. It would heavily involve the use of multiple kanbans with communication and collaboration as key components. When implementing a VMI program, it is best to work with suppliers who have had some experience in this area.
Figure 13.1 Parts VMI value stream map.
Other Potential Areas for Collaboration
There are other areas of potential collaboration requiring the enabling ability of technology, which were neatly summarized by Yossi in his 2002 paper “The Value of CPFR.” They include:
Demand management—going further than just forecasting production, planning, and replenishment; including collaborative merchandising, category management, promotional planning, and space management (at retail and DCs). Collaborative product design and new product introductions are already taking place in some companies.
Fulfillment—extend the reach of CPFR into areas not touched, such as transportation carriers, forwarders, and public warehouses.
Real-time collaboration—many of the current activities (CPFR, ECR, VMI, etc.) are more planning in nature. Many of the issues develop in “real time,” which can even further enhance the value of collaboration with better visibility. [Sheffi, 2002]
Future Opportunities and Roadblocks
While collaboration “outside the four walls” with customers, suppliers, 3PLs, etc. may be the final frontier in terms of Lean, it is good to look at the challenges ahead.
A 2007 Supply Chain Management Review found that better flexibility in the supply chain was a result of strategic alignment, supplier integration, planning effectiveness, and relationship management technology. By “flexibility,” they were referring to it in terms of order fulfillment lead time, supply chain response time, and production flexibility. [www.scmr.com, 2007]
Supply Chain Flexibility Traits
The study found the following traits within each competency that contribute to supply chain flexibility:
Strategic alignment—clear supply chain (SC) goals and objectives driven by business strategy; business strategy exploits SC capabilities, and constraints and strategies communicated to all employees.
Supplier integration—develop relationships to build on key supplier capabilities, exchanging operational information, synchronizing activities with suppliers and continuously exploring new working relationships.
Planning effectiveness—formalized, disciplined processes addressing both long- and short-term planning, contingency and risk analysis with scenario evaluations, feedback loops addressing variances and vulnerability and continuity planning.
Relationship management technology—CPFR, ECR, supplier performance, etc.
In other words, it is best to have a Lean process throughout your supply chain before using technology to enable it. But to be truly effective, you have to have all four traits to be successful, and technology can be of great assistance, especially in the areas mentioned in this chapter.
In the same survey, another competency found in Lean companies—better cost performance—indicated that both internal and customer integration were critical to reduced cost in the supply chain. The customer integration traits (which are best enabled by technology) found to contribute to this competency included:
