Through most organizations the supply chain is disconnected. Each
function manages its own P&L and logistics functions. Each part of
the organization has its own goals and reports their results up to
management. The purpose is to maximize the results for each individual
group, thinking that this will improve the entire organization. But
there is no thought to the negative effect on the whole organization or
the affect on the customer. The individual groups focus on cost
efficiency. It is of little consequence if the cost is pushed to
another function within the organization. The result is that each
function buffers inventory to avoid the vagaries in the production each
department causes. This could be in supplies, raw material, work in
process, semi finished or finished inventory. All this costs the
organization as a whole, but may save the cost center, department or
function for the moment.
The same is true for the supply chain. From the origination of the
product, raw materials to the consumption by the ultimate consumer each
step seeks to protect itself. If the focus is on cost when choosing
suppliers, manufacturer, and distributor, the reality is this could cost
more! Customer satisfaction and superior customer service suffer. I
will explain how the lack of coordination through the supply chain costs
the organization, and the customer.
In order to get the lowest price, the from a raw material supplier,
assembly contractor or from a logistics supplier, multiple vendors are
utilized, each competing to provide the lowest cost. In order to give
the manufacturer the cheapest supplies, suppliers will “cut corners” to
save money. They will supply materials at the minimum quality
specification. This causes the manufacturer to test more incoming
material and results in more handling, increasing costs. The supplier
will increase their minimum order quantity, in order to take advantage
of economy of scale, so the manufacturer has to place larger orders
based on speculation of future orders. Thus the profit of the supplier
is reduced and the inventory risk for the manufacturer increases.
Take an automotive company. They want to get the lowest possible
price for plastic. They solicit bids from multiple suppliers, each
supplier bids based on the guidelines of the automotive company. In
order to cut cost of the material, the suppliers will supply the minimum
quality required of the specification. They will require large orders
to take advantage economies of scale. They will use the lowest cost
delivery method. So the automotive company must increase their level
of quality screening, increasing their cost for manufacturer. They can
no longer receive the material on an expected day, but must accept a
longer delivery window so the supplier can use cheaper delivery methods.
The result will be production idled waiting for material, costing the
manufacturer. The automotive company must store the increased amount of
inventory, because of the higher minimum order quantity, and there is
greater risk of stock outs due to longer delivery times.
So what is the solution? Information exchange and cooperation need to
replace, the adversarial relationships. The supplier and the
manufacturer must enter into a new “co-maker” relationship, where each
party helps the other reduce costs, but not profit. When there is a
free exchange of information both up and down the supply chain then each
party can profit. This sharing of quality information through EDI,
RosettaNet, of other form of immediate information exchange creates
trust in the other. When each member of the supply chain can trust the
other, every one profits and reduces cost for the ultimate consumer. The
supplier is able to smooth the supply to the manufacturer and the
manufacturer is able to smooth the production runs. Thus each realizes
more profit and saves each other cost burdens.
VMI or Vendor Managed Inventory is a good example of how sharing
information reduces the buffer stock that the supplier, the manufacturer
and the retailer must maintain. The retailer sends POS or Point of
Sale information the manufacturer. The manufacturer feeds production
data to the supplier. The supplier stocks the manufacturer based on
this information, and the manufacturer supplies the retailer. Ensuring
there is a smooth replenishment and no stock outs.
This cooperation provides value to the consumer by allowing for the
lower price, greater variety, improved quality, eliminates stock outs
and higher profits for everyone.
