Supply Chain Chapter 1

Chapter 1

Strengthening the Supply Chain TODAY’S SUPPLY CHAINS ARE MORE CHALLENGED THAN EVER TO improve the accuracy of their business data and the efficiency of their processes. Data inaccuracy is no longer a minor issue, nor is it something that’s acceptable or even legal. Over the past few years, many circumstances and mishaps have brought attention to the detail of this issue in terms of companies reporting accurate information. Perhaps the best-known catalyst for change has been the Enron disaster and the associated issues with Arthur Andersen. A company and its auditors tracking and reporting inaccurate, and in this case falsified, information has always been against the law. These days there’s more skin in the game for those involved, thanks to the introduction of laws such as the Sarbanes-Oxley Act of 2002 (which mandates a variety of reforms governing corporate responsibility and accurate financial reporting). You may not necessarily associate incorrect financial data with inaccurate, insufficient, and, in some cases, delayed data that is generated and exchanged in running a business. In reality, data inaccuracies from internal and external sources can have disastrous results for a company and its trading partners. The key is therefore transactional integrity. When operations don’t have sufficient controls in place, organizations are often strained to produce accurate financial information. Take, for example, a typical inventory management process. Poor inventory transaction controls can lead to • • • • • •

inaccurate inventory levels (e.g., raw materials, work in progress, finished goods) emergency or rush orders to fulfill a customer need sub-par manufacturing rushed deliveries increased product returns due to poor quality, inaccurate quantities, or incorrect ship-to information adjustments to sales numbers for credit purposes Brought to you by inovis and iSeries Network eBooks

© Nahid Jilovec 2004

2 EDI, UCCnet, and RFID: Synchronizing the Supply Chain Too often, the items in this list have the direct end result of understated reserves for financials. With the boom economy’s end in about the year 2000, many companies became so eager to be first to meet customer demands that they resorted to often heroic activities and corner-cutting to win business. Those were the days when you couldn’t say “No” to a customer, even to orders that were often larger and more complex than a manufacturer could produce and ship in a timely manner. Unfortunately, engaging in this type of activity led to poor and inadequate controls over internal processes, which in turn led to bad data. Today, it’s back to the basics when it comes to doing things the right way. If that means you slow down and do things right, then it may also mean CFOs, CIOs, and CEOs avoid jail time. It is, after all, the fiduciary responsibility of all employees — the C-levels most of all — to ensure not only that internal data and transactions are accurate but also that the information shared with suppliers and customers is reliable. With supply chains tightly integrated, one bad apple can cause pain and problems throughout the entire value chain. That’s the nature of supply chain collaboration.

Tools for the Task EDI, at its core, was born in the 1960s to reduce administrative efforts, speed the processing of transactions between companies, and reduce the costs associated with processing those transactions. Among its many benefits, EDI has significantly improved the accuracy and quality of data. Today, EDI is as strong as ever. The EDI technology has evolved into an even more powerful tool for companies that want to improve data quality and speed up their processing. Where some once viewed EDI as excessive or too expensive, improvements have been made. The use of XML/EDI and the Internet have made EDI affordable for every company, regardless of size and business maturity. These newer options have propelled EDI into the powerful arsenal it always had the potential to be and now more of a household name.

Data Synchronization EDI alone can’t solve all the data inaccuracies that result in a business environment. EDI is built around a transaction that is created from data on someone’s computer systems. An EDI transaction is therefore only as accurate as its source. Take, for example, the case of a customer that

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Chapter 1 Strengthening the Supply Chain 3 wants to place an order with one of its suppliers. The customer maintains a database of the items it orders from this particular vendor. The details related to an item, or its attributes, are captured for the order transaction at the point at which the electronic order is created. Meanwhile, the supplier is making ongoing changes to its products and their related attributes. Product pricing, sizing, colors, or any number of attributes change constantly. At the same time that the customer is creating an order from the item information it has in its database, the vendor may be retiring or changing the same — or may already have done so. The vendor may even be offering a newer, compatible product. The absence of item data synchronization between buyer and seller is therefore cause for a lot of errors in order transactions. The domino effect of an inaccurate order is obvious: Bad orders can cause shipment delays, refused deliveries, inaccurate invoices, and delayed payment.

Global Data Synchronization To resolve the data discrepancy that exists between buyers and sellers, a relatively new initiative (although certainly not a new concept) has surfaced that is catching the retail world by fire. Global data synchronization (GDS) is perhaps the next largest initiative following the EDI projects of the 1980s and 1990s. Often referred to as the “UCCnet initiative,” GDS has major retailers pushing their suppliers to become UCCnet-compliant — that is, to publish and maintain their item catalogs at UCCnet’s GLOBALregistry, enabling all parties in a supply chain link to effectively exchange information about a specific product. By using the synchronized and standardized data in the UCCnet registry, retailers can capture and use the most up-todate item attributes when placing an order. The increased data accuracy enabled by GDS can save a lot of money for retailers and their suppliers. In fact, it’s estimated that errors and misinformation currently cost these parties $40 billion annually. Creating transactions such as EDI using accurate data means that orders are correct, shipments are on track, and invoices can be paid quickly. By no means does UCCnet or GDS replace EDI; rather, it complements and elevates EDI by giving members of a supply chain a more solid means of exchanging business documents.

RFID Another technology capturing the minds and budgets of major retailers is Radio Frequency Identification (RFID). Why today, when RFID technology has been in use (in one form or another) for 60 years? The answer lies in

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4 EDI, UCCnet, and RFID: Synchronizing the Supply Chain the need for further automation of the supply chain. RFID has been in commercial use for at least 20 years, with applications in smart cards, access key cards, and even tracking the manufacturing process. Today, with the push coming from Wal-Mart and the U.S. Department of Defense, the expectation is that RFID technology will become commonplace in the supply chain over the next several years. Tags will initially be used to track shipment of cartons and pallets, but they are expected to track specific instances of individual items as well. As the technology advances and RFID standards mature, we can expect to reap huge benefits from the use of this technology — from consumer applications all the way to the manufacturing process. Once again, the focus is on optimizing the supply chain. It’s estimated that inventory and logistics costs across the supply chain are grossly overextended, providing the opportunity for improvement via automation. We’ve gone from Vendor-Managed Inventory (VMI) to Collaborative Planning, Forecasting, and Replenishment (CPFR). The differences between VMI and CPFR are quite vast. Whereas VMI simply lets a vendor automatically replenish a customer’s shelves when inventory is depleted, CPFR is designed for vendor and customer to collaboratively forecast sales and demand and then build products and carry only necessary inventory levels driven by actual needs. According to a recent study by A.T. Kearney, retail consumer businesses alone lose approximately 3.5 percent of sales each year due to supply chain information inefficiencies. The study further states that 60 percent of generated invoices are in error, with more than 40 percent of them leading to deductions — not to mention the time lost in the collections process. Bad data can cost just as much as lack of data. That’s why many organizations are seeking to leverage technology to enhance their business processes and improve the quality of their information, with the goal of being able to make better, faster decisions.

Process Coordination For the past few decades, companies both big and small have tried to drive inefficiency out of the supply chain to minimize or eliminate manual processing and reduce errors, time delays, and resource costs. Although many processes have been automated, the automation has occurred in “silos.” Organizations within a supply chain are now realizing that their processes are much more interrelated than they’d planned for and that, despite their best efforts, there’s still much room for improvement. The automation of business processes and transactions has three distinct phases. These phases, which are depicted in Figure 1.1, can be classified as communication, integration, and collaboration.

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Chapter 1 Strengthening the Supply Chain 5 FIGURE 1.1 Process Improvement Phases $ Phase 1 Communication

Phase 2 Integration

Phase 3 Collaboration

Savings

0%

100%

Implementation

Phase 1: Communication Most trading partners begin with the communication phase (Figure 1.2), where the initiatives between customer and supplier are focused on replacing paper documents with their electronic equivalents. Companies often use EDI in this scenario as a paper document replacement technique. Existing paper documents, such as the purchase order and the invoice, are replaced by EDI equivalents. The order information that the supplier receives is accurate (the supplier doesn’t re-enter the information on its computer), the data is sent quickly (no mail lag time), and therefore the supplier deals with more reliable information.

FIGURE 1.2 Communication Phase Customer

Supplier

Purchasing

RFQ and P.O. Quote

Sales

Inventory Control

Release Ship notice

Scheduling and Shipping

Accounts Payable

Payment Invoice

Accounts Receivable

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6 EDI, UCCnet, and RFID: Synchronizing the Supply Chain In this siloed approach, transaction exchanges are automated between two departments on the customer and supplier side. The supplier is communicating that a transaction has occurred between it and the customer. This automation provides tremendous value, but the process automation improves only specific functions within given departments.

Phase 2: Integration Once they’ve automated certain key transactions, most trading partners come to the realization that they can benefit by integrating these processes and possibly eliminating some activities, thereby improving efficiency not just within a given department but also among departments within their organizations. In the integration phase, which is depicted in Figure 1.3, you’ll note that the automated transactions now provide visibility in more than one place, opening up the silo a bit.

FIGURE 1.3 Integration Phase Customer

Supplier

Purchasing

RFQ and P.O. Quote

Sales

Inventory Control

Release Ship notice

Scheduling and Shipping

Accounts Payable

Payment Invoice

Accounts Receivable

With access to automated purchasing activity, the customer’s accounts payable group now has visibility into upcoming invoices and can better allocate or reserve funds for payment. Similarly, the supplier’s sales records can provide clearer visibility for the accounts receivable team and improve the team’s ability to forecast. With EDI transactions used throughout, the data can be relied on as being more accurate and timely. Still, although leveraging the electronic data to gain visibility into upcoming actions and transactions provides great value, the trading partnership doesn’t benefit in the integration phase as much as the individual organizations do.

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Chapter 1 Strengthening the Supply Chain 7

Phase 3: Collaboration During the collaboration phase (Figure 1.4), trading partners truly open their processes to one another with a great level of reliance and trust. The supplier sends the customer an advance ship notice (ASN) and attaches a bar code label or RFID tag, uniquely identifying a shipment. Bar code labels or RFID tags are adhered to the containers or pallets being delivered, acting as unique “license plates” for the shipment. When the containers or pallets arrive, the customer scans or reads the bar codes or tags, allowing its computers to automatically track the specific orders received and update inventory levels.

FIGURE 1.4 Collaboration Phase Customer

Supplier

Purchasing

Sales

Inventory Control

Scheduling and Shipping

Accounts Payable

Accounts Receivable

This process collaboration gives the customer the ability to plan and track shipments that are on their way to better prepare for their receiving at the distribution center. To drill deeper, let’s assume that the supplier adheres bar codes or RFID tags to the pallet and to each carton, specifying which retail store each has to end up in. The customer can now plan the receiving and, upon arrival of the truck, read the bar code or RFID tags to determine where everything goes. In fact, using an automated process, the customer can conduct something called cross-docking — the practice of taking pallets or cartons off the receiving dock and sending them directly to a waiting truck for shipping out. To further automate the processes, the technologies are applied to the settlement cycle. Rather than pay on invoice, many companies choose a process called evaluated-receipt settlement (ERS). In this scenario, once the ASN information is matched with the material receipt, the application automatically generates a transaction to initiate the payment process

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8 EDI, UCCnet, and RFID: Synchronizing the Supply Chain and electronically notify both the bank and the supplier of an upcoming payment and its related remittance detail. During this third phase, the synchronization of data as well as processes between buyer and seller is critical to the success of both parties. Care must therefore be taken to ensure that the right systems are in place to support the processes. A failure in this phase can have a domino effect on all members of the supply chain and isn’t limited to the customer and supplier. One broken link, and it costs everyone involved, from supplier to logistics provider to customer. It is in the collaboration phase that EDI, GDS, and RFID are used as a means of process elimination. The technologies are used to strategically eliminate unnecessary procedures and improve the overall business processes within the supply chain.

The Collaborative Relationship Collaboration within the supply chain is about process first, technology second. The most critical aspect of supply chain automation is making sure that all parties involved have a trusting and open relationship. You can’t be afraid to share information, even if it’s bad. Timely information gives everyone in the chain the ability to better plan manufacturing, picking, shipping, transportation, and receiving processes. Having visibility into when things are going to happen enables everyone involved to minimize inefficiencies and leverage precious resource time on exceptions only. Ultimately, the goal is to provide the best product for the best value at the right time in the right place. Technology solutions such as EDI, bar codes, and RFID can be implemented to give confidence in the system to all. But security and data integrity are critical to ensure further confidence. With an eye on compliance, whether customer- or legislative-driven, businesses must take care to preserve the integrity and security of their data as well as that of their suppliers and customers. Done correctly, data synchronization and process coordination are what enable the supply chain to serve everyone well.

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