What is going on in this Industry?
Three key factors are driving the way inwhich the Industry thinks about relationships between trading partners. Firstly, a globalmarketplace is emerging. Protective tariffs are being dismantled and sourcing decisionsare being based on the availability of skilled labor, raw materials and proximity to theintended consumer. As emerging nations such as India and China develop into significantconsumer economies, existing sourcing strategies and decisions will be challenged andmodified.
Secondly, it is widely recognized that theconsumer is becoming more individualistic, rejecting mass-production in favor of apersonal look. The consumer also demands greater quality and value for money as more oftheir income is spent on healthcare, education and retirement. As the number of dualincome families increases, the time available for shopping decreases and convenience andproduct availability become even more important.
Finally, technology and communications makecontinuing progress towards the point where the distribution of information ceases to bean issue. Personal mobile phones, satellite communication systems and the internet, allcontribute to a situation where there is no longer any technical reason why the requiredinformation should not be available.
A global marketplace; demanding andindividual consumers; and the opportunity for ‘perfect’ information. What does this meanfor the nature of trading relationships?
The supply complex
Today, organizations recognize that thecost of entry to service an increasingly demanding and complex market is ever greater. Tohave the expertise to be an excellent retailer, manufacturer, distributor, designer or rawmaterials processor is a higher hurdle to jump. This is leading businesses to focus onjust one of these core competencies, and to use improved communications to select globalpartners with complementary specialist skills.
Why and how are communications tobe used in the new supply complex?
The basic precept of managing the supplycomplex is that it is quicker and less expensive to move information than it is to moveproduct. This appears to be an obvious statement, but it is only recently thatorganizations have started to realign their supply chains around this principle. However,experience of implementing such changes automatically leads to some associated rules.
Supply chain information needsto be end-to-end, not point-to-point
There are two basic reasons for movinginformation within the supply chain – to understand consumer demand and to satisfy thatdemand (see Figure 2).
In order to understand demand,consumer-spending behaviour must be analyzed using point-of-sale data from retail storesor from catalogue sales service points. Clothing suppliers all know that trying toforecast demand based on orders from retail customers is doomed to failure.
Retailers’ orders are influenced bypromotional activities, availability of open-to-buy, budget changes driven by theperformance of other buyers’ departments and current stock levels. All of these obscurethe true performance of their products with the end consumer. Imagine the difficulty of araw materials supplier trying to forecast demand one stage further removed from theconsumer.
Similarly, in meeting demand, knowledge ofwhat is in finished goods stock is fine. However, what is in work in progress? What rawmaterials do we have? What is on order? What is the lead-time? Are there any raw materialsin production?
Can we dye a current order in differentproportions to respond to a change in demand? Point to point exchange of information hasvalue, and is a necessary starting point. However, the big picture is of much greaterbenefit.
Some information needs to beexchanged, and some needs to be shared
Most electronic information was originallypassed via Electronic Data Interchange (EDI). This means that data is sent from one partyto the other. Examples of EDI messages include:
- purchase order
- CMT order
- dispatch advice
The case for using EDI for these messagesis well established – speed, accuracy and the elimination of clerical activity.
However, in some more recent examples,electronic information is being shared rather than exchanged. The best example is probablyin new product development. This is where the current version of the product specificationand the status of the development critical path is held in one place and available to allparties. Each company can update their own part of the information, while everyone can seethe complete picture.
Even more powerful are applications thatmanage product availability. A single database contains:
- historical consumer sales and forecasts
- in-transit figures
- current and planned production figures
- current and resultant forecast stock levels
- raw materials stocks
- production and transit figures for raw materials
All parties have access to this informationand can therefore manage their own plans.
For these types of application, traditionalEDI messages have not been able to deliver the required flexibility. These applicationsare being built around internet technology and ‘shareware’, allowing multiple remote usersto access and manipulate such data simultaneously.
Finally, companies are looking at usingthis technology for supply chain performance measurement of factors such as lead-times,quality, order fulfillment and delivery performance. The objective is to overcome thesituation where the purchaser and the supplier can not improve their joint performance.The difficulty is because they can not agree on what the current performance level is.
It’s the message, not themedium
A word of caution is needed when examiningthe opportunities presented by technology. While technology can make the exchange andsharing of information easier to achieve, the fact that this does not happen in manytrading relationships has little to do with technology.
Many relationships have managed thetransition through mail, telex, telephone, fax and e-mail without the slightestimprovement in the quality of information passed between the companies. We can beconfident that some such companies will embrace video conferencing, the internet,shareware and whatever else the IT Industry throws at us over the coming years. It willremain ineffective in exchanging the information that could make such a difference totheir success.
Returning to the issue of specializationand trading partnerships, what becomes clear is that, to be successful in the new supplycomplex, companies need to invest more time in their relationships with fewer tradingpartners. As companies do more business with fewer partners, they become more important toeach other. In turn, management spends time together. In turn, this starts to break downsome of the barriers created by years of hands-off, confrontational trading, and begins tofoster more of a true ‘partnership’ culture.
This partnership and openness is going tobe needed if everyone in the supply chain is to work to the same set of performancemeasures. Effective management means that it is better to leave product or raw materialwhere it is than to ship it. It is a short step to see that it may be better to leave rawmaterial and have spare factory capacity, than to make product for which there is nodemand.
This article opened by asking howtechnology can be used to help to control remote suppliers. In fact, if a supplier doesnot want to be controlled, then the technology we use may make little difference. It isimportant to remember that an apparel, footwear or textile company is someone else’sremote supplier. How much does a company want to be controlled?
The good news is that the company can usetechnology to exchange and share information that will help make suppliers and the companymore effective. This can now be done as readily with geographically remote suppliers aswith local suppliers.
Whether or not a supplier is remote can,with technology, be determined less by geographic distance than by the nature of therelationship. This means that companies can set up trading relationships with partners allover the world. Therefore, rather than using technology to control remote suppliers, theright strategy may be to use technology to turn ‘remote’ suppliers, including the onesjust up the road, into partners.
Peter Willmot is a principal at theEuropean practice of Kurt Salmon Associates, the global consulting company specializing inclothing, textiles and other consumer products. Peter works with both suppliers andretailers to exploit Information Technology to improve their supply chain performance.