Companies Seeking Greater Control Over Their Supply Chains
March 10, 2010
In a post entitled Walmart and the Food Supply Chain, I discussed Walmart’s announcement that it is working hard to reduce consumer prices even further by eliminating more middle men from its supply chain. The company also announced that it would be holding suppliers to a strict delivery timeline or slap them with penalties [“Wal-Mart Tightens Slack on Supply Chain,” Arkansas Democrat-Gazette, 16 February 2010]. The article reports:
“Wal-Mart Stores Inc. has joined the ranks of retailers that impose penalties on suppliers that fail to deliver products within the company’s prescribed four-day window. Under the new policy that [went] into effect Feb. 1, suppliers whose products arrive at regional distribution centers before or after that period face a 3% penalty based on the cost of the goods. Previously, the company requested delivery within a four-day window but gave suppliers no incentive to meet the schedule, said Dan Fogleman, a Wal-Mart spokesman. ‘This is a common practice among national retailers and really in line with charges assessed by our closest competitors,’ he said. Suppliers now receive a must-arrive-by date when orders are placed and will be in compliance with the retailer’s new policy if the goods arrive on that day or the three previous days. A first-time miss will not trigger the penalty, but subsequent misses will, Fogleman said.”
It was these kinds of policies that motivated Enterra Solutions to develop its first Resilient Supply Chain Solution™ — a Supply Chain Optimization System that addresses this space. Enterra Solutions’ System helps suppliers meet retailer requirements and expectations so that they can increase their return on investment by reducing deduction and shortage fines. Created for, and in collaboration with, Conair, a major consumer products group manufacturer, this System provides manufacturers and distributors with a web-based software solution that better manages retailers’ ever-changing delivery requirements, reducing costly penalties. It consists of three parts:
- The Proactive Module focuses on the activities prior to an order from a retailer and contains an organized view of retailer requirements and charges. The System, however, can be used in all phases of relationships with retailers.
- The Immediate (or At-Risk) Module monitors orders during the early processing stages of fulfillment and highlights those that are at risk of violating the retailer or operations requirements (e.g., late shipment) to enable proactive mitigation.
- The Reactive Module equips users with tools for disputing and resolving penalties and shortages quickly and efficiently.
Enterra Solutions’ Supply Chain Optimization System enables suppliers to leverage industry best practices to optimize orders with retailer requirements, be better informed of pre-sales decisions, and improve customer service coordination. The Arkansas Democrat-Gazette article explains why retailers feel justified in penalizing suppliers that fail to meet their requirements:
“If products arrive at distribution centers earlier than expected, that drives up storage costs, he said. And if they arrive late, the products are not available for customers. In short, on-time delivery means lower prices for customers, he said. … Competitors Target Corp., Best Buy Co. Inc. and Kohl’s Corp. are among the other retailers that assess penalties for early or late deliveries. Though not among the first to impose penalties for missing delivery deadlines, Wal-Mart’s status as the nation’s and the world’s largest retailer is likely to spur further adoption of such policies. It’s good business practice not to have excess inventory on hand or run short of stock, said Jim Crowell, director of the Supply Chain Management Research Center, a part of the Sam M. Walton College of Business at the University of Arkansas at Fayetteville. ‘From a customer’s perspective, they want to get that delivery window to be as tight as they can, so I think it’s just good supply-chain logistics,’ he said. Still, any change in supply-chain practices takes a while to implement with the thousands of suppliers whose goods are destined for the shelves of Wal-Mart stores.”
The article goes on to note that information exchange is key improving the supply chain.
“James Harris, president of High Impact Analytics in Bentonville, AR, said Wal-Mart is ‘one of the later companies to come to the table’ on missed-delivery-window fees. His company works with suppliers to interpret data that help them schedule deliveries to Wal-Mart distribution centers. ‘Wal-Mart gives more information to their suppliers than any retailer, anywhere,’ Harris said, referring to the Retail Link internet-based tool that lets suppliers access point-of-sale data to analyze their products’ status in the retailer’s stores. ‘This policy most likely is just going to pressure companies to do the analytical work they haven’t done in the past.’ Some small manufacturers don’t have the time or expertise to analyze Retail Link data, he said, but with some help, they eventually are able to make good use of the information.”
Lora Cecere, a noted supply chain analyst, believes that retailers and suppliers need to go beyond the exchange of information and embrace new technologies that “sense” what’s going on in the supply chain. In post entitled, The Supply Chain Black Hole, Lora writes that new technologies “will help us sense before responding. They will help drive an intelligent response.” A system that can sense and respond will greatly reduce risks for suppliers and carriers and increase supply chain optimization. Another supply analyst and frequent blogger, Bob Ferrari, notes that although large consumer product goods manufacturers stand to lose the most through penalties, they are also in a better position to put resources against the challenge. He worries that small- and medium-sized suppliers aren’t as well resourced [Supply Chain Matters]. He writes:
“Small and medium business oriented suppliers often do not have such resources. That thought caused me to ponder that the supply chain stakes for these SMB suppliers continues to escalate, while these same smaller firms stand to lose the most financially with any late delivery penalty as high as 3%.”
Ferrari agrees with Cecere that the more sensitive supply chain systems are to changing events the more value such systems will have to those that use them. He continues:
“The use of MRP or MPS planning logic which attempts to satisfy a customer delivery date without factoring all sorts of dynamic and often changing constraints across the entire supply chain can often fail to adopt to strict delivery window needs. Small suppliers can no longer use ‘rules of thumb’ planning, such as it usually takes n days of ship time, or production has always required two weeks or order lead time. A more predictive planning tool is often a better alternative, one that allows rapid re-planning based on near real-time events, or that can allow for what-if analysis, when the planning system is alerted to a delay in production or shipment activity. If a supplier stands to lose 3% by being early or late, the planning system needs to be able to factor that logic against all other alternatives.”
He notes that software-as-a-service solutions should help suppliers of all sizes meet the ever-changing requirements of retailers. He concludes:
“The good news is that there are more software-as-a-service (Saas) or hosted planning applications available that not only are tailored for SMB needs, but also offer more forward-looking predictive analysis capabilities. The key takeaway for SMB firms is to get serious about predictive vs. reactive supply chain management and fulfillment capabilities.”
Two other large companies that are taking more control over their supply chains are Coca-Cola and PepsiCo [“Coke Near Deal for Bottler,” by Dana Cimilluca, Betsy McKay, and Jeffrey McCracken, Wall Street Journal, 25 February 2010]. Cimilluca and her colleagues report:
“In a strategic about-face driven by big changes in consumer tastes, Coca-Cola Co. [is] nearing a deal … to buy the bulk of its largest bottler, according to people familiar with the matter. As part of the deal, Coke would buy Coca-Cola Enterprises Inc.’s North American operations. … The rest of the bottler, which consists of operations in several European countries, would remain independent and acquire Coke bottling operations in Scandinavia and Germany. … A Coke deal would mark a major change in the strategy the company has pursued for decades—setting up large, independent bottlers run separately from Atlanta-based Coke itself. It would also come as PepsiCo is about to close acquisitions of its two largest independent bottlers, putting pressure on Coke to make a similar move to gain the same competitive advantages PepsiCo stands to reap.”
Cimilluca and company explain that the largest advantage gained by Coca-Cola (and presumably PepsiCo as well) is flexibility. They explain:
“[Coca-Cola] could decide to distribute through its bottling system, through which products are delivered directly to stores. Or it could deliver drinks through warehouses, which is cheaper and preferable for products too small or not profitable enough to distribute cost effectively through the more expensive ‘direct store delivery’ system. For Coke’s everyday consumers, the deal potentially could mean lower prices, with some costs of distribution eliminated, and a wider variety of drinks, including niche products, in stores as the company gains greater distribution flexibility, according to industry experts.”
Commenting on these developments, blogger and supply chain analyst, Steve Banker [Logistics Viewpoints], concluded that PepsiCo’s decision to acquire its two largest independent bottlers should result in “greater cost efficiency and also improved revenue opportunities. And this was another factor in Coca-Cola’s decision to follow suit. Once PepsiCo had direct control of distribution, and had cut out the middleman, it would potentially have a price advantage over Coke.” All companies are looking for a competitive advantage. Cecere and Ferrari believe that companies are now emerging that provide those advantages. For their part, companies want results not promises. As another Logistics Viewpoints’ blogger, Adrian Gonzalez, writes: “What do customers want? Not software, I say, but outcomes—cost reductions, productivity improvements, revenue growth, increased market share, improved working capital, and so on. As Harvard marketing professor Theodore Levitt famously said, ‘People don’t want to buy a quarter-inch drill; they want a quarter-inch hole!'” [Buying Supply Outcomes, Not Software]. He’s correct. I’m finding that companies are hungry for innovative solutions that address some of their most pressing supply chain challenges. All I can say is that help is on the way.