Why Supplier Collaboration is Becoming Increasingly Important

By Kameron Hadavi

In Dan Doolittle’s article in this newsletter, “Waste Not, Want Not”, he referenced a recent article in eWeek which quoted industry analysts at Manufacturing Insights predicting 2005 trends^[1].  The article stated “…during 2005, users will look across traditional application categories to craft new supply chain solutions in areas such as SRM (supplier relationship management).”  We are seeing the same trend in our prospect and install base, and actually presented an overview on this at our recent Customer Summit event held in Newport Beach, California last October.  So what is driving this trend? 

Our customers share with us an increasing pressure to lower raw materials inventories and reduce the cost of parts and materials, while still responding even more quickly to customer orders. As a result of lower labor content, outsourced operations and global supply chains, as much as 60% of the cost of goods sold comes from third-party suppliers.  If you’re like most manufacturers, your suppliers have become a critical link in satisfying customer demand and meeting profit goals.

In recent years, eProcurement for indirect materials has received a lot of attention in response to these business drivers.  However, for manufacturing firms, direct materials – parts and materials used in production - are not only more strategic but can also have a larger tactical impact on the bottom line. Indirect materials are primarily a cost item, whereas the supply of direct materials is generally a critical success factor and often the primary constraint in responding to customer demand.

The Internet has proven to be a powerful and cost-effective enabler for optimizing direct procurement and replenishment.  Traditionally the focus of procurement has been transactional, and buying organizations had only a few degrees of flexibility for improving responsiveness.  They could keep more raw materials inventory on hand, they could expedite and pay premium freight to bring in additional supplies quickly when they needed them, or they could require their suppliers to hold more inventory.  The problem with all of these solutions is that they are cost prohibitive.

As the Internet matures and becomes embraced by manufacturers, true collaboration with suppliers are becoming the norm and improved visibility, forward planning, and communications with suppliers is supplanting the need for excessive inventory and costly expediting.  Manufacturers are using the Internet not just to automate the traditional transaction processes but to provide a strong two-way flow of information between buyer and supplier.  Internet-based supply management applications are being used to:

·          Automate replenishment in highly efficient true “pull” fashion

·          Track purchase orders, supplier acknowledgments, shipments and receipts for true “end to end” transaction management

·          Synchronize demand-driven manufacturing requirements with supplier capacity and availability, reducing “stock-outs” and maximizing the ability to fill customer orders

·          Measure supplier performance and provide feedback to drive world-class supply management

·          Lower procurement transaction overhead by eliminating non-value-add activities

So what have these applications accomplished for those who have embraced them?  Manufacturers have consistently reported a reduction in raw materials inventories, substantial savings on expediting and premium freight, and more efficient procurement and replenishment processes.  These benefits translate directly into a lower cost of goods sold as well as greater responsiveness to customer demand, both of which are essential in an ever-shrinking and more competitive world.  The payback can be quite dramatic.  We have seen reported benefits on the order of:

·          20-30% reduction in raw materials inventories

·          25% reduction in supplier lead times

·          10% improvement in on-time delivery

·          30% decrease in logistics costs

·          5% reduction in pricing

If you’re not sure where to start, consider these important questions:

·          What are your current inventory turns and what do you need to get to?

·          How will you increase turns without incurring additional replenishment overhead?

·          Have you benchmarked your raw materials inventory levels against your competitors?

·          How do you currently communicate requirements, orders and releases to suppliers?

·          How much do you spend on premium freight each month to expedite direct materials?

·          How often do you have to reschedule production due to material shortages?

·          Do you have a serious need to rationalize your supply base?

·          What tools do you have in place to analyze spend and measure supplier performance?

Supplier Relationship Management is the next evolution in Supply Chain Planning.  For those companies struggling to manage a worldwide economy that is changing the very way we do business, view this moment in time as a chance to gain market share.  It is an opportunity to grow your business.  Which side of the market share will you be on?  The side that grows or the side that shrinks?

Kameron Hadavi is Adexa’s Vice President, Partner Programs and Strategic Alliances