Executive Briefings

Supplier Collaboration Initiatives Can Save Companies Millions

The relationship between organizations and their suppliers is continuously evolving. Today organizations expect their suppliers to continually reduce component costs, improve replenishment lead time and become more responsive to their business changes. Not surprisingly such demands can create a strained relationship, becoming confrontational rather than cooperative. Those relationships are further exacerbated by limited visibility of end-customer requirements, increased variability and delays as demand information works its way through the supply network.

These factors typically cause issues such as:

• Whiplash effect, where any changes in demand are amplified as it makes its way through the supply chain, causing increased inventory

• Supply variability, where suppliers are not able to respond to customer demand within the time frames requested, causing missed shipment dates and increased expediting costs

• Supplier proliferation, where customers begin to work with multiple suppliers in order to secure component supply in a timely manner, causing reduced leverage with suppliers and increased procurement costs

A streamlined supplier collaboration process can help address these issues on both sides of the equation, leading to more productive and profitable relationships between organizations and their suppliers.

Improved Supplier Collaboration

A concerted effort to improve the relationship between an organization and its suppliers by focusing on increased collaboration can benefit both parties in a variety of ways, including: reduced inventory, shortened lead times, lower component costs and minimized risk of stock outages. In addition, tighter collaboration ensures that each stakeholder in the supply chain can meet its service agreements, resulting in a more responsive supply chain. Such a tight collaboration, even for traditional purchase order based (PO-based) relationships, can provide savings to both parties.

To reap these benefits, one of the key requirements is that traditional linear supply chains and their sequential processes must be transformed into adaptive supply chain networks. Such a network will allow all participants (customers, suppliers, logistics providers and so on) to sense changes in demand and supply conditions as they occur and share the critical knowledge required to respond appropriately. Stakeholders within the supply chain will be able to simultaneously eliminate inefficiencies in their supply chains by synchronizing the information flow with their suppliers or customers.

Supplier collaboration is one of the key enablers of an adaptive supply chain network and is increasingly being adapted by leading companies around the world.

Companies that have implemented supplier collaboration enjoy both quantitative benefits (such as lower inventory costs, reduced lead times, lower component costs, higher on-time delivery, etc) but also see significant qualitative benefits (such as relationship with suppliers becoming more strategic, supplier rationalization and increased responsiveness). Lets us examine supplier collaboration in more detail.

Types of Supplier Collaboration

There are several different methods of supplier collaboration, based on the relationship between the manufacturer and supplier for a certain part or component. Examples of these relationships include purchase order (PO), PO release, vendor-managed inventory or kanban. A manufacturer may have a PO-based relationship with a supplier for a high-value part, but a VMI relationship with the same supplier for a low-value, high-use part. As a result, a manufacturer may implement multiple types of these collaboration mechanisms with one supplier. However, any of these types of collaboration mechanisms can be implemented fairly quickly.

Purchase Order Process Collaboration: Purchase orders are the most common documents for execution of a procurement relationship with a supplier. In the supplier collaboration scenario, purchase orders are still created in a manufacturer's back-end ERP system, but that information is provided to the supplier. The supplier uses this information to get visibility into the PO and dates and quantities required by the manufacturer. The supplier can then respond to the PO by entering order confirmation information (either full or partial quantities) and communicating it back to a manufacturer. This type of collaboration makes sure that manufacturers and their suppliers are in sync on purchase orders, their status and exceptions, to ensure that things don't fall through the cracks. Suppliers also get early visibility into demand and can plan their supply accordingly. Manufacturers get supply commitments and are able to eliminate any supply-related surprises that are the cause of component shortages. Advanced shipment notices (ASNs) enable a manufacturer to be prepared to receive shipments and schedule internal manufacturing/assembly.

Release Process Collaboration: This collaboration scenario allows the communication of schedule agreement releases to suppliers. Schedule agreement releases are maintained in the customer's back-end ERP system. Releases are net customer requirements over time, usually with both a firm-order horizon and a forecast horizon. The supplier gets a notification about the releases and is asked to acknowledge the release. As a result, the manufacturer knows that the supplier has seen the release and has committed to the supply. ASNs enable a manufacturer to be prepared to receive shipments and schedule internal manufacturing/assembly.

Supplier Managed Inventory (SMI): In an SMI scenario, the manufacturer hands over the replenishment task to an external business partner, usually the supplier of a product. The manufacturer makes available current inventory data, gross demands, and goods receipt references from its back-end systems to supplier. The supplier monitors this information on an ongoing basis. The supplier is able to calculate the replenishment quantities based on inventory, demand, and minimum or maximum levels and uses it to replenish the inventory. By getting this information, the supplier has clear visibility into consumption and demand and is able to replenish on time and ensure that there is never a shortage or excess of that component. An ASN enables a manufacturer to be prepared to receive shipments of the component.

Kanban: This collaboration scenario allows an organization and its supplier to share kanban information to ensure just-in-time deliveries. In this method, the manufacturer sends kanban signals to the supplier. The supplier receives these signals, prepares the replenishment and sends an ASN to the customer.

Challenges to Collaboration

According to a recent study by Aberdeen Group, more than 55 percent of the Global 2000 organizations surveyed had either no formal supplier collaboration processes or they varied significantly from site to site. Only 26 percent had consistent supplier collaboration processes in place. On the bright side, half of the executives surveyed expected to deploy a formal and consistent supplier collaboration process within the next two years.

Assuming an organization and its suppliers are willing to collaborate, the biggest obstacle to achieving this is having an infrastructure in place through which the two parties can share relevant data in a timely manner. Few organizations share the same IT architectures, platforms, and applications as their business partners. Smaller organizations may not have the necessary IT infrastructure or support, so a solution that leverages basic internet technologies is needed. In such a situation, it's still possible to achieve collaboration. Internet-based supplier collaboration software addresses these issues.

Once the manufacturer deploys the internet based supplier collaboration software in their environment, they can begin information sharing with their suppliers, seamlessly and securely. Such solutions can implement the above-described collaboration models out of the box. Such solutions require suppliers to only have internet and email access (and no other software infrastructure) to start collaborating. Solutions that offer this information sharing provide many benefits:

• Real-time synchronization of information-changing demands and inventory levels

• Ability to integrate with any supplier IT infrastructure due to the interfacing technology

• Use of various Web-based communication services to deliver proactive alerts

• Ability to track and audit transactions online helps in quality assurance

Companies also need to easily and openly share relevant information with their suppliers. For example, the increasingly popular practice of getting suppliers to monitor and manage replenishment in a "pull-based" model (rather than replenish to purchase orders in a "push-based" model), can generate significant inventory savings and service level improvements for an organization. However, for such a model to succeed, an organization must provide their suppliers ongoing and clear visibility into their forecast and consumption plans, as well as current inventory status and planned receipts for every component that the supplier is responsible for managing.

By providing a mechanism for open and timely sharing of relevant information, supplier collaboration solutions can cut costs through reduction in inventory and safety stock, reduce overtime, lower administrative costs due to less processing effort and slash expediting costs. They can reduce risks of stockouts, production delays and increased accuracy in delivery dates, thus increasing customer service levels.

Ashok Santhanam is the CEO of Bristlecone, a supply chain consulting firm. Visit www.bcone.com

The relationship between organizations and their suppliers is continuously evolving. Today organizations expect their suppliers to continually reduce component costs, improve replenishment lead time and become more responsive to their business changes. Not surprisingly such demands can create a strained relationship, becoming confrontational rather than cooperative. Those relationships are further exacerbated by limited visibility of end-customer requirements, increased variability and delays as demand information works its way through the supply network.

These factors typically cause issues such as:

• Whiplash effect, where any changes in demand are amplified as it makes its way through the supply chain, causing increased inventory

• Supply variability, where suppliers are not able to respond to customer demand within the time frames requested, causing missed shipment dates and increased expediting costs

• Supplier proliferation, where customers begin to work with multiple suppliers in order to secure component supply in a timely manner, causing reduced leverage with suppliers and increased procurement costs

A streamlined supplier collaboration process can help address these issues on both sides of the equation, leading to more productive and profitable relationships between organizations and their suppliers.

Improved Supplier Collaboration

A concerted effort to improve the relationship between an organization and its suppliers by focusing on increased collaboration can benefit both parties in a variety of ways, including: reduced inventory, shortened lead times, lower component costs and minimized risk of stock outages. In addition, tighter collaboration ensures that each stakeholder in the supply chain can meet its service agreements, resulting in a more responsive supply chain. Such a tight collaboration, even for traditional purchase order based (PO-based) relationships, can provide savings to both parties.

To reap these benefits, one of the key requirements is that traditional linear supply chains and their sequential processes must be transformed into adaptive supply chain networks. Such a network will allow all participants (customers, suppliers, logistics providers and so on) to sense changes in demand and supply conditions as they occur and share the critical knowledge required to respond appropriately. Stakeholders within the supply chain will be able to simultaneously eliminate inefficiencies in their supply chains by synchronizing the information flow with their suppliers or customers.

Supplier collaboration is one of the key enablers of an adaptive supply chain network and is increasingly being adapted by leading companies around the world.

Companies that have implemented supplier collaboration enjoy both quantitative benefits (such as lower inventory costs, reduced lead times, lower component costs, higher on-time delivery, etc) but also see significant qualitative benefits (such as relationship with suppliers becoming more strategic, supplier rationalization and increased responsiveness). Lets us examine supplier collaboration in more detail.

Types of Supplier Collaboration

There are several different methods of supplier collaboration, based on the relationship between the manufacturer and supplier for a certain part or component. Examples of these relationships include purchase order (PO), PO release, vendor-managed inventory or kanban. A manufacturer may have a PO-based relationship with a supplier for a high-value part, but a VMI relationship with the same supplier for a low-value, high-use part. As a result, a manufacturer may implement multiple types of these collaboration mechanisms with one supplier. However, any of these types of collaboration mechanisms can be implemented fairly quickly.

Purchase Order Process Collaboration: Purchase orders are the most common documents for execution of a procurement relationship with a supplier. In the supplier collaboration scenario, purchase orders are still created in a manufacturer's back-end ERP system, but that information is provided to the supplier. The supplier uses this information to get visibility into the PO and dates and quantities required by the manufacturer. The supplier can then respond to the PO by entering order confirmation information (either full or partial quantities) and communicating it back to a manufacturer. This type of collaboration makes sure that manufacturers and their suppliers are in sync on purchase orders, their status and exceptions, to ensure that things don't fall through the cracks. Suppliers also get early visibility into demand and can plan their supply accordingly. Manufacturers get supply commitments and are able to eliminate any supply-related surprises that are the cause of component shortages. Advanced shipment notices (ASNs) enable a manufacturer to be prepared to receive shipments and schedule internal manufacturing/assembly.

Release Process Collaboration: This collaboration scenario allows the communication of schedule agreement releases to suppliers. Schedule agreement releases are maintained in the customer's back-end ERP system. Releases are net customer requirements over time, usually with both a firm-order horizon and a forecast horizon. The supplier gets a notification about the releases and is asked to acknowledge the release. As a result, the manufacturer knows that the supplier has seen the release and has committed to the supply. ASNs enable a manufacturer to be prepared to receive shipments and schedule internal manufacturing/assembly.

Supplier Managed Inventory (SMI): In an SMI scenario, the manufacturer hands over the replenishment task to an external business partner, usually the supplier of a product. The manufacturer makes available current inventory data, gross demands, and goods receipt references from its back-end systems to supplier. The supplier monitors this information on an ongoing basis. The supplier is able to calculate the replenishment quantities based on inventory, demand, and minimum or maximum levels and uses it to replenish the inventory. By getting this information, the supplier has clear visibility into consumption and demand and is able to replenish on time and ensure that there is never a shortage or excess of that component. An ASN enables a manufacturer to be prepared to receive shipments of the component.

Kanban: This collaboration scenario allows an organization and its supplier to share kanban information to ensure just-in-time deliveries. In this method, the manufacturer sends kanban signals to the supplier. The supplier receives these signals, prepares the replenishment and sends an ASN to the customer.

Challenges to Collaboration

According to a recent study by Aberdeen Group, more than 55 percent of the Global 2000 organizations surveyed had either no formal supplier collaboration processes or they varied significantly from site to site. Only 26 percent had consistent supplier collaboration processes in place. On the bright side, half of the executives surveyed expected to deploy a formal and consistent supplier collaboration process within the next two years.

Assuming an organization and its suppliers are willing to collaborate, the biggest obstacle to achieving this is having an infrastructure in place through which the two parties can share relevant data in a timely manner. Few organizations share the same IT architectures, platforms, and applications as their business partners. Smaller organizations may not have the necessary IT infrastructure or support, so a solution that leverages basic internet technologies is needed. In such a situation, it's still possible to achieve collaboration. Internet-based supplier collaboration software addresses these issues.

Once the manufacturer deploys the internet based supplier collaboration software in their environment, they can begin information sharing with their suppliers, seamlessly and securely. Such solutions can implement the above-described collaboration models out of the box. Such solutions require suppliers to only have internet and email access (and no other software infrastructure) to start collaborating. Solutions that offer this information sharing provide many benefits:

• Real-time synchronization of information-changing demands and inventory levels

• Ability to integrate with any supplier IT infrastructure due to the interfacing technology

• Use of various Web-based communication services to deliver proactive alerts

• Ability to track and audit transactions online helps in quality assurance

Companies also need to easily and openly share relevant information with their suppliers. For example, the increasingly popular practice of getting suppliers to monitor and manage replenishment in a "pull-based" model (rather than replenish to purchase orders in a "push-based" model), can generate significant inventory savings and service level improvements for an organization. However, for such a model to succeed, an organization must provide their suppliers ongoing and clear visibility into their forecast and consumption plans, as well as current inventory status and planned receipts for every component that the supplier is responsible for managing.

By providing a mechanism for open and timely sharing of relevant information, supplier collaboration solutions can cut costs through reduction in inventory and safety stock, reduce overtime, lower administrative costs due to less processing effort and slash expediting costs. They can reduce risks of stockouts, production delays and increased accuracy in delivery dates, thus increasing customer service levels.

Ashok Santhanam is the CEO of Bristlecone, a supply chain consulting firm. Visit www.bcone.com