How is distribution changing?

BY STEVE EPNER
Software and technology specialist

As I work on research into the future of distribution, it is very interesting to translate the academic world’s research into something that can be used in the real world. A little background is needed first.

The supply chain is a way to describe our traditional linear process of taking raw materials, manufacturing, distribution and wholesale/retail to get a finished product to an end user. We are all part of a chain whether we purchase products from any of the advertisers in this publication or build our own from basic materials.

Each of us buys material from a supplier and sells it to an end user. As one link in the chain, we are usually limited in our contact with any other links. Also, there is often fiction where our link meets the supplier or customer links. We can rub each other the wrong way. This is not a prescription for success. It is part of what is driving some fundamental changes in the way we work and the way we will work in the future.

So what is changing? Everything. There are so many forces at work it can be confusing without a scorecard. Global competition, pressure on gross margins, consolidation and inconsistent use of technology-based business processes are making it difficult for many traditional supply chains to survive. Disintermediation (end users buying direct from manufacturers), internet-based business models and a general reluctance to change have increased pressure on all trading partners -- especially small to medium sized distributors.

Improvements in information infrastructure have made it possible for distributors at all levels to implement technology-based concepts already in use by large multinational corporations. Some of the more popular include vendor managed inventory, evaluated receipts settlement and electronic remittance. Each of these concepts is defined below.

Businesses are rethinking the operation of the supply chain as a viable model for the 21st century. Sophisticated companies are already moving toward a collaborative or interactive environment with electronic data sharing to improve processing throughout the channel. As we will discuss later, the biggest roadblock is not technology, but trust between trading partners.

If you are part of a supply chain that does not make their operations more accurate, faster, less costly and secure, you may be in danger of being replaced or eliminated. If you do not respond, the economy will force the rapid reorganization of the supply process. As a trading partner, it is your choice to wait until disruptive change occurs or to move forcefully, allowing your businesses to evolve into new forms with the least amount of turmoil possible.

So what are three of the most common ways you can start to move into the future?
The first is using electronic payment systems. If you saw the movie, Catch Me if You Can, you already know that forgery is easy. Most people who use laser-generated checks have no idea how easy they are to fake. It is simple to use common types of tape to “lift off” a payee’s name and replace it with your own.

As many of us get used to paying online at home, it is just as convenient to do at the office. There have to be proper controls, but these are well known and can be implemented from most computer systems with a minimum of effort. Just think -- what would you save annually by eliminating printed checks? Think about the cost of the checks, the added security to protect them from misuse, printing checks with special (that means expensive) toner, plus the handling and postage to send the checks in the mail.

It is true that you can play the “float” while snail mail carries the check to your supplier, but at what cost? How many hours are spent filing, retrieving, losing, finding and handling copies of checks for internal processing or to prove to a vendor that you did send a check? How many filing cabinets do you keep for copies of checks? And how much do you think the value of an extra two or three days float is worth compared to the cost to get it? In most cases, it is a loosing proposition.

There are no more lost checks. No more uncashed checks you deal with every accounting period. No more proving the money was received. This is all automatic. The records are electronic and available to you and your supplier (if you want to make it so) easily and online.

And it works just as well if you encourage your customers to pay you online. The money is deposited immediately. No one can divert a check to a fake account, checks do not get lost in processing, and deposits are never delayed while figuring out what was being paid.

Then there is Evaluated Receipts settlement. I do not want to go into too much detail here, so we will only consider one small aspect. The question is why send invoices? They serve no useful purpose except to make up unnecessary work which costs more money then it is worth.

When I receive a product shipment, I should already know exactly what our company agreed to pay for it. This is often based on a purchase order. If I know the individual price, I can multiply times the number of units received to calculate the total cost. Then, using electronic payments, all of the paperwork can be completed in seconds instead of weeks.

Get rid of filing paper copies of all pos so you can retrieve them to staple a copy of the “receiver” to it after the warehouse clerks hand count everything that arrives. Of course, you then have to re-file everyone to wait for the invoice to come in. Anywhere from days to a month later, the invoice arrives and you go back to the files to retrieve the paperwork again to attach a copy of the invoice -- if it was misfiled, this can take hours. It is then passed to someone in accounting to verify that all three documents match. If there are any errors, the faxes, phone calls and letters start flying back and forth. It is very easy to spend $100 of resources to fix a $5 or $10 mistake.

Without waiting for the invoice, everything can be done in seconds. There is no filing, there is no matching, there is no waiting, and it was not so long ago that no one remembers exactly what was received or what happened if there was a special circumstance. Again, how much can you save by not filing, by not retrieving, losing and re-filing, by not having to have rooms of file cabinets, by not tying up resources who could be doing productive work.

Worried about the float? Think about the cost and today’s low interest rates. As the kids say, it is a no brainer. Think you need the paper trail? It is not an issue for most of the world’s largest companies. They could not operate if they had to go back to the Stone Age and handle so much paper.

If you really want to get sophisticated, consider Vendor Managed Inventory. This is where you allow your supplier to control your inventory levels of their products. For many, this sounds like putting the fox in charge of the hen house. But it really makes sense. One of the problems with incomplete communication between buyers and sellers is what is called the “bullwhip” effect. This is where there are great swings in inventory levels because incorrect information about sales and forecasts is used to plan production and purchasing.

Having the vendor work closely with the distributor makes information about product movement available accurately and in real time. The advantage is the manufacturer can do better planning and improve fill rates and customer service levels while reducing excess inventory in the whole supply chain.

The $64,000 question (that probably dates me) is why are these functions not being used and what can be done to increase their adoption? The answer comes down to a few issues. The most critical is trust. It is a simple word, but one that has not been in great supply in our current environment. Everyone is out to help themselves. We hide data that we feel would give our trading partners information they could use against us. We spend thousands checking paper because we are afraid our partners will try to hurt us.

Without going into all of the other issues, this is the one we need to work on the most. One of our clients even held a special meeting. Instead of inviting customers to an appreciation event, they invited their suppliers. The focus of the meeting was how to work better together. The results were amazing. In two days, we were able to remove so many barriers to good business that everyone wondered why most businesses do not do the same thing.

In future articles we will continue to explore how to improve relationships with all of our trading partners. There are many ways to decrease costs -- not by shifting them to another link in the chain, but by eliminating them all together. Send me your stories of success or failure that we can share and dissect to help all distributors.

 

Steve Epner makes technology understandable for mere mortals and busy executives. He uses his knowledge of business to help clients create competitive advantage through the use of technology. Epner can be reached in St. Louis at 314/983-1214 or by e-mail at sepner@bswc.com.