The weakest link

Most large companies’ highly tuned IT supply chain engines sputter inefficiently when they have small companies in tow. By designing sophisticated systems that ignore lower-tier suppliers, business giants can suffer disruptions in product deliveries, unnecessary labour costs and inventory snafus that bog down operations. But even the most sophisticated supply chain system can run into trouble from delivery disruptions to inventory problems if it ignores the second- and third-tier suppliers.

A few major retailers and manufacturers have begun to shift their focus to the needs of the little guys, understanding that the electronic data interchange (EDI) capabilities of most small businesses are nonexistent or extremely limited.

But it’s not going to be easy.

For one thing, there’s the ubiquitous fax machine inside small operations and that’s often the weakest link in a business giant’s automated supply chain.

Take American Outdoor Products Inc. in Boulder, Colo., for instance. The 25-person company has been selling freeze-dried meals and munchies to backpackers through retailers for more than 50 years. One of its biggest outlets is Recreational Equipment Inc. (REI) in Kent, Wash., which accounts for 15 per cent of the small company’s sales. Until last April, REI had to order the popular food products via fax machine because American Outdoor Products wasn’t part of REI’s EDI supply chain.

“Faxes came through in giant globs from dozens of stores,” recalls Shayleen Snyder, shipping manager at American Outdoor Products. Because each REI store’s order form looked alike, her warehouse staff would inevitably confuse one store’s request with another’s and pack boxes with the wrong materials.

When the mispacked and often mislabelled boxes arrived, labour efficiency and inventory controls suffered while the mess was sorted out, says John Strother, director of inventory and logistics at REI.

Snyder’s firm wasn’t the only business outside REI’s EDI supply chain that was prone to error. That’s why REI struck a deal with SPS Commerce Inc., a St. Paul, Minn.-based vendor that specializes in hooking up small businesses to big supply chains using an application service provider model.

Third-party help is the best path that IT managers can take to bringing smaller firms into an automated supply chain, says Larry R. Smeltzer, professor of supply chain management at Arizona State University in Tempe.

SPS links American Outdoor Products to REI through an Internet-based application that translates EDI ordering and shipping requirements so Snyder can access them through a Web browser on her PC. “It stopped the error rate dead in its tracks,” she says.

Strother agrees that for small companies, the benefits have been impressive. But the SPS approach has its drawbacks for companies on the cusp of being midsize to large. He says those suppliers are better suited for more traditional EDI technologies.

Also, Strother says he’s disappointed that it’s taken so long to complete the project. REI started working with SPS late last year and “customization of business rules took several months” to get into the SPS system, he says. Still, it’s “going at a pretty good pace,” with 250 small suppliers linked to REI through SPS and 130 larger companies using the EDI application directly over a virtual private network, Strother says. He estimates that payback for the SPS investment will be achieved by the second half of next year.

The return on investment may be a little further down the road for Johnson Controls Inc., a first-tier supplier to the world’s automotive giants, but it could turn out to be huge.

The US$17 billion Milwaukee-based manufacturer does three-fourths of its business supplying 23 million automobile interiors to the likes of General Motors Corp., Honda Motor Co., BMW and other car makers. According to John Waraniak, director of e-business speed at Johnson Controls, car companies have pushed the management of smaller vendors down the supply chain to Tier 1 companies like his.

Waraniak says 80 per cent of Tier 1 suppliers in the automobile market have EDI links to the auto manufacturers. But when you move from Tier 1 to Tier 2, that figure drops to 30 per cent. From Tier 2 to Tier 3, EDI communication is a paltry 2 per cent. Yet Smeltzer says it’s the second- and third-tier suppliers “where the critical bottlenecks in manufacturing exist.”

That lack of EDI infrastructure in the lower tiers has forced Johnson Controls to re-evaluate how to improve the efficiency of working with smaller operators. Automation of the lower levels of the supply chain should begin where the biggest ROI can be derived, Waraniak argues. For Johnson Controls, that’s at the design stage.

“We’ve moved way beyond EDI,” Waraniak says. “We’re now into collaboration and knowledge.”

Automakers are now designing their 2004 models, and one of the best times for manufacturers to save money is before the cars get off the drawing board. “The cost of catching a necessary engineering change at the design stage is a factor of 10. It’s a factor of 100 if you catch it in production. If the unit is already in the field, it’s a factor of 1,000,” Waraniak explains.

“It’s absolutely critical that design engineers consider the chain when they create products,” says Sean Willems, chief scientist at Optiant Inc. in Somerville, Mass. Willems, who wrote his MIT dissertation on the subject, adds, “Eighty percent of costs are locked in at the design stage.”

To manage its costs during design, Johnson Controls uses collaboration software from MatrixOne Inc., a US$141 million application vendor in Westford, Mass. With it, Johnson Controls has established a portal that can be accessed by smaller vendors that can bid on projects online without having to make expensive EDI investments. More important, Waraniak says, “they can add value.”

As an example, he describes a scenario during the design stage when the position of an instrument panel is altered a few millimetres. “This changes everything in the supply chain, from crash-worthiness to the cost of screws,” Waraniak says. With everyone viewing all of the changes in real time through the portal, engineers and suppliers in Tokyo, Detroit and Stuttgart, Germany, can immediately see the implications of the change.

Even with advances in software and connectivity, it’s still hard to get every small supplier aboard the automated supply chain, cautions Stephen Cavanaugh, director of IT at Printpack Inc., a US$1 billion flexible packaging company in Atlanta.

“The one challenge for suppliers is that they will be expected to understand the planning process and use our information to better plan for our needs,” Cavanaugh says. “We have a couple of suppliers that can do that today, but the majority of them still run order to order.”