It’s ‘Management 101’ — by reducing operating costs, companies can lower prices and increase sales. And one of the most effective ways to reduce operating costs is through the Synchronized Value Chain (SVC).
The SVC is the sum total of all trading and logistics activities, from procurement through to manufacturing and distribution. You’ve often heard it referred to as simply the supply chain, but the rapidly growing challenges of global trade are making it imperative for the adoption of an optimized version of the traditional supply chain — one that is smarter, and more dynamic in its adoption of efficiency and service whenever there is movement and consumption of an item.
The SVC model has three critical characteristics, implied within the name. ‘Synchronized’ means that the right asset is available and deployed to the right place at the right time to the right trading partners. For many years, companies have implemented proven technologies such as enterprise resource planning (ERP), demand planning, EDI, barcoding, and warehouse management systems (WMS), all of which contribute to synchronization.
The second term, ‘Value’, streamlines synchronization. Value means performing all activities in the most efficient and cost-effective manner possible. Value introduces lean methodology, whereby all non-value-added steps throughout the chain are systemically eliminated. In the past several years, technologies like Radio Frequency Identification (RFID) and Global Data Synchronization have begun to increase value and improve leanness while building upon core technologies such as ERP and EDI.
‘Chain’ refers to all parts of the supply process, which must be viewed as a whole rather than its constituent parts. Here we concern ourselves with the integration of technologies and processes, both traditional and new. In legacy supply chain models, many organizations worked within a silo approach, adopting new technologies one by one as they were required, influenced by acquisitions or trading partner requirements. Recognizing that a chain is only as strong as its weakest link, the SVC takes a longer term, integrated and ultimately more cost-effective approach.
Critical success factors
To be sure, the SVC will optimize profitability. And yet the objective of the SVC in its purest form is to increase sales. The key to using the SVC to boost sales is simple: always focus on the underlying cause of increased sales — customer satisfaction.
In six sigma terminology, success is related to CtC (Critical to Customer) factors. In the SVC, these factors generally fall into three categories:
- CtC — Critical to Cost: Ensuring the best product for the best price.
- CtQ — Critical to Quality: Ensuring the highest quality with no defects.
- CtD — Critical to Delivery: Ensuring the right product at the right time.
Continually optimizing cost, quality and delivery are the root causes of increased sales; it can’t be any different.
RFID and the synchronized value chain
“The Synchronized Value Chain places great emphasis on integrating core technology with new initiatives such as RFID,” said James Williams, senior consultant at Avatar Partners. “Within the SVC, RFID can be thought of as a technology that will provide visibility and automation where none existed before.”
Most companies have sufficient control over existing processes through an integrated ERP system. Yet once a work order is produced, very few companies have visibility of those products through manufacture, storage, transport and delivery to the customer. It is difficult for companies to know if there is an issue with the product, and if so, where the issue might be and how much it is costing. Enter RFID.
RFID is not a new technology; in fact, it’s been around for decades. But as the technology evolves and becomes more attractive from a pricing perspective, it is becoming an essential part of the Synchronized Value Chain.
In effect, RFID can computerize every widget and track all the stages of its life cycle. It can provide visibility to all processes that a company is currently blind to. Unlike a barcode, it contains a unique serialized number specific to each item produced. It can also trigger automated events and record history and even environmental conditions.
Said Deon Nel, practice leader at Avatar Partners, “RFID provides the kind of control over the life cycle of widgets that ERP has over business processes.”
The US Department of Defense, Wal-Mart, Tesco, Metro Group, Target, and other buy-side vendors are demanding that their suppliers place RFID tags on pallets, cases, and in some instances individual items. These initiatives will involve RFID tagging by more than 100,000 manufacturers and distributors worldwide. But today, the list is just at its infancy, as RFID proves itself to be not just a technology to aid in the receiving process of buyers, but also a benefit throughout the entire SVC.
RFID has been used in many thousands of organizations worldwide for the past sixty years to track high-value items. Generally, any assets that a company owns that would benefit from visibility are candidates for RFID. Examples that our organization has come across include:
- Asset tracking in hospitals for moveable items such as wheelchairs, beds, and surgical equipment.
- Inventory control of high-end computer electronics stored in warehouses, that are prone to theft or misplacement.
- Tracking of moveable equipment that is rented out to customers, such as expensive film post-processing equipment.
- Tracking of reusable items such as gas cylinders, which are excellent candidates for RFID when utilized in conjunction with GPS and wireless technology.
RFID can be used not only to know where the item is in real-time, within a three-foot radius, but also to trigger alarms if the item is moved.
As well, RFID provides exponentially greater visibility and therefore the ability to react to customer-service needs by knowing exactly what is in inventory. It also reduces shrinkage, which ultimately leads to better knowledge of the inventory and therefore again, better customer service.
Making processes more visible
RFID is not just about tracing pallets between buyer and seller. It can provide visibility to processes in the manufacturing, warehousing and distribution of goods, and therefore can provide better costing control and better planning, resulting in reduced inventory while improving product availability.
One such example is ‘Work In Process’ (WIP) tracking through the manufacturing cycle. Few companies know their true cost of goods (COG) due to low visibility of labor and materials (value added) for each WIP step. This results in a great deal of guesswork around COG and scrap costs. Most companies have a very rough idea of yield and scrap, but few truly understand where the scrap is coming from and how to reduce it to improve output.
Generally, processes are not being tracked at all, or they are being tracked manually, or they are being tracked with a combination of barcoding and manual effort. Manual efforts take time, and in a manufacturing line, the last thing anyone has is time. Therefore, any of these tracking processes are highly prone to inefficiency at best, and misinformation at worst.
Because RFID can automate WIP tracking throughout the manufacturing and assembly line, without the need for human intervention, it can greatly increase both accuracy and efficiency in knowing the true cost of goods.
Opportunities for automation
Perhaps the most overlooked opportunity for RFID is its ability to automate. As mentioned earlier, RFID places networked intelligence onto anything — on any widget produced and at every stage of its life cycle. Because RFID can be read in an automated fashion, an item’s movement or activity can trigger events throughout its life cycle. RFID can also improve quality by identifying errors in production, such as machining errors. It can quickly point out where the error has occurred and with what part.
Several of our customers have dramatically reduced both labor and inaccuracies in the picking and packing process through RFID. As the RFID tag interacts with readers, the system verifies items being picked with the orders themselves. We have found that RFID can eliminate up to three audit and reconciliation processes per order. Furthermore, RFID scanning of inbound and outbound items can automate receiving, advanced shipping notices (ASNs) and other required EDI processes. This in turn reduces the cost of freight and returned merchandise. And of course it also reduces the biggest cost of wrongly picked items — the erosion of customer satisfaction. RFID can greatly improve the product getting to the right place, at the right time, to the right customer, thereby strengthening customer relationships.
RFID is also useful with products that have a limited shelf life, such as food. Not only can RFID trace and record the life of the goods, such as country of origin and lot number, but it can also record temperature variances and trigger alerts, if, for example, an item has expired. Instead of relying on human effort to pick items with the earliest expiration date, RFID can automate this process entirely, thus reducing waste. Because RFID tags can be writeable, they offer a unique advantage with products that require a high degree of audit and control, such as pharmaceuticals.
Our customers who are most successful with RFID see the bigger picture, and proactively implement RFID with the Synchronized Value Chain in mind. RFID must contribute to additional sales, as should all technologies and processes that contribute to the overall SVC model. Even a proactive slap and ship approach, which we frequently help companies implement in a very cost-effective manner, can greatly benefit the supplier in the future. The key is to do it right the first time around, and use the investment to fuel optimization of quality, cost reduction and product delivery.
–Marlo Brooke is a principal at Avatar Partners (www.avatarpartners.com), a systems integrator specializing in SVC technologies such as RFID, EDI, Data Synchronization and eCommerce. Brooke is a six sigma black belt, and an internationally recognized expert and author on supply chain optimization. She welcomes your email at[email protected]