Role of Suppliers in Supply Chain Management

Companies of all sizes are realizing that they no longer have complete control over their
market success. This is because they rely heavily on the performance of their supply
chain trading partners. Many large companies are now insisting that their small and
medium industrial suppliers help them improve supply chain cost, responsiveness and
reliability.

Supply chain improvements will not only improve internal performance, but will also
create benefits that will ripple through to customers and partners as well. Cost savings
through reduced inventory levels, expediting, fulfillment and premium freight costs
could allow a company to provider more favorable prices or terms to customers.
Likewise, effective planning and execution can help companies and their customers
adapt to the market’s demand shifts. When the company can purchase, produce and
distribute the right products to the right channels in the right quantities at the right
time, both supplier and customer will increase revenue capture by channel and region.

One of the keys to successful supply chain performance improvement is cooperation

and mutual decision making between trading partners. Companies that collaborate with
customers in demand and replenishment planning have a better chance of meeting
demand. Those who give accurate information may also gain visibility of customer
requirements and inventory levels. This starts the improvement cycle, as the supplier
can then reduce their own inventory stocks. By synchronizing operations with
customers, the supply chain is more responsive to the marketplace with less waste.

Identifying Performance Opportunities

The performance characteristics with the greatest value in a supply chain are accuracy,
responsiveness, on time complete deliveries, reduction of inventory and mutual
continuous improvement.
Document and Process Accuracy – Discrepancies in actual vs. planned or actual vs.
documented order quantities, product specifications, promise dates and pricing cause
disruptions in production, costly expediting, and countless hours disputing and settling
charges. Unfortunately inaccuracies are common between supply chain parties. This is a
result of manual processes, human error, miscommunication and limited checks and
balances. Re-designing and automating supply chain processes and inter-company
communication can reduce these errors.
Supply Chain Responsiveness – Inbound delays and shortages of material wreak havoc
on production schedules, promotional effectiveness and revenues. Suppliers often
struggle to produce enough of the right items at the time the customers need them
because they cannot build in small lot sizes. This inflexibility stems from a make-to-stock
production model and a management focus on equipment utilization measures. Even
some companies that are more flexible cannot process demand changes quickly. The
focus needs to shift to a build-to-demand model that better supports customers’ Lean
and just-in-time (JIT) production lines. When the company cannot meet a demand shift,
it needs an early detection system to avoid the problem or allow customer service or
sales to alert customers of upcoming delays.
Continuous Communications – Supply chain responsiveness depends on frequent
communication between suppliers and customers. Many buyers are frustrated when
suppliers do not acknowledge their purchase orders, revised schedules, and order
changes. This leaves customers wondering whether the order or request was received
and what they can expect when the shipment of materials arrives. Customers’
administrative costs are high because they need to track down and resolve issues. If
suppliers communicated better and with greater frequency, that would be avoidable.
SCM applications can provide assistance with that process issue. Automated
acknowledgement saves significant time, yet keeps the customer informed and efficient.
Perfect Order Delivery – Customers can’t afford persistent shortages, errors and
defects. They look for zero defects, 100% fill rate and 100% on time deliveries. Few
companies have achieved these goals, but a growing number are getting very close.
Everyone else must improve their operations to retain their best customers. Perfect
delivery requires sound supply chain processes from start to finish – from planning
through production and execution. Best practice processes and integrated SCM
applications can support that smooth operation.
Vendor Managed Inventory – Customers always want to carry less inventory. Originally,
VMI just shifted ownership of inventory in customer facilities onto the backs of
suppliers. Now, customers are opening the kimono online and providing visibility into
their operations and inventory levels. This can lead to a real win-win situation. The
benefit to customers is the ability to reduce the cost of inbound inventory stores and
shortages on their lines. The benefit to suppliers is the ability to plan more accurately
based on real demand and thus significantly reduce their own finished goods inventory.
Coordinated Continuous Improvement – Improvement in one part of the supply chain
may not pay off if other parts of the chain can’t keep up. Companies have learned this
the hard way. They may achieve Lean production in their plants, but if suppliers don’t
deliver the right parts at the right time, production stoppages often result. There are
countless opportunities to reduce waste and costs while improving product innovation,
customer experience, quality and throughput. Continuous improvement requires trust,
joint processes, common data points, shared data access and mutually viable metrics.

Improving Supplier Performance

Some companies have made it their mission to become the best supplier to do business
with and improve operational performance. This generally involves making changes in
contracts, processes and information technology.
Contract Changes: Spot purchase orders come and go. There is no formal agreement to
continue doing business together or any guarantee of additional orders. Blanket order
contracts, on the other hand, offer an annual or volume-based commitment. These
commitments have the potential to facilitate closer relationships, which in turn can lead
to collaborative decision making, mutually beneficial VMI programs, and access to
information needed to improve internal sales & operations planning. Contracts may
require the supplier to be ready to commit to a certain service level and other metrics or
suffer penalties – but the visibility and trust gained in return can pay off handsomely.
Process Changes: Clearly, automating a process that hasn’t been redesigned to support
new business objectives, supply chain models and performance goals is likely to fail.
Suppliers striving to increase their performance in the supply chain are rethinking how
they do business, where the non value-add activities take place, and how they can
synchronize their activities with customers’. These process changes are often needed to
leverage newer technologies and supply chain applications. They also create
opportunities to work closely with customers.
Technology Changes: Information technology plays a significant role in supporting
contract and process changes. The Internet has made it financially viable to integrate
operations internally and electronically share information with trading partners
externally.
In addition, application solutions once built for and sold to larger manufacturers have
become easier to purchase, implement and maintain. Not only have prices come down,
but more solutions have been designed to specifically meet the needs of midsize and
smaller companies.
Bullwhip effect
The objective of supply chain management is to provide a high velocity flow of high
quality, relevant information that will enable suppliers to provide an uninterrupted and
precisely timed flow of materials to customers. However, unplanned demand
oscillations, including those caused by stock outs, in the supply chain execution process
create distortions which can wreak havoc up and down the supply chain. There are
numerous causes, often in combination that will cause these supply chain distortions to
start what has become known as the “Bullwhip Effect”. This unplanned for demand
results in a disturbance or “lump of demand”, which may be a minor blip for any one
customer, oscillates back through the supply chain often resulting in huge and costly
disturbances at the supplier end of the chain.

Understanding the causes

 sporadic sales promotions impact demand patterns, cost and margins
 sales incentive plan contribute to demand distortions
 false orders and subsequent cancellations
 transportation incentives cause demand lumps

Eliminating the Bullwhip effect

 Minimize the cycle time in receiving projected and actual demand information.
 Establish the monitoring of actual demand for product to as near a real time basis
as possible.
 Understand product demand patterns at each stage of the supply chain.
 Increase the frequency and quality of collaboration through shared demand
information.
 Minimize or eliminate information queues that create information flow delays.
 Eliminate inventory replenishment methods that launch demand lumps into the
supply chain.
 Eliminate incentives for customers that directly cause demand accumulation and
order staging prior to a replenishment request, such as volume transportation
discounts.
 Minimize incentivized promotions that will cause customers to delay orders and
thereby interrupt smoother ordering patterns.
 Offer your products at consistently good prices to minimize buying surges
brought on by temporary promotional discounts.
  Identify, and preferably, eliminate the cause of customer order reductions or
cancellations.
 Provide vendor-managed inventory (VMI) services by collaboratively planning
 Inventory needs with the customer to projected end-user demand then, monitor
actual demand to fine tune the actual VMI levels.

Information asymmetry in Supply Chain Systems

Through sophisticated IT systems information sharing in done in a decentralized supply
chain where one manufacturer supplies to multiple retailers competing in price. Each
retailer has some private information about the uncertain demand function which he
may choose to disclose to the manufacturer. The manufacturer then sets a wholesale
price based on the information received. The information exchange is said to be
confidential if the manufacturer keeps the received information to herself, or no
confidential if she discloses the information to some or all other retailers. Without
confidentiality, information sharing is not possible because it benefits the manufacturer
but hurts the retailers. With confidentiality, all parties have incentive to engage in
information sharing if retail competition is intense. Under confidentiality, the retailers
infer the shared information from the wholesale price and this gives rise to a signaling
effect that makes the manufacturer’s demand more price elastic, resulting in a lower
equilibrium wholesale price and a higher supply chain profit. When all retailers share
their information confidentially, they will truthfully report the information and the
supply chain profit will achieve its maximum in equilibrium.

Game theory at work in supply chain

Case where SCM IT implementation was a success

Case where SCM IT implementation was a failure