Date: Jan 30, 2012
Robert Palevich discusses the major components of the Lean Green Supply Chain: external and internal.
The supply chain is composed of all the parts of the enterprise and its associated trading partners. The Lean Green Supply Chain is made up of two major components: external and internal. There is a synergy between these two parts. The internal savings can, in some cases, be equal to the external supply chain savings. To exclude the internal improvements that supplement the productivity of the External Lean Supply Chain is to miss out on a major component of long-term sustainability.
The external side represents the suppliers and customers throughout the supply chain. Collaborative technologies and software can be used to minimize the cost of the organization and decrease the company’s carbon footprint. Forecasting procedures reduce the variation in systems processes in their connection with suppliers and customers in the external supply chain. Improving forecasting methodology through the implementation of Gamma Smoothing increases accuracy in forecasting and stimulates savings.
The typical EOQ (Economic Order Quantity) considers mere receiving and carrying costs in the warehouse. The new EOQ model moves companies beyond current warehousing needs and into the external environment. Through the incorporation of inbound and outbound freight, the EOQ model increases forecasting accuracy, leading to cost reduction throughout the external supply chain.
The internal supply chain is composed of the technologies that can be used to make the corporation and its employees more productive. Implementation leads to lowering the amount of space and resources necessary to perform the job. This represents the definition of Lean and Green sustainability. The sustainability effort needs to incorporate workflow technologies and the use of software to minimize the use of paper and other costly resources.
Putting It All Together
Now it’s time to enter customers and suppliers into the equation of collaboration. The most important consideration at this point is what is best for the entire supply chain. This can be emphasized only by involving the other suppliers and customers. What is good for one may not work for all. For example, 10% of the United States GDP (Gross Domestic Product), which was $14.26 in 2010, is involved with supply chain. Today’s companies are realizing that the competition is not with their competitors but with competing supply chains.
According to a study by consultants A.T. Kearney, inefficiencies in supply chains can waste up to 25% of a company’s operating costs. In companies with profit margins of 3% to 4%, even 5% improvements in supply chain efficiencies focusing just on material flow can double profit margins.(1) The supply chain is the greatest cost in today’s industry and consequently has the best chance for the highest return if the process can be further improved.
One measure of the ability of a company to enhance its standing among the competition is the metric called Gross Margin Return on Investment (GMROI). GMROI looks at a company’s quantitative ability to compete. GMROI is the gross margin percentage of a company multiplied by the inventory turns of that company. Turns are the term used to convey how well a company turns its inventory. Turns = while GMROI = GM × Turns. If two companies have the same gross margins, with one company’s inventory turns being 50% better than its competitor’s, the company with the higher turns is making more profit for the enterprise. For example:
- Company A has a gross margin of 20% and has 3 inventory turns. The GMROI throughout the year on their inventory investment is an average of 3 × 20% = 60%.
- Company B has a gross margin of 20% and has higher inventory turns of 4.5. Company B’s GMROI is 4.5 × 20% = 90%.
Company B is making 90% on its inventory investment for the year. It is also making more money on opportunity cost because company B has 50% fewer inventories held as compared to Company A. This frees up capital or expenses if loans are involved. Company B can now afford to sell at a lower cost and also sell more expensive alternatives at lower prices.
Sustainability is meeting the needs of the present generation without compromising the needs of future generations. For every $1,000 spent on Lean Technologies, there is a Green payback of approximately $426, which includes savings in the environment. The greatest Green Savings is found in the transportation highway infrastructure yearly maintenance costs. Removing the cost of the transportation infrastructure from the scenario still provides for approximately $280 savings for every $1,000 spent on Green. The payback is well worth the cost, not only in dollars but also in sustainability.
Creating the World-Class Company
The following sections describe the initial components to create a world-class company. We begin with resource management, the management of resources to differentiate the company from competition. This is followed by the second part, which is forecasting the future enterprise inventory requirements. This is not just about the forecasting methodology but also integration and collaboration within the value chain. The term value chain is used to make notice of all the savings within the supply chain, savings that can separate your firm from the competition. The collaboration was made possible with VMI (vendor-managed inventory) and certification programs. The topics of EDI (electronic data interchange) and the various transaction sets are used for infrastructure integration and automation. At the end is a summary of the lean and green benefits.
Step One: Resource Management
The global competition is changing for the entire set of business paradigms. Today’s companies need to be more competitive, flexible, innovative, and lean because of increased global competition. It is not a privilege to make a profit today, it is an expectation of stakeholders—employees, banks, government, and suppliers. The global recession has forced companies to cut costs and look for new, innovative ways to do more with fewer people. This has brought on the concept of Innovation Management, the need to think creatively and find better ways to be more productive. This differentiates a company from its competition.
How can a company remain innovative enough to separate itself from the competition? This was Steve Job’s major mantra when he came back to Apple Corporation in 1997. Apple needed to catch up with the competition: IBM. At the time, people needed something different to overcome their fear of computers. Steve’s comment to the team at Apple was, “Apple cannot keep trying to get one step better than their rivals. They must be innovative and make something different.” This was the start of Apple’s comeback with the introduction of the iMac.
The iMac was the first computer that looked friendly and came in bright, vivid colors. This simple change brought about the start of Apple’s great growth pattern. The popular belief is that if Apple would have waited an additional year, they would have been doomed. Another example of Apple’s innovative philosophy involved asking their employees to spend 20% of their time thinking creatively. The employees sat in a comfortable room, separate from their work area, to explore ideas that were new and innovative.
Charles Darwin said, “It’s not the strongest species that survive, or the most intelligent, but the most responsive to change.” Innovation Management is the concept of trying to create the most innovative atmosphere in the company that’s possible. How do employers teach people to think beyond the box? One way to facilitate this is to have the managers go to one or two conferences focusing on areas where improvement is needed each year and then return to share their knowledge with the rest of the staff.
Staff training is a good time to facilitate affinity analysis. This is the concept of recording the ideas on a chart so that the information is easily seen by the group. The information flow can be categorized and prioritized by importance. An overriding theme for each innovative improvement is to improve the product by changing the playing field on the competition. Implementing an open training forum makes it harder for competitors to ramp up in a new direction. By the time they catch up, the innovative management team is already on the next playing field.
Innovation Management will not succeed without Talent Management. Creativity and innovation are viable only when the most talented people in the organization are placed into an atmosphere conducive to thinking outside the box. Google understands this concept and touts the practice on their Web site of creating “an atmosphere that, when they had hired the most talented people, they, in turn, did not want to leave. This not only refers to not leaving for another job, but also refers to wanting to spend more time at work. The employees actually enjoy being at work.” Innovation Management drives talented people to companies that practice this method.
Employee retention requires a top-down attitude of Talent Management. Creating a desirable work environment might mean providing on-site health classes such as yoga, offering local gym memberships, or bringing in guest speakers to focus on personal and professional improvement. The benefit to the company includes decreased health-related absences, lower health-insurance costs, and increased camaraderie among the staff. For employees in manufacturing or distribution, injuries such as carpal tunnel syndrome are commonplace. The wellness program can help lower the incidence of medical claims.
The final piece of the Talent Management puzzle is the profit-sharing program. Profit sharing creates a personal stake in the success of the company, which increases employee productivity. Do it Best Corp. has instituted a profit-sharing program that led to one of the highest retention rates in the industry. Their profit sharing today is over 20% of employee pay, which has increased staff involvement in cost-cutting methodology.
After the talent is in place, the next necessary step is to spark the innovative talents of the staff by creating an atmosphere of Change Management. The key element in Change Management is continuous improvement through motivating employees to consider change a benefit and to embrace each one as a new challenge. This is done with the introduction of continuous improvement concepts. These improvements can be introduced to the employees in a discussion forum, which allows them to confer with others on the viability of each concept.
For example, the manager’s job is to find the why and how of extra inventory problems. Employees have the answers and a good manager seeks those answers through the philosophy of Management by Walking Around (MBWA). Managers who are there to listen allow subordinates to be more open to sharing improvement ideas. Sometimes the best ideas come from informal conversations with employees. Employee objectives should be made visible through the use of scoreboards throughout the office and communicated through weekly meetings. The objectives are then used to create constant awareness in the way each step is taken in the supply chain.
Employees who are rewarded with incentives are more likely to consider corporate objectives and improved processes. Acknowledgement of critical milestones through the creation of public displays promotes the team players who can be imaginative. Companies that nurture the spirit of thinking beyond the box open communication and encourage and reward new ideas. The corporate culture of new idea generation requires constant nourishment. It also requires the right people who are self-motivated and willing to work with others.
An additional but essential part of Change Management is execution. There are too many CEOs and directors not clearly tied to their goals. Their pay and bonus structure does not reflect the performance and profitability of the company. To move with the times, execution must reflect from the top of the organization down to the production floor.
Companies have prospered through the generations with each technological advancement:
- In 1910: Mass production
- In 1960: Lean technologies
- In 1980: Flexibility through computerization
- In 1990: Reconfiguration
- In 2000: Knowledge management
In the era of knowledge management, the leaders must grow creatively to unlock the potential of the personnel. The only way to perform this is through Execution Management. Steve Jobs of Apple Computers envisioned the Mac computer, iPod, iPhone, iPad, and iTunes. He knew how to execute the vision and make it happen. Allen Mulally of the Ford Motor Company turned Boeing around and then transformed Ford with its new styling and innovative models.
Execution is giving the personnel direction and a vision of what needs to be accomplished. A company can empower employees to succeed by enabling them to make the vision possible while motivating them to use their talents to execute the vision. Execution is making things happen that delight the customers and shareholders.
Technology is changing the environment, allowing companies to execute in an even more expeditious fashion. There are four trends that make this possible:
- Development of an ERP (Enterprise Resource Planning) environment. All knowledge in real time and all from the same source. Information is more accurate and relevant, which expedites decisions and informs all interested parties of progress.
- On-demand, which means going to the next-generation real-time management systems called SAAS, or Software as a Service. The user is billed and pays only for what is used. This software is more pervasive than the old-style ERP systems. It is assumed that the software will be downloaded from the Internet in a cloud, ASP (Application Service Provider), or App Environment. Now information analysis can be more readily available on all data realized from the ERP system above.
- BI, or Business Intelligence, which is software that is inbred into a DSS, or Decision Support System. This expands the horizon of the two preceding steps. Analysis is achieved with the on-demand software, and the information received will translate to knowledge for the corporation through the use of Business Intelligence. It allows the intellectual capacity of the analytics system support to aid the managers in decision making and risk analysis. This difference is what separates the leaders from the followers.
- On Device, or mobile, which means that the employee can be engaged anytime and anyplace. This has started the new generation of the always-on, always-connected world. These devices will transform the business industry. Now when decisions need to be made immediately, communication between management and staff will not be put on hold. The decisions can be made more expeditiously.
After the team is in place, the Lean Green journey can continue through the management paradigm and begin again with Innovation Management. Innovation Management works best when Talent and Change Management techniques are implemented in unison. For instance, when a new forecast system was needed to streamline the purchase of 55,000 items, innovative management sought out the most qualified employee and worked with him to allow his creativity to produce the technology necessary to create the system. He was permitted to leave the job site daily at noon and work at the location of his choosing for six months.
From a table at a local coffee shop, this employee coded the Forecasting and Ordering Using Regression, Time Series and Econometrics (FOURTE) system. When implemented, FOURTE allowed the company to differentiate itself from the competition by attaining the industry leadership in turns and service level. The system increased productivity by a factor of 16. The same employee was later offered the opportunity to design the only promotional forecast system in the industry using SAS as the analytic engine. Without an attitude of innovation, this company would have missed out on long-term sustainability and an unmatchable competitive edge.
Today’s successful company involves each department in the corporation as well as customers and suppliers along the supply chain. Collaborative versions of technology software such as ERP II (Enterprise Resource Planning) and MRP II (networked closed-loop manufacturing requirement planning) are networked with accounting financials and other departments such as Human Resource, Distribution, and Marketing. The one overriding feature is that there are no more silos for independent enterprise software. The common thread in creating the world-class corporation is determining how each decision affects every point in the supply chain, as well as knowing what is best for the entire company.
Step Two: Forecasting the Future Enterprise Inventory Requirements: Best of Breed Forecast Systems and the Supply Chain
Vendor-managed inventory (VMI) is an agreement between the supplier and the retailer of merchandise. The retailer must give the usages, on-hand and on-order information to the supplier so that they can take full responsibility for maintaining the retailer’s inventory. This is usually in the form of an EDI (electronic data interchange) transaction set 852. The supplier now has the goal of balancing the demand and supply side of the equation for the retailer. A 3PL or third-party logistics provider can also be used by the retailer to augment the success of the VMI program by maintaining better control of the inbound and outbound traffic.
In the traditional relationship, the distribution centers stock their warehouse with products from the supplier and the orders are based on demand forecast from the supplier. The vendor could also stock stores in a similar fashion, in which case the supplier could bring in extra storage, displays, or promotions. The vendor may have to pay a slotting fee for storage in the retail store, but it is worth the time and expense because it increases sales and profits due to the added visibility of product. The product can also be delivered on a consignment basis, which means the product is owned by the vendor and the retailer does not have to pay for the inventory. This is great for the retailer because they garnish the sales from the additional product and pay for the items only when they are sold. The supplier, in turn, bases forecasts and inventory levels on past orders from the retailer.
In a VMI arrangement with the retailer, the supplier may take over the inventory functions that the customer managed. In this scenario, the supplier responsibilities include the following:
- Providing the racking or bins for the storage. This also includes all signage and advertising media.
- Determining how the merchandise will be displayed. Is it an end-cap or a dump bin?
- Determining the receiving schedule for inbound receipts. This needs to be approved by the retailer of the distribution site.
- Maintaining all inventory transactions. This needs to be very visible with the retailer and supplier.
In the traditional relationship, the customer has an incentive to keep inventory lean by placing small, frequent orders. This is called the just-in-time (JIT) concept. This ensures that the customer maintains an acceptable fill rate and a low inventory level. When this concept is used, it is necessary to be cognizant of the increased cost of added transportation and receiving.
With the Green variable for the supply chain, the vendor will not have to ship the product as often as the just-in-time arrangement from the retailer. This saves in mileage traveled by the manufacturer, and the extra inventory is stored in one facility, usually owned by the supplier. This facilitates smaller warehouses on the retailer’s side and smaller supply chain inventories because it is not stocked heavily in many locations.
The onsite supplier (OSS) can measure the climate of each sale and get closer to the customer. This is very important when the vendor is looking for new product information or is looking for better information for a promotion. The keys to making VMI work is shared risk. Often if the inventory does not sell, under the VMI partnership the supplier will repurchase the product from the buyer (retailer). In other cases, the product may be in the possession of the retailer on consignment. This can dramatically increase the turns of the buyer’s inventory. The general definition of turns is:
Let’s say the average inventory is 1,000 units and sales per year equal 4,000 units. If T = 4 then there is an average of 1/4 of the year’s inventory on hand:
When inventory is consigned, it is written in the books as sold only when the sale takes place. If a business is open 360 days a year, the item is owned only for the day it sold. The turns for the consigned inventory equal 360.
Lowes has an agreement with its suppliers on large appliances to be the marketing representative of brands such as LG. After the customer buys the product, it is shipped out of LG’s warehouse and delivered to the customer by Lowes. This is a great savings in inventory because the product is not stored in two places, it is stored only at LG’s facility. This is a great savings in the total aggregate supply chain.
Consigning inventory is expanding into industries such as the HVAC (Heating, Ventilation, and Air Conditioning) industry. The HVAC service companies have the parts inventoried by the parts distributors in their warehouse. If the HVAC company gets a job, their service representatives go to the appropriate distributors to pick up the product and then go the customer to fix or service their heating or air-conditioning systems. This saves the HVAC company from having to store its distributor’s entire inventory in the warehouse.
If they did store the material, there would be a duplication of inventory in the supply chain. Companies may enter into an arrangement with the suppliers that 20% of the items that represent 80% of the sales could be stored with HVAC’s distributors. This could represent 50% to 60% of the HVAC’s inventory. The VMI partnership helps foster a closer understanding between the supplier and the manufacturer by using EDI formats. EDI software and statistical methodologies are used to forecast and maintain correct inventory in the supply chain.
Vendors benefit from more control of displays and more contact to impart knowledge to employees, thus enhancing the growth of the partnership. The retailers benefit from reduced risk, better store staff knowledge (which builds brand loyalty for both the vendor and the retailer), and reduced display maintenance outlays. Both vendor and retailer or distributor benefit by the usual once-a-year technology meeting in which both partners share their knowledge of the best-of-breed technology in the companies. The overriding theme for these conferences is that both parties realize that if they help each other the whole will become better than the sum of the parts.
Consumers benefit from knowledgeable store staff who are in frequent contact with manufacturer (vendor) representatives when parts or service are required. Employees with greater knowledge of the products offered by the entire range of vendors have the ability to help the customer choose from competing products for items most suited to them. This actually increases the manufacturer’s sales because the retailer’s employees are more knowledgeable about the supplier’s product line. They can suggest items that they had no knowledge of in the past. In a VMI partnership, manufacturers stand to increase sales by 3% to 4%.
An additional reason to use VMI is to add compliance and optimization into the supply chain. There are a number of technologies available, but the main issue is to optimize collaboration between trading partners. Vendor Managed Inventory will also minimize the “bullwhip effect.” The bullwhip effect is variation in demand caused by poor communication between the retailer and the manufacturer. Its name originated with Wal-Mart and PG’s VMI program.
Do it Best Corp. has about 5,000 vendors and approximately 4,000 customers. The VMI vendors were chosen using the Pareto approach, considering which vendors had the biggest bang for the dollar: the 20% that contributed 80% to sales. These vendors are usually the most sophisticated and able to enter into long binding partnerships with the company. In most cases, an EDI network is needed to make sure that the data is sent and received in real time and accessible by all parties involved.
Certification programs will become more and more necessary when entering into these long-range contracts. They help in establishing standard operating procedures (SOP) among trading partners. This is essential to realizing the truest form of economy of scale with manufacturers. There must be a grading scale to guide future progress and maintain balance with numerous VMI trading partners. A sample document for the VMI or VMI partner response to the suppliers is shown in Table 1-1. This form is to be used in the certification process for the suppliers. It is a list of rules they must follow to be included in the certification program.
Table 1-1. The VMI Partner Document
The Savings of EDI
Electronic data interchange (EDI) is used to transfer electronic documents or business data from one computer system to another computer system. In the following explanation, data is exchanged from one trading partner to another trading partner without human intervention.
The Internet provides a means for any company, without regard to size or location, to become part of a major supply chain initiative hosted by a global retailer or manufacturing company. Many companies around the world have shifted production of labor-intensive parts to low-cost, emerging regions such as Brazil, Russia, India, China, and Eastern Europe. Web-based EDI, or WebEDI, allows a company to interact with its suppliers in these regions without the worry of implementing a complex EDI infrastructure.
In its simplest form, WebEDI enables small to medium-sized businesses to receive, turn around, create, and manage electronic documents using only a Web browser. This service seamlessly transforms data into EDI format and transmits it to the trading partner. Simple prepopulated forms enable businesses to communicate and comply with the trading partners’ requirements using built-in business rules. Using a friendly web-based interface, EDI transactions can be received, edited, and sent as easily as an email. No third-party software installation is necessary. The only requirement is an Internet connection. WebEDI is accessible anywhere in the world and does not require a dedicated IT person to manage software.
Some examples of the processes automated by EDI are represented by a term transaction set. The transaction set is the data formatted and sent for a particular process. The different transaction sets have a numerical name such as 810 for an invoice. Some of the examples of the common transaction sets used are the following:
- Purchase order is sent electronically with a transaction set called an 850. This will allow the sending of all purchase orders electronically to the supplier. Paperwork is minimized and employee productivity enhanced.
- Invoices are sent electronically through transaction set 810. All invoices can be sent back from the supplier electronically. These invoices are from the electronic purchase orders received at an earlier date. The invoice is also considered a turnaround document. (A turnaround document refers to the time period after the purchase order is sent to the time the data is turned around as an invoice, the document that follows the purchase order. An invoice follows the purchase order after its receipt and the advance shipping notice is created after the purchase is loaded onto the truck for shipping.) The purchasing invoice cycle is now done electronically.
- Advance Ship Notice (ASN) is sent electronically through the transaction set 856. Receiving can be planned in advance due to the advance ship notice of what is coming in from each supplier using the ASN. Some products are hard to put away and need a specialized staff. With the ASN, it is easier to determine which trucks contain the vendor products, so staffing becomes easier. Second turnaround documents are used when a supplier receives the purchase order electronically. After a PO is received, the supplier turns around and sends the other two documents. They then ship the product and send the ASN electronically, allowing companies to reduce the paperwork requirements.
- Transportation Carrier Shipment Status Message is sent electronically through the transaction set 214. This transaction set is used to schedule a carrier into the dock. The carrier will use the 214 transaction set to notify their arrival, making arrival time approximately 90% accurate to the hour. Now a closed-looped environment has been created. Each truck is identified by the Shipment Status transaction and given a status of their location and time of delivery. Receiving is now scheduled proactively.
- Payment Order/Remittance Advice is sent electronically through the 820 transaction set. A remittance advice is a letter sent by a customer to a supplier to inform the supplier of invoice payment. If the customer is paying by check, the remittance advice often accompanies the check. Remittance advices are not mandatory; however, they are seen as a courtesy because they help the supplier’s accounts-receivable department match invoices with payments. The remittance advice should therefore specify the invoice number(s) for which payment is tendered. Modern systems will often scan a paper remittance advice into a computer system, where data entry will be performed. Modern remittance advices can include dozens or hundreds of invoice numbers and other vital information. The primary purpose for the remittance advice is to let the supplier know when and how much was paid and when it will arrive. This helps greatly in the balancing of cash flow from a vendor standpoint.
- MSDS (Material Safety Data Sheet) is sent electronically through transaction set 848. The transaction set can be used to communicate chemical characteristics, hazards, and precautions for the safe handling and use of a material. The transaction set is intended to convey the information required for an MSDS as defined by the Occupational Safety and Health Administration (OSHA). The MSDS provides the receiver with detailed information concerning material identity, emergency response, chemical and physical characteristics, toxicology, and industrial hygiene procedures.
- Price Information Transaction Set is called the 879. The transaction set contains the current price or price changes to the customer for documentation or for their electronic catalog.
- Price/Sales Catalog is sent through transaction set 832. The 832 EDI document type is used to provide a trading partner with a report of vendor product data for ordering purposes while maintaining an established practice in furnishing trading partners with prices of goods or services in a catalog. The 832 Price/Sales Catalog has four major functions: catalog operation, a traditional vendor catalog, item setup and maintenance, and sales price communication. After the 832 Price/Sales Catalog is received, a 997 Functional Acknowledgment is sent back from the transportation provider indicating that the Price/Sales Catalog was successfully received.
Traditionally Scan Based Trading programs use EDI solutions as the key component to synchronize information on store locations. Here are a few of the transaction sets:
- Organizational Structure 816—This transaction set can be used to transmit pertinent information about a parent organization, its members, and the relationship of a member to another member and/or to the parent organization. The transaction set contains some of the following information: address, geographical location, contacts, and identity code. The identity code is the D-U-N-S numbers and the supplier company numbers, which may be internal numbers to identify the individual companies, buying units, and suppliers.
- Items Price/Sales Catalog 832—This transaction set is used to update an electronic catalog or share pricing with the buyer or seller. It has the following components: item identification, data time reference, restrictions and conditions, product description, item physical details, pricing information, bracket pricing, currency, address information, and geographical information.
- Price Information 879—This transaction set can be used to enable a manufacturer, a supplier, a broker, or an agent to provide a trading partner with pricing information. The transaction set is also used in setting up new items in a store. When a new item is set up, Item Maintenance Transaction Set 888 is needed. The details are similar to those for the Items Price/Sales Catalog 832.
- Item Maintenance Transaction Set 888—This transaction set is used to enable a manufacturer, a supplier, a broker, or an agent to provide detailed finished goods product information to a partner. This transaction set can be used to provide information about new products or changes in existing product specifications.
- Daily Sales Product Activity Data 852—This transaction set gives the supplier or user information about the movement of the product. This transaction set is used when performing VMI or QR quick response with trading partners. It has the following fields: Item on Hand per Location, Item on Order per Location, Item Usage per Location, and Item Backorder per Location.
- Receiving’s Receiving Advice 861—The transaction set can be used to provide for customary and established business and industry practice relative to the notification of receipt or formal acceptance of goods and services. It uses the following fields: Currency, Date Time, Purchase Order Reference, Carrier Details, Carrier Routing, Carrier Special Handling, Geographical Information, and F.O.B.-Related Information.
- Organizational Structure 210—The Motor Carrier Freight Invoice transaction gives the location of the delivery, and from this you can determine its approximate delivery time. This is extremely useful in planning for the receiving staff and also for customer notification of product delivery.
- Forecast Planning Schedule 830—This is one of the innovations that sets us apart from the competition. The transaction set tells the supplier what we will be selling on promotions with anticipated volume. The supplier can plan its MRP processes better, and our service levels are greatly enhanced.
Summary of the EDI Transaction Sets
- Transaction set 856: Advance Ship Notice
- Transaction set 810: Invoice
- Transaction Set 210: Motor Carrier Freight Invoice
- Transaction set 214: Transportation Carrier Shipment Status
- Transaction set 820: Payment Order/Remittance Advice
- Transaction set 850: Purchase Order
- Transaction set 848: Material Safety Data Sheet
- Transaction set 879: Price Information
- Transaction set 832: Price/Sales Catalog
- Transaction set 997: Functional Acknowledgment
- Transaction set 816: Organizational Structure
- Transaction set 888: Item Maintenance
- Transaction set 852: Daily Sales Product Activity Data
- Transaction set 861: Receiving’s Receiving Advice
- Transaction set 830: Forecast Planning Schedule
Lean and Green Savings Using EDI
This section covers the metrics and savings that can be actualized through the implementation of the Vendor Management Program and electronic data interchange. The use of these tools requires a trusting relationship between the trading partners, but the return for both is significant. When a VMI vendor is added, that vendor needs to be on the same certification program. The VMI productivity increase is composed of three parts:
- The EDI savings on the Advance Ship Notice, Purchase Order, and Invoice
- The VMI Reduction of Inventory
Productivity Increase in
- SKU count, and
- Increased Service Level for Promotional and Seasonal Items
The following is a list of some of the important EDI automation savings used in VMI.
The Advance Ship Notice (ASN) transaction set 856 offers a view of the contents of the goods arriving on the carrier in advance of the delivery date. Using this document alone has allowed Do it Best Corp. to realize a 15% increase in labor productivity in the Receiving Department and a labor savings of 7 people × .15 = 1.05 person labor hours. At $18 per hour and with additional benefits of 25%, direct labor savings is $46,800 per year. This assumes the need for one less person in receiving.
The ASN can replace the Purchase Order (PO) when the vendor is doing the planning for the customer as in VMI. The ASN shows what is coming in, and this document can be used to pay the invoice. Payment is made through the ASN. The Supply Management Handbook says, “It often costs organizations more than $100 in administrative expenses to generate a purchase order” and adds, “In many firms, the cost of managing and generating a purchase order can exceed $200 per transaction.” The analysis conducted by Do it Best Corp. found that paper purchase orders can range from a cost of $50 per manual paper purchase order to $1.50 electronically. The solution to their success was to integrate as many transactions with the supplier as possible.
(Note: The tables in Chapter 4, “Transportation Management System (TMS),” are used in the following analysis.)
There were 1,625 × 9 = 14,625 purchase orders per month. The average PO is three pages. This is 14,625 × 3 = 43,875 pages per month or 526,500 pages per year. Normally 500 sheets weigh five pounds, which means that 5,265 pounds of paper were consumed per year. A tree produces roughly 800 pounds of paper. So performing the calculation:
shows that the purchase order process consumed seven trees per year (see Table 4-4 in Chapter 4). There are 175,500 pages of invoices per year. The invoice has miscellaneous credit memos and other explanatory pages with and following the invoice statement. In estimation, the number of pages in the invoice process is about the same as in the PO process. Knowing this, we can calculate that seven additional trees are consumed in the invoice process. The total savings is 7 + 7 = 14 trees per year for automating both the PO and the invoice process.
In manufacturing paper, the wood is turned into pulp. The yield is about 50%—about half of the tree is knots, lignin, and other material not used to make paper. Therefore, a pine tree yields about 805 pounds of paper. A ream of photocopier paper weighs about 5 pounds and contains 500 sheets (paper is often seen described as “20-pound stock” or “24-pound stock”—which is the weight of 500 sheets of 17″ × 22″ paper). Using these measurements, a tree would produce (805 / 5 × 500) = 80,500 sheets of paper (see Table 4-4).
Lean and Green EDI Savings of the Advance Ship Notice, Purchase Order, and Invoice
Using the ASN to replace the purchase order and invoice for the VMI vendor results in Lean Savings:
- The electronic purchase order system saves $525,500 per year compared to the manual purchase order procedure.
- The electronic invoice system saves $1,228,500 per year compared to the manual invoice procedure.
- The ASN allows a 15% increase in labor productivity in the Receiving Department. This is a labor savings of 7 × .15 = 1.05 person labor hours. This means reducing the number of employees needed by one. At $18 per hour and with additional benefits of 25%, direct labor savings is 1 × 1.25 × 40 × 52 × $18 = $46,800 per year.
- The Lean Savings is ($525,500 + $1,228,500 + $46,800) = $1,800,800 per year.
- The Green Savings amounts to 14 trees per year being saved. Using Table 4-7, we can see that 14 trees equates to 910 pounds of CO2 saved per year.
- Total savings so far is $1,800,800 per year + 14 trees + 910 pounds of CO2 saved per year.
These savings can be used as productivity metrics for personnel or management. Visual Supply Management increases the productivity of personnel, using better and timelier information from the suppliers. For instance, in the past, it took all day for a purchase agent to review a very large vendor manually for all nine of the Do it Best Corp. warehouses. It can now be reviewed in 5 minutes. The only things to review on the VMI vendors are the turns and service levels for each warehouse. As long as the turns and service levels are increasing, they are increasing profit and sales for the company. This also shows that the supplier is doing a better job of demand forecasting if the turns are going up (more sales for less inventory) and the out of stocks are going down (more revenue with less inventory). The increase in labor efficiency is 400% using the collaborative electronic system. Employees can be deployed to more profitable jobs. Installing a VMI system does not create success by itself. Other processes are needed to enable the technology. These processes include the technologies discussed throughout this book.
Eight people are involved in the purchasing/invoice system. With a 400% increase in productivity, two are currently required. 3,060 kWh × $0.16 = $490 dollars were saved in electricity usage by reduction of computer usage for the purchasing group. Similar productivity improvements allow for the creation of a company with 50% fewer personnel than the competition.
VMI collaborative metrics for the supply chain include a 400% increase in staff productivity. There is also a 30% to 50% increase in turns. If there exists a $300 million inventory, assuming a 35% increase in turns, $78 million in inventory dollars are freed to be invested elsewhere. Using this method, Do it Best Corp. created a sales increase of 3.5% with no increase in inventory levels, a 25% increase in SKU count with no increase in warehouse space, and customer service levels of 97% or more on promotional and seasonal items, as well as significantly reduced paper-handling costs.
Do it Best Corp. originally had three turns with $300 million average inventory and $900 million in sales. At 35% increase in turns, the new number of turns, after VMI, is 4.05. With average sales of $900 million for the VMI vendors, the new inventory figure would be $900 million / 4.05 = $222 million ($78 million in reduced inventory). There was an increase of 3.5% in sales without an increase in inventory. This was possible only with a long-term partnership with suppliers who are now able to work with the customer on better selling categories, new promotions, and new items. It becomes essential for the supplier that the customer succeeds as well. The trend for DBI took approximately five years to develop. So the learning curve was five years.
The savings to Damaged and Obsolescence is 9.75% of inventory. Do it Best Corp. obtained the savings through VMI. Calculations show a 9.75% of $78 million, or $7.606 million, savings in Damaged and Obsolescence costs.
With the 400% increase in productivity and the 35% increase in turns, the calculations shown in the following section are now possible.
Lean and Green Savings of VMI Reduction of Inventory
The Lean Savings of VMI Reduction of Inventory:
- Starting Inventory is $300,000,000.
- Starting Sales are $900,000,000.
- Starting Turns are 3.00.
- A 35% increase in turns, allowing an inventory reduction of $78,000,000.
- The New Inventory using VMI is $300,000,000 − $78,000,000 = $222,000,000.
- The new turns are 4.05.
- Carrying cost of 26.66% savings yields a $20,720,000 reduction.
- Freed-up cost of capital is .02 × $78,000,000 = $1,560,000.
- Total Lean Savings from VMI Reduction of Inventory is $22,280,000.
The Green Savings of VMI Reduction of Inventory:
- $490 saved in electricity usage for the Purchasing area.
- $7.606 million per year in landfill savings.
- Total Lean and Green Savings for VMI Reduction of Inventory is $29,886,490.
The Green Savings is as shown here:
A new warehouse (now unnecessary) would cost $14 million in inventory and $10 million in the building cost. The VMI initiative would save:
- $3.517 million in additional infrastructure cost.
- An additional 3 to 6.5 million with an average of 4.75 million in furnishing, equipment, racking, and automation equipment will not be needed.
- This totals to $14 million in inventory dollars + $3.517 million + $4.75 million equals a total cost of $22,260,000.
- Without the existing improvement in technology, it would be necessary to increase the size of the warehouse by 35%. The increase would represent additional costs of 35% × $22,260,000 = $7.791 million.
- The added cost of utilities would be computed as $0.5717 a square foot annually. This is dependent on the amount of automated equipment in the warehouse. For a 450,000-square-foot warehouse the average is 450,000 × $0.57170 = $256,500 spent annually on electricity. Total savings in utility costs is .35 × $256,500 × 9 = $807,975.
The last three categories of savings are Green Savings. The savings are a 25% increase in SKU count with no increase in inventory space, a cost savings of $807,975 saved in electrical usage generation, and finally a sales increase of 3.5% without additional resource expenditures.
- The Lean Savings is the added sales = 1.035 × $900,000,000 = $931,000,000. This is a $31,000,000 increase in sales. With a profit margin of 18%, this represents an increase in profits of $5,580,000.
- The new turns are 931,000,000 / $222,000,000 = 4.19 turns.
- The Green Savings erases the need to spend an additional $7.791 million in added warehouse infrastructure costs to accommodate the 3.5% sales increase and the 25% addition in SKU count. This is considered Green Savings because raw materials for warehouse expansion are unnecessary.
- The added cost of utilities would be computed as $0.5717 a square foot annually. This is dependent on the amount of automated equipment in the warehouse. For a 450,000-square-foot warehouse, the average is 450,000 × $0.57170 = $256,500 spent annually on electricity.
The Total Lean for the three categories is the increased profits from an increase of 3.5% of sales = $5,580,000; company turns are 4.19, sales are $931 million, and inventory is $222 million.
The Total Green for the three categories is the decrease in infrastructure cost = $7,791,000; the decrease in utilities cost = $807,975; and the total Green Cost = $8,598,975.
The total savings for the entire VMI & EDI program including all the preceding steps is as shown here:
- Lean Savings of $29,660,800 +
- Green Savings of $16,205,465 =
- Total Savings of $45,866,265
Certification Program and Scorecarding
The next area of concern is the vendor or supplier scorecard. This helps keep a dashboard view of the supplier and perhaps also the carrier’s performance for eventual continuous improvement, or the Kaizen process. Development of a joint retailer/supplier scorecard is critical to success. Measurements include the following:
- Product profitability
- Inventory turns and service level
- Promotional effectiveness
- New product introduction effectiveness
- Quality/returned goods
- On-time performance
The operational issues of certification programs include these:
- Product frequency of arrival with receiving cost in mind
- Product delivery timing during the day
- Vendor minimum
- Item minimums
- Pallet layer stacking
- Frequency of arrivals
- Pallet or container type
- Label type to use
- Label placement
- RF collaboration with current system to make a more efficient information flow between the supplier and the distributor
Certification programs cut Do it Best Corp. lead times down by approximately one day. That one-day savings included a reduction in manufacturing lead time as well as receiving and stocking the product. Do it Best Corp. found that the certification program equates to an additional 2.2% reduction of inventory for each day saved in lead time. Therefore, the savings for the certification program is 2.2% × $222 million in inventory. This is approximately $5 million in inventory reduction, making the new inventory level $217 million.
Do it Best Corp. also mandated the use of specific labels, pallet sizes, and label placement to maximize productivity. Logistics labels are increasingly used to track containers and other logistics units through the supply chain, as recording and monitoring the movement of goods is an essential part of supply chain management. This allows the employees to scan each container or large box and know how many items are inside. These are the most successful mandates:
SCC-14 (Shipping Container Code) is a 14-digit number assigned to fixed-content shipping containers. Using the SCC-14, it is assumed that like items are in each box. When the box is scanned, the count is given without opening the container for counts. For example, the UPC number tells the system that the box holds 12 units.
SCC-18 (the Serial Shipping Container Code) is a unique serial number that is used to identify each individual pallet, assuming that various assorted products are on a pallet. Scanning the pallet gives the items contained on it. The pallet can be moved to the stocking location without the shrink-wrap being broken at this time. Employees can scan more products per hour and move products from receiving to stocking at a much faster rate.
Another part of the certification program is the use of the “funnel” program. Do it Best Corp. asked the supplier to stock like items on each pallet. This means that a pallet may have multiple purchase order numbers from multiple orders for the same item. Using the old system, manufacturers filled their orders by purchase order and any back orders were filled and palletized by PO. Having like items spread across multiple pallets hurts productivity. Do it Best Corp. also requires suppliers to have bin location numbers on their files. The suppliers place stock merchandise in the pallets with the same inventory location.
The largest part of receiving is the breakdown and sorting of product. This accounts for as much as 80% of the time spent in receiving. The bottleneck is eliminated by having the pallets go directly to the stocking location without any breakdown or sorting.
Certification Program Savings
The Lean Savings of the Certification Program
- Carrying cost savings $5,000,000 inventory × 26.6% = $1,330,000
- Freed-up cost of capital is .02 × $5,000,000 inventory savings = $100,000.
The Green Savings of the Certification Program
- 9.75% for Damage and Obsolescence × $5,000,000 = $487,500 per year in landfill savings.
- Total Lean and Green Savings so far is $1,917,500.
To this point, after the Certification Program:
- Company turns are 4.25.
- Sales are $922 million.
- Inventory now is $217 million.