This case shows how advanced partnering agreements can span the entire supply chain and benefit more that just a few firms in the network.. The final case demonstrates the supply chain i
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Douglas Burke
In the previous chapter we presented many of the details necessary for effective SCM In this chapter we present four pointed case studies that give the reader a view of what is currently being done to improve SCM All the case studies are based
on documented research; however, the names of the actual businesses have been changed In some instances, the case studies presented are a compilation of numerous examples from a specific field or industry
The first case study is centered in the retail industry, which was the first to recognize the importance of improving SCM to gain market share and business advantages This case highlights one company’s innovative approach to inventory management This well-known retail chain took advantage of today’s information technology to establish a “pull-through” supply chain, resulting in dramatic reduc-tions in inventory and improved customer satisfaction
The second case study focuses on how a truck-manufacturing firm used local partnering to improve its SCM and gain business advantages This case follows the evolution of what started as a simple partnering agreement but ended as a synergistic coupling of two good companies, leading to results far in excess of what any one company could obtain alone You will see the importance of trust and shared benefits
in this type of simple partnering agreement
The third case study focuses on the grocery industry This case shows how advanced partnering agreements can span the entire supply chain and benefit more that just a few firms in the network This case points out some different aspects of SCM because of the short shelf life of products, the need for short lead times, and close promotional management to smooth variations in demand
The final case demonstrates the supply chain improvement effort of a computer-manufacturing firm, moving from the initial data analysis for determining areas of improvement through the implementation of the improvements What is important about this case is the use of interdisciplinary teams that had to be cross functional
to accomplish the established goals You will also see how SCM improvement efforts must fit into a company’s strategic plan
17.1 OPTIMUM REORDER CASE STUDY
Working with a number of customers from the consumer retail industry, Company A developed an effective and industry-recognized three-step supply chain improvement SL3003Ch17Frame Page 369 Tuesday, November 6, 2001 6:00 PM
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system This technique, appropriately named the constant refill program (CRP), was adopted as the company’s vision for responding to the growing need for faster, more accurate stock replenishment while maintaining a high level of customer satisfaction Company A continues to claim that CRP has changed the long-established relation-ships between customer and supplier By implementing CRP, Company A has sim-plified and streamlined the reorder process, reaping improvements in efficiency and effectiveness Additionally, the improved order response process eliminated steps that were not adding value to the customer, reducing costs and cycle times
The CRP process begins with orders received from the customer distribution centers via EDI (electronic data interchange) along with Company A’s inventory and receipts To obtain optimum reorder quantities, these orders are accumulated and transmitted to the customer headquarters site, which represents the pull-through demand Then the demand is compared with the inventory to calculate the optimum reorder quantities After making summary analyses and adjustments due to promo-tions and other pricing activities, the headquarters group routes the actual orders back to the distribution centers and Company A’s headquarters
Orders specific to individual plants are then sent from Company A to the individual manufacturing sites to start the production process After the needed products have been manufactured, dedicated carriers with dedicated delivery sched-ules move the newly manufactured goods to the customer distribution centers The newly manufactured goods and the on-hand inventory are then sent to stores for specific customers In this system, inventories are controlled by keeping the stocks
in the distribution centers at minimal levels and shifting dependence to the flexibility
of the manufacturing systems at Company A plants to meet most of the store needs Clearly, the actual process is more detailed than this However, all the functions that make the system work are represented The total effect is a system in which both the customer and Company A benefit from a lower cost, speedier process, and the ultimate consumer gets a more diverse product mix at a lower price Company A-documented customer benefits include
• Reduced customer-owned inventories and better utilization of distribution center space
• Greater than 65% reduction in customer warehouse inventory
• Elimination of paperwork and reduction of administrative costs by using electronic interchanges
• Improvement of store service levels to over 99% on specific products by providing the correct inventory quantity and mix to the customer
• A tripling of inventory turns, with a one-time cash-flow increase of almost
$0.25 million resulting from lower working capital tied up in warehouse inventory
Company A recorded these benefits:
• A greater than four-point increase in market share
• An almost 30% increase in orders
• An average of 8% vehicle utilization improvement SL3003Ch17Frame Page 370 Tuesday, November 6, 2001 6:00 PM
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• A decrease of over 50% on returns and refusals
• An average 30% reduction in damaged goods
• Improved customer service and satisfaction
By implementing this program, Company A now takes the incoming point of sales (POS) transaction data and determines what needs to be shipped even before
an actual order is created by the customer Substantial advantages are gained in planning and scheduling by this capability For example, products such as diapers typically suffer from wide variations in scheduling Customer needs depended on the particular type of diaper being consumed: regulars, absorbent, or super-absorbent grade Under CRP, manufacturing fluctuations have been significantly reduced because the plant knows which types are being pulled out of the system By having Company A and its customers involved in the CRP process, they both can offer the ultimate customer lower retail prices by passing through system savings Additional advantages are improved product freshness, reduced out-of-stock situations, and decreased package damage
Recently a large computer-manufacturing firm purchased Company A’s system This confirms that the CRP system is one of the leading-edge practices that will help to drive supply chain improvement to reality We expect that other firms will develop this type of system and that it will be expanded to the upstream side, including the suppliers of the materials needed to make the products Clearly, the opportunity for system improvements has started to be practical System improve-ment requires that the companies involved are able to recognize the types of enhance-ments that can be worked out by cooperative efforts between suppliers and producers The same methods can be used between suppliers and manufacturers as are used between manufacturers and stores
Company A is now working to introduce the next version of its supply chain improvement process — termed smooth logistics — and developing tomorrow’s solutions for today’s SCM problems
17.2 BASIC PARTNERING CASE STUDY
The next time you are on the road, take note of the number of large tractor-trailers pulling their loads across the United States A large manufacturer of the tough and durable machines that pull these trailers formed an alliance with a large supplier of tires The supplier (let’s call it the Tire Company) provides an excellent example of how to make a true partnering effort successful This is a true case study and presents
a successful business endeavor for both parties
Following a corporate spinoff, the truck manufacturer made a strategic decision that developing a partnering concept could offer special business advantages when evaluated against its traditional supplier relationships Management first performed
a serious internal review of existing procedures and supplier relationships The results were eye opening but not surprising, as you can see below:
• The dominant purchasing strategy was price buying
• The procurement base was fragmented
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• Profits for both buyer and seller had limited opportunities for growth
• Relationships with all their suppliers were mainly adversarial, neutral at best
• Customer satisfaction was neglected
A three-pronged approach was developed to find specific opportunities for improvements in these traditional circumstances The three areas selected for improvement were tires, engines, and drivetrains Multifunctional teams were selected to start the improvement process Team members included people from quality, marketing, manufacturing, production control, planning, finance, engineer-ing, and purchasing The first team, formed to investigate drivetrains, selected the Joni Corporation as a partnering candidate Another team was formed to investigate tires; they came up with the focus of this case study
The first investigation of the original tire improvement effort had the following results:
• The supply base was fragmented
• The Tire Company was the largest supplier
• Tires represented the third-largest cost item
• Tires had a high pull-through percentage
• The return of product was low
• Purchasing of tires was centrally controlled
From these findings it was clear that there were ample opportunities to improve this segment of the trucking business At this point, the objectives of the improvement effort needed to be established One objective, which was determined early in the project, was to develop a partnering arrangement with a key supplier or suppliers The team recognized that it must make certain that additional profits for the truck firm would be part of the results The team quickly moved toward the use of common resources for mutual benefit to achieve that goal The team developed the following project objectives:
• Develop a better understanding of the tire market
• Identify potential business opportunities
• Motivate suppliers to offer better and more comprehensive proposals
• Have a positive and significant impact on profits
The team started communicating its goals and expectations to various tire com-panies To convey the importance of the improvement effort, the teams chose to communicate this through site visits and formal presentations, as opposed to written
or verbal media Time was also spent interviewing dealers, customers, and truck firm managers to make certain that they were not missing input from any of the important stakeholders These visits took the team to training facilities, the truck firm’s assembly operation, tire plants, research and development centers, headquar-ters locations, test tracks, and trucking firms
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After the visits were completed, the field of potential partnering suppliers was reduced to four Potential partnering candidates were selected by using a formal objective evaluation procedure Large quantities of data went into the solicitation for proposals Using a complex and focused table of deciding factors, the truck firm developed a scoring system that led to selection of the finalist: Tire Company Tire Company’s director of sales and the truck firm’s manager of supplier relationships were intimately involved in this segment of the process They openly reported that many factors were key in building the original partnering relations An early consideration was whether the decision-making processes at both firms were compatible Data-gathering ability and the possibility of building a trusting relation-ship were other crucial considerations Ultimately, what the truck firm wanted was
to make sure that it moved in the right direction and that both firms were comfortable with the new alliance they were about to form This cautious initial planning was necessary because, if successful, the arrangement would be used as a model for other alliances
The partnering proposal that was eventually implemented satisfied all the truck firm’s “must-have” criteria and the most important of the “wants” criteria From the partner’s perspective, the proposal presented Tire Company’s expectations in terms
of obtaining a growing share of the truck firm’s business Also stated in the agreement was the fact that the partnership was to be open-ended and could be terminated by either of the two partnering firms Basic staffing and office commitments were outlined, providing resources to the core implementation group and a full-time partnering team that would direct the development of the alliance
At the initial meeting of the joint tire group, a mission statement and goals were developed The mission statement clearly established the groundwork for a success-ful partnering situation It begins, “A business partnership is defined as a joint business alliance wherein two companies agree to favor each other’s business activ-ities.” The mission statement adds, “Each partner must dedicate resources in capital, people, and facilities in order to support future business and growth in profit.” Finally, the mission statement elaborates, “Progress is not measured by the success of a single firm but [is] measured by the success of both firms which identify, prioritize[,] develop, and implement the cooperative efforts of both companies.” This progressive and eloquent mission statement was endorsed and signed by top-level executives in both firms
Early in the process, team members suggested hundreds of improvement projects without restraint or comment These projects were grouped by their relationship to either strategic goals or a functional work group They were then evaluated and prioritized by members of full-time business teams Evaluation and prioritization were accomplished by using a simple point system based on risk, timing, required resources, and potential benefits
When the business management team was formed for the joint activities described in the previous paragraph, care was taken to get a true cross section of disciplines The thought was that a multidisciplined team was necessary to avoid compromising one area within the company for the benefit of another The original team included full-time participation from the disciplines shown in Table 17.1 SL3003Ch17Frame Page 373 Tuesday, November 6, 2001 6:00 PM
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Team roles were established as follows:
• Communicate results and promote the value of the alliance
• Provide a forum to address strategic issues
• Develop and implement partnering business plans
• Manage all aspects of the team process
• Provide leadership and support to working groups
It is interesting to note that the degree of empowerment given to the team was much higher than you would typically see in a traditional improvement effort This supports the fact that the level of senior management endorsement was very high from both companies
Next, working groups were set up and staffed with core members and ad hoc members participated when needed These teams were responsible for performing myriad tasks, including reporting progress, forming task groups, developing action plans, generating innovative solutions, and acquiring necessary resources
One working team generated results that demonstrate the success that can be generated from a true partnering association The on-time assembly (OTA) team was established to design a better system for mounting final tire assemblies The OTA team was easily up to the task and eventually developed an innovative solution The team first focused on an analysis of the current systems and procedures in the procurement and assembly areas Tires and rims were typically ordered by the truck firm and stored with relatively low inventory levels The rims were then painted
or surface treated and sent to the mounting area that had dedicated factory floor space The team discovered that many errors occurred in this area when the tires were mounted, such as improperly mounted, low-pressure, or out-of-balance tires Although the percentage of defects seemed small, there were also ample opportu-nities for savings through reduction in floor space and increased throughput in the assembly area, along with the elimination of the previously mentioned errors
As we will see, the solution can be showcased as a model of partnering principles Before the partnering arrangement, the truck firm did most of the work They received all tires and rims, did the painting and mounting, and produced the final assemblies Because of the significant rejection rate of the final assemblies, 10 days’ inventory of tires and rims had to be maintained as a form of safety stock Under the new conditions, the truck firm suggested that Tire Company assume responsibility
TABLE 17.1 Disciplines Represented in the Original Team
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for the tires and rims, the painting, the mounting, and the final balancing processes The truck firm’s major wheel supplier was contacted and brought into the picture as part of the partnering arrangement This firm had the core competency in wheel and painting expertise, so an expansion of the alliance was quickly executed Tire Company established that the wheel supplier would be the manufacturer of choice for the rims and quickly formed a second partnering arrangement with the firm
In order to get this newly formed alliance under one roof, a new facility was built near the truck firm’s plant where tires and wheels could be sequenced for easier, error-free assembly Robotic arms were set up to flawlessly apply paint to the wheels Other robots lubricated the tires for proper mounting Finally, tires were automatically inflated to a particular vehicle specification using a computer-controlled program Next, a fully computerized balancing station was installed, ensuring that cus-tomers would receive perfectly balanced tires on every wheel assembly After the assembly process, the completed assemblies were stacked so that installation could
be done sequentially on designated trucks Final assemblies were loaded automati-cally via a computer-controlled conveyor into trailers, which were then continuously transported to the assembly plant There they were off-loaded and put on a conveyor belt that fed the assembly lines At the truck plant, technicians removed the finished units at the point of need and installed them on the appropriate trucks
Implementation of this activity required the combined strengths of both Tire Company and the wheel supplier The results were impressive: a high-quality, tire-and-wheel assembly process with a clear competitive advantage Benefits to the truck firm include improved finished tire-and-wheel assemblies, increased shop floor space, and reduced inventories The OTA team, which was spun off into an individual corporation, has expanded its business base and now ships units to Canada on a just-in-time basis What once was a 10-day supply of finished inventories has been reduced to a supply of hours, which represents a savings for all three parties Also, producing detailed business plans generated mutual savings One unexpected benefit has been that revenue from the savings due to partnering has been used to buy a test truck, which is now used for experimenting with other new products that will ultimately lead to more customers and higher revenues for all firms involved Without the trust demonstrated by the open communications that developed when the partnership was put together, this alliance would have never worked out Subsequently, the truck firm has offered to colocate Tire Company’s personnel to further facilitate partnering interchanges Another necessary aspect of this case was the training of the joint team members, which immediately improved communica-tions between all levels of the firms This is obviously a case with a win–win ending Both companies knew how to apply partnering the way it was meant to be applied, and reaped more benefits together than either could have gained by itself
17.3 ADVANCED PARTNERING CASE STUDY
Jerry’s, a Midwest-based grocery firm, has more than 100 stores within a 35-mile radius of a major metropolitan area The firm is noted for its leading-edge position among its peers in the industry and its willingness to look at innovative changes that will improve its systems
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During Jerry’s usual annual strategic planning, the topics on the agenda centered
on how new initiatives could be generated without substantial cost increases to the firm They wanted to build on the current effort to develop efficient consumer response techniques and develop a model of efficiency specifically designed for the retail grocery business Because of recent successful initiatives Jerry’s has been implementing, the vice president was interested only in building onto existing ini-tiatives rather than developing totally new systems or processes
A decision was made to pilot an effort based on an advanced partnering solution With that in mind, supplier ABC and a bakery, Sonja Corporation, were invited to participate Jerry’s would provide distribution resources from its own center and let its grocery stores be the focal point of retail sales Jerry’s sent out letters of invitation
to participate in a pilot effort and each firm gladly accepted the opportunity Jerry’s also developed a proof-of-concept paper, which was sent to each partic-ipant This paper generated additional topics of discussion from all involved parties This discussion format was used in conjunction with a questionnaire asking for objectives and expected deliverables This solicited preliminary ideas from the group with regard to the validity of the pilot project and helped to identify those areas that needed further exploration
When participants from each company met to discuss the pilot, consensus was quickly achieved on the validity of the exercise Furthermore, the group developed
a process map of the interconnecting relationships among the firms Brainstorming led to the creation of more than 50 potential improvement areas These possibilities were refined into roughly half that number of critical issues, with action teams developed to start working on them The action teams were formed to accomplish the following:
• Develop electronic data interchanges (EDIs) that would benefit the pilot members
• Develop and analyze a flowchart for the order-handling process
• Develop and analyze a flowchart for the forecasting and planning process Next, team assignments were made, realistic timetables were established, and action teams went out to find savings across the full supply-chain network Initially,
a list of benefits was developed that included
• Reduced transportation costs
• Improved cash flows
• Reduced administration costs
• Improved customer-service levels
• Reduced inventory
A list of available process data was developed that included promotional impact, price, cost, packaging, quantities, product, dates, and customer or con-sumer requirements
Next, the teams met to develop a list of actions to meet these goals Each team developed a high-level map of the process it was considering Some of these maps SL3003Ch17Frame Page 376 Tuesday, November 6, 2001 6:00 PM
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were lengthy, but in most cases, for the first time, the team members could plainly see the interaction of activities necessary to supply product to the stores Product cycle length was the first area of clarification because the actual estimate of cycle length far exceeded the perceptions brought to the exercise Some of the key areas proposed for improvement were
• Products being handled an excessive number of times
• Fill rates of less than 100%, in spite of having more than 3 months’ inventory
• A lack of consistency in measuring fill rates
• Accuracy of distribution-center forecasting
• Self-imposed redundant or unnecessary inspections
• Excessive paperwork
• Excessive items out of stock
• Handling of promotional items
• More effective and efficient EDI transactions
• Excessive scrap in the form of damaged and spoiled goods
• Excessive shrinkage, overshipments, and material-system waste
• An ineffective system for handling reconciliations
• Elimination or better utilization of infrastructures in the distribution net-work
• Excessive flaws at point of sales (POS)
• Need to use POS data to estimate stock replenishment levels
The teams developed the list of action deliverables from the opportunities listed
in the previous paragraph One product, cakes, was selected for the actual study The reasons for selecting one product type were to keep the stock keeping units (SKUs) at a manageable level, and to develop the system around a product with seasonal variations and high inventory costs Review steps were established to monitor the progress of each team This also allowed the use of good program management tools and ensured that resources were allocated to each team These review meetings spawned many needed items for each action team, such as
• A cost-benefit analysis — including payback for the actions
• A list of objectives
• A defined scope for each action team
• Recommended improvements
• A means of measuring progress
• A timeline for completion
One team had the task of improving the forecasting and planning flow From the mapping exercise the team discovered that the lead time from the start of baking the cakes to when the packaged cakes were stocked on Jerry’s shelves was more than 5 months With this type of important information, the team was able to prepare
an action item list intended to redesign the process for beneficial business results Another key finding from this joint project was the existence of many weeks of SL3003Ch17Frame Page 377 Tuesday, November 6, 2001 6:00 PM
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safety inventory, necessary to cover inefficiencies in the existing supply chain net-work Safety inventory was also needed so Jerry’s could make changes in Sonja Corporation’s manufacturing schedules due to promotional activities
The promotional activity situation was particularly interesting Essentially, the response of the manufacturing facility needed for the promotions to work caused variances in the production schedules These schedules, established from earlier forecasts, were overridden by promotions that resulted in significant additional costs The team discovered that by developing a closer liaison among the parties feeding back information on the promotions, they could mitigate the need to make so many adjustments to the manufacturing schedules Hence, the variations could be lessened (or even eliminated) by using data to coordinate the timing of the promotions and feedback on the progress of the promotions
From following the teams’ analyses, recommendations, and implementations, these preliminary results were identified:
• Decreased manufacturing variability due to better promotions management
• Average cycle-time improvements of 50%
• More successful promotions due to better management
• Almost 1 month of inventory was eliminated across the entire supply
chain network
More important, the ABC Company, the Sonja Corporation, and Jerry’s have established a synergistic working relationship, built on trust, that can be expanded
as they seek other areas of potential improvement This is the essence of any advanced partnering initiative If the cost is kept to a minimum and the potential savings are shared, future work together will be self-funding and self-perpetuating
17.4 SCM IMPROVEMENT CASE STUDY
This final case spans most of the elements of supply chain management It illustrates how a large organization took the necessary steps and effort to discover and imple-ment significant improveimple-ment across a global network of supply chain activities The Computer Company (CC) is a worldwide producer of computer products, with annual sales of nearly $20 billion CC has a business presence on all continents through a network of more than 50 companies and approximately 100,000 employ-ees This story involves the North American segment of CC, which has nearly $5 billion in sales and is organized into five operating divisions One of the divisions, the service division, controls the accounting, logistics, and purchasing functions, which are core areas for finding supply chain enhancements
This specific improvement effort started with CC and other leading computer product companies redefining how to gain a competitive advantage The search for
a competitive advantage is a common initiating function for companies seeking improvement through innovative management of their supply chains The first dis-covery by CC was that their existing performance measures were nonresponsive and inadequate for managing future market conditions To illustrate this point, we can look at three measures — order lead times, order completeness, and on-time delivery SL3003Ch17Frame Page 378 Tuesday, November 6, 2001 6:00 PM