October 31, 2002, 12:00 AM

Getting Connected

Retailers’ biggest suppliers recognize the benefits of a web-based supply chain. But small suppliers who also may provide crucial products need some selling and incentives.

As the retail industry pushes toward more effective ways of quickly moving products to the right stores at the right time, small suppliers have suddenly come into focus. Retailers have mostly worked with their largest suppliers in developing web-based supply chains, looking for the quickest payback. But now many are urging small suppliers to join their larger counterparts in cost-efficient Internet-based transactions of purchase orders, invoices and advanced shipping notices.

And some are moving beyond the urging stage. For many merchants, there are no exceptions, regardless of how valuable a supplier’s wares. “They may have the best product in the world, but if they don’t have the infrastructure to connect electronically with us, we can’t sell their products,” says Jeff Johnson, inventory director for supply chains and e-business at Best Buy Co. Inc.

Small vendors, which can be companies with up to $200 million a year in sales, generally fall within a retailer’s vast majority of suppliers, where the proverbial 80-20 rule applies: 80% of the suppliers are small and provide 20% of the goods. But they still fill a crucial role in many retailers’ product mixes and merchandising strategies and in meeting a retailer’s overall efforts to better manage inventory.

In some cases, a small supplier may provide a key item-such as trendy Christmas ornaments or trinkets popular with teenagers-that retailers place in prominent, front-of-store positions to invite store traffic. “A small supplier can provide something strategic to your retail operation,” says Chris Verheuvel, senior director for retail at supply chain technology provider Manugistics Group Inc.

Losing patience

But no matter how important the product, small suppliers can be disruptive to a retail operation if they do not electronically transmit purchase orders and other documents to retailers while most other suppliers are doing so. The most immediate problem that such lack of tech-ability can cause: Costly inaccuracies in product pricing. A study earlier this year by consultants A.T. Kearney for grocery retailers and manufacturers found that the grocery industry loses $40 billion a year to inefficient manual data entry of supply chain information, and that 43% of invoices have errors that lead to untimely price reductions.

Retailers, meanwhile, are exerting more pressure on small suppliers to adhere to their shipping specifications, such as which preferred trucking companies to use, and how to pre-pack and label cartons so that the retailer’s distribution center easily knows which stores to forward them to. “It’s as important for the small vendor to be up on this as for the big ones,” says Joe Nentwig, director of retail business development for High Jump Software Inc., Eden Prairie, Minn.

For example, if a retailer had ordered from a small supplier 100 packages, one for each of 100 stores, but receives only 80 and without documentation such as an advanced shipping notice explaining the discrepancy, the retailer must call the supplier and sort through the details of the purchase order. That can create costly delays in inventory management as well as in store merchandising plans, leaving retailers unhappy, to say the least. “Retailers aren’t being very patient with small suppliers, and they’re enforcing chargebacks,” Nentwig says. Retailers will often process chargebacks-or reductions in the supplier’s price-if the supplier doesn’t abide by a merchant’s specified means of shipping, packing and labeling products. And chargebacks often harm small suppliers more than big suppliers who can absorb the cost of chargebacks into other parts of an operation.

But hectoring doesn’t usually cause businesses to change how they operate. And unilateral chargebacks cause some suppliers to hate certain retailers. And so retailers are adopting a number of tactics to encourage their small suppliers to take another look at the web for supply chain functions.

For one, some are so eager to get their small suppliers into a web-based supply chain that they are willing to underwrite some of the costs. That’s the approach that Trilegiant Corp., a distributor of merchandise for loyalty programs, has adopted. Two years ago, Trilegiant spent hundreds of thousands of dollars to subsidize the set-up fees for small vendors to link into SPS Commerce Inc.’s supply chain translation program. Small vendors can now submit their data to Trilegiant in any format they want through SPS and SPS will translate it into the format that Trilegiant desires. Trilegiant says the investment was well worth it. “We’re saving several hundred thousand dollars,” says Evan Guttman, vice president of retail operations. He says Trilegiant has already recouped the initial cost of the program.

Others take an educational approach. Federated Department Stores Inc. and Sears, Roebuck and Co., for example, have led in this area by conducting seminars around the globe for their suppliers, showing them the different options for sending data electronically.

Inexpensive communication

Others stress not just the overall benefits of a web-based system and how it can help eliminate chargebacks, but also the lower cost of Internet transactions. “A lot of the incentive that we stress is that communication is inexpensive compared to VAN (value-added network) charges, and the accuracy increases dramatically,” says Greg Beck, director of purchasing for O’Reilly Auto Parts Inc., Springfield, Mo., a chain of more than 950 stores that wants to get all 400 of its suppliers connected over the Internet to its supply chain management system.

The cost of transmitting data through VANs, which enable electronic data interchange between a retailer and its suppliers, has long been a deterrent to participation in electronic systems by small suppliers. That’s because VANs typically charge upwards of 12 cents per kilocharacter-in some cases as high as 20 cents. With a typical purchase order containing 2,000 or more kilocharacters of data, a small supplier who can’t win favorable pricing is faced with spending $40 per document in addition to the cost of installing EDI software.

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