Getting Connected

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.

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.

But developments over the last few years in web-based technology are offering an alternative at a fraction of the cost of EDI. “Four years ago, we all knew that the lower-end vendors wouldn’t be able to connect with EDI systems,” says Cheryl Layne, a former EDI project manager for J. C. Penney Co. Inc. who now is director of product marketing for ecVision Inc., Newark, N.J. “Now, with Internet-based systems, you can bring in even mom-and-pop vendors. You’d be hard-pressed to find any supplier that does not have at least e-mail for transfers of documents.”

In some cases, getting small suppliers into a web-based system enables a retailer to continue leveraging its existing EDI system. At Best Buy, an evolving program of electronic data sharing, including a corporate extranet for small suppliers, has done away with cumbersome modes of communication that small suppliers often prefer, such as the faxing of purchase orders, invoices and other documents. This has enabled Best Buy to get all small suppliers connected to its EDI system. “We haven’t done faxing for two years,” Johnson says.

Best Buy’s extranet, ExtendingTheReach.com, enables any supplier with a web browser to access web forms that they fill out online to electronically transfer purchase-order acknowledgements and other documents into Best Buy’s EDI system. The extranet also makes available information that suppliers need regarding product and shipping specifications so they know exactly how the retailer wants products to arrive at distribution centers.

Johnson says Best Buy found it fairly easy to bring along its suppliers to its policy, announced two years ago, of requiring an all-electronic system of transferring documents. Some small suppliers initially resisted, preferring to continue exchanging documents over fax machines. But once Best Buy met with suppliers and showed them how easy it is to use its extranet, their attitudes quickly changed, Johnson says. “It was really easy to teach them how to use ExtendingTheReach.com,” he says, “and they realized that it was easier than doing all that faxing.”

The result, he adds, is that Minneapolis-based Best Buy has improved its ability to keep its shelves and floors stocked with merchandise, since it deals with far fewer discrepancies in deliveries from small as well as large suppliers. And like more and more retailers, Best Buy is striving to extend the benefits of its supply chain improvements to all of its retailing channels, including its Music Land and Canadian-based Future Shop stores as well as its three Best Buy-branded channels of catalog, web and stores. “Our mission is that, when you go to a Best Buy store and go to that shelf, the product will never be out,” Johnson says. “We want to make sure that product is available to buy.”

For many smaller suppliers, the fastest and easiest way to get on board with a web-based supply chain system is by simply using a browser to access a web-based application for sending data, such as the web forms on Best Buy’s extranet. A web forms application can also sit on a third-party server, such as at QRS Corp., which charges $69 a month plus $2 to $7 per document.

Other options include sending flat files through an FTP, or file transfer protocol, network connection, or using software that can translate the data into Extensible Markup Language and then transfer it over the Internet to a retailer’s electronic data interchange system. The smallest of suppliers hand over their information via fax, phone, e-mail or other means to a service bureau, an option offered by QRS and other supply chain software vendors. For a monthly fee of generally less than $100, the bureau forwards supplier data to a retailer in whatever form it wishes to receive it. Like web forms, there may be additional charges of a few dollars for each transmitted document.

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For its larger suppliers, Best Buy continues to exchange documents directly over its EDI system. Eventually, it hopes to move all document traffic to an Internet-based EDI system to save on transmission costs and provide for more real-time exchange of information. This would also support Best Buy’s interest in conducting more collaborative planning, forecasting and replenishment with its suppliers. In the near future, Best Buy will operate several e-commerce systems on a platform from Minneapolis-based Retek Inc., which will serve as the central communication foundation for forecasting and other supply chain capabilities from vendors including i2 Technologies Inc. and webMethods Inc.

Like Best Buy, Food Lion LLC, a supermarket chain based in Salisbury, N.C., plans to have all EDI transactions conducted over the Internet. It hopes that by November of next year it will connect to all small suppliers that way, says Carolyn Hager, manager of e-business. Food Lion has handled 94% of its purchase orders over its EDI system for several years, accounting for most of its communications with large and medium-size suppliers.

But with EDI over the Internet, “we’re reaching more of the small ones,” she says. Food Lion deals with niche suppliers of specialty items as well as major food manufacturers. So far, the migration is proceeding well. Food Lion already has moved 25% of its EDI transactions to the Internet under a program started earlier this year.

To help with the transition, Food Lion is working with vendors including QRS, Richmond, Calif., which makes it easy for small as well as larger companies to use EDI over the Internet, Hager says. Large and small suppliers alike can migrate to the Internet without having to purchase and immediately implement new software, she adds. While larger companies can have QRS redirect their VAN transactions through the Internet to reach Food Lion, smaller companies can either fax information to QRS for translation into an Internet EDI transmission or access web forms that can be filled out online and forwarded by QRS to the retailer.

By migrating its EDI system to the Internet, Beck says, the lower transaction costs will make it easier to engage more small suppliers—a crucial step toward reaching its 90% goal. He expects to include even his smallest suppliers, such as Minneapolis-based Solar, a provider of car battery accessories such as booster packs and converters for alternate current. O’Reilly buys only three SKUs from Solar, compared to thousands of SKUs from larger suppliers.

Retailers of apparel and other items sourced from small, foreign suppliers have often had the hardest time establishing electronic data transfers.

Neiman Marcus Group Inc., for instance, buys from a large number of boutique suppliers of luxury items and channels its orders and communications through agents in Asia and other areas. In the past, Neiman Marcus received information from these boutique suppliers by phone or fax at its Dallas headquarters. Now, working with a supply chain management application from Qiva Inc., a San Francisco-based provider of supply chain and logistics systems, Neiman Marcus arranges for its foreign boutique suppliers to fax, call or hand their information to a local sales agent who enters the data into a web-based system connected to headquarters.

Pressure from retailers and expectations of less costly and more efficient transmissions are not the only incentives for small suppliers to participate in web-based electronic document exchange systems. For some small suppliers, the motivation can come with the realization that connection to a web-based system can easily extend to integration with their back-end business software applications.

A number of business software vendors already provide integration between front-end web-based software and back-end software for small- and mid-size businesses, including Accpac International and Microsoft/Great Plains Small Business Solutions. The cost to implement such systems can vary widely based on such factors as a supplier’s number of products and the number of documents it exchanges with retailers, but a small supplier can expect to pay a few thousand dollars to implement an integrated system, plus several hundred dollars or more per month in fees, says Reg Cheney, business development officer for Edmonton, Alberta-based mBase, a software company that works with Accpac. And more integration providers are likely to crop up, says Pete Abell, director of retail research for AMR Research Inc. “You’ll see a cottage industry integrating software into Peachtree small-business accounting software,” he says.

A longer-term goal is for small suppliers to also participate in more sophisticated online collaboration with retailers, who would then be able to share real-time updates on changes in such areas as production flow and delivery times. Whenever it becomes known that intended merchandising plans will be killed by interruptions in delivery, supply chain systems can go a long way toward enabling retailers to take the best preemptive action. “Moving to the ‘Net will make it easier for small companies to join collaborative commerce,” says Bernard Goor, vice president, retail and consumer packaged goods, i2 Technologies.

paul@verticalwebmedia.com

How one small supplier moved to the web one step at a time

Acorn Manufacturing, a privately held company with 43 employees, makes hinges and other items used in installing cabinetry. For most of its 65 years, Acorn has used traditional mail to exchange purchase orders, invoices and other documents with customers ranging from local hardware stores to national chains like Ace Hardware Corp., Sears, Roebuck and Co. and The Home Depot Inc.

Business has been steady over the years, but Acorn’s system of exchanging documents was rife with data errors and untimely deliveries of purchase orders and invoices—common problems stemming from the manual entry of data into business documents. “There was so much manual labor and room for human error,” says Diana Macedo, office manager for the Mansfield, Mass., company.

Things started to change four years ago, when some of Acorn’s biggest customers demanded that it transmit and receive documents through electronic data interchange systems. Acorn then started using a service bureau to connect with EDI. Acorn would use a fax machine to exchange paper documents with the bureau, which would then translate and manually input Acorn’s data into a network connection to forward to the EDI systems.

But data-entry errors were still too common. And if just one character is wrong in an EDI invoice, Macedo says, Acorn wouldn’t get paid for it, and she would have to spend a lot of time rectifying the situation.

Although the service bureau route was an improvement over Acorn’s earlier system of exchanging documents, more improvement was yet to come. A year ago, Sears provided Acorn with a way to bypass the faxing and instead use web forms that send electronic documents directly between Acorn and Sears’s The Great Indoors store. After taking a one-hour online training course, Macedo says, she and her staff now send and receive documents directly from their desktops. Acorn pays $1 per transmitted document compared to what could have been $10 or more for an EDI document plus the cost of EDI software. And not only is there less error-producing manual data entry, which Macedo says “saves a lot of my time fixing errors,” but documents are exchanged much more quickly. “We get our money faster,” Macedo says.

To get purchase order data into its back-end accounting system, Acorn still must print out a web form and manually input information into its accounting software program. But even that step has been abolished at Cyber Acoustics LLC, which provides computer desktop speakers to retailers like Best Buy Co. Inc. By implementing the Accpac Exchange software suite from Accpac International, Cyber Acoustics automatically integrates its incoming EDI-over-Internet documents directly with its back-end accounting system, says Jeff Mastin, Exchange product manager.

He notes that the cost of deploying Exchange varies based on a company’s size and number of trading partners. But for a $10 million company exchanging purchase orders, invoices and advanced shipping notices with three trading partners, Exchange would cost about $10,000 for the software, $7,500 for implementation and training, and $100 per month for ongoing data transmission service.

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