How the web is moving inventory into and out of warehouses faster.
By Kurt Peters
In 1999,
Manco Inc. , a provider of tapes, glue and kitchen and bath products, came to
Ace Hardware Corp. with a problem: The software that Manco used to link to Ace’s
supply chain system was not Y2K compliant with little prospect of becoming Y2K
compliant; it also was getting old and Manco’s vendor was no longer supporting
it. Manco had been participating in Ace’s vendor-managed inventory, EDI-based
supply chain program and didn’t want to return to a paper-based relationship.
But it didn’t know how to address its software problem.
At the same time, Ace had been contemplating moving to
a web-based supply chain after seeing Eckerd Corp.’s drugstores and pharmaceutical
manufacturer Schering-Plough Healthcare Products implement such a system. “We
told Manco they could go back to having us cut a traditional purchase order
for them, or they could do it this other way,” says Scott Smith, department
manager, inventory, for Oak Brook, Ill.-based Ace Hardware. “In my mind, going
to the web system was a no-brainer. I had no concern that it wouldn’t work.”
Avon, Ohio-based Manco was the first vendor to move to Ace’s
web-based supply chain system from Atlanta-based E3 Corp. Now, two years later,
nine suppliers are participating in it. Those nine already represent more than
10% of the goods that Ace buys, and Ace is on the verge of bringing two more
online. Ace deals with over 2,000 suppliers and Smith sees no reason that all
would not want to be part of the web-based supply chain. “Who wouldn’t want
to dial into their customer and cut themselves a purchase order?” Smith says.
Using the web to automate the supply chain is the latest
development in an effort that extends back to the 1970s to get inventory out
of warehouses. The just-in-time inventory movement developed along with EDI
through the 1980s and 1990s, but in the retail sector began to stall as both
smaller retailers as well as small and mid-sized suppliers balked at the cost
and effort of installing software and hiring tech staff to maintain it. Furthermore,
so many standards for trading information via EDI were fielded that cross-industry
trading became confusing and many companies elected not to adopt standards.
And there was never a good way of knowing whether a trading partner could even
accept EDI transactions, and if so, which transactions a partner could support
and in what format. While believed to hold much promise as systems developed
throughout the ‘80s and ‘90s, EDI in retrospect was cumbersome and expensive.
The facilitator
But the failure of EDI to answer the issues related to
automating the supply chain did not mean the death of those automation efforts
or the death of EDI. In fact, EDI standards are embedded in certain web-oriented
trading languages—and the rise of the web itself gave new life to automating
the supply chain. “The Internet is the facilitator,” says Todd Hartz, chief
technology officer of supply chain software vendor EXE Technologies Inc. of
Dallas. “It’s a pervasive network, it gives everybody shared access and it’s
a set of de facto standards for people to talk to each other.”
The ultimate goal of web-based supply chain systems is
what the Voluntary Interindustry Commerce Standards Association has dubbed Collaborative
Planning, Forecasting and Replenishment. CPFR lets manufacturers into a retailer’s
inventory control system so the manufacturer can see directly how its products
are selling in that retailer’s stores. Using guidelines agreed upon by the retailer
and the manufacturer, the manufacturer generates its own purchase orders to
replenish the retailer’s stock.
Such a seamless connection between retailers and manufacturers
is to the supply chain what catching the Road Runner is to Wile E. Coyote—much
to be desired, much pursued, but not yet achieved. “While there’s a lot of interest
on the part of retailers and manufacturers in CPFR, there’s a very steep learning
curve they have to go through,” says Janet Suleski, senior analyst, retail applications
for Boston-based AMR Research Inc. Suleski produced AMR’s “Beyond CPFR: Retail
Collaboration Comes of Age” report in April (See box, p. 16).
Short of full-blown CPFR, the web has already generated
benefits in the form of increased sales for participants who are using it only
for basic applications in the supply chain. By speeding the exchange of information,
web-based systems have increased sales by making products more available when
the demand for them exists, retailers say. And one of the ways it is doing so
is by moving inventory through warehouses and distribution centers faster. “It
used to be the warehouse was a black hole—an order would go into the warehouse,
then not come out until days later,” says Chris Heim, president and CEO of Eden
Prairie, Minn.-based HighJump Software Inc., which provides what it calls a
supply chain execution system that uses the web to monitor the status and location
of inventory. “Now with orders getting smaller and smaller, expectations have
gone up that the inventory will be where it’s needed when it’s needed.”
In fact, that benefit is why Pacific Sunwear of California
Inc., a $600 million retailer of casual apparel for teens and young adults based
in Anaheim, Calif., is implementing a web-based supply chain system in which
the retailer and the supplier trade the purchase order, advance ship notice
and invoices electronically. There’s no collaboration of the type envisioned
by CPFR. But because of the efficiencies that the electronic format creates,
Pacific Sunwear has dramatically improved the flow of merchandise through distribution
centers.
Reacting faster
Merchandise is now in and out of the centers in one day
vs. three days previously. “The merchandise doesn’t sell until it gets to the
store selling floor and if you can reduce the time it takes by two days, you
get those two extra days on the selling floor,” says Ron Ehlers, vice president
of information services. “That means you get to re-order two days earlier if
it’s a hot style-and that can help you beat your competitors.” PacSun and its
suppliers use an ASP system created by St. Paul, Minn.-based SPS Commerce Inc.
Since Manco began participating in Ace’s collaborative
supply chain initiative, sales of some products at Ace outlets have increased
as much as 15%, says Brian Bastock, Manco’s director of customer logistics.
“We’re in stock better at Ace because we can see what’s happening better and
we can react faster,” Bastock says. “Hardware co-ops by their very nature don’t
represent a lot of growth, but with this system, we now consider Ace a growth
customer.”
The same has been true for other manufacturers. United
Plumbing Technologies’ PlumbPak division, for instance, has increased its presence
on Ace shelves from 98% in stock to 99.5%, Smith reports. He says that of the
nine suppliers with which Ace is collaborating, five have placed additional
product lines into Ace stores as a result of their willingness to collaborate.
“Manufacturers they were competing with weren’t able to fill at the level we
wanted,” Smith says.
Going to a full-blown CPFR system such as the one Ace
is working on is a long process. While PacSun expects to implement its simpler
web-based system within a few months, CPFR requires significant changes in how
retailers and manufacturers operate. “An element of organizational change that
needs to take place,” Suleski says.
For starters, both sides must agree on which data each
wants the other to have access to. “That’s one of the hardest things for retailers
and manufacturers to do,” she says. “You need a policy at the corporate level
about what kinds of information can be shared.”
The importance of such a policy was underscored by a manufacturer
who told her of a retail trading partner that wanted to know the manufacturer’s
actual cost of producing a certain product. “They were extremely concerned about
losing the business of this major retailer, yet the request was wildly inappropriate,”
she says. Appropriate data for retailers and manufacturers to share include
forecasting data, data about shipments from the distribution centers to stores
and information about promotion plans, she says.
Playing by the rules
After the retailer and the manufacturer agree on which
data to share, they then must make sure that each side understands the business
rules of the other. Those are many of the same rules that both sides operate
under already—such as the level of retailer’s stock on hand that generates a
re-order, the size of shipments that a retailer will receive, when a manufacturer
must provide an advance ship notice, when a manufacturer can issue the invoice
for the merchandise, the minimum order that a manufacturer will accept under
the pricing arrangement with the retailer and so on.
But since the rules are communicated without human intervention,
the trick is to make sure the other party understands the rules and abides by
them. Automated checks for that purpose can be programmed into a system to generate
an exceptions report for an inventory analyst to review when a violation occurs.
In addition, vendors would be foolish to initiate orders that violate a retailer’s
rules for a short-term benefit. “We’d lose credibility pretty quickly if we
pushed through an order simply to make a monthly quota,” Bastock says.
After the two sides reach such agreements, the retailer
must make sure its host computer is secure so manufacturers see only what the
retailer wants them to see. “The first thing we did was to make sure the security
was there to allow manufacturers to dial into our mainframe over the Internet,”
Smith says. Once that is accomplished and manufacturers log on, “we walk them
through the maze to what they want and don’t let them get off the maze,” he
says.
Once both sides are talking to each other, they then can
generate automated advance ship notices, print scannable labels that tell the
receiving dock the contents of the package, track the shipment from factory
to retailer’s distribution center, create automated invoices and keep track
of all transactions since they’ve all been generated electronically. Furthermore,
the manufacturer can access the retailer’s promotions calendar to help determine
manufacturing levels to meet promotional demand.
With such visibility of the merchandise throughout the
supply chain, the distribution center knows what’s coming when and where it’s
supposed to go. That reduces handling in the distribution centers. “This allows
us to pre-allocate everything,” says PacSun’s Ehlers. “When a carton arrives
at the back door, we can scan it and know where to send it.” Whether the distribution
center wants to store the carton in a picking area to re-allocate the merchandise,
keep it as back stock or send the entire carton on to a store, the receiving
dock knows as soon it arrives what to do with it. “A carton can come in one
door and go out the other within a half hour and without being touched at all,”
Ehlers says.
Such quick movement of inventory certainly reduces the
cost of maintaining inventory. “One of the biggest things we do is reduce inventory
by 20 to 30%,” says Kurt Unglaub, vice president, corporate sales and ASP for
E3.
Avoiding costs
But that is only part of the benefit that retailers earn
from a web-based supply chain system, retailers say. Ehlers says PacSun, for
instance, will be able to grow its business without hiring additional staff
to manage orders and relationships with retailers. At the end of the year, PacSun
is moving to a new distribution center that will be three times the size of
its current center. The 300,000-square-foot center will be able to handle 1,500
stores, yet PacSun does not plan to increase its distribution center staff.
“Expense growth is not matching sales growth because of the efficiencies,” Ehlers
says. “You’re avoiding future spending and getting a lot more out of the dollars
you’re spending now.”
Bastock says manufacturers get a similar benefit. Manco
will be able to grow without adding staff, he says. “Under the old vendor-managed
inventory system, we had one analyst full time dealing with each customer we
were selling product to,” Bastock says. “Today, each analyst has two accounts.
Soon it will be three and it still won’t be a full-time job.” And the same is
true at Ace, where Smith expects each inventory analyst will be able to deal
with more suppliers.
Another benefit to retailers is that with automated systems,
invoices can be matched against purchase orders and all documents pertaining
to a transaction, ensuring the retailer has received everything properly and
was billed properly. “You can do literally 100% automated invoice matching in
accounts payable and that relieves a lot of resolving of problems that you have
to with manual invoicing,” Ehlers says.
Despite the benefits, not all retailer-manufacturer relationships
are as friendly or as easy to implement as Ace and Manco experienced. Many manufacturers
are small companies and don’t want to invest in making changes, especially if
they sell to a lot of retailers. There is undeniable resistance by suppliers
as the process starts, says Jim Frome, executive vice president of SPS Commerce.
“Most suppliers see us as ‘You’re the thing Target made me do,’” Frome says.
To mitigate the costs to small companies, SPS Commerce
offers an ASP model so small manufacturers don’t have to make changes to their
systems at all. The retailer identifies which suppliers are the most technologically
sophisticated, and SPS approaches them first. Then it works its way down the
list until the final suppliers may simply be submitting paperwork via fax to
SPS, which automates the information. “Eventually they get connected electronically,”
Frome says.
Using the SPS Commerce system, a retailer will pay anywhere
from $25,000 to $200,000 to web-enable the supply chain, although the average
is $50,000, Frome says. That price covers integration of the system to an existing
system and drawing up of a standard set of documents. Once SPS has finished
the retailer portion of the work, SPS contacts the retailer’s suppliers. Suppliers
who contract to use SPS’s ASP model typically pay $50 a month.
Overcoming resentment
Retailers using the E3 system pay $10,000 to $100,000
for a license for the software then a monthly fee based on usage. Suleski says
retailers will typically pay $50,000 for the technology for a CPFR system. That
does not include costs of scrubbing the retailer’s data or consulting fees.
With simpler goals than a full CPFR system, retailers
and suppliers can implement a web-based supply chain system quickly. Ehlers
says Pacific Sunwear expected to bring up 100 vendors a week, with a goal of
having all 400 vendors online by the end of August. Most retailers that SPS
does business with are ready to roll the system out to suppliers within six
months, Frome says. The full-blown CPFR systems, of course, take longer, as
evidenced by Ace’s having brought in nine vendors in two years.
One issue that suppliers need to deal with is how they
connect to other retailers, once they’ve made the investment to connect to one
through a particular vendor’s system. They address that issue in a number of
ways. For one thing, it’s relatively easy to connect to other retailers via
the web, once a supplier has learned how to do it with one, Frome says. For
another, SPS has found that once a retailer in a certain segment goes with the
SPS system, others are eager to follow. Since manufacturers supply more than
one retailer, the suppliers end up in a good position to link to other retailers.
And finally, Frome says, suppliers suggest retailers that SPS might contact
so the suppliers can leverage their new-found web expertise with retailers who
are not SPS customers already.
The downside to web-based supply systems is that many
organizations don’t have data in good enough shape to make such systems work.
And the cost of getting the data cleaned could be significant. Furthermore,
organizations all handle data differently. “It’s a very complex process that
requires extensive data integration,” says David Taylor, research fellow with
New York-based Jupiter Media Metrix. “And data that comes in from other companies
isn’t necessarily something you can do anything with.”
Such challenges notwithstanding, vendors of web-based supply
chain systems are already looking down the road to the next big development.
Many see wireless, envisioning warehouse workers armed with web-based wireless
devices that will allow instant updating of inventory status as they pull items
to ship to stores. “Visibility like that will continue to gain in this market,”
says Heim of HighJump. “Amazon raised expectations of customers to know the
status of their order-they get messages all the time about their order. That
will extend from b2c to b2b. Many retailers will start wondering, If I can get
that from Amazon, why can’t I get that from my suppliers?” l
kurt@verticalwebmedia.com
The coming
boom in CPFR systems
If retailers are
starting toward the Emerald City that CPFR—Collaborative Planning, Forecasting
and Replenishment—represents, they are only at the start of the yellow brick
road. Spending on CPFR and other systems that permit supply chain collaboration
between retailers and manufacturers this year will total only $63 million, says
Janet Suleski, senior analyst, retail applications for Boston-based AMR Research
Inc. But such spending will ramp up quickly: It will more than double to $152
million next year and will reach $540 million in 2004, she projects.
Growth will be so strong and quick because
web-based supply chain management has hardly penetrated retailer’s thinking
at all. Suleski’s report “Beyond CPFR: Retail Collaboration Comes of Age,” published
by AMR in April, concluded that fewer than 45 retailers and manufacturers have
adopted CPFR in “meaningful” form. And by Suleski’s definition, the market has
a long road ahead of it: “A meaningful level would be where a majority of SKUs
are being bought and sold collaboratively between two trading partners,” she
says. Given that most retailers deals with hundreds or thousands of trading
partners, the meaningful level of CPFR today is indeed only a few bricks in
the road.
Suleski reports that only 17% of the retailers
describe CPFR as “quite important” or “extremely important” now, although 44%
use those terms to describe the importance of CPFR two years from now.
Given that the market has been plenty excited
about technology solutions to supply chain problems in the past, why should
anyone believe that CPFR is any more likely to become universal than EDI has
become? “CPFR is different in that it doesn’t cost a lot to get started in it,”
Suleski says. “The benefits can accrue to companies no matter what their size.”
In fact, Suleski expects small and mid-sized retailers
to be enthusiastic users of CPFR, perhaps even more so than large retailers.
“In some ways, they have more to gain from CPFR because when you’re big, you
already have collaborative relationships with suppliers,” she says. “But if
you’re small, chances are you don’t have those relationships, so this is a good
way to achieve that. And once you’re collaborating with your suppliers, you
have the opportunity to differentiate yourself through customer service—you’ll
have the items in stock and consumers will know they can trust you to have what
they want. You won’t be able to compete with big retailers on price, but this
will allow you to compete on service.”
PacSun avoided EDI—to
its relief today
Only recently did Pacific Sunwear
of California Inc. become large enough that executives felt it could support
an EDI supply chain system. But now it’s too late for EDI and Ron Ehlers is
glad the company never took the EDI plunge. “We never made that leap into EDI,
and so we have no legacy systems that we have to supplant,” says Ehlers, vice
president of information services.
PacSun management had always believed that once a retailer
reached $1 billion in sales, it was time for EDI. And, in fact, PacSun had planned
to start development of an EDI system this year in anticipation of reaching
$1 billion in sales in 2003. “We were going to jump into EDI because of the
size we had become and because some of our vendors already had EDI,” Ehelers
says.
But then PacSun executives became aware of SPS Commerce
Inc.’s web- and ASP-based based supply management system and changed their minds.
Not only would the system allow the company to move to electronic ordering,
advance ship notices and invoices, but it was easy for suppliers to implement
compared to EDI—an important factor to PacSun since most of its suppliers are
small clothing manufacturers. “We deal with a lot of small vendors without technology
capabilities in house,” Ehlers says. “They never would have adopted an EDI system.”
PacSun and SPS began serious discussions about the web-based
system in July 2000, went live with tests in March and by the end of August
planned to have all 400 suppliers online. “When I began hearing about this,
my reaction was that this was too good to be true,” says Ehlers. “We had been
looking at traditional EDI, but that required both parties to be technologically
sophisticated. This does not require that level of sophistication.”
