PVF Supply Chain Management - In The Real World
Many PVF players today operate out of modernized facilities, utilizing wondrous material handling equipment and wireless bar code scanners to keep track of the flow of goods. These things removed inefficiencies in large chunks. Costs today get extracted at a pennies per line item pace, or through vendor managed inventory (VMI) or integrated supply arrangements that essentially eliminate competition but carry a staggering premium in customer service.
It's not all about saving money. Equally imperative is the need to eliminate mistakes and hassles. A customer who receives the best possible price will not be happy if the goods aren't there when needed, or if they're the wrong goods. In researching this article we came across one case where a VMI partnership fell apart. "It's really critical to have a relationship with the supplier over a long period of time," said the wholesaler in assessing what went wrong. "Sole sourcing a commodity product is especially hard when prices are changing, when you are dealing with import issues and when you can't predict what might happen in a year or two."
Be that as it may, most of the people we spoke with did react with some enthusiasm about their SCM activities. Here are summaries of our conversations.
Keith Walls, system contract manager, F. W. Webb Co., Burlington, Mass.:
"Our company's VMI program grew out of some integrated supply contracts we had with MRO and OEM accounts. VMI takes it to the next level for a customer looking to cut inventory costs. Carrying costs for inventory typically range from about 19% to 30% a year. Integrated supply does not address that issue.
"With VMI we've been able to reduce customer min and max levels and increase turns. In many cases companies were doing less than one turn per year. We've been able to take that to a desired level of four to six turns for MRO accounts, and 10-12 for OEMs. Increasing turns lowers the cost of possession, as well as purchasing, by utilizing bar code technology and automatic min-max reorder reports. If you set up intelligent min-max levels, it won't do much to your shipping and receiving costs. If you can take turns from one to four, that's a 75% reduction in inventory carrying costs.
"At F. W. Webb, we regard VMI as a value-added service to integrated supply. We are able to take all of the vendors we purchase from under an integrated supply contract and make them look and act like one company.
"Technology is very important in managing this kind of system. We use a very focused software called Sitemaster. It also helps in 'critical spares analysis' - i.e., the items that if missing would cause an MRO or OEM customer to lose more money by shutting down production than it would cost them to keep enough of the goods around to assure that never happens. The majority of spare parts are not that critical, however. We also look to eliminate duplication so that, for example, a customer isn't carrying four different types of ball valves.
"Our VMI system enables us to have more of what our customers need when and in the place they need it, with fewer people required to handle it. We save them a lot of money."
Tim Arenberg, president, Columbia Pipe & Supply, Chicago, Ill. (and chairman of the ASA Industrial Piping Div.).:
"There are different areas we as an industry have not been exercising such as in the area of supply chain. We can look to what other industries are doing as a benchmark.
"Several years ago Action Plan 2003 was about getting away from the auction mentality. Now we are in the next phase. What are the things you need to do that will help all of the partners in the supply chain be more effective? There is still a percentage of people who think all you can do is aggregate volume and get a better price.
"With VMI and EDI you are making a commitment with someone. You need a level of trust. They need to be able to keep you competitive. That is a huge concern.
"Improving the efficiency of the supply chain is the next wave of our industry. There are many opportunities in that area. If we can get a critical mass of suppliers to engage in supply chain initiatives, we can spend more time managing less mundane things."
Jack Fink, corporate product manager, Columbia Pipe & Supply, Chicago, Ill.:
"We are using EDI wherever possible. That includes purchase orders, invoicing, advance shipping notices and material certification. We are using either EDI or the Internet for price changes.
"I evaluate how our suppliers are working with us, assessing how we can reduce costs. Often when I do a review I'll find out, for example, that the manufacturer's packaging makes it difficult for our receiving people to receive the product expeditiously.
"After every review I send a follow-up Gannt Chart. We not only inform our suppliers when they are deficient, but also give them suggestions based on our 67 years of experience.
"Since we have 14 locations, we try to get manufacturers to ship direct to all our locations. When they don't, and ship to us in one location, we have to receive, pack and ship the product to other locations. That means double handling, paperwork and more opportunities for error.
We are doing VMI programs with some suppliers, although you can't ever do away with multiple suppliers and continue to be a customer service company.
"We have benefitted from VMI in several ways: shipping to multiple locations, working together to reduce receiving and billing costs (we are working on bar code receiving and summary invoicing), preferred status, better deliveries, better turns, payment terms.
"We take other measures to reduce costs, for example, reducing the number of receipts to complete orders. We don't want an average of 10 shipments to complete a purchase order. Every time we receive that means additional time taken to receive and an additional invoice to process and pay.
"We are also attempting to reduce damages and developing better return and exchange policies with suppliers, so that we can bring new product in without fear the manufacturer won't take a return.
"We have developed contractual agreements that are win/win with several suppliers. We ask any new manufacturer and many current suppliers to participate. With many it is a condition of our doing business with them that they sign our contract.
"We also try to rotate inventory so products don't become obsolete sitting on the shelf."
Robert Westfield, president, Industrial Piping Specialists, Tulsa, Okla.:
"We have improved internally to extract costs from the supply chain. For example, we installed a new, updated computer system. We use it for inventory management, for example, to help us track turns at the line item level vs. the product line level. We also are using it to streamline purchasing and other daily sales activities for the five locations for which we buy materials.
"We are in constant contact with our manufacturers and have strong relationships with our major vendors. We are large enough that we have sufficient purchasing power to enable us to consolidate with just a few manufacturers on each product line in order to get the best possible price.
"We have the ability to process orders and invoices in a paperless environment, but most of our customers are not yet in a position to make the transition. We are paperless with a few of our suppliers, but not with many of our customers. Our business is pointed in that direction and we will be prepared when our customers decide to make the transition. In some cases we are willing to provide part of the cost and equipment to enable the customer to access data and retrieve mill test reports and delivery schedules off the Internet.
"Our immediate goal is to provide bar coded products to some of our customers, but not necessarily bar code our entire inventory. It will be about two years before we will complete a comprehensive bar coding system that will handle all shipping and receiving functions. At this time, we have a few internal things to work out, including cost. Our extremely competitive market does not allow us to cover additional internal cost in our sales price. We have had to be innovative in selling our customers cost reducing programs and at the same time reward our company with lower internal cost."
Dennis Niver, vice president/purchasing and alliances, Red Man Pipe & Supply Co., Tulsa, Okla.:
"Vendor managed inventory is a very confusing issue because everyone gives you a different definition. If someone tells me they want to start a VMI program with me, what that means to me is they will put product on my shelf, and we would pay for the products as they move off our shelf. If we are involved in VMI and I am expected to pay for the products as they go on my shelf, then that supplier is telling us he understands how to inventory better than we do.
"Some manufacturers want to tell us how much to put on our shelves and will then send a bill for what is shipped to our locations. That is still us managing inventory. We feel VMI should be the manufacturer stocks the shelf and bills for the material as it is pulled from the shelf. When we have presented this definition to manufacturers that approach us about VMI, they don't disagree with the definition, but it is not what they want to manage.
"VMI locks you into one vendor. That vendor has locked up your shelf, so it would take a great deal of confidence in a manufacturer to operate this way.
"From an efficiency standpoint, e-commerce can create savings. The disadvantage that we see to online purchasing is not getting it embedded in both company's mainframe systems. You can set up an online store but won't necessarily embed the data in both companies' operating systems. The links are not always there for both parties. Electronic data interchange speeds things up. Embedding EDI purchasing into management systems improves serviceability and cuts out errors. The order can go straight to the picking floor.
"We utilize EDI with a number of our high-volume manufacturers. We have cut as much as seven days out of the processing time from order to shipment. That alone is a huge savings. We have been using EDI purchasing for about four years. It reduces the time factor because we don't have to re-enter the order. The next step will be ACH, where the invoice is paid automatically without a lot of extra handling. The more paperless you can become, the more efficient you are."
Randy Adams, vice president/sales and marketing, Red Man Pipe & Supply Co., Tulsa, Okla.:
"We are working on several e-commerce initiatives to reduce costs in the supply chain. For example, we are working with trade exchanges such as Trade-Ranger and Pantellos, developing several in-house programs and creating our own e-commerce Web site.
"Within our own Web site we are working with customers to look at Open Catalog Interface (OCI) programs. The customer can punch out from his or her procurement application to our Web site, create an order on our site and at the same time create a requisition within his or her own procurement system. This process drives a lot of cost out of the supply chain. Two of our customers are testing this right now. One is a utility company in Oklahoma. The other is an energy services/gas transmission firm in Texas.
"Red Man is also developing several vendor-managed inventory programs. We are actively setting up consigned inventories that we can automate to help drive supply chain costs down. Some of the processes can be done by basically doing back-end integration into the customer's computer system so it will auto-replenish by sending a purchase order to us via EDI or XML. We have that set up with several customers.
"The latest thing we are working on is a vendor-managed inventory program tied to e-commerce initiatives. The program is based on an Internet consignment application that eliminates bar code scanners. The system works through a standard Internet browser. After the employee has pulled material from the shelf, he or she logs into our Intranet, clicks on the bin location and enters the quantity. The system asks for any accounting detail, and if you want you can charge the material to a specific cost center, project number or AFE number.
"We have completed a similar program with one customer using a physical stand-alone kiosk. The kiosks have touch screens so no mouse is required. The usage is transmitted directly to our stores and replenishment is made when the levels fall below the reorder point. This keeps us from having to go out to count inventory and then go back with the delivery. We can just download that data daily into our system as they use it. With the physical kiosk it took a while to write the program to interface into our program and theirs.
"Red Man is creating a similar program using the Internet. The Internet-based program is almost complete. We plan to launch it with some power plants in the near future. The kiosk program has been up and running for about six months. We hope to launch the Internet-based program by June or July. It is something we feel can work well for power plants that have a workroom or tool crib area with computers that have Internet access.
"This has been a good tool for us. The best thing for the customer is the ease of use and the account detail that shows which business unit pulled the item and how the material should be charged."
Peter Davidson, chief executive officer, Davidson Pipe Supply Co., Brooklyn, N.Y.:
"We are looking at every cost we have and seeing how we can hold it or minimize it. We belong to a very small, select buying group that is not well known in the industry. That is one way we can keep our costs down.
"We have tried to reduce paper by using e-mail and faxes. Our ordering system is mostly paperless. Orders are entered directly into the computer.
"We do not have bar codes in the warehouse, so we have to create paper to fill orders and deliver. In the office we are mostly paperless."
A PVF wholesaler (name withheld by request):
"We do EDI order entry with vendors and receive EDI from customers. We also do EFT (electronic funds transfer) with some customers and vendors.
"We do vendor managed inventory with some of our customers but not with any of our suppliers. With VMI our customers are able to reduce their inventory. We provide a continuous stream of replenishment. Our people check inventory so they don't need to worry that one of their people will wait until they run out before re-ordering. We have the materials there when they need them but they actually carry less inventory, which means less money is tied up. We have been dabbling in bar coding. That will become the next big thing in our industry. Only a few of our customers are asking for bar codes but the number is growing." <<
For The "Perfect Order"
The following case study grew out of an SCM project of the ASA Industrial Piping Division and was presented to members at last year's ASA Convention in Las Vegas. It deserves further scrutiny.
The large PVF manufacturer NIBCO worked with many of its wholesaler customers to design an ordering system from the wholesaler perspective. Wholesalers described six areas that were of great importance to them: 1. Order entry; 2. Phone response; 3. Shipping timeliness; 4. Shipping accuracy; 5. Product quality. 6. Product availability.
If NIBCO performed perfectly in these six areas, it would result in the Perfect Order. If they slipped in any one area, the order would be less than perfect. That meant the measurement of a perfect order had to take into account all six areas on every order so the formula to determine performance had to be multiplicative, i.e., order entry performance, times phone response, times shipping timeliness, etc.
This means that if NIBCO achieved 90% of perfection on each of these tasks, the result in overall performance would be .9 x .9 x .9 x .9 x .9 x .9 = .54. Performing at 90% sounds good until you realize how interrelated each element of the Perfect Order is. If one thing goes wrong, it is daunting. By the math above, if NIBCO achieved perfection 90% of the time with each element, it would achieve perfection in the customer's eyes only 54% of the time. Or put another way, something would be messed up with 46% of the orders.
When NIBCO was first able to measure their Perfect Order performance, they were in the 20% to 30% range. They were shocked, because they considered themselves to be a pretty good supplier. Today, they are in the 88-90% range, which requires a 96% to 98% performance in each individual area. How did they get to this point? They achieved it through benchmarking and reengineering various processes at each step of the way. The benefits to NIBCO have included:
- Securing several prime source agreements they feel certain would not have come their way without their Perfect Order system.
- Finished goods inventory has been decreased by over 30%.
- Two distribution centers have been eliminated.
- Headcount in the call center has decreased by over 35%.
Benefits to NIBCO's wholesaler customers include:
- Decreased receiving time. An example: one large customer has reduced receiving time on a truckload from four hours to 35 minutes - an 85% reduction.
- Through a secured Web site, NIBCOpartners.com, wholesalers can access 100% of the data that NIBCO customer service reps can see, including inventory. Before placing an order, the wholesaler knows exactly how many units of a particular part are in stock. If a product is out of stock, the system gives the wholesaler the production date.
- Wholesalers can track the orders via NIBCO's secured Web site, as well as click on hotlinks to all carriers to know when to receive shipment.
- If NIBCO was making/receiving four to seven calls for every mis-shipment, wholesalers were on the other end of the phone calls. They receive the same time savings benefit as NIBCO.