FOR DISTRIBUTION CHANNELS
Many distribution channels are on the brink of a revolutionary reduction in costs (value) and margins. In the 80's, powerful buyers like Wal-Mart and Ford imposed successful, total supply channel reconfigurations on suppliers. Now, independent channel players can mimic the big players re-engineering benefits with the help of third party, infotech solution providers. The first movers will lower costs significantly and split these savings between lower prices to grow and fatter profits for reinvestment. Fast imitators will lose market share, but may survive. Try-harder traditionalists will die.
THE INFOTECH RACE STARTS NOW
The rate of infotech change in all aspects - power, cost, user-friendliness, interoperability - is being driven by semiconductor power which is currently doubling every 12 months for the same cost. With bits per chip currently at 231 power (512mm), a new age of electronic commerce will be possible by January 1997. And, by 2002 we will have supercomputers in our wrist-watches!
If it takes two years to understand, choose, test, and rollout new infotech solutions, then the real race is just starting. Infotech investments developed over the past ten years will quickly become obsolete and perhaps handicaps.
While preparing for the emerging world of "electronic commerce", channel players must start immediately on the four diagrammed projects. These measures will achieve most of the cost reductions and service improvements that Wal-Mart’s "quick response" (QR) system started delivering back in 1986.
FOUR STEPS TO APPROXIMATING QR;
Project #1 - Internal Barcoding:
WD = Wholesale Distributor; F.C. = Final Customer; EDI = Electronic Data Interchange
Distributors should install barcoding internally (#1 above) - now. Don't wait for industry standards to be set. For $3000 or less, a company can be printing its own labels for incoming goods and using scanners to put away and pick items. The time for these extra steps is negligible compared to the following benefits:
- Whatever the scanner receives that also matches a purchase order in the computer should be paid for immediately to shrink the payables department. Negotiate with suppliers for a faster-pay discount in lieu of the trade credit float. And, explore together how to do electronic funds transfer (EFT) with remittance data through one of several PC-based methods that third party providers have been announcing this year. The big savings from EFT will be in the liquidation of both the supplier's receivables department and the distributor's payables department plus the efficiencies of same day automatic claims.
- The putting away and picking of goods with barcode checks reduce errors and lost items along with their related costs while boosting both customer satisfaction and salesforce morale.
- If a distributor does inter-branch shipments of goods, then all of the benefits can be doubled.
If the industry ever settles on different barcoding, spend a weekend to switch labels. The benefits that can be earned in the meantime are worth it. Besides, the human cost of learning and implementing barcoding will only rise in cost between now and then.
But, who will bell this cat? We need an "infotech champion" who can work full-time on all of the diagrammed projects. The right person must be set free to start with a total educational immersion into EDI/barcoding. After education, field trips to leading practitioners and a total cost/benefit report, this hero must lead the implementation to measurable results.
After Project #1 is finished or perhaps concurrently, the champion can tackle #2 with the top 1 to 5 suppliers. Most large manufacturers have their own EDI/barcode specialist who is often unknown to their own firm's field sales force. Imagine how excited they might get when a "real customer" calls who speaks the same language and wants to work on an "Automatic, EDI, Top-Off Replenishment Program" starring "open-purchase orders" with "vendor-managed inventory(vmi) responsibilities."
The benefits of this opportunity are huge. Case studies have seen distribution centers’ inventory investment halved, fillrates improved by 5+%, and total procurement costs reduced by over 10%. The suppliers get better daily, production-forecasting data; streamlined order fulfillment costs; and significant pick-up in market share.
- The distributor downloads day-end inventory balances for a given supplier's items to a PC in universal code. The supplier polls the counts on the swing shift and computes what has moved out of the warehouse by subtracting against the previous day's counts. If the supplier has a good sampling of distributors on such a system, their forecasting ability for production purposes can be improved significantly.
- When a predetermined amount of the supplier's goods have been sold out of the distributor's warehouse, the supplier automatically ships replacement goods. Before a shipment goes, the distributor can review and edit the order if they want. Exceptional items can be removed initially from the program. And to guarantee against loading up, the supplier can agree to take back excess inventory quarterly for no charge or to offer attractive offsetting trade credit dating.
- The two partners should seek to also achieve: same day receiving and claims with common barcoding; paperless transactions starring EFT whether it be instant or scheduled for a traditional payment date; and a maximization of volume flow at the expense of redundant suppliers who now will have much higher traditional cost and price structures.
When Proctor and Gamble installed such a system with Wal-Mart in 1988, turns for Pampers went from 52 to 104 per year, and in-store fill-rates went from 90% to 99+%. Owens and Minor, the Richmond based, hospital supply distributor, first installed such a system with Kimberly-Clark and now is planning the same relationship with three other manufacturers. Thomas and Betts, the electrical products manufacturer, now is experimenting with this approach with progressive electrical distributors. Should you wait until a competitor drops prices 6 to 8% while putting another 2 to 4% to their income line?
PROJECTS #3 AND #4 TAKE TIME
The third piece of the re-engineering puzzle is to work with progressive customers on serving them with top-off replenishment plans similar to what must be achieved with key suppliers. Large, powerful customers may demand such an arrangement; so be prepared and process smart from working with suppliers. For other customers, a distributor could coin a brand name for the replenishment process and print a brochure to help sell a radical idea. Because this type of system liquidates over 80% of a full-time buyer’s traditional activities and is a sole supplier marriage proposal too, don't expect full-time buyers to move without a top-down edict.
This type of program is best sold by distribution management to customer management in a low-key way. Plant the seed; don't rush the process; and hope that a top-down decision is made to revamp purchasing strategies, policies, methods and staffing.
Step #4 in the diagram represents an offer to install a top-off system for the customer from their receiving dock on through with barcodes, etc. Most medium and small-sized companies are not apt to have their own infotech champion, but could still be a good volume, distributor account. For a fee, a dis-tributor's "special services division" could fill the role.
Payment for this service could come from the new stream of price discounts that will be earned by the customer under the new program. It is an easier sell when a customer doesn't have to - do, know, or pay anything.
A CALL FOR ACTION
The "information age" is really just beginning. A number of "electronic commerce" applications will shrink, by-pass and reinvent traditional channels of distribution by the year 2000. We must all start a crash course in "what will be happening two years out" in order to start reshaping our companies today. But, the technology for QR re-engineering already exists, and the four projects discussed above are already happening. Will we be first-movers or lose out?
Merrifield Consulting Group, Inc., Article 7.2