Supply Chain Operating Networks Accelerate Profitable Growth
A supply chain operating network facilitates the communication and operations between a company and partners.
The adhesives and sealants supply chain is complex. The diversity of applications means an assortment of customers. In addition, strong growth in housing markets, infrastructure spending, and automotive sales is occurring worldwide (with higher growth in Asia-Pacific), creating a unique set of fulfillment challenges. Competition is reasonably fragmented, and several companies are currently undergoing mergers and acquisitions. So how can supply chain innovation support adhesives and sealants companies’ growth objectives?
A supply chain operating network (SCON) is a business-to-business (B2B) platform that facilitates the communication and operations between your company and all of its trading partners. Features include a touchless order process, collaboration among trading partners, management-by-exception alerting, and process visibility and data visualization.
A SCON has four components:
- B2B integration to automate supply chain transactions, such as purchase orders, advanced shipping notices, invoices and shipments
- Process automation and collaboration, which enables trading partners to operate efficiently on the transactions they share
- Visibility and analytics, which, when coupled with the B2B integration network, allow real-time data feeding proactive alerts and performance management features
- A partner community by way of the ecosystem—members benefit from the network effect, evident in partner discovery and onboarding efficiencies; network content provides for advanced analytics
Every supply chain practitioner recognizes that automation is valuable and relatively easy to quantify. Eliminating manual tasks creates knowledge workers who can focus on solving problems and serving customers. Automation reduces errors and the operating chaos that accompanies them. So why have we automated only about 40% of our supply chain transactions?
The traditional approach to automation involves integration to trading partners via electronic data interchange (EDI) messages of a chosen standard. Every partner has their own definition of each transaction. They choose from a variety of standards. To automate, each side must come together and analyze the business process, design the integration maps, develop and test a solution, and build a process to handle contingencies when transactions fail. A traditional project repeats this for each partner. By contrast, the supply chain operating network creates a “come as you are” model that normalizes each transaction into a universal definition.
Collaboration in supply chain management has typically meant suppliers viewing their buyers’ inventory levels to decide when and how much to replenish. However, that is only one example of supply chain collaboration. What if you had access to your customers’ site operations to book delivery appointments, or could obtain real-time access to freight accessorials as your carriers incur them? Having access to the same data about shared transactions eliminates confusion and disputes, allows both sides to optimize their operations, and improves agility.
Collaboration in the SCON ecosystem eliminates your spreadsheets, emails and faxes. Collaboration should be aligned with the transaction network to fully realize the value across all participants. This is an inherent feature of a supply chain operating network.
How often does your customer tell you that you missed a delivery window? How much is it worth to your business to ensure that never happens again? Have you ever tried to implement a supply chain event management solution that didn’t work because the data was so bad you kept getting false alerts? How many reports have you read about supply chain visibility? The topic is not new, but proven success stories are not as common as they should be.
What is new is the collection of technologies and solutions that constitutes a SCON. Most visibility solutions rely on “carbon copies” of data from multiple systems, which can be out-of-sync, latent and just plain wrong. A SCON connects all related transactions, works on real-time data feeds, predicts and alerts you to problems, and allows you to visualize data in a variety of ways to create the supply chain management solution that works best for you. The SCON model is a perfect platform for identifying potential supply chain failures, quickly executing contingency plans and managing performance.
Achieving the Network Effect
Google defines the network effect as a phenomenon whereby a product or service gains additional value as more people use it. This is true with supply chain operating networks in a few ways. Most obviously, it reduces onboarding costs for partners that are already on the network. Each participant only needs to connect once to the network to gain access to all other network participants. This approach dramatically lowers the costs of automation as compared to building point-to-point connections.
But the more compelling and innovative examples of the network effect are in the areas of prescriptive analytics. For a system to automatically detect problems and suggest alternatives, it requires machine learning algorithms and data—lots of data. Tapping into the network content, a SCON’s prescriptive algorithms learn faster and produce higher-quality results.
Impact on Profitable Growth
Consider a global adhesives manufacturer with $5.5 billion in annual revenue,
$4.2 billion in cost of goods sold (COGS) with $2.2 billion in direct material spend, $330 million in transportation spend, and average finished goods inventory of
$846 million. By implementing only on 50% of their transaction volumes and associated trading partners in a supply chain operating network, this supply chain manager can save his or her company more than $25 million in operating expenses. With a 10% cost of capital, they remove $56 million of working capital from their balance sheet. Improved customer service results in an increase in customer satisfaction and sales.
Value is achieved through several benefits, including lower processing costs, reduced expedited freight, shorter cash-to-cash cycle, and more.
Lower Processing Costs for Supply-Chain Transactions
Without automation, operators and customer service representatives spend 8-10 min on manual data entry and coordination for every purchase order, sales order, and invoice. The effort is higher for shipments where capacity is constrained and multiple parties are involved. According to Spend Matters, companies can reduce the cost of purchase order requisition, submittal, and approval by up to 75% with procurement automation. Invoice processing costs can also be reduced by up to 90%.
Reduced Expedited Freight
Manual data entry leads to errors and latency, which leads to more expedited freight. A lack of visibility when carriers don’t respond or cannot meet requested dates can also lead to last-minute “fire drills” to maintain customer service levels. Some companies have justified the implementation of a SCON based solely on the expected savings from expedited freight, which can top $1 million in our example.
Shorter Cash-to-Cash (C2C) Cycle
Better visibility to inbound inventory creates more confidence in the inventory management function and reduces safety stock levels. Automation of shipment signals from third-party warehouses and visibility of D-term shipment arrivals accelerates customer invoices. An automated solution operates 24/7, allowing you to expand your window for order taking and shrink order lead times. Proactive monitoring of customer deliveries and higher on-time delivery service reduces days sales outstanding (DSO). All of these strategies together can combine to remove 3-5 days from the C2C cycle. The impact can be further amplified by implementing VMI programs and other collaborative processes.
Without automation of the ordering process, you will never be able to take advantage of early payment discounts from your suppliers. With a direct material spend of $2.2 billion, as in our example, if you are able to capture a 2% early payment discount for 80% of your invoices, you save your company more than $10 million.
Lower Freight Costs
For many companies in the process industries, freight accessorial charges constitute the largest unplanned expense in logistics. Traditionally, these charges have the least amount of scrutiny and discipline in the payment process.
Improving collaboration on individual freight costs can both decrease the costs the carriers charge you and increase the opportunities to recover these costs from customers. Suppose this could eliminate just 1% of your transportation spend. In our example, that equates to more than $3 million annually.
Impact on Growth
The obvious connection between a SCON and increased sales is through improved perfect order fulfillment, which leads to higher customer satisfaction. But consider also the impact of customer service representatives who no longer spend 80% of their days doing manual data entry. Instead, they can monitor customer deliveries, spotting potential problems before they occur and proactively notifying customers. The collaboration and visibility solutions available through a supply chain operating network allow you to differentiate your offering through innovative, value-added services.
In a complex world with a rapidly changing business landscape, companies of all sizes must improve their resilience and agility to compete effectively and grow. As the number of trading partners and transactions increases, manual processes cannot keep up. Your network must be designed to be scalable across technology and business processes and capable of managing millions of transactions daily.
Emphasizing efficient execution of business and supply chain processes means companies experience game-changing, sustainable, profitable growth. Using a robust supply chain operating network elevates your supply chain to a competitive advantage. ASI
For more information, visit www.elemica.com.