January 1, 2006

Supply Chain Lessons

Innovative lessons from companies that are rethinking everything from the inflow of raw materials to the shipping of finished goods.

Big retailers such as Wal-Mart and Home Depot and global manufacturers such as Ford have been beating up their suppliers over the past few years. Margins now are usually razor thin, and suppliers have turned around and pushed for the same concessions from their own suppliers, and so forth down the line. Everywhere, the pressure to move quality goods and materials faster and cheaper is mounting.

“There’s so much competition, especially from overseas, that it puts the emphasis on efficiency,” says Philip Evers, an associate professor of logistics at the Robert H. Smith School of Business of the University of Maryland. “The idea is that suppliers might be able to make up some of the difference by lowering distribution costs.”

Forward looked at three innovators that tell portions of the continually evolving supply chain story. One is a parts replenishment system at AM General, maker of Hummer vehicles; radio frequency identification (RFID) for a maker of padlocks; and a bar-coding technology at Precision Steel. Forward also looked at a new trend in industrial supply chain management, sharing sensitive forecasting information across the supply chain.

Several lessons emerge for metals distributors. First, they should strive to be more methodical about setting inventory levels and tracking the movement of goods in and out of the warehouse. Second, they could benefit by providing buyers with more data about their purchases and where the goods are at all times. Finally, and perhaps most obviously, work continuously to drop the cost of inventory.

“If they can reduce the total spend, it drops right to the bottom line,” says Michael Hilbrich, vice president of industry marketing and an expert in metals supply chain management at i2 Technologies, a supply chain software and advisory firm, based in Dallas, Texas. Large buyers, as in most industries, are rationalizing their supplier base. To survive, suppliers will have to innovate, he says.

“As a group, metals service centers have been slow to embrace these technologies,” says Hilbrich.

It’s not always easy for companies in mature industries to modernize the way they do business. But they should try. Those that don’t innovate will lose business. “At some point companies in mature industries are going to have to embrace things like RFID,” says Evers. “They may not face the same urgency that other industries have, but eventually they will.”

The new technologies don’t always fit easily into a metals environment. The metals industry has found it very difficult to implement bar-coding technology, Hilbrich says. It is still too soon to know how transferable RFID technology is to the metals world, he says.

When AM General, the South Bend, Indiana, maker of HMMWV military vehicles, struck a deal with General Motors to produce Hummer SUVs for the consumer market, the company, which traces its roots back to 1903, knew it would have to change a few things. It would be adding a factory capable of producing 40,000 vehicles a year compared to much lower volumes in its current plant. “To us it was very high volume,” says Debbie Cafiero, chief information officer.

In 2002, the company completed a new 673,000 square foot state-of-the-art plant in Michawaka, Indiana, that was vastly different from its current plant. “We had a blank slate to design whatever systems were necessary to support 'just in time' manufacturing processes,” says Cafiero. Among the technologies AM General deployed is a replenishment system that allows parts to be delivered to the line at the exact moment they are needed. When supplies on the line start to run low, the line-side operator simply pushes a button to signal, over a wireless system, to a fork-lift driver exactly what replacements are needed and where they are located. In storage, the driver sends another signal that the parts have been picked up and are moving along to the line. “This saved a significant amount of time, as drivers previously had to drive to stations to collect part movement information,” says Cafiero. The paper-based system took additional time and caused confusion among drivers and the status of parts to be moved. She says the new parts replenishment system cuts time and inefficiency out of the manufacturing process.

Cafiero says the parts replenishment system, provided by a company called GE Fanuc, California, allows AM General to keep fewer parts in storage. It also allows for fewer parts on the line, creating more space and flexibility. “When people walk through our plant, they often comment on how organized and uncluttered it is,” says Cafiero. “The floors are shiny and there are very few parts lying around.”

Perhaps the greatest feature of the system, however, is that it’s wireless. Engineers constantly are changing the arrangement of the line. As production speeds up, more functions might be packed into one station, for example. With wire-based systems, every time a part is moved, the signaling equipment has to be moved and rewired. “Now, if the line changes, you just pick up the button and move it,” says Cafiero.

She adds that while the software is relatively inexpensive, the biggest expense was on consulting fees to configure the system and technical training for her staff.

Other software packages can reap immediate rewards for metals distributors. “Demand forecasting software has become almost commoditized it works so well,” Hilbrich says.

In early 2004, Hampton Products International Corp. CEO Kim Kelley walked into the office of CIO Brian Millsap with a question. He wanted to know what the technology expert thought of implementing a radio frequency identification (RFID) program. Retail giant Wal-Mart was set to require its top 100 suppliers to begin shipping products to certain distribution centers with RFID tags at the start of 2005. And although Hampton, a Foothill Ranch, California-based maker of door hardware and security lighting, was not a Top 100 Wal-Mart supplier, Kelley wanted to be ahead of the pack.

The CIO’s response? “I told him no,” recalls Millsap. At the time, the CIO says he didn’t see the value of implementing RFID. He figured it would be a massive cost center. That would irritate the finance department, cause headaches for his own staff and take valuable time away from other projects. Even after attending some RFID “bootcamps,” Millsap still didn’t think it was a good idea. “I still wasn’t convinced it had value for Hampton,” he says. Undeterred, Kelley signed the company up as a volunteer with the Top 100 anyway.

A few months later, Millsap was converted from a critic of the project to its champion. For one, he realized that the company could do the implementation on its own, saving lots of money. And second, he began to see the transformative power of the technology. “It put some of our business processes under a microscope,” he says. And then there was the buy-in from finance, global supply and logistics departments.

Brian Millsap, CIO, Hampton
Products International Corp.

Instead of griping about the cost, finance saw opportunities to save money on shipping discrepancies. When errors are made in shipments to customers, or if the customer believes there was an error, customers penalize the suppliers with fines known as charge-backs. RFID allows Hampton to verify receipt of items at the customer’s location without the possibility of human error in receiving, ultimately resulting in fewer charge-backs and less cost at both ends to reconcile the discrepancies.

But the real money, according to Millsap, is in the supply chain visibility RFID eventually will provide. Currently, Hampton only tags shipments to the one Wal-Mart distribution center that requires it, but eventually expects to expand the program across the board.

“From our back door to the cash register was a black hole. We had no idea where our inventory was,” says Millsap. He says that with RFID there are now multiple read points between Hampton and each RFID-enabled store that will help ensure that Hampton can get products to its customers when they need them. The system will allow the company to know whether a truck is on the way to a store the night before a promotion goes into effect, or if an entire pallet is lost in the back room of a supplier. “We can even tell when inventory is stocked on the shelf,” Millsap says.

The technology works by attaching a tiny computer chip with a mini antenna to a carton or pallet. When the chip receives a radio signal, it transmits location information back to the person tracking the shipment.

Hampton is working on refining the tools it uses to interpret the streams of data created by RFID. “The key question is ‘what are you going to do with all the data?’” notes Millsap. He says the real power of the technology will only be realized when Hampton is able to turn the information into knowledge. For now, the company is happy to have won the favor of one of its most important customers. In fact, Hampton recently won a Supplier/Vendor of the Year award at Wal-Mart.

While RFID technology itself has been around for awhile, it is only now taking off in terms of users. “The technology that enables it is evolving very rapidly,” says Jerry Brown, director of the Supply Chain Practice at PricewaterhouseCoopers Advisory Services in Toronto, Ontario, Canada. He says that the costs associated with RFID will start to fall dramatically. “RFID is coming,” he says. “There’s no stopping it.”

While RFID is still a relatively new phenomenon, some service centers are finding ways to make an old technology do new tricks. Bar codes, which can be found on nearly every product under the sun, increasingly can be found in use at service centers. For large metals distributors, bar coding can be difficult to implement, but not impossible. A.M. Castle & Co., Bassett Industries Inc. and Precision Steel Warehouse, Inc., are only a few of the companies that have instituted bar coding. What is rare in metals service centers, however, is end-to-end bar coding, where materials are tracked from receiving to inventory to fabrication and to shipping using the same bar-code tags. That’s because whatever the metal is at the beginning of the process, it will be different in some way at the end—different shape, different size, different metallurgy. Many service centers, therefore, simply add bar code tags at the end of the process—to customer specifications—to allow buyers to track their inventory. But back-end bar coding robs service centers of the ability to track their own inventory and work flow.

With bar-coding equipment, such as printers and scanners, becoming increasingly cost-effective and built to withstand the harsh conditions of a plant floor, some service centers find that they can track inventory through the process, adding new tags each time the material takes a new form. For example, Precision Steel Warehouse, with steel service centers in Franklin Park, Illinois, and Charlotte, North Carolina, specializing in processing steel for the automotive, medical equipment and appliance markets, tracks inventory each step of the way, from the 20,000 lb. coils it purchases from the mill, to the processed products it ships out the door.

While most mills do provide bar-coding on steel coils, Precision affixes its own tags to each coil as it is received. All incoming shipments are carefully bar-code tagged for size, grade and temper. But the real value to Precision comes after portions of a coil are processed for jobs, leaving one or more smaller coils. The smaller coils are re-tagged and can be easily found for orders that are close in size. “It’s a tremendous way for us to track small coils and fit them to other jobs,” says Steve Kraft, marketing manager at Precision. “The name of the game is to eliminate as much waste as possible. We will slit to as low as 25 pounds for some jobs.”

Precision’s system generates a packet of bar-code tags to complete each order, including tags to restock the coil and shipping tags to the customer’s specifications that might include such information as part number, description, weight and thickness. Precision also includes a second set of tags on finished goods that contains important shipping information about the customer, including the address. That allows its tracking system to complete the loop as goods are shipped out. Precision also uses AIAG tags, an auto industry standard, for its automotive customers.

Although Precision has been bar-coding inventory and shipments for some time, “we are always looking at ways to improve the system,” says Gary Osgood, manager of IT services. Now the company is using wireless scanners at one plant to free up workers from sitting at computers. He says the company is also exploring ways to include more information on the bar codes, such as job activity. “Where we are heading is developing tags that could track the specific tasks of specific employees.” He says the information could then be used to track work flow and create more efficient processes. The company is also looking to explore the value and feasibility of RFID. “It’s a little down the road, but we will take a hard look at it,” says Osgood.

Bar coding isn’t without limitations, however. It does rely on front-end data entry. “It’s only as good as the information entered up front,” says Osgood. “Any inaccuracies will cause problems down the line.” And unlike RFID, each item has to be physically scanned at multiple points along the processing chain, which can be time-consuming and prone to error if some items are missed. As the technology evolves, though, Osgood says that Precision gets better and better at realizing value from it.

Regardless of the system—RFID, bar coding, Unique Identification Tags (see Market Analysis, www. msci.org/forward)—supply chain technology is either coming down from the top of the chain, the end user, or up from the bottom. Metals companies will eventually have to change their own systems to complete the chain in the middle.

Perhaps one of the biggest trends taking place in supply chain management is information sharing among companies. Companies are passing on sales data and even sharing their sensitive forecast information.

The intention is to combat the bullwhip effect. This is the idea that a small adjustment in the supply chain can send a ripple upstream, which becomes increasingly distorted as it moves along. For example, an increase in an order by a retailer can cause its supplier to increase its own order, plus some safety stock to cover expectations that the trend will continue. This pattern is amplified down the chain, leaving downstream providers of raw materials with little grasp on reality.

Sharing information allows those several steps down the chain to see what’s happening at the top of chain. “Metals executives see huge distortions from the end user as to what is really happening in the market,” says PricewaterhouseCoopers’ Brown. Sharing “helps everyone reduce inventory and plan for labor use better,” adds Brown.

While it seems like a simple concept, it’s only recently that companies have felt comfortable sharing sensitive data with key suppliers. “In the past it was a trust issue,” says Brown. There was also the danger that some companies would intentionally mislead others to create a favorable advantage. Some companies are even setting up Internet sites to share data in real time. “This is something you are going to be seeing a lot more of,” Brown says.