Growing competitive pressures compel strategies and tactics that yield
efficiency and efficacy within virtual supply chains. This is especially
true for middle tier suppliers. For example, distributors are finding
that they need managers who are not only good expediters and know their
products, but who also understand how to use decision support tools to
make their work more effective. Advances in information technology now
make it more feasible for distributors to adopt these tools such as supply
chain management software. This paper examines the steel service center
segment of the wholesale distribution industry as a case in point of the
challenges facing distributors and the relief offered through supply chain
is Part One of a three-part note. This part defines the Challenge faced
by wholesale distributors. Part Two discusses the Critical Objectives
in meeting this challenge. Part Three covers meeting the objectives with
Supply Chain Management Software.
In many ways, steel service centers (SSC's) typify the evolution of wholesale
distribution in general. Historically, wholesale distribution has remained
on the trailing edge of the information technology curve. It has been
more important to focus on other priorities. For example, steel service
centers have advanced quality and precision in processing and handling
many sectors of wholesale distribution, SSC's have found a niche in the
supply chain because they provided a way for smaller manufacturers to
buy products when they could not effectively negotiate with large, powerful
suppliers. In the case of steel service centers, these suppliers are the
integrated steel mills.
SSC's started as brokers, buying low and selling higher. But that provided
little barrier to entry, no competitive advantage, and margins that could
not be sustained. In an effort to differentiate themselves, many SSC's
have progressed up the value chain, adding steel processing to their product/service
bundle. Other types of distributors have incorporated value-added services
that are appropriate for their own customers.
Supply chain planning software applications emerged on the market about
15 years ago. The applications have improved, the technology on which
they have been built has become more available, and the architecture has
become more open. The first companies to appreciate the potential of such
applications were the most sophisticated in terms of their supply chain
planning. These also happened to be larger companies who had significant
IT budgets and expected to invest in these areas.
years ago, I wrote forecasting and inventory models in spreadsheets for
the steel service center where I worked. It required hours if not days
to key in the required data, which only became available once each month.
At that time, these tools challenged the old, familiar decision-making
processes of some of my colleagues.
decision tools are now commercially available "off the shelf". The Internet
provides "anywhere access" to applications that are so enabled. Advances
in technology now ease the integration of these decision tools with back
end transaction systems, even those used by many steel service centers.
This means faster, more accurate results for managers who now know more
about how to use them.
While supply chain management applications have proven themselves in the
real-world use of operations management theory, competitive pressures
continue to grow even more intense, particularly in distribution and in
other middle tiers of supply chains. Managers in all industries have become
more knowledgeable about how to manage supply chain issues like service
and inventory investment. They are learning that mathematics can help
decision makers do their job by making recommendations and then allowing
them to focus in areas where their judgment and experience are needed
are placing increasing pressure on their vendors to bear more of the risk
of time and money in the total supply chain equation. Vendors, including
steel service centers, are being asked to hold inventory, thereby assuming
the lead time risk and the risk of investing working capital. They are
being asked to do this while maintaining, or even lowering, the amount
that they charge the OEM for the product/service bundle.
extended supply chain - all of the organizations, resources and processes
that are required to meet customer demand - is much like a balloon, with
the air inside representing time and money (cost). On the one end, OEM's
compress the "balloon" so that the burden of time and money is pushed
toward the middle. In some industries, the first tier vendors can push
some of this additional burden on to their own suppliers-in essence, compressing
their part of the supply chain balloon, forcing the burden of cost and
time on down the line.
in the case of steel service centers, not only can they not pass this
burden of cost and time on to the steel mills, but the mills squeeze the
"balloon" from the other end, compressing time and money out of their
portion of the virtual supply chain onto the steel service center.
of this squeezing of time and money from one part of the supply chain
to another occurs without ever reducing the total supply chain cost. In
order to survive, the member of the supply chain on the receiving end
of the "squeeze" will eventually have to find an outlet for this increased
pressure. Too often, for a wholesale distributor such as a steel service
center, this time and cost pressure shows up in red ink or lower margins
on the income statement. The supply chain equation is a zero-sum solution
over time. Simply moving costs around will not make the value chain any
more profitable or effective over time. Unless the total volume of cost
and time in the "balloon" is reduced instead of merely shifted, it must
eventually be passed on to the end customer or absorbed by one of the
links in the supply chain.
costs on to the end customer or delaying final shipments is often not
possible. For example, automobile manufacturers mandate cost decreases
from time to time and penalize suppliers for late shipments. The only
other option is for one or more partners to lose out through decreasing
margins. Over time, this will force the disadvantaged partner to reduce
investment and become less competitive. In the end, that trading partner
will be replaced by a competitor who may face the same fate.
The steel industry presents some structural challenges for service centers
that illustrate those faced by other distributors. Customers and mills
have more relative bargaining power than service centers. That structure
is not likely to change soon. However, the path to increased bargaining
power within that challenging structure, as well as the road to survival,
lies through a better way to manage the burden of cost and time that is
being pressed on the SSC by the other trading partners. The steel service
center must manage this cost and time more effectively than either its
trading partners did or its competitors can. Essentially, this is taking
some of the total time and money out of the supply chain equation-like
letting air out of the center of the "balloon" that is being squeezed
from both sides, making the entire supply chain more competitive than
alternative combinations of trading partners.
exciting part of this challenge is that nearly all of time and money that
the steel service center can release from the supply chain "balloon",
will go directly to its own bottom line.
concludes Part One of a three-part note. Part Two will discuss the critical
objectives in meeting the challenges covered in Part One. Part Three will
cover meeting the objectives with Supply Chain Management Software.
MARK WELLS has worked for the past 20 years on many aspects supply chain
management from within industry, as a supply chain consultant, and as
part of a software development organization. For two years, he worked
for a steel service center as an internal consultant. He holds an MBA
from Drexel University where he has also taught operations management
and operations research. He currently works for the applications development
division of Oracle Corporation, focusing on supply chain planning.
can be reached at email@example.com.