Does Supply Chain Management Software Make Sense in Wholesale Distribution?

  • Written By: Mark Wells
  • Published On: September 8 2001



Executive Summary   

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 software.

This 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.

Distribution Evolves   

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 steel.

Like 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.

Many 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.

Software Matures   

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.

Twelve 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.

Such 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.

Industry Structure   

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 most.

OEM's 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.

The 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.

However, 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.

All 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.

Passing 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.

Structural Challenges   

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.

The 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.

This 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.

About the Author   

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.

He can be reached at mark.wells@oracle.com.

 
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