Trust and information sharing
• The key to optimizing a supply chain is
information sharing
• The technology to do this exits –reading 2
• Most supply chains do not do a good job
leveraging information
– No trust
• The exercise we did last class should give you a
good feel for why trust is so hard to build and so
easy to destroy
The negotiation exercise
Why do these behaviors exist ?
• Measures
– Car salespeople (and other salespeople) offer the most
obvious example
• We have always behaved this way
– The article entitled “the Trust Factor in SCM” gets at
this- most of the top people in an organization got there
by behaving in this manner
– Micro-soft article
– Once this type of behavior starts it is really hard to stop
Key point
• Before we can start to share information there has
to be trust between the various links in the supply
chain.
• Almost everything we will talk about this term is
predicated on being able to share information
openly with the appropriate members of the chain.
Trust is then a key foundation of SCM.
Trust
• What does it mean?
• Main types of trust we are concerned with
– Trust that information is truthful
– Trust that other party is being open and honest
• Can you “tell the truth” and still not be open and honest?
– Trust that other party has all supply chain members’
interests in mind as opposed to just their own interests
– Microsoft
– Car salesperson
– In your exercise was there a super-ordinate goal?
Inter vs. Intra organizational trust
• I am mainly looking at trust across chain
members. They may be within the same company
but they are distinct entities.
• The article entitled “The enemies of trust” in your
course-pac does a good job discussing why most
big companies have internal trust issues. And if
you read it carefully it should be become clear that
trust is incredibly hard to achieve even within our
own boundaries
– What does that imply for trust between different
companies?
Building trust
• Some rules of thumb from Handfield and Nichols (1999)
• Be reliable – follow through on your commitments and act
in a predictable way
– Over time this is one of the best ways to build / destroy trust
• Assign competent people to the interface –technical
knowledge
• Assign competent people to the interface –people skills
• Both sides need to be somewhat vulnerable
– This is a key and often overlooked point
• Be loyal – supply chain relationships are often likened to
marriages
Some other elements of trust
• Moving to SCM is change- and most people fear
change
– If you fear something you are not going to trust it’s
proponents (see the Trust Factor article again)
– The people who profit from the existing systems are not
going to want to change for obvious reasons
• Microsoft –yesterday and today
• Jostens
• Like any other change moving to SCM
needs to be top down
Measurement
• “Tell me how I am measured and I will tell you what I will
do”
– Is the car salesperson acting rationally?
– Were you (if you value free food) acting rationally?
– What my pay is tied to
– “your” focus on grades not what you learn
• Change does not occur if measurement and rewards do not
change
– Saturn dealerships – totally different pay structure to
create a totally different car buying culture
– Dogs and Skunks
Structure- is also linked to trust
• Within an organization or across a supply chain
you generally do not want to create conflict
– Many structures create unneeded competition for
resources or duplicated effort
• Why both Jostens and Dana Engine Controls (in Independence
KS) have national purchasing contracts
– Creates a much tighter relationship with suppliers
• I did not go with my wife to functions in the English
department when at KSU. The business school was considered
the enemy by the English faculty (even though we supplied
them with many customers –and cash). And the business
school did not leverage the English department’s capabilities
very well either.
Processes and trust
• Process tend to be housed in an individual function or
company. Yet in reality almost all functions are linked to
other functions and or companies.
• Therefore it is suggested that managing as many processes
cross functionally as is possible is a way to build trust.
– In many companies (BAE systems) they have material
management people who are responsible for the flow of materials
from the moment it is loaded on a truck at the supplier’s until it
leaves the plant. The material manager then interfaces with the
supplier, the purchasing people, the warehouse people, the
manufacturing people and the shipping people.
• MC Ink / Tow vehicles
– Chrysler’s design process was one of the key reasons Mercedes
bought them
Need to build a culture of trust
• Different members of the supply chain need to have:
– A reason to work together
– Measures that encourage them to work together
• If I had told you ahead of time that my measure of success for
the negotiation exercise was going to be the combined scores
the first thing you would have done was share information
– Structures that encourage cross functional process
• Combined this will build a culture where various chain
members can trust each other and share information –so
that they work toward supply chain goals not individual
goals
From trust to information sharing
• See the article on the DC sniper. All the
information existed to (probably) catch these
people much earlier
– Many different law enforcement agencies had different
bits and pieces of the total
– They did not / could not communicate
– How many cop shows have you seen where there is
tension / hatred between the locals and the “feds”
– Philadelphia Mayor and the FBI
Information and information systems
• Once we have trust information can start to flow
through the chain – this is the ivory tower view of
the world
• Reality- usually we build trust over time- and as
the level of trust increases the types of information
changes and the volume of information increases.
• The growth of SCM has coincided with the growth
in information systems- for good reason
– When all information was stored on paper sharing it
across entities was time consuming, error prone, and
very expensive.
Some ways to share / leverage information
• Electronic commerce
– Any way to conduct business in a paperless environment
– Includes EDI
• Data warehouses and ERP – now also includes things like
CRM
• Decision support systems –
– Yellow Freight’s command center
• Common numbering/ labeling schemes
– Look at the number on your apple
• Perhaps the most important invention of the 20th century –
the bar code scanner – note the 21st century is moving
beyond the bar-code to RFID tags
Why the bar code scanner maters
• We can automatically know where every thing is
in the chain.
– Wal-Mart’s point of sale system
– Payless DC
• Dirt cheap
• Can link lots of disparate information
automatically and easily.
• An example from a project I did at K-State to use
information to improve an entire SC – to bad it is
still not in regular use because of trust issues
An example – the simplified cow SC
Drug companies
Surgical supplies
Animal Health services
Cow and calf
Operations
Feed lot
Growers of corn, hay
and other feeds
Meat processor
Safeway meat
department
State of the Industry today
• In case you somehow missed it – we have MadCow Disease in the USA
• We still have not accounted for all of the cows that
grew up with the infected cow
– Note that records on Dairy cows are much better than
records on cows raised only for meat.
– The gestation period of mad cow is pretty long so don’t
panic
• Typical cow – multiple owners for short periods of
time
The Cattle supply chain
• The flow of goods (cows) through this system is pretty
apparent.
• However, there are also information flows through this
system- and it is managing this information that is going to
increase efficiency and also allow the entire chain to
provide more value to the end consumer – hence increase
profits for all chain members.
–
–
–
–
–
Demand
Inventory
Effectiveness of medications in real settings (contingencies)
Forecasting
Etc.
Some obvious savings
• Research suggests that 5-7% of the average Vet’s
gross is lost through poor inventory management
– This is above an beyond the $5000 in inventory holding
costs that an average vet incurs in a year
– So better management of inventory is like free money
• Doing all of this by hand is a waste of time and
error prone. An information system that would
accurately keep track of everything a vet does
while in the field with no reentering of data would
reduce paperwork time, increase accuracy of
inventory records, and make billing easier
Not as obvious
• The average purchase order costs $75 to process
and is error prone
– Electronically transmitted purchase orders cost 1.25 to
process and are not error prone.
– Once a vet has a system set up it can generate and
transmit orders automatically – saving time and money.
More value added
• Customers are starting to demand much more complete
records of a specific animal’s history
– Feedlots- to control costs
– End consumers- In Europe beef comes with a life history so that
consumers know what they are getting- someday this will come to
the USA – in “fancy” restaurants and stores it already has.
– Both of these trends suggest that Vets who can provide a complete
and accurate record for each individual animal are going to have a
competitive advantage
• The same system that helps a vet control inventory costs,
billing and the like is going to help the vet provide a higher
value added service. In others words costs decrease as
value increases.
A little More
• Mortality and morbidity rates over the last 20 years have
not changed much even though there have been many
advances
– Only 40% of cows are tagged ( circa 2003) so it is difficult to be
100% sure which animal got what
– If Wal-Mart can afford to bar-code a piece of bazooka there is a way to do
this with cows.
• Why no RFID in USA? There is a trust element here as well
– Controlled experiments at the College of Veterinary Medicine are
not the same as animals in the field
• In the process of collecting data for billing and inventory
control vets will be building a very useful database of
what actually works –as well as when, how and
information on interactions- this is another flow of
information that can significantly improve practice. And
once more it comes from the same system
End result of project - theory
• A single system can be used to track a cow from
“cradle to table”.
– More accurate records are created at a lower cost.
– The individual cow is worth more at no additional costbecause a feedlot (and end consumer) will have a much
higher level of certainty about the animal’s health
– Data for research purposes can be collected almost for
free- which will improve practice as well – and lower
costs
– Note that all members of the chain benefit- now the
question is will they trust each other enough to do it?
End result - reality
• The various members of this chain do not trust
each other
– For instance Ranchers are very happy that we have
closed the borders to Canadian cows. Meat packers are
not.
– No one wants to pay for technology
– Tend to beat the crap out of each other on price
• Hard to build relationships or trust when transactions occur at
auctions!
– Many large ranches only use a vet for emergencies
– Sooner or later this will be mandated till then…
Building on our example
• Information flows are one of the three main flows
in a system. The other two are stuff (goods) and
money.
• Obviously we have always had supply chains and
managed them – what is revolutionary is the
information component.
Information management
• What types of information flow through a
supply chain?
• Some technologies you should be aware of
• E-commerce and new technology
– This changes everything!
– This changes nothing!
– This changes something – but we are not sure
what?
Information in a supply chain
• Demand forecasts – aggregate and disaggregate (Volvo
story in reading)
• Inventory
– How much / where / when / etcetera
• Customer orders
– Due date, design, pricing, etcetera
• Production and delivery schedules
– All members of the chain
• Future customer desires – new product and service
development
• Financial flows – who owes what to whom?
For example – demand forecasts
• CFAR – collaborative forecasting and
replenishment. In many retail settings (think WalMart not The Gap) the retailer can not forecast on
their own – create forecasts with suppliers based
on
– Real time sales data
– Marketing plans – both tiers
– Overall market forecasts – both tiers
• Useless unless we also know
– Production and shipping schedules for entire chain
• Combined much more robust planning tools
Why is getting this data hard?
• When you negotiate do you want to tell a
customer that:
– You have plenty of capacity and can get the job done
fast?
– You have had shipping delays from suppliers
– Etcetera
• Do you want to tell a supplier that:
– You need as much of their product / service as you can
get or that you have stock outs ?
– Do you want a supplier to know you are having a great
year?
For example– new product / service development
• Traditional design processes
• Concurrent processes
– DFM /DFE / DFX
• What are the benefits of this increased
involvement ?
• What are the potential pitfalls / costs ?
• What is it going to take to make this happen on a
regular basis across your chain?
Increased information sharing
• The foundation of most SCM improvement efforts
is speeding and or increasing information flow.
• Usually across functions and chain members
• We have all sorts of cool new technologies to do
this
• None of that matters until the chain members have
incentives to do this (and of course trust)
You should be aware of:
•
•
•
•
•
ERP / enterprise systems
EDI – electronic data interchange
CFAR
Concurrent design – ESI
The bar code scanner / reader
– Considered by the some the most important technology
of the 20th century – now it is RFID
• CRM – customer relationship management
• Auction technology – especially reverse auctions
What is happening right now?
• Many experts on SCM claim that new information
technologies (especially web based technologies)
are the key to optimization.
• Think hard about this
– What is really new?
– Can technology compensate for poor management
– Would you rather have the best systems or the best
strategy (properly executed)?
E-commerce – is this a revolution?
• EDI has existed in some form for 30 years
• The revolution – if there is one- comes from the
web.
• A typical non-web based EDI system was used to
allow members of a supply chain communicate
with each other in real time and without paper. It
required:
– A large investment in software – usually produced by
the buyer and forced upon suppliers
– Dedicated hardware to run the software
What is different today continued
• EDI systems were then
– Expensive
– Proprietary – Wal-Mart’s system did not use the same
technology as K-Mart’s- to supply to both required two
investments. This was typical
– It was a big deal when the automakers went to a
standard EDI system – so a supplier only had to invest
once.
• Lower costs for suppliers
• Increased number on system – note if much les than 100%
value was very limited
– EDI systems had very high start-up costs, high fixed
costs, and were not generally adapted by all members
of a supply chain.
So what has changed?
• Almost all e-commerce is done using internet platforms –
which means what?
– First a number of companies who invested in
proprietary systems in the middle 90’s wasted a lot of
cash
– The hardware a supplier needs is a PC with a modem
– The only software they need is a browser
– So the set-up costs for the supplier are almost nothing
and they can be on multiple networks.
– The buyer ends up with an entire supply base using the
tools removing the need for a paper bound system (yet I
still meet plenty of people placing orders via fax) –
Note my gift certificate from Colorado Cyclist.
Other changes
• From a supply chain perspective the Web is the big change
but other technology matters as well
– Processing speeds - yield management / Yellow Freight
– Storage capabilities – this is huge for data mining and mass
customization
– ERP systems that actually work – often run on the web now
– RFID, satellite links for trucks and ships and other real time
communication
– Flexibility of production systems because of computer controls
• Nissan (most productive car plant in the world) can make 4
models on their Symrna Tennessee line with no set-up times to
change models
• The IBM commercials on constant change and reality
• Bottom line- more information flowing to more people at
higher speeds
The “revolution” from a SCM perspective
•
From the articles I would ague there are 4 or 5 themes all
based on the ubiquity of the net (note many of these
themes were sounded over EDI and never happened)
1.
Through exchanges and auctions the net gives us the
power to lower prices
Lower purchasing costs are one of many ways we can
reduce the costs of our present process
If we just improve the present process we will not be able
to really leverage the net to its fullest
The new processes will create 2 classes of suppliers
You need a strategy - even more now than in the past
2.
3.
4.
5.
Lets start with the most hyped stuff
• The internet is going to lower prices
– B to B exchanges and auction sites
• How do auction cites work?
– Savings are often 20-30%
• Are they universal?
– Requires a very precise RFQ
– Requires many available suppliers
– Requires a willingness to have a transaction based
relationship
Can new technology do more than just lower
prices?
• Krispy Kreme
– Electronic ordering system
• If order quantities change dramatically it queries the manager
– Did you mean 50 or 5?
• When bad items are shipped managers can place orders for
instant replenishment
• Far fewer errors
Jet Blue
• Paperless cockpit
• All pilots have a laptop with
– Most up to date flight manuals
– Faster searches – no out of date information
– Faster turn time on the ground
Lower costs
• These example are typical e-commerce
information sharing examples.
• They involve the reduction of non-value adding
tasks – all of them would make a JIT / Lean
proponent happy
– Reducing wasted resources in the supply chain.
• None of this will lead to a long term competitive
advantage.
Competitive advantage
• All of the previous examples showed ways to:
– Reduce prices and hopefully costs
– Decrease lead times
– Increase the likelihood that the right inventory is being
held
– Teach customers more about a product (or service) or
how to service it
– Etc.
• So why doesn’t this create competitive advantage?
Long term CA continued
• Is auction technology available to everyone?
• Is web based communication available to
everyone?
• Is the expertise to make this work becoming easier
to access?
• I would argue the answer to all of these questions
is yes.
To gain a CA from information technology
• So far most of the processes we have talked about
changing using e-commerce / IT are the non-core
parts of our supply chain.
– We improve communication
– We reduce inventory
– Etc.
– But we do not fundamentally change what we make or
how we do it- we are making an existing process as
good as it can be.
Key point
• The internet and other investments in IT can make
our existing processes more efficient
• But to gain a real long term competitive advantage
ala Dell (15 years?) you need to change processes
as well.
One area of real promise from e-commerce is
• Creating all new process to allow for true “mass
customization”
– Mass customizers reap the benefits of economies of
scale while giving customers some level of
customization- lower cost linked with higher prices
• This is limited- recent research – full customization increases
production costs and lead times – ATO no trade-off.
• Note level of customization has no statistical influence on cost
or time in marketing or service. Again see IBM adds
– Dell is probably the best example of this – note they
were doing it before the web- that just made it easier for
them
– Taco Bell is Mark’s favorite example
Lets examine a specific supply chain - cars
• The auto industry has had EDI for 20 years. They
have moved suppliers to the web. They are using
web auctions. They have an average of a 60 day
supply of cars in the USA – yet they rarely have
the car you want on a lot
– Most let you search dealers inventory to see if you can
find what you want
– This is still a push system
– The costs of this inventory are humongous – and the
costs are also inflated because people will not pay as
much for a car that is close to what they want as a car
that is exactly what they want.
What has to change?
• The real problem is not finding out what
consumers want- it is making it.
• But car makers are JIT what is the problem?
– Harley is JIT and does mass customization.
• Lead time is measured in many months
• Customers willing to wait
– Car companies have a much more complex product
– Customers less willing to wait
• Still the real issue is the way a car is made
– Smart Car concept.
– BMW – 12 days Europe- 24 days USA
Examples of leveraging new technology
• Some companies who have changed their
processes or created all new processes
–
–
–
–
–
–
–
ChemStation.com
Dell
E-bay
Plagerism.com
Amazon.com
Text book publishing?
Education without a campus?
Lets step back - a supplier perspective
• Prices reduced – and buyers have full access to
pricing information
• If your product or service can be described by a
RFQ with no uncertainty everything but price
becomes an order qualifier.
• So companies are going to end up in 1 of 2
categories- things bought on price and things
bought for other reasons.
– It does not take a genius to figure out that if you are in
the price only category that competition will be brutal
and margins will be minimal
Edison’s Curse
• Gary Hamel’s article is perhaps the best thing on
new information technologies I have read.
• Starts with electrification at the start of the 20th
century.
– Consumers- lower prices
– Makers of generation equipment – large profits
– Electricity distributors – lots of cash at first and then
competition increased and they made less
– Industrial companies – much more efficient but no
more profitable
E- commerce equivalents
• Consumers – lower prices
• Makers of internet hardware (routers, servers and the like)
– think Cisco
– Until every company has this stuff they are going to continue to
grow – the last few years created expectations that were too high but in the long term someone is going to make this stuff – but
eventually they will become GE power systems
• Distributors – ASP’s, Portals and the like – already starting
to look less attractive
• Industrial companies- more efficient but not more
profitable
Electricity to e-commerce
• Most companies became much more efficient with
the advent of electric power – but no more
profitable- why?
• Hamel predicts the same thing with e-commerce
– Costs will go down considerably due to increased
efficiency
– Increased information will also lower costs - he notes
that many industries are premised on imperfect
information – this is bad for me
– But for most companies these two things do not equal
increased profits
Hamel’s key point
• “Any company that plans to make money from “e”
must have a web strategy that creates unique value
for customers, confers unique advantages in
delivering that value, and is tough to copy”
• This changes nothing.
Conclusions
• Much of the competitive advantage that well run
chains have comes from leveraging information to
create new and or better processes.
• Can not leverage information unless people are
willing / have an incentive to share
– Need a culture of trust
• So how do you explain Wal-Mart?