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The Need to Know

May 1, 2003
Manufacturers are using sophisticated software to take cost out of the supply chain.The distribution world is having fun keeping up with changes such

Manufacturers are using sophisticated software to take cost out of the supply chain.

The distribution world is having fun keeping up with changes such as consolidation, integrated supply, Y2K and the Internet.

However, manufacturers' enterprise resource planning (ERP) programs (loaded with sophisticated software like SAP) are having an even greater impact on the distribution business because of the unparalleled access these systems offer to timely information. Here's why:

Basically, ERP allows manufacturers to get accurate information on all aspects of their manufacturing process, including inventory levels, supplier lead times and production data, so that they can cut inventory out of the pipeline, better match production to demand and shorten delivery cycles. When these systems first came onto the scene about four or five years ago, manufacturers were looking to replace non-year-2000-compliant legacy computer systems. Along with upgrading their MIS functions for Y2K compliance, manufacturers wanted to create a single integrated solution that could link a company's manufacturing plants around the world and provide management with a single consolidated general ledger. Theoretically, this sounds pretty simple. It's not easy to execute. Just ask any manufacturer who has attempted a global SAP implementation. It takes years--and millions of dollars--to make this a reality.

A successful ERP implementation allows management to make better decisions because they have better information. This access to better information forever changed the power base within manufacturing companies. In the past, those companies were ruled by operations and engineering. This isn't the case today, because the president and CFO are no longer dependent upon delayed information from the field and operations. Senior executives can use the latest ERP software to rapidly find the once-hidden costs of their business operations. For instance, CFOs can use it to dissect the costs of the business and begin to connect pieces of the information puzzle. One of the primary goals of this analysis is to gain a better understanding of regional idiosyncrasies to match production.

In the past, CFOs focused on cost reduction within two central points of the business. One point was working with the manufacturing team to better utilize existing facilities; the other was reducing "company-owned" distribution centers. Streamlining business was the core goal of most manufacturing resource planning (MRP) systems used since the 1950s. This focus led many manufacturers to reduce plant capacity and change existing manufacturing processes. One important change was the move to the Just in Time (JIT) manufacturing phenomenon over the past 15 years.

To implement JIT, CFOs cut back the on-hand inventory levels that they needed to meet production schedules. They quickly found JIT reduced the risk of inventory obsolescence, freed up extensive amounts of capital so it could be used for other corporate efforts and reduced space requirements to store their raw component goods.

The trend toward JIT was great news for distributors, because they were able to use their local inventories to help their vendors achieve JIT's manufacturing objectives. The wholesale distribution business exploded because of this JIT-inspired "postponement of inventory" at the plant.

Once they streamlined the flow of goods from their own suppliers to their factories, manufacturers moved on to reduce "company-owned" distribution centers, the second major focus created by the use of ERP systems. They saw streamlining company-owned distribution centers could offer a fast pay back and that their warehouses were inefficient storage centers with too much unsold or obsolete goods. Companies were continually building new warehouses to store the items the company manufactured.

Something had to change. It has. Access to better information through ERP was the driving force for these changes. This access had a profound impact on the distribution community, because manufacturers were scaling back their ability to serve customers regionally--the exact point where distribution added value to the supply chain. Savvy distributors saw this trend and beefed up their technical support staffing. These value-added services, the heart and soul of today's MRO distributor, gave rise to the "extended supply chain." In this business model, manufacturers postpone inventory and "push" it to local independent distributors-giving more power to these distributors.

The shift in power is one of the key drivers in the industry's consolidation and the phenomenal growth of buying consortiums that compete with industry giants. As the power base becomes more balanced between manufacturers and distributors, it's critical that distributors make suppliers aware of their value-added services. Rapid new product development positions distributors with solid engineering and technical support teams to prosper in this environment. Once again, knowledge is the cornerstone of a distributor's value-added service.

However, some distributors believe access to supply-chain information can be a two-edged sword for them. It has helped make them a bigger player in the supply chain for the reasons just discussed. However, manufacturers are searching for more critical information on the supply chain that many distributors are reluctant to part with: point-of-sale data for their best customers. While manufacturers have been able to use ERP systems like SAP and Baan to squeeze costs out of their own product needs for production runs, they are still searching for more accurate methods to forecast demand from end users. The demand-forecasting software now available only solves demand forecasting within the internal operations.

That's why point-of-sale data is of so much interest to them. However, there's a current of distrust running strongly through many distributor-manufacturer relationships, and many distributors fear that if manufacturers know who their best customers are and what they are buying, a manufacturer could do an end run around the distributor and sell to this customer directly. This concept of bypassing the distributor and selling direct is called "disintermediation."

Will disintermediation become a reality? That's up to distributors, because they must prove their worth to manufacturers. As manufacturers found with the use of ERP systems, knowledge is a very powerful tool, and can help them become more profitable. It can also help distributors survive, if they can communicate to manufacturers the value that they add to the supply chain.