Trust and information sharing

1. 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

2. The negotiation exercise

3. 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

4. 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.

5. 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?

6. 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?

7. 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

8. 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

9. 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

10. 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.

11. 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

12. 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

13. 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

14. 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.

15. 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

16. 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

17. An example – the simplified cow SC Drug companies Surgical supplies Animal Health services Cow and calf Operations Feed lot Meat processor Growers of corn, hay and other feeds Safeway meat department

18. State of the Industry today • In case you somehow missed it – we have Mad-Cow 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

19. 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.

20. 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

21. 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.

22. 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.

23. 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

24. 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 cost- because 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?

25. 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…

26. 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.

27. 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?

28. 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?

29. For example – demand forecasts • CFAR – collaborative forecasting and replenishment. In many retail settings (think Wal-Mart 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

30. 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?

31. 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?

32. 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)

33. 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

34. 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)?

35. 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

36. 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.

37. 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.

38. 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

39. 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) • 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

40. 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

41. 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

42. 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

43. 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.

44. 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?

45. 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.

46. 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.

47. 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.

48. 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

49. 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.

50. 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