Higher availability, lower costs

19 OCTOBER 2012

More than two million electronic components with different, partly extremely long and fluctuating delivery times are currently available in the market. Due to this huge variety, it can result in repeated supply shortages. When there are communication problems between those involved in the supply chain, the manufacturer produces and the distributor orders without knowing what customers actually need. Whether the customer then receives what they need in good time, is purely a gamble.

by Joachim Kaiser
Managing Director Logistics and Materials Management
Rutronik Elektronische Bauelemente GmbH

Contemporary logistics systems are therefore based on a significantly closer cooperation between companies and suppliers than was previously the case.
This includes a relationship of trust, which deterred many companies in the past. But an increasing number of them are seeing the advantages of such systems and benefit from virtually 100% supply security. A pleasant side effect is that they can simultaneously optimise their processes significantly, reduce process costs and increase process quality.

Opening of borders

In the traditional supply chain, every company border also represented a border in the value added and supply chain. Processes are usually uncoordinated between supplier, manufacturer and customer and communication is interrupted. Decision making, which goes beyond company borders, is therefore not possible. To nevertheless ensure their own supply, every party involved operates its own buffer stock. The main reason for introducing logistics systems is to reduce stock and procurement costs and to transfer them to service providers.
Today, however, the securing of supply and process cost reduction are at the top of the list of priorities. Because the sheer quantity of components with their derivatives and the trend to release second or even third sources increasingly rarely, makes need-compliant procurement a real challenge. To ensure it, all contemporary logistics systems are based on a timely, precise and comprehensive exchange of data.

Crucial is that the customer provides the distributor with long-term planning figures and passes on all data at item level in an unfiltered manner. Because every manual influence with factors, which change the figures upwards or downwards, may result in supply problems at a later stage.

Electronic data exchange

A large number of IT systems with different data formats is available for electronic data exchange, which a distributor should be able to easily process. This creates the foundation for automatic procurement and supply processes, which are ultimately identical for every logistics system: the customer sends its detailed short-term and long-term forecasts to the distributor on a set defined weekday. The latter defines from the weekly planning the current need and supplies the required components in the corresponding units collected to the supply address(es) of the customer on a weekday that is also defined in advance.
Due to the long-term planned figures from production, the distributor orders the items probably required with an advance of up to eight months from the manufacturer.
A suitable backlog management of the logistics partner can also cushion longer delivery periods any time. To this end, the distributor automatically generates from the customer’s forecast the orders with the manufacturer in a time window of up to one year. The manufacturer then keeps the corresponding production capacities in stock. In doing so, the customer retains best possible flexibility, because it does not need to determine the precise items until about four to six weeks before delivery date. At the

same time, transport costs can be reduced in this way, which may make up a significant proportion of unit costs in particular for passive components. If the components can be shipped by sea instead of air freight thanks to a long advance period, the cost share drops from ten to about one per cent of the component price.
If the customer does not have such planning itself, the distributor should be able to provide it. With the use of forecast models, which include figures from the historical use and production of the weeks ahead, for instance, it can generate an artificial forecast, which represents a good basis for the entire supply chain.
This creates a real win-win situation for all parties involved: the manufacturer knows the requirement of the market and therefore has a solid indication for its production planning. The distributor has the security of having items in stock at the time of requirement even in the event of longer delivery times. And the customer benefits from nearly 100% supply security. It can also be maintained in the event of unforeseeable extensions to delivery periods – ash clouds, earthquakes or an unusual economic performance therefore become less terrifying, at least as regards production. Other benefits: as the company borders are permeable in such a logistics system and planning involves manufacturer as well as distributor and customer, one single security storage is sufficient for all three parties, which means that fewer capital commitment costs are incurred. As a rule, the distributor keeps in stock the customer requirement of the coming one to two months in the security stock, which means that surprising additional requirements or production losses of the manufacturer can be bridged for several weeks.

Leaner and better processes

The basis for this kind of cooperation in the supply chain is electronic data exchange. Because this is the only way of transmitting the planning figures in good time and comprehensively on a regular basis and in sufficient quality. In addition to ensuring the supply, many process steps in procurement therefore become unnecessary – and quite automatically without a process analysis.
As such, the demand carriers are not required to submit requests or demands with procurement, for example, procurement does not obtain any offers and convert orders, in goods inwards, the verification, posting and merging of the goods and the work of the registration, i.e. the storage of the delivery note, the invoice and order

processes, is entirely unnecessary. As the costs of manual activities are reduced dramatically, the process and procurement costs fall clearly. At the same time, the quality of the processes improves, as the risk of erroneous inputs or typos drops significantly.
Contemporary logistics systems are also based on the three classic systems of consignation, kanban and delivery schedule. Which one suits the relevant customer best results from the circumstances and relevance, which has a series of factors for the customer, e.g. how much room is available in goods inwards or in the warehouse or how continuously production is carried out. If these factors are interpreted correctly, the customer gets the system that meets its ideal requirement.

Trust is the start of everything

The fear of opening too strongly and being bound to the suppliers, has kept some companies from using such logistics systems until now. In particular during the internet boom, it was standard practice to choose suppliers solely on the basis of price without considering product quality and availability. This narrow focus often resulted in quality issues and production losses, which frequently overshadowed the cost savings. Due to this experience and the fact that short-term orders with the strongly risen quantity of components are hardly possible anymore with the various and occasionally very long delivery periods, a different culture of trust developed in which customer and supplier work together more closely.
Another consequence of this development is companies’ focus on fewer suppliers. The impact on the process costs of the customer must not be underestimated: every supply partner has its own processes and its own contact, with which the order, the supply and the invoicing must be discussed. As such, not only the selection of the relevant supplier takes up time, but also the communication with every individual one. This means: the bigger the proportion of the requirement that a logistics partner can cover, the fewer suppliers a company needs. The time requirement and costs are reduced accordingly. A long-standing relationship of trust between the customer and supplier or distributor, which is contractually secured, forms a solid basis for such a close connection, which benefits all parties involved.

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