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– Micro-soft article– Once this type of behavior starts it is really hard to stop

• If you became CEO treating employees, suppliers and customers like crap what will you assume?

• Google – did they really set out to piss off other members of the chain? – “do no evil”

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.

• Hopefully you know how hard it is to build trust 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

– 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 health care industry (next reading)– How can these changes not have taken place ?

• Philadelphia Mayor and the FBI• FBI, CIA and so on spent billions after 9/11 to

build a single shared data base – last I checked still not up and running because…

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

Meat processor

Safeway meat department

Feed lotCow and calf Operations

Growers of corn, hay and other feeds

Animal Health services

Drug companies Surgical supplies

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

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 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?

End result - reality

• The various members of this chain do not trust each other– For instance Ranchers were very happy when we have closed the

borders to Canadian cows. Meat packers were not.

– Some meat packers want to test every cow for mad cow and the government will not let them !

– 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 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

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

• Pirelli tires• We the people legal service

• 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

2. Lower purchasing costs are one of many ways we can reduce the costs of our present process

3. If we just improve the present process we will not be able to really leverage the net to its fullest

4. The new processes will create 2 classes of suppliers5. You need a strategy - even more now than in the past

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?