Cost of Exceptions

Exceptions in the supply chain often represent a disproportionally large opportunity cost. Many companies have experienced the hold up of a production line from lack of one component. Line down is the worst-case scenario caused by exceptions in the supply chain - in this case, the disruption in supply flow. The opportunity cost for companies includes both missed revenues and lost market share.

If a company's normal supply chain partners are unable to accommodate this spot and unplanned need, this company goes into "scour the earth" mode searching for this part, and is typically forced into the open or secondary market for sourcing. Some participants in the secondary market are extremely opportunistic which lead to some of the highest price variance from standard cost for companies, and ultimately affect profit margins.

The other side of the profit margin coin is when a company has purchased too much material. Overbuys typically sit as inventory until companies are ready to declare these overbuys as excess, and a decision is made to scrap material or to sell in the secondary market. Again, opportunistic participants will purchase the material at a significantly reduced value. Because many companies are large with different product divisions and sometimes different information systems, situations occur where one company is simultaneously selling and buying identical parts from the secondary market, and is therefore realizing reduced value from both the buy and sell need. Immediately turning to the open market with a spot need does not always return the best value for a company.

Today, there are very few credible and scalable solutions available when companies need to look beyond their normal set of supply chain partners.

Common Causes of Exceptions

Continuous production while balancing supply and demand is the challenge facing supply chain managers. Perturbances to the supply chain range from acts of nature to imperfect market prediction. Despite best efforts to control processes and flow within an organization, dependence on external partners trigger exceptions to your supply chain. Common causes of exceptions germinating from suppliers include changes to lead times, allocation of products that are facing high demand, form-fit-function changes to parts, and product obsolescence.

Perhaps the greatest cause of supply chain exceptions is inaccurate forecasting. A survey done by Industry Directions Inc. indicates that less than 20% of companies forecast with accuracy greater than 90%. Most companies surveyed had less than 90% accuracy and a significant number were not tracking forecast accuracy.

Dealing with Exceptions

Improving intelligence on supply alleviates exceptions triggered by suppliers, because it allows companies to plan thoughtfully about material changes rather than react in crisis. Timely notification is the key. Original Equipment Manufacturers (OEM) need to know about product changes and obsolescence of components in their products. This type of critical information triggers procurement and engineering activities, and often materially affects product flow from suppliers. In the electronics industry, supplier product change and obsolescence will affect companies with product lifecycles longer than two years or expensive re-qualification. However, receiving relevant information in a timely fashion is difficult. Information flow problems are exacerbated by complexities in the supply chain like use of contract manufacturing, purchasing through distribution, and challenges inherent in communicating within a large, geographically disbursed company.

From Supplier-centric to Customer-centric

Another information flow challenge is ensuring that the right people receive the right information. A common misconception is that companies use information. Companies do not generally use information, people use information, and people use information in different ways depending on their job functions and how their companies are organized. For example, many companies organize their engineering and procurement departments by commodities. Consequently, sending microprocessor-related information to an engineer solely focused on connectors is not relevant.

The flood of available information overwhelms users. Solutions should strive to customize information for each individual user. Today's software technologies support creation of solutions that filter information based on individual preferences and job functions. Additionally, many sources of information can be aggregated to provide a single stream of data. This changes the paradigm of supplier notices from supplier-centric to customer-centric. For example, aggregating product change and obsolescence information across all suppliers, filtering this stream based on individualized settings, and then disseminating customized information to users optimizes the use of an important resource - time. Internet-based solutions are particularly well suited to provide a cost-effective and efficient platform for pro-actively delivering highly relevant information to individuals who are geographically and functionally disbursed.

Fixing Misalignment between Supply and Demand

Even with the best supply chain intelligence, misalignments between supply and demand occur, because forecasting is typically inaccurate.

Many companies focus resources on optimizing processes when things go as planned, but often do not have a well-defined process or tools to manage situations when things do not. The first step in managing these costly exceptions is to provide a standard and repeatable process when looking outside your normal supply chain partners to fix overbuys or underbuys.

Spot demands often involve hard to find parts, and spot demand differ from forecast-based demand. While open market exchanges and auction sites position themselves to fix spot situations, the likelihood of companies resolving their needs via a coincident active transaction in the myriad of auction or exchange sites available is extremely low. Let us compare characteristics of forecast-driven processes with exception-driven processes, and describe attributes necessary for successful exception-driven solutions.

Forecast Driven Processes

Normal supply chain partners that represent long-term established relationships execute forecast driven processes. These partners share information and sometimes co-manage supply chain processes. Many solutions focused on forecast driven processes automate quoting, order taking and order fulfillment. Transactions are private between known partners. Relationships between partners are long standing and have already been negotiated.

Because partners are already qualified and terms are already negotiated, the primary aim of supply chain automation in forecast-driven scenarios is to streamline costs and execution.

Exception Driven Processes

When unplanned situations arise in the supply chain, sometimes existing supply chain partners can accommodate the change, and shared plans are updated. However, if existing partners cannot resolve the problem, companies need to look beyond their normal supply chain. In these circumstances, companies are often dealing with people they do not have established relations, and the deal is typically accomplished via a broker.

Spot needs that are causing line down require timely resolution. Consequently, companies will deal with non-partners simply because they have the needed parts. The normal due diligence or supplier qualification is not done, because availability is the highest priority rather than price. Additionally, companies do not have any measure of assurance on the quality of the parts until receipt.

The Problem with Brokers

In order to address spot situations today, OEMs, contract manufacturers and authorized distributors must deal with parts brokers in a highly inefficient, expensive and chaotic process. Brokers are opportunistic in nature and thrive on panic-induced situations where extremely limited insight into supply/demand of parts works to their advantage. Many companies that are part of the legitimate supply chain view brokers as a necessary last resort. These companies feel gouged on pricing, believe they are realizing low value for over-stocked parts, and lack confidence in the quality and handling of parts purchased from brokers.

Brokers do provide a valuable function. However, good brokers are sometimes difficult to find and to qualify. Consequently, companies typically deal with one or two qualified brokers, including some that stock inventory.

Criteria for Demand Driven Exception Solutions

With the broad reach and economy of scale possible with Internet-based solutions, new solutions for managing supply chain exceptions have emerged. When evaluating these solutions, some criteria to keep in mind are as follows.

These solutions need to pro-actively reach qualified sellers and to provide a broad reach without adversely affecting pricing. Because the source for parts is from unfamiliar companies, these solutions must minimize both financial and quality risk. Additionally, anonymity must be rigorously supported, because identity should never be used to your disadvantage. Solutions should also map to your existing procurement processes. For example, the ability to settle and reconcile with a purchase order.

One example of such a solution comes from SupplyEdge. SupplyEdge offers the Internet-based eBusiness applications that proactively and confidentially identifies other users of these parts for potential buy or sell opportunities. Via their ISO certified logistic partner, SupplyEdge reports back count and condition metrics as a function of escrow, and also provides a process for companies to benefit from escrow and anonymity while supporting purchase orders for settlement.

Another important solution criterion is the ability to privately level out misalignments within a company or more broadly among trusted supply chain partners. This feature is important, because immediately addressing spot needs in an open market does not always provide the best value for companies (i.e., closest to standard cost). This feature facilitates communications among trusted partners. Many times partners can handle exceptions if the right information gets to the right people at the right time. The lack of communications generally stems from the time urgency for resolution, the lack of tools to facilitate information flow, and the incompatibility of installed information systems.

Solutions should provide a framework for supporting both private and open transactions, because the goal is to provide a robust capability for companies to maximize their asset management in every context and situation.

While many solutions endeavor to be the NASDAQ of parts, it is important to understand the participants. For example, brokers support many open markets. This is not necessarily a negative attribute, but customers should be aware of the types of companies allowed to participate in these marketplaces and that a process exists for qualifying participants.

Integrated Supply Chain Solutions

The next evolution of supply chain solutions is integration of best of breed solutions into a seamless end-to-end process for companies. The Internet, new software technologies such as XML (extendable Markup Language), and industry led standardization efforts like RosettaNet make this integration feasible. In order to optimize the complete supply chain, both forecast-driven and exception-driven solutions are required. There are many forecast-driven solutions in the marketplace, and a new generation of exception-driven solutions is emerging. Companies will now have solutions available that allow them to effectively compete across supply chains, not just individual companies.