Time is money
- Anonymous-
According to Lambert, Stock, and Ellram, "Quick Response (QR) is a retail sector strategy which combines a number of tactics to improve inventory management and efficiency, while speeding inventory flows." QR is generally a flow of information and product between manufacturer and retailer only, however as shall be shown some QR systems include raw material manufacturers and in-process manufacturers. Thus a fully implemented QR system applies a form of J-I-T throughout the complete supply chain.
QR works by combining electronic data interchange (EDI) with bar coding technology, so that consumer sales are tracked immediately. This information is then passed on to the manufacturer who uses the data as input for forecasts that drive production scheduling required to meet system replenishment needs and in turn drive raw material orders. Thus inventory is reduced while response time is shortened. Out-of-stocks are reduced while handling costs and obsolesence costs are also reduced.
QR began in the textile industry but has now spread to many sectors in the retail industry. The grocery industry has adapted QR to a system commonly refered to as efficient consumer response (ECR).
Qr has a major impact on distribution operations. Rather than "warehousing" product, distribution centers are now charged with "moving" the product through quickly. This new imperative frequently entails cross-docking, whereby the inbound product is unloaded, sorted by store, and reloaded onto trucks destined for a particular store, without ever being warehoused. As a result of QR (or ECR) Mercantile Stores has reduced the number of distribution centers it operates from 12 to 8.
To further improve retail efficiency, some suppliers are shipping goods prehung and preticketed. This concept, known as "floor-ready merchandise," is growing in popularity. As noted by Randy Burnette, director of QR for Mercantile, "Our strategy and goal is to maximize the portion of business that is floor ready." Preticketing reduces the amount of time a product stays in the DC by three days in one case, reducing average DC inventry and total system inventory.
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Between 1981 and 1987 U.S. apparel and textile manufacturers suffered a loss of 20% of their domestic market share to foreign competitors. Protectionist legislation retarded the decline but profits dropped by nearly , from $1.9 billion in 1987 to $600 million by 1991.
In 1986 an industry association commissioned a study of supply chains in the domestic U. S. apparel industry. The study concluded that supply chains were too long and too poorly coordinated to respond effectively to changes in the marketplace. Time-to-market averaged 1.25 years from loom to store shelf. Industry wide these inefficiencies were estimated to be costing the industry $25 billion per year, or one quarter of industry gross sales. The supply chain could not absorb such large cost inefficiencies so they were apssed on to consumers, until imports became a threat.
Among the first companies to implement pilot programs designed to redress these inefficiencies was Milliken & Company, the U.S.'s largest textile producer. Before implementing the pilot program Milliken's performance in the supply chain was as follows:
• Milliken received incoming orders slowly, by mail.
• Weaving would normally be completed within eight weeks after the yarn was obtained.
• Dyeing and finishing took a further four to five weeks.
• The stock, when completed, would be forwarded to a central
shipping location until needed by the customer.
• The time elapsed from receipt of the order to shippment of the goods was estimated at 18 to 20 weeks.
• Inventory costs and customer service were sacrificed to obtain manufacturing economies.
Milliken stood at the top of the supply chain, the cloth next went to an apparel manufacturer that usually took another 18 to 20 weeks to ship the clothing to a retailer. Retailers, fearing stockouts, regularly ordered more merchandise than they needed, increasing their inventory carrying costs and resulting in markdowns of excess stock. If retail inventories became too high orders to the apparel manufacturers would be cut, leaving apparel manufacturers with excess inventory. The manufacturers would in turn cut fabric orders, leaving Milliken with unwanted inventory.
In the pilot program Milliken partnered with Seminol, a clothing manufacturer, and Wal-Mart. The pilot project was for basic slacks and targeted sales and profit improvement achieved through the application of a QR system. Sales increased 31% during the year of the study and inventory turns increased 30% while margins were maintained or improved.
• All members of the supply chain must be ready to forego opportunistic behavior and enter into collaborative relationships that have the success of the entire supply chain a the objective instead of the short run success of one company. Such a perspective is identified by a commitment to the relationship and trust between the parties. At the heart of this trust is a high level of communication, shared values, and a recognitions of the costs involved in leaving the rleationship.
• A system must be in place to allow the full and free movement of information between parties in the relationship. Electronic Data Interchange (EDI) is the most common system used today in these relationships.
• Cost data specific to the functions involved and the products under study must be available to managers. Such data is the result of activity based costing (ABC) carried out by a computerized decision support system. The result is a database that allows managers to quickly retrieve data and to relate that data to other data as required, a relational database structure.
Electronic Data Interchange (EDI) is the electronic, computer-to-computer transfer of standard business documents between organizations. EDI transmissions allow a document to be directly processed and acted upon by the receiving organization. Depending on the sophistication of the system, there may be no human intervention at the receiving end. EDI specifically replaces more traditional transmission of documents, such as mail, telephone and even fax. And may go well beyond simple replacement , providing a great deal of additional information.
Tow key points should noted in the definition of EDI. First, the transfer is computer to computer, which means that fax transmissions do not qualify. Also, the transmission is of standard business documents/forms, such as purchase orders, material releases, invoices, electronic funds transfers (EFT) for payments, shipping notices, and status reports. Thus e-mail and sending information randomly over the internet, which is non-standard free-form data does not fit the definition of EDI.
Two types of EDI systems are now common, proprietary systems and value-added networks (VANs). Proprietary systems, also known as one-to-many systems, involve an EDI system which is owned, operated, and maintained by a single company. That company usually buys from, and is directly connected to a number of suppliers. Such a system usually occurs where a large and powerful company can persuade its key suppliers to become part of its proprietary network.
The advantage to the system owner is control. The disadvantages
are that it may be expensive to establish and maintain. Suppliers
may not want to be part of such a system because it is unique
and requires dedicated systems.
Value-Added Networks. Vans, or third party networks, or one-to-many systems appear to be the most popular form of EDI system today. In a Van all transmissions go through a third party firm, which acts as a central clearing house.
In practice a buying firm may send a number of purchase orders (POs) which go to different suppliers through the VAN. The VAN sortsthe Pos by supplier and transmits them to the proper supplier. The real "value added" comes in when buyers and suppliers use incompatible communication and/or message standards. The VAN the performs translation "invisibly", so that the user does not need to worry about system compatibility with its trading partners. Additionally, the users to not need expertise in EDI standards and issues as many Vans provide turnkey, off-the-shelf systems which lower start-up costs and lead times.
Using EDI over the internetis rapidly becoming a reality. After initial software purchase and system setup, EDI over the internet is virtually "free." Major corporations such as NASA Goddard, AVEX electronics, and UNISYS are currently using the internet for EDI.
One of the major areas of EDI impact has been on order cycle variability. Order cycle variability is one of the major causes of increases in inventory in the supply chain and is impacted by the increases in communication time and quality possible through EDI.
A total order cycle from the customer's perspective is illustrated below.
key:
1. Order preparation and transmittal 2 days
2. Order received and entered into system 1 day
3. Order processing 1 day
4. Order picking/production and packing 5 days
5. Transit time 3 days
6. Customer receiving and placing into
Storage 1 day
Total order cycle time 13 days
Thus many customers see a 13 day order cycle while the manufacturer/supplier sees only those parts that are controllable within their organization, steps 2, 3, and 4. However the variability associated with all six steps must be considered along with its impact upon inventory levels.
Daily Sales = 20 units
Order 13-day supply of inventory (20 units x 13 days = 260 units)
260 order quantity/2 = 130 units average cycle stock
20 units per day X 8 days order cycle variability = 160 units safety stock
Average inventory = Average cycle stock + safety stock = 290
units
Daily Sales = 20 units
Order 8-day supply of inventory (20 units x 8 days = 160 units)
160 order quantity/2 = 80 units average cycle stock
20 units per day X 8 days order cycle variability = 160 units safety stock
Average inventory = Average cycle stock + safety stock = 240
units
Daily Sales = 20 units
Order 13-day supply of inventory (20 units x 13 days = 260 units)
260 order quantity/2 = 130 units average cycle stock
20 units per day X 3 days order cycle variability = 60 units safety stock
Average inventory = Average cycle stock + safety stock = 190 units
Thus through the use of EDI both between companies and within companies the variability in order cycle was reduced to 5 days. The savings in average inventory was greater than in a system where the system was much faster though less reliable. The improvement through the implementation of EDI can have extraordinary effects on financial performance.