Barnes, 1997; Dawe, 1997), IT and non-IT measurement issues in SCM. (Ellram ..... Balseimer, P. and Wendell J.V. (1996), ``Supply chain management: a time-based ... Lawrence, B. and Varma, A. (1999), ``Supply chain strategies'', Industrial ...
T h e E m era ld R es ea rc h R e g ister fo r th is jo u rn a l is a v a ila b le a t http://www.emeraldinsight.com/researchregister
T h e c u rren t is su e a n d fu ll tex t a rc h iv e o f th is jo u rn a l is a v a ila b le a t http://www.emeraldinsight.com/1463-7154.htm
Using information technology to improve downstream supply chain operations: a case study John McLaughlin and Jaideep Motwani
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Department of Management, Seidman School of Business, Grand Valley State University, Grand Rapids, Michigan, USA
Manu S. Madan Management Department, University of Wisconsin-Whitewater, Whitewater, Wisconsin, USA, and
A. Gunasekaran Department of Management, University of Massachusetts, North Dartmouth, Massachusetts, USA Keywords Supply chain management, Information technology Abstract To succeed in today’s global marketplace, organizations are looking at streamlining their supply chain through the successful deployment of information technology. This paper, by means of a case study, discusses how a manufacturing company implemented a transportation planning and optimization system to enhance their downstream supply chain operations. The application development framework is used to analyze the implementation process. The findings of this case study will benefit companies seeking to create a competitive advantage in the marketplace through advanced physical distribution capabilities.
1. Introduction In today’s marketplace, corporations are looking for ways to differentiate themselves from their competition. Creating competitive advantages is vital to sustaining growth. Companies are aggressively pursuing initiatives to better manage their supply chains. In that sense, many companies are expanding the scope of management of their operations to manage upstream and downstream channels. Investment in information technology (IT) for managing supply chains has been an effective way of obtaining competitive advantage (Spalding, 1998; Kwan, 1999). This article is a case study of one US manufacturing company’s focus on improving external downstream supply chain operations. Many companies are seeking opportunities to create value by optimizing physical distribution. In this study, we discuss the company’s implementation of new technology to perform advanced transportation planning and optimization. The study examines the role of IT in managing complex carrier service and rate structures, as well as outbound shipping scenarios. In the market several business process optimization tools for freight management are available. The solution implemented by this company has functionality to manage service provider information, shipping locations, load building and
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optimizing, rating, and financial tracking. The application of this technology shows how one company is developing the means to serve their stakeholders by increasing throughput, lowering inventory, reducing operating expenses, planning proactively, and increasing customer satisfaction. Reduction of costs would come in the form of lower freight costs, increased inventory turns, reduction of leased space, lower carrier detention fees, and fewer trailer leases. The tool will provide order visibility through the distribution and delivery process. In addition, the repository of tariff rates and related information will drive rating, carrier selection, and negotiating new contracts. Customers would also benefit from more timely deliveries and the efficiencies resulting from better consolidation of shipments among the main company and its subsidiaries. Through this study, one should begin to see how organizations benefit from implementing a freight optimization solution. It should become apparent that improvements could be gained in reducing transportation costs, decreasing inventory levels, and increasing customer satisfaction by integrating and optimizing back-end processes. 2. Review of literature There is a substantial amount of research conducted that addresses the role and impact of information technologies in managing supply chains. Several research studies provide comprehensive definitions of supply chain management (SCM) from an IT perspective (Muller, 1993; Johnson, 1997). The overview articles, on the other hand, include a diverse range of topics such as the role of IT as a critical element in SCM (Scott and Westbrook, 1991; Marcia, 1994; Parker, 1994; Bradley, 1996; Copacino, 1996; Andel, 1997; Barnes, 1997; Dawe, 1997), IT and non-IT measurement issues in SCM (Ellram, 1990), different types and effective applications of IT in SCM (Szymankiewicz, 1997), IT roadblocks and pitfalls to implementing SCM (Ellram, 1990), and the comparisons of SCM practices among different businesses and industries (Parker, 1994; Hill, 1995). These analyses and comparisons also look at the role of IT. Several researchers have also suggested specific models and/or methodology for implementing the principles of GSCM (Stevens, 1990; Muller, 1993; Battaglia, 1994; Weil, 1997; Mason-Jones and Towill, 1998). IT is an integral component of all these models, methodologies and performance measures. Lastly, there exists a fair amount of research that deals with the assessment and successful implementation of IT for GSCM by manufacturing (van Oldenborgh, 1994; Foster, 1995; Martin, 1996; Dickey, 1997; Kopczak, 1997; Handfield and Nichols, 1999; Kwan, 1999; Hill, 2000; Stroeken, 2000) and service organizations (McKee, 1994; Cottrill, 1995; Fernie, 1995). Most of the above research, done through field studies, questionnaire surveys or case studies, illustrates how IT helps SCM in creating a competitive advantage.
3. Case study In this section the methodology utilized for this case study is presented. First, the research method is explained. Next, a brief description of the company, system implementation strategy, current and future challenges, and the benefits accrued is presented.
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3.1 Research method A case study approach was employed to conduct the research. Data was collected primarily through interviews, and archival sources. Interviews were conducted, in person, with executives who were familiar with the manufacturing process. These included the vice president of logistics, project manager for renaissance logistics project, financial lead for logistics, transportation lead for logistics, distribution supervisor, regional traffic coordinators, direct shipping coordinator, fleet manager, logistics systems manager and the logistics systems analyst. The interview time was approximately an hour, the time varying from 40 minutes to two hours. Unstructured interviews were also conducted with other management and nonmanagement personnel during periods of observations on the manufacturing floor. Archival documentation was the second major source of data used in the research. Feasibility studies, reports, memos, minutes of meetings, proposals, newspaper articles, and books that were available were reviewed and the contents analyzed. These documents were collected and analyzed to identify and/or validate data. During the data collection, special attention was given to ascertaining whether evidence from different sources converged on a similar set of facts. Guidelines in the existing literature on the enhancement of retrospective data accuracy were followed in the process of data collection. When all the evidence had been reviewed, and after an initial case study narrative was documented, the factual portion of the case study was reviewed by the major informants in the company. Such a review was not only a minimal procedure for validating the data collection process, but also a courtesy to those who had co-operated with the research.
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3.2 Description of the company The company in this case study employs close to 8,000 people and has annual revenues exceeding 1.3 billion dollars. On average over 500 customer shipments are handled each day among seven major manufacturing sites and five distribution centers across the country. These shipments are sent to both dealers and ultimate users that number in the thousands. Most of the US and Canadian shipments travel by road with a small portion going airfreight. Three different shipping methods are employed by this company: inventory is consolidated at a distribution site and shipped to the customer, a single manufacturing site ships directly to the customer, and multi-site merge
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in-transit shipping to the customer. Freight costs for almost all shipments are considered ``prepaid’’ as this charge is built into the product price. Currently, the company operates under a ``build to order’’ manufacturing process employing ``lean manufacturing’’ and ``just in time’’ principles. Such technologies help businesses to coordinate and integrate activities of the entire supply chain (Harrington, 1999). Most of the company’s sales come in the form of project work and require the coordination of manufacturing and distribution from multiple sites. To accomplish this coordination the company utilizes a manufacturing-planning tool to synchronize raw material procurement and manufacturing. The company’s improvement strategies are in line with the supply chain operations reference (SCOR) framework for managing supply chains (Handfield and Nichols, 1999). The SCOR framework entails activities involved in planning, sourcing, making and delivering of products. Supply chain management can be very effective in managing the interaction between suppliers, distributors and customers (Lawrence and Varma, 1999). The manufacturing planning tool has served as a starting point for order scheduling and timely shipment of orders on the customers requested delivery date. Distribution planning can be very useful in management of supply chains (Sengupta and Turnbull, 1999). The transportation project was planned to supplement the manufacturing-planning tool in solving supply chain management problems. The project when fully implemented will enable the company to acknowledge reliable delivery dates to customers. Such a project will help the company in moving towards the ultimate level of integration where ``all member links in the supply chain are continuously supplied with information in real time’’. 3.3 System implementation strategy In order to systematically evaluate how the case study went about implementing the new system, we decided to use the application development framework for our analysis. This framework combines the steps of the system development cycle and changes the traditional role of IS specialists and end users. The framework comprises the following phases: (1) system investigation/analysis; (2) system analysis/design; (3) system design/implementation; and (4) implementation/maintenance. System investigation/analysis phase. The previous system of transportation planning relied on a highly trained staff to manually plan the weekly order schedule of outbound shipments. Orders were reviewed initially by direct ship coordinators to identify potential truckload shipments that would bypass traditional handling at a distribution center and ship directly to the customer. Order entry specialists, through the use of paper reports and on-line screen
displays performed the identification process. Warehouse picking lists served as the means for regional traffic coordinators to organize shipments into loads once inventory arrived at the distribution center. A large sorting effort provided a means of grouping shipments within proximity to each other. Assigning carriers to loads was based on a listing of approved carriers for each region. The carrier selection was often determined on personal knowledge of the carrier’s performance and equipment availability. Traffic coordinators were driven to maximize truckload deliveries and reduce less than truckload (LTL) shipments. With limited visibility to future orders, each coordinator would balance the likelihood of upcoming freight volume to a region and the cost of carrying the inventory with completing a more timely delivery for greater customer satisfaction at a higher cost. Frequent changes to shipment destinations and delivery dates created difficult challenges for previous attempts at implementing a transportation planning engine. System analysis/design phase. This phase involves an analysis of a new system to be built that helps developers better understand the nature and requirements of a new system. A project team consisting of seven full-time individuals was assembled to design the new system. The team was made up of a regional traffic coordinator, a shipping coordinator, a warehouse supervisor, a systems analyst, a transportation director, a fleet manager, and a logistic systems manager. The transportation director for a subsidiary company was assigned to lead the project. The team spent a lot of time revisiting the problems associated with the current system. Based on observations and discussions, they concluded that problems with the original planning process were as follows: excessive paper handling; extensive direct shipment determination; manual grouping and sequencing of shipments in loads; subjective carrier and mode selection; frequent address and delivery date changes; and rising freight costs. The goal of the new transport planning system would be to overcome the problems associated with the original planning system. System design/implementation phase. The project team utilized a phasing approach to implementing this technology to minimize operational risks, lessen the reliance on outside consulting expertise, build on incremental successes, and gain a return on the investment as quickly as possible. The phases would attempt to implement the transportation strategy in modules. The priorities were to implement the planning and optimization tools prior to implementing execution functionality and to plan outbound logistics before inbound logistics. The implementation would start with the core company, region by region, and then progress to consolidate subsidiary shipments. US shipments were to be
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brought on-line before international shipments. Finally, transportation planning would be performed in a reactive mode when inventory became available and would move to a proactive planning mode in later phases. Integration of this tool with the existing legacy system would come before integration with multiple ERP systems that were in the process of ``going live’’. The implementation stages were: (1) configuration; (2) tariff entry and validation; (3) application interface development; (4) functional and interface testing; (5) optimization strategy development; and (6) implement production environment. The first stage in the process was to configure the system based on the company’s distribution strategies. Configuring the system consisted of assigning a myriad of default conditions from business hours to maximums on the load composition. It also included mapping out divisions, manufacturing sites, distribution center hubs, and shipping zones. The company has basically 50 shipping zones and routes within the US states. This stage was more than just data entry, it involved rethinking and clarifying the company’s logistics strategy. It was in this stage that the strategy was translated into business rules and configured into the system. These business rules set the boundaries for the planning and optimization tool to manage constraints, to make the correct operational decision, and to generate load plans. Complete understanding of these parameters was critical to setting up the planning engine. The next stage was to load and validate carrier tariff information. All tariff contracts for carriers, including the private fleet, were manually entered. Over 50 tariffs were loaded for carriers, each of which had multiple service levels. Most carriers were over-the-road truckload carriers. A service offering by a carrier consisted of rates, rate ranges, conditions, options, discounts, and restrictions for each route within shipping zones. Carriers with poor performance as measured by the transportation manager and traffic coordinators were placed on ``hold’’ in the system. The ``hold’’ status would allow the carrier to be involved in the rating but ineligible for load assignment. Sample loads were created to meet each carrier’s conditions, and rate quotation requests were used to validate proper setup. Rate quotation is a method of rating and routing a load with the carrier base to select the most cost effective carrier, service, and transportation mode. Additionally, testing included performing a rate shop function for a given load to compare carrier rates, service breakpoints, and to measure the ranking of the private fleet with common carriers.
After the configuration and loading stages, the next stage was to build a reliable interface with the legacy system to import transactional data. As finished goods inventory was created on the legacy system, transport orders and shipments were created on the transportation system for planning. Then, the system was tested for accuracy of data, processing speed, data transfer time, transaction volume, restart capability, and problem tracking. The transport order data was manually verified using the existing legacy system to ensure proper calculations and data manipulation. Then, it was time to process transport orders and shipments. These shipments were attached to a plan and then optimized into loads based on the destination region, delivery dates, and optimization strategies. The loads were next rated for carrier selection and tendered to the carrier. At this point actual shipment data was flowing into the test system, now the final stage prior to implementing could begin: developing optimization strategies. Combining shipments into optimal loads included a large number of trade-offs. The optimizer was designed to run through hundreds of different load plan scenarios to create the most cost-effective plan. Some of these strategies included: consolidating picks and drops; allowing multiple picks and multiple drops based on a predetermined radius around each shipping point; swapping stops to improve cost plan; comparing direct ship scenarios; and analyzing light loads (truckloads). The optimizer also provided a comparison between non-optimized shipments and optimized shipments. This report detailed the degree of improvement by listing the number of loads and the cost savings resulting from the optimization. System implementation/maintenance phase. Several discoveries were made as we performed optimizations. On several occasions, optimizations and ratings returned a carrier and service recommendation that appeared illogical to veteran traffic coordinators. Analysis of each route pointed out that there existed different cost breakpoints between service levels based on the weight and cube of the shipments. This application of information technology simplified analysis of the breakpoints between parcel shipments, LTL shipments, header rates, and truckload shipments. Also, inclusion of accessorial charges such as stop charges revealed the impact of rising surcharges on the service decision. In some cases, consolidating shipments into a single multi-stop truckload turned out to be more expensive than shipping under LTL or header rates. The project team also learned by manipulating the pick up and delivery date ranges that they could create a flexible transportation plan to account for fluctuations in the manufacturing completions. The ranges for pick up dates
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were calculated to encourage earlier shipments if inventory was produced early. For past due inventory, the pick up dates were set to provide the minimum planning time to ensure the shipment moved within the day. For customers who did not provide delivery dates, a delivery date was calculated based on average LTL transit time between the origin and destination points. By using the LTL transit time, which is longer in duration than truckload transit time, it provided a wide date range for greater freight consolidation. In all cases, the customer provided delivery date or the calculated date was used in developing the transportation plan. As the project team’s understanding of the optimization strategies and procedures improved, several adjustments were made to ensure more cost effective load planning. By optimizing shipments in batches as late as possible, prior to the release of the order to production, the greatest number of shipments would be available at one time for planning which would provide the best chance of combining more loads. Broadening the pick up and delivery date ranges, in keeping with the promised delivery date, allowed for more load combinations. Many times the date changes would allow a single customer to receive several shipments on a single load. Accurate consignee addresses were essential in the optimization analysis. Slight differences in the spelling of addresses caused infeasible routes for loads or resulted in the assignment of several stop charges. Lastly, the project team decided to standardize carrier tariff structures to provide a more efficient means of rating carriers and to better manage contracts and rates. These changes included requesting a blended rate for both cartoned and blanket wrapped freight. Also, many accessorial rates were renegotiated out of the tariffs. 3.4 Challenges Numerous challenges were overcome in implementing this system and some will be resolved in future enhancements. One of the earliest challenges the team faced was adapting from a traditional shipper’s focus to one of a third party logistics provider. From a shipper’s perspective, clients were accustomed to shipping products (order line items). By recognizing what products were shipping, traffic coordinators and material handlers could easily adjust loads for weight and cube inaccuracies. However, the transportation planning solution was designed from a third party logistics perspective. Users of the system had to adapt to merely shipping a quantity of containers instead of products. Product information was transferred and stored in reference areas for reporting purposes, however, it was not readily available nor was it necessary in the load building process. The load planning and rating decisions are reliant on accurate product weight and cube measurements. These measurements are used in determining size of the loads, size of required equipment, and service rating comparisons. Acquiring this information was another challenge. It was widely known within the company that many products carried incomplete or inaccurate weight and
cube measurements in the legacy system. This problem had grown because there was no individual who was formally responsible for the maintenance of these figures. The large number (easily over a million) of standardized and customized products with various product and packaging options made gathering measurements a daunting assignment. The project team solicited packaging engineers, warehouse staff, and suppliers to gather this missing data and to keep it up to date. One subsidiary has chosen to capture weight information on a raw material level and summarize these weights for each customized product. This solution will also address the need for measurements in service part shipments to customers. Significant progress has been made and the process is expected to be on going. Another challenge arose from the delivery or consignee addresses received from the network of dealers who entered orders into the system. These addresses represent dealer warehouses or ultimate user addresses. In both cases, the addresses received were often found to be invalid according to the US and Canadian postal databases. The project team encountered unrouteable loads and fewer shipment consolidations due to inaccurate addresses. The vendor to validate addresses at order-entry created custom interfaces. At the current time, traffic coordinators manually correct address problems. Implementation of address validation against postal databases is planned for implementation within the order-entry system to alleviate this problem. Most of the challenges faced were related to ensuring the quality of data inputs into the system. To maximize effectiveness of this tool and to eliminate rework, these issues had to be addressed. The solutions required quality testing prior to data transfers into the system. 3.5 Benefits gained As a result of the implementation, the excessive paper handling in original process was reduced. In the initial phase, traffic coordinators continue to handle warehouse picking lists, however, this paperwork is presorted and grouped to match the optimized loads. Future phases will minimize all handling of paper for the transportation planning process. Improvements were also noticed in the load consolidations performed by the optimizer. Traffic coordinators all reported that the transportation optimizer surprised them with shipment consolidations that appeared to be illogical and expensive. After manually analyzing these questionable loads, it was confirmed that the routes and carriers chosen were indeed the most economical transportation given the time, weight, and volume constraints. Further effort is in progress to optimize larger batches of shipments to drive more truckload consolidations and to allow the optimizer to determine direct shippable loads. Another benefit derived was an improvement in carrier and service mode selection. The project team was able to determine benefits by comparing the most likely carriers to be chosen by the traffic coordinators for a group of loads with the optimizer’s selection. Using the ``rate shopping’’ function, the freight
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costs of each selection were recalculated manually and compared. The old system frequently chose a lower cost supplier without regard to documented performance problems, because cost was always used as a determining factor to traffic coordinators. Under the new system, carriers with consistent performance problems were removed from the eligibility for loads. The companies’ priority remains on performance before cost. However, performance consideration is handled offline at this time. Project team members were also involved in influencing policy changes to reduce order changes. The policy changes encouraged customers to provide accurate delivery date and addresses when orders were taken. Additionally, surcharges were added for last minute order changes. The project implementation resulted in reduced freight costs, reduced carrier rates, and improved decision making. However, tracing improvement in terms of cost and rates directly back to the transportation planning tool was very difficult. For instance, freight costs are influenced by sales volume, type of products purchased, equipment availability of desired carriers, carrier rate changes, customer service requests for quick shipment, concentration of freight moving at that time in a region, manufacturing reliability, shipping date assignments, and direct shipment selection. Under such circumstances, one way to measure improvement in costs was to calculate the freight cost per pound for each region. As each region was implemented this calculated cost per pound rate is projected to decline by over 10 per cent in the first full quarter of operation. To date this calculated projection has held true for the northeast and southeast regions of the USA. The change from analyzing both carton and blanket wrap rates to analyzing a blended rate provided a more effective and easier method of comparing carriers on cost. One of the most utilized carriers for this company reviewed their rates after seeing a reduction in load tenders. As a result, the carrier lowered their rates for desired routes. Also, after the implementation it became clear that some carriers with high rates would never be selected for load tenders. Therefore, these carriers were placed in a ``hold’’ status and subsequently considered for removal from the transportation planning system. 4. Conclusion and future directions A close analysis of those successful companies around the world suggests that their successes are partly dependent on their ability to apply IT to SCM. In today’s highly competitive environment companies, big or small, need to improve effectiveness and efficiency. SCM, as a major part of business operations, plays an important role for organizations to achieve competitive advantage. In this paper, by means of an extensive case study, the authors demonstrate how one US manufacturing company used IT to improve its external downstream supply chain operations. In the future, the company intends to expand the scope of the project beyond planning to include the execution of the load plan. Integration of the transportation planning system with the warehouse legacy system will enable
load planning results to trigger the printing of shipping documents and the picking/loading process. In addition to the outbound domestic business of the company, inclusion of international and subsidiary shipments could drive even greater shipment consolidations when brought into the system. The ability to determine cost effective direct shipments from manufacturing sites to the customer is another future enhancement in the planning stages. This enhancement would provide a more systematic approach to the direct shipment determination using both load optimization and rating technology and would eliminate the manual efforts used currently. A change in the timing of transportation planning is also a desired next step. Transferring from a reactive mode to a proactive mode, by planning shipments prior to manufacturing would provide earlier visibility to future loads enhancing the load optimization process. Ultimately, the intent is to link the manufacturing and transportation planning engines to coordinate the order entry to order fulfillment process to reliably delivering orders to the customer on time and complete. Linking the planning tools will promote the continuous flow of raw materials, work in process, and finished goods from suppliers to the manufacturing line to the customer. References Andel, T. (1997), ``Information supply chain: set and get your goal’’, Transportation & Distribution, Vol. 8 No. 2, pp. 33-6. Balseimer, P. and Wendell J.V. (1996), ``Supply chain management: a time-based strategy’’, Industrial Management, September-October, pp. 24-7. Barnes, C.R. (1997), ``Lowering costs through distribution network planning’’, Industrial Management, Vol. 39 No. 5, pp. 28-31. Battaglia, A. (1994), ``Beyond logistics: global supply chain management’’, Chief Executive, No. 99, pp. 48-9. Bradley, P. (1996), ``1996: Meeting the supply chain’s demand’’, Logistics Management, Vol. 35 No. 11, pp. 37-41. Cachon, H. and Fisher, M. (1997), ``Campbell soup’s continuous replenishment program: evaluation and enhanced inventory decision rules’’, Production and Operations Management, Vol. 6 No. 3, pp. 266-76. Cachon, G. and Fischer, M. (2000), ``Supply chain and the value of shared information’’, Management Science, Vol. 46 No. 8, pp. 1032-48. Copacino, W. (1996), ``Seven supply chain principles’’, Traffic Management, Vol. 35 No. 1, p. 60. Cottrill, K. (1995), ``A slow reaction to supply-chain management’’, Distribution, Vol. 94 No. 13, pp. 44-8. Dawe, R.L. (1997), ``Information supply chain: building systems to meet needs’’, Transportation & Distribution, Vol. 38 No. 4, pp. 28-32. Dickey, J. (1997), ``Tightening the supply chain’’, Iron Age New Steel, Vol. 13 No. 3, pp. 74-6. Ellram, L. (1990), ``Global supply chain management: the industrial organization perspective’’, International Journal of Physical Distribution & Logistics Management, Vol. 21 No. 1, pp. 13-22. Fernie, J. (1995), ``International comparison of global supply chain management in grocery retailing’’, The Service Industries Journal, Vol. 15 No. 4, pp. 134-7.
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