Eliminating Waste In Supply Chain Processes

By Stacy Lee Bersbach, Marketing Manager, Direct EDI, Inc. In this era of economic difficulty it is important to make every penny and minute count, as time is money. Most successful companies strive to optimize a supply chain which decreases waste and activities that do not directly add value. This can be achieved through developing lean supply chain management methods.

In this era of economic difficulty it is important to make every penny and minute count, as time is money. Waste within a company’s supply chain -- either internal or external -- through inefficient processes, ordering errors and mistakes, lack of responsiveness and breakdowns in communications are an enormous expense of both time and money that can be dramatically decreased through more efficient supply chain processes.

Most successful companies strive to optimize a supply chain which decreases waste and activities that do not directly add value.  This can be achieved through developing lean supply chain management methods.  

One method that can be rapidly implemented is the use of Electronic Data Interchange (EDI) to standardize business processes including accounts payable/receivable, order processing, warehousing, logistics and inventory management. The exchange of electronic data can be integrated with numerous in-house systems, to either replace or enhance their current functionality making processes more efficient.

Overhead and inefficiency costs are incurred by crucial supply chain processes, including: 
• physically receiving and processing purchase orders, invoices and payments
• manually sending paper invoices
• personally checking inventory
• ordering the necessary raw materials by phone, fax or e-mail
• preparing and mailing invoice payments.

Understanding how these costs are multiplied throughout the supply chain is important. For example, a small manufacturer receives an average of 80 orders per month. At an applied rate of $19.59 per hour, as averaged for the positions of manufacturing technician, accountant, office manager and plant manager at Payscale.com, they can expect to incur the following expenses caused by inefficient processes:

Supply Chain Expenses

In this example, each order incurs approximately $24 in inefficiency costs.  These numbers can be exponentially higher for larger companies.  Therefore, in order to remain competitive, a company needs to eliminate inefficiency and incorporate lean business practices.  The proper implementation of these practices can achieve long-term savings and increased opportunity costs. 

The purging and replacement of inefficient processes is the core concept of lean business practices. The four primary categories where cost-savings can occur are: 
1) Order Processing
2) Inventory and Raw Materials
3) Material Acquisition
4) Compensation and Reimbursement Processes.

These four areas, where most inefficiency occurs, can be considered the core of the supply chain. 

Order Processing
Typical internal procedures for handling order processes involve:
• Order comes in, verbally, via fax or e-mail
• Order gets manually entered
• Inventory management is alerted to the order via phone, fax or e-mail.

The process described is unnecessarily wasteful and should be streamlined to occur without the use of paper, toner and man-hours. An Enterprise Resource System (ERP) or accounting system can help alleviate much of this activity. These systems are designed to centralize the necessary information in processing an order, including customer information, pre-filled forms and automatically generated next-step items.

Additionally, Warehouse Management Systems assist in the ordering and monitoring of inventory and raw materials, as well as decreasing the man-hours required to physically check inventory levels.

These two systems can be used simultaneously to create a seamless process from ordering to inventory management. As these systems can be expensive, it is recommended to complete an ROI analysis of the cost savings and the expected timeframe to reach those results.  

Inventory and Raw Materials
Implementation of just-in-time (JIT) inventory practices allows a company to immediately increase their cost savings. This process will decrease the cost of inventory, increase inventory turn and assist on gaining a perfect-order measure of close to 100 percent.

The cost of warehousing inventory is unnecessary when electronic communications can make ordering raw materials a simple process of typing and clicking, with a dramatic reduction in communication errors and overhead costs.

With JIT practices, the supply fulfillment process will reflect exactly what is needed for order fulfillment, without incurring additional costs. Through the execution of this process, not only is the physical and obsolescence cost of inventory reduced, but also several overhead expenditures including warehousing, rental and utility costs, as well as insurance and taxes.

Although JIT practices strive to eliminate the surplus cost of inventory and raw materials, some vendors will offer reduced prices and rates for ordering a minimum amount of product. Sometimes these rates outweigh the savings incurred by the utilization of JIT practices and should be taken into account when implementing this strategy.

Material Acquisition 
Acquiring the raw materials necessary for order fulfillment includes numerous wasteful processes including:
• Determining the proper quantity of materials
• Placing orders via phone, fax or e-mail
• Writing purchase orders
• Sending purchase orders to suppliers.

The above procedures require an excess of time and money to fulfill. Through the utilization of a Warehouse Management System that is integrated into a seamless ordering system, such as an electronic data interchange (EDI) system, this process is decreased from four manual steps to two:
• Check material levels
• Type and send purchase order.

This will dramatically reduce the non-essential costs associated with material acquisition, making it a smoother, more efficient process.

Another way to reduce costs in acquiring raw materials is to find vendors that work in close proximity to one another. These vendors might be willing to ship products together in one crate or on one pallet or truck, depending on quantities and the preferred shipping method, to reduce the cost of transport and delivery.

Using both these tactics to implement lean processes within material acquisition will not only reduce the overall cost of martial acquisition, but also save money through the elimination of non-economical business processes.

Compensation and Reimbursement Processes
The process of sending and receiving payments squanders valuable resources. The use of accounting programs usually involves a workflow similar to:
1) Invoices are manually recorded
2) Invoices are printed
3) Invoices are mailed or e-mailed
4) Payments are manually logged as credits
5) Trip to the bank to completely process payments.

This workflow creates additional work and excess expense within the Supply Chain. Why pay for paper checks, printer paper, toner, stamps and numerous other office necessities formerly required for proper bookkeeping when there is an easier, more economical way for these processes to be completed?

Electronic payment processes can dramatically decrease overhead costs and the costs associated with the manual activity completion. EDI systems can create invoices from purchase orders and payment actions from invoices, with just a click of a button.

Additionally, Electronic Funds Transfers (EFT) quickly transfer money from one bank account to another, making sending and receiving payments easy and economically. Many electronic payment options automatically update the necessary information in an accounting system, reducing the prospect of errors that can occur through manual entry.

Electronic Data Interchange
Electronic Data Interchange (EDI) is an important process for any manufacturer looking to reduce the cost of business and save money. It replaces many wasteful processes within the supply chain including order processing and placement, compensation reimbursement and logistics.

Also, EDI can enhance current processes and programs, including accounting and Warehouse Management Programs, to augment their efficiency.

In these challenging economic times, it is important that every process is as proficient as possible, so that money is not spent on unnecessary items nor hemorrhaged through inefficiency. 

Direct EDI, Inc. is an e-commerce solution provider, specializing in EDI services for all members of the supply chain.  For more information please contact Stacy Lee Bersbach at stacy.bersbach@directedi.com or visit http://www.directedi.com

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