Knowledge is power. This famous Latin expression means “knowledge is power”. In the domain of organizational management, knowledge is linked to the ability to influence employees or colleagues in order to achieve desired results. In some situations, however, this phrase is interpreted as a justification for not sharing what is known and, thus, maintaining control and power. Is this the case in supply chain management or supply chain management?
One of the pillars of the supply chain management philosophy is simply “teamwork”. There is an understanding that, without joint work between the companies that make up the supply chain, their efficiency and effectiveness objectives – and the much-desired competitive advantage – cannot be achieved. Products will not be available at the customer's desired location and time at a competitive price.
According to Cao and Zhang (2011)[1], collaborating with companies in the supply chain involves joint, coordinated work, with a view to achieving common goals for the parties involved. Collaborating with supply chain partners can bring many benefits. Collaborating not only leads to joint learning, but also promotes the development of new skills that are not achieved by working in isolation. Such capability leads to improved efficiency in the execution of organizational processes, reducing transaction costs. And, even more important, the learning and confidence generated during the work promote the execution of activities intrinsically to the companies involved, creating an environment difficult to be imitated by the competition. In other words, collaboration has the potential to lead the companies involved to achieve a competitive advantage in the market.
For such benefits to be achieved, it is necessary to create a structure that supports the collaborative process. For example, a human resources infrastructure dedicated to relationships, technological support, management processes and performance targets is needed. The academic literature and experiences in the industry point out that many other factors are also important and necessary for the formation and development of a collaborative relationship between companies in the supply chain, such as the support of the board and the alignment between the companies' strategies, in addition to working with partners with a long-term orientation. Much is also said about the importance of developing a collaborative competence – an ability to interact and coordinate work with individuals in other companies.
There is one element, however, which, if absent, makes the collaboration process unfeasible or impairs. Regardless of the alignment with the strategic guidelines of the companies, or any of the factors mentioned above, the success of collaborative relationships between companies in the supply chain will largely depend on the level of internal logistics competence of the companies involved. In other words, it will depend on the existence of a technical knowledge platform and internal processes implemented at satisfactory levels. The premise of this article is that, before aiming for a collaborative effort with companies in the supply chain, it is imperative that logistical activities are well executed internally in companies.
But what is logistics competence?
Logistics competence can be understood as a skill, organizational process or knowledge that allows a company to achieve better logistics performance and maintain its competitive advantage. Morash (1996)[2] proposes that logistics skills can be divided into two categories: demand and supply. Demand competencies emphasize tightness and responsiveness in customer relationships, while supply competencies emphasize operational excellence, typically with an internalized focus and emphasis on cost reduction.
In order to understand this issue, researchers from the University of Arkansas conducted a survey of more than 60 consumer product suppliers in Brazil.[3]. The survey assessed the level of implementation of various supplier logistics activities and also explored the relationships between such activities and performance in the relationship between them and with retailers.
The focus on retail stems from the fact that the dynamic nature of operations has a direct effect on company performance, and the same is expected with regard to the effects of collaboration. In fact, according to the Customer and Channel Management (CCM) survey[4] Led by McKinsey & Company, Nielsen and the Grocery Manufacturers Association with more than 50 of the largest consumer packaged goods (CPG) companies in the United States, collaboration with retailers is a strategic priority for food producers, and almost all companies are involved in collaborative initiatives with retailers. However, only 20% of the participants observed significant impacts on the dimensions related to operations and sales growth.
In the sample collected in Brazil, it was observed that, in general, a collaborative climate is present. Nearly 90% of suppliers rate their relationships with retailers as cooperative and say they are treated fairly. Another relevant dimension concerns the fact that most participants consider that the business relationship with retailers benefits both companies.
A dimension of interest was also included in the survey: the supplier's strategic orientation. Most suppliers stated that understanding customers' needs and expectations, in addition to adding value to them, are strategic priorities.
The most detailed part of the questionnaire was related to the various logistics activities in the specific context of the retail supply chain, such as: transportation, inventory management, demand forecasting, order management, distribution channels, etc. For each activity, questions about systems, processes and human resources to manage such logistical activities were also included. Some of the activities included those that must be carried out in collaboration with the retailer, such as: joint planning and execution of operations, demand forecasting, promotions, as well as staff dedicated to managing collaborative activities in the supply chain. The results for two critical areas in retail are presented below: demand forecasting and inventory management.
Demand forecast
Figure 1 represents the average of the suppliers' responses on the level of implementation of activities related to demand forecasting. It is noted that simpler activities, such as the availability of a basic infrastructure for forecasting demand, are at a more advanced level of implementation than other more complex activities in this area of logistics. While, on average, vendors have a basic demand forecasting infrastructure in the pipeline, retailer-only demand forecasting is still in the pilot stage.
Figure 1 – Average degree of implementation of activities related to demand forecasting
On average, more sophisticated models for forecasting demand that follow and seek to reduce errors in forecasts have not yet been developed. Collaborative activity related to demand forecasting – collaborative demand forecasting with the retailer – is not yet conducted, on average, among sample participants. It is important to point out that the companies that presented more advanced levels of internal logistics activities also presented more advanced levels of activity linked to collaboration with regard to demand forecasting.
It is natural that companies that are still not proficient in internal demand forecasting question whether it is necessary to first invest in the implementation of internal demand forecasting processes and systems before seeking to conduct a collaborative forecast. The evidence shows that it does. Generally speaking, the retailer's demand forecast will not be the same as the supplier's. Retailers offer in-store promotions while suppliers implement advertising campaigns. The supplier is well aware of its consumer profile and its price elasticity, as it invests massively in market research. The retailer, on the other hand, better understands consumer buying dynamics across different stores.
Supplier and retailer stand to gain if such information is shared in planning. But if companies still don't have models that can predict the impact of such measures on forecasting their demand, exchanging information will be of little use. Thus, in order to develop a collaborative demand forecasting process, it is necessary that suppliers have an understanding and demand forecasting process implemented internally, so that there is an alignment between the plans of retailers and suppliers. In more advanced stages of collaboration in this aspect of logistics, such as in the case of CPFR (Collaborative Planning, Forecasting and Replenishment, or collaborative planning, forecasting and replenishment), it is necessary that companies, at an individual level, have a system and knowledge about how such a prediction should be made.
Inventory control
The same pattern observed was repeated in other dimensions of logistical operations in the sample. It was evident in the results that the activities related to collaboration are at a less advanced stage of implementation than the others. With regard to stock control, for example, almost the majority of participants answered that they understand the concepts of EOQ (Economic Order Quantity) and ordering and replenishment standards, and such processes are, on average, in the implementation phase. In general, inventory optimization processes are still in the pilot phase, while the accuracy of the inventory level in the systems is still not ideal.
Regarding the collaborative activity linked to the management of the buyer's inventory (Vendor Management Inventory - VMI), the participants state that, on average, it is not yet implemented (Figure 2). If the supplier is interested in maintaining a high level of availability of its products in stores and, at the same time, maintaining a minimum level of stock desired by the retailer through strategies such as VMI, it is imperative that the supplier master the techniques of optimization of inventory levels internally and demonstrate to the retailer that such systems are effective.
Figure 2 - Degree of implementation of activities related to inventory control in the sample
In addition to specific logistical activities at the collaborative level, collaboration in the supply chain was also measured according to five activities proposed by Cao and Zhang (2011)1. The first is related to the joint creation of knowledge. That is, companies promote joint development of projects to increase efficiency and growth. The second collaborative communication refers to the structure of periodic meetings focused on collaboration. The third, called alignment of incentives, refers to the joint definition of KPIs and the business plan. The fourth decision synchronization concerns collaboration with the supplier in the areas of demand forecasting, promotions and advertising. The fifth convergence of objectives refers to the mutual interest of both parties in developing a partnership relationship. The sixth and last dimension refers to the exchange of information, such as data sharing via EDI.
For each group of activities related to the supply chain, it was observed that companies that presented more advanced levels of implementation of several activities related to internally managed operations (transport, inventory, demand forecast, systems, etc.) presented higher levels of implementation of collaborative activities with the retailer in terms of the six proposed dimensions.
Even more important was the result that suppliers with more advanced levels of implementation of various logistics activities showed better levels of performance, in terms of fewer days of inventory in the store (DOH) and higher levels of merchandise availability (Instock). Specifically, it was observed that each increase of one point in the implementation scale implied a reduction of eight days of stock (DOH) and an increase of almost 5% in the availability of stock (Instock) of the suppliers. This is a very important result, as it indicates that logistical training provides simultaneous gains in efficiency – in terms of low inventory levels, without compromising effectiveness – and in the availability of merchandise in the store. These are exactly the goals pursued by retailers. Figure 3 represents this process.
Figure 3 - Representation of the influence of logistics skills on the collaboration and performance of relationships between suppliers and buyers
The natural question at this point is: “What activities to prioritize?”. In fact, all activities are important and seeking to improve one area alone will not guarantee the desired results. Logistic activities work in a systemic environment: decisions in one dimension interfere with the results of another. In retail, however, considering the important variables for the retailer, demand forecasting systems and inventory control appear to be the main areas.
Considering the benefits of investing in logistical training, another issue to be discussed concerns how to promote the logistical training of small suppliers that do not have the infrastructure or technical knowledge in the areas of transport, inventory control, or supply.
Suppliers certainly see the benefit of building skills in this area, especially when working with global retailers such as Walmart. 8th & Walton, for example, is an American company (not affiliated with Walmart) that provides training to suppliers in various areas such as product category management, international operations and supply chain management. An interesting aspect of this company is that the courses are created and taught by vendors. Since its creation in 2006, the company has already expanded its business to Canada and Latin America.
Many companies understand the opportunity that collaborating in the supply chain can offer. But if internal logistical activities are not handled properly, the benefits of collaboration are harder to achieve. To collaborate on various activities with partners in the supply chain, it is first necessary to improve your internal logistics capabilities.
The research provided evidence that developing processes and logistics knowledge within the company itself is a precursor to successful collaborative operations and an essential factor for collaboration between companies in the supply chain. If companies' systems operate successfully and their internal people understand the dynamics of logistical activities and the interactions between them, such activities, when done at an interorganizational level, will be successful. Such training requires investments in human resources, adaptation of processes and, potentially, the adoption of new systems. But the effort is worth it: collaborating effectively across the supply chain with retailers leads not only to customer (retailer) satisfaction, but also to improved levels of performance.
It follows, then, that in supply chain management knowledge is, in fact, power. Knowledge of how to efficiently carry out logistical activities is an important enabler in structuring a successful collaborative relationship with business partners, which has the potential to serve as an instrument in the pursuit of customer satisfaction and competitive advantage.
[1] CAO, MEI AND QINGYU ZHANG (2011). Supply chain collaboration: impact on collaborative advantage and firm performance. Journal of Operations Management, 29, 163–180.
[2] MORASH, Edward A; DROGE, Cornelia LM; and VICKERY, Shawnee K (1996). Strategic logistics capabilities for competitive advantage and firm success. Journal of Business Logistics, 17(1): 1-22
[3] HOFER, Adriana Rossiter; HOFER, Christian; and WALLER, Matthew A. Put Your Money Where Your Mouth Is: Resource Commitment Drives Productive Retailer-Supplier Collaboration. Department of Supply Chain Management, Sam M. Walton College of Business. Working paper, 2010
[4] Grocery Manufacturers Association, Nielsen and McKinsey & Company. Emerging From the Storm: The 2010 Customer and Channel Management Survey http:// www.gmaonline.org/downloads/research-and-reports/ CustomerChannelCollaboration_2010.pdf
