Tue, 03/24/2009 - 7:30am
Stacy Lee Bersbach, Marketing Manager, Direct EDI, Inc.
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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: 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.
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