Case Study

SUPPLY CHAIN SKILLS—WORKING WITH GLOBAL PARTNERS

Faced with shrinking margins and intense competitive pressure, officials at Hunt Corp. (in Philadelphia,

Pennsylvania) knew something had to change. So, in 2002, the privately owned maker of office and

graphics supplies decided to outsource manufacturing of its high-volume products to contractors in China

and to use other lower-cost offshore suppliers. The good news: Hunt, a supplier of office supplies used

worldwide by businesses, consumers, educational institutions, and professional photographers and

framers, got the lower manufacturing costs it was after. The bad news: The switch to offshore sourcing

and manufacturing put new strains on the company’s supply chain. Lead times—the time it took for Hunt

orders to arrive at its shipping dock—grew from days or weeks when manufacturing was done in-house

to an average of 95 days, for example. Inventory costs and overnight shipping charges also rose. As a

result, says Bill Bracey, Hunt’s materials manager, the company has been forced to “undergo a model

change.” This means Hunt had to switch from being a company that could respond quickly to customer

requests for supplies such as paper clips, pens, and X-ACTO brand items by depending on its

manufacturing prowess to one that has to rely on its partners. “Our role in the market is changing from

[one centered on] our strength as a manufacturer to [one in which] our strength [is] our distribution and

supply chain prowess,” adds Bracey. To get the most out of this changing business model, Hunt began

designing and implementing new supply chain processes intended to improve communication and

collaboration with suppliers. So far it’s working. Hunt has been able to reduce its lead times from 95 to 65

days, cut airfreight charges and reduce inventory levels on imported items by 10 percent. Hunt isn’t the

only company that, having outsourced some manufacturing offshore, will be forced to revamp its supply

chain. With many companies turning to overseas suppliers to lower unit prices, Bracey says,

manufacturers that focus only on lowering manufacturing costs will eventually lag behind. “Companies

can afford to acquire a lot of inventory while the cost of money is low, but that won’t always be the case,”

he says. “As companies begin to pay the same amount for goods, that cost benefit also goes away. The

only way to create sustainable advantage is through a well-run supply chain.” As Hunt has learned, there

are challenges to doing business overseas. Outsourcing production can significantly reduce the cost of

goods. But it also typically means working around long lead times and accepting large lot sizes. Long lead

times lead to less accurate forecasts and make it difficult to manage unplanned spikes in demand, while

large lot sizes can mean carrying excess inventory. It soon became clear to Hunt officials that a 95-day

lead-time was “unacceptably long,” according to Tony Stafford, Hunt’s purchasing manager. The long lead

time was not only driving up inventories, it was also making it difficult for Hunt to service customers

quickly and to efficiently manage returns, a significant issue as retailers increasingly move to a

consignment model where they return any unsold inventory to Hunt. In order to cut lead times, Hunt

officials realized they had to work much more efficiently with suppliers. “We had to schedule capacity and

get [suppliers] to operate as an extension of our organization,” says Bracey. Hunt set its sights on

developing supply chain processes that would provide “a more continuous flow of product so when price

is less of a factor, we still have competitive advantage in being able to service our customers without

carrying excess inventory,” Bracey explains. That means continuing to improve communication and

collaboration with its suppliers to shorten the order-to delivery cycle. To help suppliers plan capacity, Hunt

first modified its forecasting process. Rather than giving suppliers just one level of commitment—a

discrete order—Hunt established what Bracey calls “firm, slushy, and free time zones in our forecasts.” In

the firm zone, the company is committed to buying the finished goods in the amount specified. In the

slushy zone, the company is committed to purchasing the raw materials and standard components so the

supplier can plan its purchases and production. In the free zone, Hunt has no commitment to buy. “The

free zone is typically three to five months out and is strictly for reference information to help them

manage capacity,” says Bracey. At the same time, Hunt worked to give suppliers better visibility into its

forecasts and inventory levels. Hunt uses the full suite of QAD Inc. (based in Carpinteria, California)

MFG/PRO enterprise resource planning (ERP) applications to run its internal business, so it was natural

for the company to use QAD’s hosted Supply Visualization application. The application, hosted by QAD on

its MFGx.net site, is designed to provide suppliers with visibility into a manufacturer’s forecasts and

inventory levels. Using a hosted version of the application, says Bracey, helped Hunt get a quick return on

its investment. Supply Visualization helped Hunt communicate effectively with suppliers and, ultimately,

drive lead times down to 60 days. The Supply Visualization application is integrated with the company’s

MFG/PRO software applications. Inventory and forecast data from MFG/PRO are published to partners

over standard Internet browsers, which means suppliers can access inventory and forecast information as

soon as it’s updated rather than waiting for a fax or e-mail from Hunt when the data is rolled up monthly

or quarterly. So now, even if suppliers can only meet part of Hunt’s demand, they can more quickly and

easily communicate that, and Hunt can make contingency plans. Hunt updates its forecasts monthly and

can update a forecast on individual products or by group as needed. To develop its forecasts, Hunt uses

the Demand Solutions forecast applications from Demand Management Inc. (based in St. Louis, Missouri)

and imports/exports that data into its MFG/PRO ERP system. In the new process, Hunt meets with

suppliers once a month (or more frequently if necessary) via conference call to discuss the forecast and

plans and how they compare to Hunt’s actual needs. “In the past, we didn’t have a tool that would force

us to get together and work out the details,” says Bracey. Sharing forecast data and improving

communication with suppliers also means all members always have the same data from which to work.

Stafford says Hunt’s partners look at the Web site for changes or new information “daily, if not more

often.” One advantage of the browser based system is that supplier browsers can be set up in Chinese so

the information appears in their native language. That way Hunt doesn’t have to depend on just a few

people who are fluent in English. Shorter lead times have delivered several benefits to Hunt. For one thing,

they’ve made for more accurate forecasts because, with 35 fewer days between order and delivery, there

is less data to try to analyze and less time for surprises to hit the process. “The further out you look, the

less accurate your forecasts are and the more you have to hedge on that forecast. Having a 50 percent

longer lead time more than doubles the work with far less certain results,” says Stafford. Shorter lead

times also let Hunt cut off product pipelines more efficiently when it sees the end of an item’s selling

period. That’s important as product life cycles shorten. Shorter lead times also reduce the need for safety

inventory. That’s important to Hunt because “if that inventory goes obsolete, it’s a real struggle to get rid

of it without contaminating your market,” says Stafford. Hunt also found that by moving its manufacturing

processes to suppliers, it moved its work-in progress (WIP) and raw materials inventory to those suppliers.

It’s then the suppliers that have to improve the way they manage that inventory. To do that, suppliers

need more accurate and timely demand and forecast data from Hunt. Besides cutting lead times and

inventory levels, Hunt has been able to reduce its airfreight costs for items it couldn’t wait 35 travel days

to receive. Under the previous process, when it needed product in less than 95 days, the company would

have to airfreight product from China to its distribution center. The new process let the company cut

$200,000 in airfreight charges in the first half of 2003. But Bracey says Hunt isn’t stopping there. The next

step in improving its supply chain is for the company to use the Supply Visualization tool to move away

from creating a discrete purchase order for each item and toward generating a firm release of the forecast

so suppliers can simply package product and send it to Hunt efficiently. “Letting our schedule float could

shorten lead times to 45 days,” says Bracey. “With a floating schedule, when our customer orders change,

we don’t have purchase orders clouding the picture of what we really need. At the latest possible moment,

our suppliers could take the latest requirements, load the container, and let us know what’s coming.” To

make the supply chain even more efficient, Bracey is also beginning to discuss with Hunt’s

productengineering group the standardization of parts. That would mean, rather than carrying a finished

goods inventory, Hunt’s suppliers could carry a parts/materials inventory. That could allow the company

to carry less total inventory and possibly reduce the company’s risk and need for safety stock. Already,

though, Hunt has increased its level of service and reduced cost by improving its supply chain. “If you

don’t have the right processes in place when the cost of money rises and the price of goods levels out for

everyone, you won’t be competitive,” Bracey says. “We assume that day will come, and we’re developing

processes that will put us ahead of the curve.”

Source: This article originally appeared as “Syncing the Supply Chain” by David Kodama, Managing

Automation magazine, March 2004. © Thomas Publishing Company, LLC, New York and reprinted with

permission of Managing Automation.