Supply Chain Foundation Guide (SCF)
Supply Chain Overview and Benefits
When a customer asks a vendor to apply a bar
code label or lose their business, the benefits are easy to estimate. To be more
accurate, some of the benefits are
easy to estimate. Others take digging to identify and quantify.
Time and experience have shown that manual
data collection and data entry systems (handwritten documents followed by
keyboard data entry) are cost drivers for
- Manual data collection is slow and error prone. Bar
code is significantly faster (about 15 times) and more
accurate (about 10,000 times) than manual data entry systems.
- Manual data collection systems tend to be batch oriented
so data bases are often out of date. Bar
code data entry can save hours or even days of the
"Information Float" period. "Information Float" is the time
between an event occurring and the information system knowing it occurred, i.e.
the time it takes to enter a receiving transaction or the completion of a
specific manufacturing operation, etc.
- Manual data collection is so expensive and error prone
that companies are discouraged from collecting important information. Realizing
the problems of collecting data manually, many companies donít collect data
that they should.
The consequences of these problems are
significantly higher costs that ripple throughout an entire organization ĖĖ
even entire industries.
Examples of Benefits to Individual Companies
An investment in bar code , or any other
technology for that matter, can pay for itself in three ways:
- Increasing Sales;
- Improving Gross Margins;
- Reducing Overhead.
Some benefits, like keeping a customerís
business, can be easily measured. Others, like increasing sales due to improved
customer service, are more difficult to predict with any certainty.
Any bar code application can be analyzed by
its impact on sales, gross margins and overhead. Consider the following two
The cost of inaccurate inventory records.
inventory records should always be perfectly accurate. If every transaction is
recorded in "real time," the inventory will be accurate.
Realistically, however, dayĖtoĖday mistakes throw the accuracy off. One
solution is to take inventory more often in order to detect the cause of the
Unfortunately, taking inventory with
traditional methods is not a pleasant task and sometimes this fact discourages
companies from counting inventory as often they should. This leads to inaccurate
inventories: not knowing what is on hand or where it is stored. The consequences
of inaccurate inventories can be felt throughout a business. For example:
- If you tell a customer you donít have something when
you do, you may lose a sale.
- If you miss a delivery date, or you lose orders, retail
shelves are bare.
- Damaging your reputation with a customer due to late
deliveries or not having what they need eventually causes lost sales.
- Buy from a competitor to supply a product you thought
you had but didnít; your margins suffer.
- Tell a customer to keep a product shipped by mistake
rather than pay to have it returned.
- Pay RUSH transportation costs to expedite an item you
thought you had but didnít.
- Pay higher prices to a vendor to drop ship a small
quantity of product because you didnít have something you thought you had.
- Inaccurate inventories often lead to purchasing buffer
inventories which causes lower inventory turns.
- Lower material handling productivity. The productivity
of material handlers can be reduced if inventory records are inaccurate because
they waste time trying to find merchandise.
For all the reasons stated above, bar code is
frequently used to take annual physical inventories and conduct cycle counts
because using bar code is easier, more accurate and faster than manual methods.
The Cost of Picking & Shipping Errors
When the wrong product or the wrong quantity
of the right product is sent to a customer, it initiates several costs.
- Lower sales force productivity. Shipping errors irritate
customers. They take it out on the sales force. Rather than selling, the sales
force winds up apologizing and spending time and money trying to keep a
- Undetected over-shipments lead to inventory inaccuracies
which can lead to lost sales.
- Undetected over-shipments by definition are shipments
with no corresponding invoice. This shows up as reduced overall gross margins.
- Customers frequently delay paying incorrect invoices Ö
even if most of the invoice is correct. Delayed payment reduces cash flow and
increases borrowing costs.
- Picking up the incorrect merchandise and re-shipping the
proper merchandise increases transportation costs, with
"overnight" charges or even salespeople or other personnel making
- Material handling productivity
is reduced if merchandise shipped in error needs to be re-stocked and if the
correct merchandise needs to be picked again.
- Issuing credits and rebills (debit memos) consumes
administrative time and money. Some portion of one or more personís salary
goes to researching these errors and issuing the necessary paperwork.
A company issues 200 invoices per day, 240
days a year. They process 10 credits / rebills a day (5%). Half of these were
because they made a picking, packing or shipping error (5 per day). The other
half are customer errors or errors out of their direct control. The total number
of errors under their control per year is 1,200 (5 per day @ 240 days). At an
average cost of $75.00 per error (administrative, material handling,
transportation, etc.), the total cost of errors is $90,000 a year.
If the company is earning 5% pre-tax profit,
this is the equivalent of a $1,800,000 customer! And even if you are only
shipping 50 invoices a day, it's still like a $450,000 customer.
In fact, the actual cost may be double this
amount since the detected errors are brought to your attention by customers when
you make an error in your favor. Errors in their favor may never be reported.
You notice them as inexplicable low gross margins or inventory adjustments.
Shipping errors drive costs up at both the sender and the receiver side. The
costs described above donít include the cost to the recipient and should be
included in the overall cost of errors to an industry.
Bar code-assisted order picking and shipping
verification systems pay for themselves by reducing these costly errors.
2.2 Summary of Company Benefits
Within organizations, bar code
has proven its ability to help companies compete better. A few of the documented
benefits are listed below:
improved on-time fill rates.
reduced inventory carrying costs.
accurate and timely reporting of
increased material handling
identification of production
increased inventory accuracy.
reduced data entry costs.
reduced picking and shipping
reduced buffer inventories.
Any one of these benefits is
worth pursuing, but when GS1 (formerly EAN/UCC) numbering, bar code and EC/EDI are implemented
throughout an industry, individual members of that industry can achieve
meaningful gains in all of them and help entire industries remain competitive!
2.3 Industry Benefits
Manufacturers, distributors and
retailers conduct thousands of business transactions every day. Many of these
transactions involve the communication of item numbers and quantities. Most
transactions start out as handwritten documents, followed by a phone
conversation or computer generated report which is ultimately E-Mailed, FAXed or
mailed to a trading partner.
In many cases, products pass
through the entire distribution channel without being changed at all, so
translating to proprietary item numbers is an
unnecessary and errorĖinducing step. A birdís eye view of the relationships
between trading partners looks like this:
Birdís Eye View of
Trading Partner Material and Information Flow
Instead of using proprietary item
numbers requiring multiple translations, retailers, distributors and
manufacturers can use standard numbering systems and bar code and/or EC/EDI to
record sales, receive merchandise, place orders, count inventories, verify
shipments, and record storage locations. As unnecessary costs associated with
using proprietary numbering schemes are removed from the distribution pipeline,
entire industries become more competitive.
With improved accuracy and
timeliness of POS data, retailers can control their inventory better, increasing
sales by stocking the proper merchandise and reducing unplanned markdowns. Using
bar code to track work in progress helps manufacturers identify production
bottlenecks and improve deliveries while reducing inventory carrying costs.
Distributors using bar code and GS1 (formerly EAN.UCC) numbers can improve inventory accuracy,
on-time fill rates and reduce inventory carrying costs.
2.4 Final Thoughts on the Benefits of Bar Code
Tracing the actual benefits of
using bar code instead of manual data collection systems is true detective work.
It takes time but it can be very rewarding because it can improve sales, improve
gross margins and reduce overhead.
Companies using the
GS1 (formerly EAN.UCC)
standard numbering system and bar code are not pioneers. Fortunately, each of
these communication technologies has already been tested and implemented
successfully in many industries.
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