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Essential to the open communication between two com­panies of such sensitive information as cost data and production schedules is the explicit understanding that this information will not be shared outside the imme­diate relationship without the prior permission of the supply chain partners. After all, many direct competi­tors use the same suppliers and, in order to openly share sensitive information with a supplier a company, must have assurances chat this information will not end up in the hands of a competitor.

Although it would be nice to be able to shake hands with suppliers and trust that they will do the right thing, it is much safer to have a written agreement spelling out exactly what the right thing is. Including a confi­dentiality clause in the agreement will make sure there are no misunderstandings later. Spelling out who within each company will have access to cost data of the sup­ply chain partner will alleviate the fear that a low-level employee will go to work for a competitor and deliver the cost data on a silver platter. As Henry Kissinger once said, "Trust but verify."

Competence and Reliability


As a company works more closely with its supply chain partners, it will become more dependent on their abil­ity to meet their commitments, including on-time de­livery and cost containment. A company will probably reduce its safety stock of material because its supplier is committed to fulfilling its needs. Or a company may offload some of its inventory tracking and ordering re­sponsibilities by adopting VMI, in which a supplier tracks and automatically replenishes a customer's in­ventory. This can prove disastrous if this supplier turns out to be unreliable and frequently late with deliveries. This is why customers place such a tremendous amount of effort during the development of a supply chain relationship into validating the competence of the supplier's management team, the financial soundness of the organization, and the long-term ability of the supplier to remain a reliable source. It is not unusual for a customer to subject a potential key supplier to a supplier certification review that lasts several months and touches virtually every part of the organization. After all, a customer does not want to turn over a sub­stantial part of its business to a company that goes bank­rupt three months later!


Once two companies agree to enter into a supplier chain relationship as partners, they must decide how to most efficiently share information. After all, the sharing of in­formation allows the supplier to eliminate the one activity that it is virtually guaranteed to get wrong—forecasting. Since a forecast is just "an estimate of future demand,"2 and no one in the past few centuries has proven he could accurately predict the future (with the possible exception of Nostradamus), replacing a forecast with real customer information is often the first priority between supply chain partners. By replacing the forecast with actual customer data, a supplier can reduce inventory while simultaneously providing a higher level of on-time delivery to the customer. The customer, now being able to rely on on-time deliver­ies from the supplier, is able to reduce safety stock of the goods that the supplier is furnishing.


If a company is on a material requirements planning (MRP) or an enterprise resources planning (ERP) sys­tem that generates requirements to the Purchasing De­partment, the requirements can be conveyed to the supplier fairly easily.

      Segregate the requirements by supplier. This will serve
as the basis of the information that will be transmit­
ted to the supplier.

      Determine how solid or fluid the quantities and items
are within the time-fences. For example, if quantities
are frozen within the first two weeks but subject to
25 to 50 percent swings from weeks
three to six, docu­
ment this information so it can be discussed it with
the supplier.

      Meet with the supplier to review how the informa­
tion is structured. Keep in mind that MRP may be a
foreign concept to some suppliers, so in-depth train­
ing may be needed for them to understand how to
use the information to help schedule their business.

      The most effective schedule sharing agreements in­
clude a guarantee from the customer that once an
item's demand appears within an agreed-upon fro­
zen time-fence (such as two weeks), the supplier will
purchase it. Suppliers will not be nearly as reluctant
to produce—and possibly customize—inventory for a
customer who guarantees it will be purchased.

      Review seasonal trends and abnormal events such as
vacation shutdowns or special promotions with the
supplier and obtain an agreement as to how these
special events will be handled.

      Finally, determine how often and in what form the
schedule will be transmitted. Should it be sent hourly,
daily, weekly, or monthly? Should it be communi­
cated via mail, fax, electronic data interchange (EDI),
or the Internet?

Once these details are ironed out, a company can be­gin sharing its schedule with its supplier. If the opera­tion needs a standard, periodic delivery (such as every Tuesday at 10:00 a,m.), a company has the opportunity to establish a supply chain relationship with a transpor­tation provider. By establishing regularly scheduled de­liveries, a firm can ensure that all the hard work expended by it and its supplier does not go to waste because the product is left sitting on a loading dock. In addition, a company can make the most efficient use of its receiving employees by helping smooth out the peaks and valleys of incoming deliveries.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 13


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