Unpredictable supply chain disruptions such as natural disasters and labor disputes garner the biggest headlines, but the predictable disruption of a channel partner changing its business system can cause some of the biggest headaches. Despite a potential for upheaval, distributors and manufacturers can take strategic precautions to minimize problems.
A company changing its ERP will never garner the same dramatic headlines as a natural disaster or labor dispute, yet the seemingly innocuous move to a new business system can sever a supply chain as ferociously and frequently as any tsunami or longshoremen strike.
“That is one of the most common ways that the supply chain gets disrupted,” says Kevin Boyle, president of Industrial Distribution Consulting LLC. “Manufacturers cause disruption in the channel all the time because they configure new business systems, they change the way they manage their order entry, and they don’t tell their distributors early enough.”
Manufacturers know about new system implementations – which companies actually employ, in part, to prevent disruptions – months in advance, differentiating it from supply chain saboteurs such as a volcanic eruption or geopolitical crisis. But when a manufacturer moves to SAP, for example, and doesn’t let its distributors know in advance, it sparks a host of issues that range from minor delays to incorrect orders to a complete shipping stoppage.
“I’ve seen lots of disasters,” Boyle says. “I don’t know if it’s arrogance or if it’s over-confidence that there will be no problems, but they let the distributor know a couple of weeks in advance that they’re going to a new business system. If a supplier would only engage his channel partner and let him know his plans early enough, they can help them prepare for it.”
Assessing the Problem
A manufacturer that transitions to a new business system isn’t aware of the problems it can cause, which is why they don’t often communicate the change to their channel partners, says Michael Sprague, director of e-business development, ThomasNet.
“A lot of the manufacturers think these problems are distributor problems,” he says. “They say, ‘I’ll give you my data, and you have everything you need.’ Well, the distributors aren’t staffed to take those PDFs and convert them into the data that they need.”
A bearing company that Sprague works with has 17 percent of its electronic orders “popping out because part numbers don’t match and they have to be manually processed,” he says. “So a system that we put in place to automate our business between our two companies is actually failing, and we don’t have the staff now to go back and say, ‘Figure this all out.’”
When a distributor’s and manufacturer’s ERP systems aren’t aligned, the process of entering and shipping orders can disintegrate, sometimes causing experienced customer service personnel to “break down in tears because they’re so frustrated by the new computer system and don’t know what to do,” says Matt Onofrio, president and COO of GT Midwest, Wichita, KS.
This problem has snarled his company’s supply chain in a variety of ways. One supplier told him an order would ship in a month and it showed up later that day. In another instance a supplier said an order had shipped that day only to find out a week later that it hadn’t left the distribution center.
“Anything you can think of that can possibly go wrong, goes wrong,” Onofrio says. “Some of them can go a day or two or three without making outbound shipments, and then invoices are late and invoices are wrong, and all of the supporting paperwork that we’re used to getting that we need with the product gets lost. It’s unbelievable.”
A customer’s shift to a new system can also create a pain point upstream to the distributor, says Jim Derry, president, Field Fastener, Machesney Park, IL.
“That’s like a death sentence for me,” he says. “If they’re going to SAP, for six months they’re not going to know anything. I don’t know how people can make these decisions to switch these businesses knowing that they’re going to put their company at risk for six months, but we see that all the time.”
And even distributors can be at fault sometimes when they implement a new system and forget to alert others, says Onofrio, who acknowledged the issue comes up regularly at industry meetings. While he and other distributors may joke about the suppliers and customers
who change computer systems, they also know their trading partners say the same thing when it’s the distributor making that change.
“It’s very rarely smooth. It’s very rarely well communicated,” he says. “And it almost always is a major disruption.”
Companies up and down the supply chain implement new business systems for a variety of reasons, and just as they planned and prepared internally for adopting SAP, Oracle or another platform, they need to plan for its integration outside their own world, as well.
An executive with an electrical distributor in the Southeast says preparation and planning are keys and that a company must view the new system not as tangential to the supply chain’s continuity, but rather “they have to look at that as part of their supply chain and treat it the same way.”
The other crucial component, he says: “Communicate, communicate, communicate.” That means alerting and involving channel partners well in advance so everyone can work together on making the process as smooth as possible.
“If it’s done right the disruption is minimal,” he says. “There’s a lot of other things that get blamed on ERP implementations during that one-year window around going live that may or may not have anything to do with the implementation, but it’s going to get blamed for it.”
In addition to communication, training is crucial. And while it’s impossible to build the same level of competence and confidence quickly among personnel working on the new system, a company that invests in training will increase employee preparation and decrease the risk of lost productivity.
“I don’t think it’s possible to overtrain for something like this,” Onofrio says.
But, Boyle cautions, no matter how much training happens, no matter how many hours are spent on preparation, problems will emerge. “The truth is, you can’t avoid them,” he says. “It’s just how do we minimize those problems.”
Ask a Distributor
Besides planning, communication and training, manufacturers can also establish and seek advice from distributor advisory councils to help address and minimize risk associated with a business system implementation, according to Boyle and Onofrio.
Onofrio was part of a council for a supplier that had seen and heard the “horror stories” of a business system implementation and sought input from the council’s distributor members about what needed to be done, how the change should be communicated and what issues might arise.
They advised the supplier to be upfront about the timing change, to ask distributors to stock up on inventory and even to extend payment terms on stockout orders to lessen transactional volume demand during the first three or four weeks of the new system.
“They did almost everything that the council suggested, and that one was frankly as close to being a smooth transition as any I’ve ever seen,” Onofrio says.
But companies must understand that a new ERP system could require an extensive organizational restructure, because “disruption of data will disrupt everything,” says Randy Aardema, executive vice president, supply chain, US LBM Holdings LLC, Green Bay, WI.
“It takes a lot more time and a lot more resources because you have to change your organization to fit the software, as opposed to the other way around,” Aardema says. “That’s a difficult thing for companies to do. If you change ERP systems, you probably also have to change your organizational structure to match the ERP and most companies don’t do that, so that’s a huge source of frustration.”
Supply Chain Strategy
Other tips for preventing, or at least minimizing, disruption in the supply chain include establishing a contact person for channel partner problems, creating a contingency plan for what happens when – not if – something goes wrong and maintaining the same level of attention to
that ERP system throughout the life of the partnership.
“OK, you built it, that’s great, now how are you going to maintain it?” Sprague says. “It’s not having the baby that’s the issue, it’s the 20 years of rearing the child, the food, the diapers, everything. So anybody can do anything once, and getting that data set out there is good, but you really have to have the processes and the procedures and the communications to keep it current and in sync.”
It speaks to thefive-step formula that Paul Dittmann, executive director of the Global Supply Chain Institute at the University of Tennessee-Knoxville and co-author of the book The New Supply Chain Agenda, uses for generating excellence in a supply chain: hire the right talent, select the appropriate technology, collaborate internally, collaborate externally and manage change.
The alternative for those who don’t follow suit isn’t pretty, says Boyle.
“A lot of people forget that it’s a channel partnership and there are three partners in this channel – the supplier, the distributor and the customer,” he says. “And if you disrupt something with the supply chain, the customer is cut off. He’s going to be unhappy, and they may be unhappy enough to look for a competitive product.”