Reference no: EM131627616

Demanding Retail World Extends a Small Supplier

By DEBRA A. TURNER ,From The Wall Street Journal Online

The Problem: How does a small supplier cope as the big guys try to squeeze out every inefficiency in the supply chain, while demanding greater quality, increased speed and customized features?

For EdgeCraft Corp., which makes the Chef's Choice brand of kitchen cutting utensils and sharpeners, shipping to customers used to be simple: It was a matter of getting a paper invoice and sending out products in a standard amount to a box.

But for suppliers like EdgeCraft, things are anything but simple these days.

Faced with an increasingly competitive market, retailers are squeezing costs out of every corner of their business that they can — including from suppliers. They are forcing suppliers to find cheaper, more-efficient ways to move products from the warehouse to their shelves. And they are demanding that suppliers work with new computer systems and accommodate a level of customization the suppliers never saw before.

Retailers now require items to be "floor ready," says Sam Weiner, president of EdgeCraft, based in Avondale, Pa.

The problem, though, is that "floor ready" means different things to different customers. One may want the price labels preapplied. Another may want antitheft labels in place. One may want the labels inside the box, another outside. Yet another may want the item to be shipped already gift-wrapped in paper supplied by the retailer.

Also, chains of retailers no longer want items shipped in EdgeCraft's formerly standard six-products-to-a-pack boxes that the retailers would open, repackage and then ship to their individual stores. Instead, the retail chains want the items ready to be shipped to their stores, and the shipments tailored to the turnover rates for each of their stores, with, say, two items boxed, labeled and ready for shipment to one store; three ready for another; and four to another. They may even ask for individualized labeling with bar codes that can easily be scanned.

But the retailers' ultimate efficiency push has been to get rid of all the paper. Retailers have sought a seamless ordering system -- one where their shelves would be stocked without a single piece of paper being exchanged.

All of these changes have required retailers to integrate suppliers into retail operations and give them access to once-proprietary inventory systems. For instance, major suppliers to Wal-Mart Stores Inc. now monitor inventories in individual stores themselves so they can keep the stores stocked without waiting for an order.

Driving this so-called enterprise integration are electronic data interchanges, which allow companies' information systems to communicate with each other. A company's EDI system electronically transmits invoices and purchase orders, among other things, to another company's EDI system, making ordering, shipping and invoicing much speedier.

In 1989, EdgeCraft got its first taste of enterprise integration when one of its customers, Dillard's Inc., a department-store chain, basically told EdgeCraft it would begin operating a fully computerized system of issuing purchase orders in 1990, and using it was "a condition of doing business" with Dillard's, Mr. Weiner recalls.

"We had not really had any kind of contact with a computer-generated order system" at that time, he says. EdgeCraft didn't even know what one looked like.

The Solution: When Dillard's went to an EDI ordering system, EdgeCraft had only one large, central computer with no Internet access, Mr. Weiner says. The company bought a personal computer and a modem for about $5,000 specifically for connecting with the Dillard's system. At the time, EdgeCraft was only a few years old and much smaller, so $5,000 was a big investment, Mr. Weiner says. In the beginning, EdgeCraft printed out the Dillard's orders from the PC and manually re-entered data into its central computer's own ordering and inventory system. At first, EdgeCraft began learning to work with the Dillard's system "because we had no choice," Mr. Weiner says. "It wasn't making us more efficient" because even though EdgeCraft was receiving data electronically, it was still manually entering data back into its own central computer.

When faced with a new trend like EDI, though, "you have to ask yourself what will stick around and what's just a passing fad," Mr. Weiner says. In retrospect, he says, Dillard's was "on the leading edge of what was to come."

After EdgeCraft made its $5,000 investment in a PC and modem, the company began to build in house -- with the help of consultants -- what Mr. Weiner calls "computer bridges," which transferred Dillard's data directly from its network to EdgeCraft's own computer system. But then other retailers began to demand the same type of networked communication. There was one hitch: Every major retailer used a different data-interchange system, so EdgeCraft was faced with building a computer bridge to each of its larger customers' systems. "The burden is on us for almost every retailer to customize our software" to make it compatible with theirs, Mr. Weiner says.

Seeing opportunity in the EDI technology, entrepreneurial software consultants and new companies came along to help businesses like EdgeCraft update and customize their ordering systems to deal with electronic data interchanges, says Mr. Weiner. With no standardization among the EDI systems, there were a lot of kinks to work out. And the company found that many of the technology start-ups that sprang up to help work out those kinks didn't stay in business long. Navigating on the leading edge of a trend that is in fact a major shift in the way business is conducted can be rough-going for all concerned.

"Many times we were pulling our hair out," he says. "You were always worried about information being delayed or stopped."

EdgeCraft now deals with systems-integration specialists such as Global eXchange Services, a business-to-business e-commerce unit of the tech buyout fund Francisco Partners. Because there's still no standardization yet and each retailer uses its own customized EDI system, EdgeCraft has different specialists working on customizing its connection to each of those systems. Mr. Weiner describes GXS's service as providing "a toll road along the information highway." It maps a highway system separate from the Internet on which to conduct commerce.

It took EdgeCraft about 10 years -- until 1999 -- to get enough infrastructure built to efficiently use EDI systems and to bring enough savings to cover its system's costs, he says. Today, two-thirds of EdgeCraft's sales comes through data interchanges. He says it would be difficult to pinpoint how much connecting with the various EDI systems ultimately cost EdgeCraft, but he estimates the company now saves about 25% in customer-service costs alone, where labor-intensive data entry and paper handling have been reduced. "For the past three to four years, we've saved quite a bit of money," Mr. Weiner says.

Though EDI has meant that EdgeCraft's products spend less or no time in a retailer's inventory, it has meant increased costs for the company. Retailers "have pushed the cost of storage to us," he says. "Our warehouse has grown disproportionately faster than sales."

He adds: "On the surface, it doesn't sound like a big deal" when retailers began wanting shipments as small as two or three items. But EdgeCraft had to develop new part numbers for the computers to recognize, and employees went out to size up new boxes.

The saving grace for EdgeCraft, Mr. Weiner says, turned out to be flexibility. There aren't a lot of levels of management in the 150-person company, he says. Within minutes of a new requirement, EdgeCraft can address it.

To meet the growing demand for more customizing of products and packaging, EdgeCraft has added separate production lines. It also has a buffer inventory of basic products, which are ready to run down those lines for speedy customizing. Also, some things that used to be outsourced were moved inside. As shipments and shipping labels became more customized, Mr. Weiner recalls, EdgeCraft moved its label making in house, for speed, customization and cost savings.

And just as the retailers mandated that EdgeCraft improve efficiency, EdgeCraft, in turn, gave its suppliers a mandate as well. The company asked them to store some parts for it and deliver them on an as-needed basis. It also asked its suppliers to use bar codes on their shipments to help in inventory checks. Because bar codes are scanned, they eliminate some human error and improve accuracy and productivity with less training for employees, Mr. Weiner says.

The company also asked employees to work smarter. And it has automated some operations, he says.

"It's really a determined drive toward efficiency," Mr. Weiner says. "We're becoming more demanding in ways that our customers [retailers] expect."

Another thing that has helped EdgeCraft keep costs down is its commitment to quality. In the appliance business, about 5% to 7% of products are returned on warranty problems. The bulk of EdgeCraft's sharpeners and cutters are still made by the people who work in Avondale, a small town near the Delaware border. There, EdgeCraft maintains a tight control on quality. As a result, its products have a 1 in 10,000 return rate, Mr. Weiner says. That represents a tremendous cost saving for both EdgeCraft and its retailers, particularly for the retailers in 50 other countries where return costs are compounded by high freight rates and duties.

-- Ms. Turner is a staff reporter for Dow Jones Newswires in New York.

Question:

There is no doubt that the speed and efficiency in which a business can get their product or service to their target market is not only a requirement, but an essential variable in the strategic management of the marketing function. As Thomas Friedman says “the world is too flat” for businesses not willing or able to react to the external market forces of competition and the globalization of the market place. This holds true for sourcing product as well as moving it through the supply chain. Following this is an article from the Wall Street Journal that is germane to this discussion.

React to it by summarizing it in the first paragraph of your case analysis specific to marketing strategy and the value proposition using marketing theory and vocabulary. In the second paragraph, does the business you work for currently have an EDI system, if explain, if not, how would it benefit? How does the business you work for use channels of distribution to deliver value to the market?