Elements of Supply
Chain Success
Lean manufacturing helps lead to successful supply chains.
But you also need collaboration with partners and a sound
e-business strategy. Sometimes distributors can lead the way.
Ray Kulwiec
L
ike revolutions in the past (both social and indus-
trial), the supply-chain and e-commerce revolu-
tions are bound to produce their share of casual-
ties. From an e-commerce perspective, the distributor
function appears especially vulnerable because it is being
squeezed from both sides of the supply chain.
Manufacturers are looking for ways to collapse their
supply chain to save on inventory cost and avoid obsoles-
cence risk. With the e-revolution, they now have a
method for selling direct and bypassing the traditional
supply chain. At the other end of the chain, large retailers
are also looking to bypass that same intermediary func-
tion, and buy direct from manufacturers.
The challenge to distributors is clear: Reinvent
In essence the yourself. Learn to add value. Or provide a unique benefit
company turned that justifies your continued presence in the supply
its business on chain. That challenge was accepted by Daisytek Interna-
tional Inc., a Plano, TX-based major distributor of office
its head ...
p roducts and computer consumables. In essence the
company turned its business on its head, reconfigured the
way its supply chain worked, and provided new levels of
efficiency and economy for all partners in the supply
chain. By providing a win-win situation for all con-
c e rned, Daisytek turned from being an endangere d
species to becoming the central, driving partner in the
supply chain.
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Manufacturer Turns Distributor
Founded in 1977, the company was a manufacturer
of printer hardware products for Daisy wheel printers.
Around 1980, significant market changes occurred that
caused the company to rethink its mission.
The changes started with introduction of the per-
sonal computer, followed by the appearance of the desk-
top laser printer. Significant as these advances were, an
accompanying development of equal or greater signifi-
cance was the cost ratio of consumable products to
hardware. In the past, the cost of consumables such as
printer ribbons amounted to about six percent of own-
ing and operating a dot matrix printer over an average
f o u r-year product life span in an office enviro n m e n t .
For a laser printer, however, 65 percent of the cost over
the same time period is incurred for consumables. One
small example illustrates the point: A $1300 laser print-
er can use up to $7000 worth of toner in just a few
years. For Daisytek, the growth opportunity message was
clear: Focus on distributing consumables instead of
making hardware.
Minefields in the Market
Going after the real money, consumables, was not
as simple — or as secure — as it may have seemed at
first. One of the stumbling blocks was the inefficiency of
the traditional supply chain that existed in the informa-
 Traditional Information/Office Products Supply Chain

8% 15% 2% 4% 10% 1%
Manufacturer Research Manufacturing Ware- Inventory Sales Delivery
and and housing Management
Development Assembly & Distribution
tion/office products market, as illustrated in Figure 1. 40% of sales ➤
The layers of redundant inventory shown in this tra-
ditional model are especially bad news for a manufactur- 3% 2% 2% 8% 5%
er. The cost of carrying inventories is an obvious draw- Wholesaler Light Manufacturing Ware- Inventory Management Sales Delivery
back. But even more serious, the building up of invento- and Assembly housing and Distribution
ries, not only at the manufacturer level but in other parts 20% of sales ➤
of the supply chain, creates inefficiency and inability to
respond quickly to change. Product life cycles keep shrink- 2% 2% 14% 2%
ing, and the pace of technology innovations keeps jump- Dealer Ware- Inventory Management Sales and Delivery
housing and Distribution Services
ing. Accumulating inventories of yesterday’s products at
various levels in the supply chain can be disastrous as 20% of sales ➤
competitors are introducing new, improved versions.
And yet that’s what was happening. Each company Figure 1. Redundant activities are present at various levels of the supply chain. An estimated 80
percent of the costs added to raw materials were spent getting a product from manufacturing to
at each level in the distribution chain had its own redun-
the ultimate end consumer.
dant warehouse and inventory management team, as well
as sales forces and delivery systems. It was estimated that
80 percent of the costs added to raw materials were Next-day delivery has become extremely important
incurred in getting a product from manufacturing to the in a great number of markets. The common industry Next-day delivery
ultimate consumer. Compounding the problem was the practice for office consumables was an order cutoff time has become
fact that manufacturers were introducing new computer of 2 p.m. to 3 p.m. in order to ensure next-day delivery in
products regularly, requiring the stocking of a greater extremely
North America.
number of compatible supplies. No wonder Daisytek felt Thanks to its FedEx relationship and its investment
important in a
vulnerable in such a scenario! No wonder manufacturers in state-of-the-art material handling and related infor- great number
and retailers — including office superstores — were mation technologies, Daisytek was able to stretch cutoff of markets.
looking for shortcuts in the supply chain. to 10:30 p.m. As packages move through a sophisticated
The Distributor’s Radical Solution sortation system prior to exiting Daisytek’s warehouse, a
The general practice in the office products industry FedEx employee stationed in the warehouse at the end of
was for wholesale distributors to have numerous ware- the sortation line (during peak hours) immediately scans
houses located close to customers. Daisytek had five such package information into the FedEx shipping and deliv-
regional centers located around the country. Convention- ery system. The payoff is that a customer in Los Angeles,
al wisdom would have called for adding five more to meet to use an example, gets better service from the consoli-
market needs. Instead, after deciding that a quantum dated Memphis center than he or she did from Daisytek’s
leap was needed, the company opted to eliminate their previous L.A.-based warehouse.
five existing distribution centers and consolidate opera- Consolidating into one warehouse enabled the
tions into one “super” center in Memphis, TN. Signifi- company to reduce overall inventories while at the same
cantly, the new warehouse was located adjacent to Federal time being able to offer the greater range of supplies
Express’s primary hub. Daisytek developed a close, strate- required by constant proliferation of computer products
gic relationship with FedEx, using it as the company’s key (around 26,000 different stock-keeping units are handled
delivery partner. here). Economies were also realized by having all prod-
The Memphis warehouse includes a number of ucts delivered to one location. And, the company has ben-
advanced material handling and information technolo- efitted from reducing its brick-and-mortar real-estate
gies, including automated carousels for staging products, costs. The combined cost savings allowed Daisytek to
paperless picking (pick-to-light) systems that dramatical- neutralize its overall higher freight costs, and charge cus-
ly increase order-assembly accuracy and productivity, a tomers ground freight rates while delivering by air in
sophisticated package and parcel sortation conveyor sys- many cases.
tem, a state-of-the-art warehouse management software Big Payoff for Manufacturers
system, and a highly efficient call-management system. The results of the supply-chain restructuring can be
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 seen in Figure 2. Redundancies have been driven out of n y ’s Memphis distribution center and inform a t i o n
various levels of the model, and distribution costs cut infrastructure provided the means for launching a new
from 80 percent to 30 percent. All partners in the chain business service, that of third - p a rty logistics pro v i d e r
have benefitted. Manufacturers in particular have gained (3PL). Accordingly, Priority Fulfillment Services (PFS)
faster access to market, and have far fewer dollars at risk was born in 1995. E-business capabilities were quickly
in inventory. added to the new entity, creating PFSweb, an e-com-
The benefits to Daisytek were substantial. The merce logistics provider.
company had annual sales of $250 million at the time Initially a subsidiary of Daisytek, PFSweb has
it relocated to a single distribution center in Memphis since been spun off into a separate company with Mark
in 1992. Since that time, it has grown to be the leader Layton as its CEO. The new 3PL fills a need created by
in its field, with annual revenues of over $1.2 billion. It the growing worldwide trend toward outsourcing. It
represents 150 of the world’s largest technology manu- allows manufacturers and other client companies to
f a c t u rers, including Hewlett-Packard, IBM, Imation, excel by concentrating on their own core competen-
and Lexmark. cies, as well as providing superior service to their cus-
After implementing the supply chain re s t ru c t u r- tomers by taking advantage of the expertise of the out-
ing, Daisytek CEO Mark Layton realized that the compa- sourcing provider.
PFSweb also fills a need in the growing area of e-
business and e-commerce. Manufacturers and others
developing a growing business over the Internet are
Lean Information/Office Products Supply Chain Model
realizing that the ord e r-fulfillment practices used in
7% 10% 3% their traditional business are not always appro p r i a t e
Manufacturer Research Manufacturing Sales for e-commerce. To move quickly into this new area,
and and many are outsourcing this function to a 3PL with
Development Assembly online expertise.
20% of sales ➤ PFSweb provides its services on a fee basis. It does
not own the inventory or accounts receivable, but man-
1% 1% 1% 1% ages them for its clients. The services include: call cen-
Wholesaler Ware- Inventory Management Sales Delivery ters operating 24 hours a day, seven days a week; inven-
housing and Distribution
tory management with status reporting; warehousing
4% of sales ➤ and distribution with late-night cutoff for next-day
delivery; credit and collections; and returns processing.
Dealer Sales and Services PFSweb operates out of the Daisytek Memphis hub, and
s e rves manufacturing clients such as IBM, Hewlett-
11% of sales ➤
Packard, Okidata, and BASF.
Figure 2. With redundancies driven out of the supply chain, costs have been reduced from 80 Manufacturing As Supply Chain Leader
percent to 30 percent. Benefits accrue to all partners in the chain. The Daisytek success story featured in this article
illustrates how a strong, motivated, and value-adding
distributor can drive efficiencies and benefits up and
Requirements for a Manufacturing Supply Chain Leader down the supply chain in which it functions. Often,
h o w e v e r, manufacturers are in the best position to
• Be able to forecast demand accurately assume a leadership role in promoting supply-chain
• Be able to run small lot sizes efficiencies and competitiveness. Total operations con-
• Have short leadtimes sultant James A. Tompkins, Ph.D. (President, Tompkins
• Practice continuous-flow manufacturing Associates, Raleigh, NC) has developed a number of
• Conduct e-business over the Internet guidelines for accomplishing this leadership position,
based on his years of working with manufacturing com-
Figure 3. panies to help them achieve supply-chain success.
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 Tompkins said that in order to be a supply-chain
leader, a manufacturer must, as shown in Figure 3, 1)
be able to forecast demand accurately, 2) be able to run
small lot sizes, 3) have short leadtimes, 4) practice con-
tinuous flow manufacturing, and 5) conduct e-business
over the Internet.
Excess inventory is a particular enemy to supply-
chain competitiveness, Tompkins said. He added, “After
all, a supply chain doesn’t exist in a vacuum. If supply
chain A has a total of 55 days of leadtime throughout
all links of the chain, while supply chain B has only 11,
it’s a good guess that supply chain A — and the compa-
nies within it — may become an endangered species.”
The scenario is depicted in Figure 4.
Partnering is truly the key word when discussing
supply chains. And, very often, manufacturing is well
positioned to take the lead in building and maintaining
strong partner relationships. A good example Tompkins
pointed to is from the brewing industry. The supply chain
for the beer industry starts with farmer silos containing
barley, corn, and hops. These grains in turn go to millers
and processors who supply refined ingredients to brewing
companies. The supply chain continues from brewer to
distributor to retailer and, finally, to the consumer.
Several years ago, the now-familiar "distributor
squeeze" was taking place in this industry as well as in
others. It was marked by a large proliferation of brands
("ice" beers, "red" beers, specialty beers, imports, etc.).
The spurt in brands also led to a large volume of stock-
keeping units (SKUs). The physical and financial bur-
dens being placed upon distributors were intensified by
the fact that general market tradition saw the largest
volume of beer sold on Fridays and Saturdays. Many dis-
tributors actually were beginning to require additional
warehouse space, in spite of tighter profit margins.
The solution developed at Miller Brewing Compa-
ny, Milwaukee, WI for various levels of its supply chain
was partnering, and some changes in basic processing
and distribution paradigms. To begin with, distributors
were no longer required to purchase minimum pallet-
load quantities per product. Instead, the brewer agreed
to ship in the quantity and mix required by distributors.
The partnering extended to the retail level, so that
point-of-sale information generated here could be used
to help manage distributor orders.
At the brewery level, product proliferation also had
an effect, in that it made more frequent line changes
necessary. But partnering and information-sharing at
various levels of the supply chain have led to better
inventory management and more efficient operations Excess inventory
throughout the chain. is a particular
The manufacture r’s adopting frequent line enemy to
changes points out the new paradigm regarding produc-
supply-chain
tion uptime. Maximizing uptime for pro d u c t i o n
machinery and equipment used to be the top priority for competitiveness ...
manufacturing executives. That’s not necessarily true
anymore. What you want to maximize today is the effi-
ciency that a manufacturer can establish throughout its
supply chain. And that in turn means operating in a
continuous-flow mode. When called for, the right prod-
ucts must flow through the factory and to the customer
at the right time and in the right place.
Leading in the Internet Economy
Regardless of the level at which supply-chain lead-
ership may be found, it is difficult to discuss it without
re f e rence to the Internet. For, as Daisytek quickly
learned, e-business and e-commerce must be part of any
l o n g - t e rm supply-chain strategy. The recent Supply-
Chain World North America 2000 conference and expo-
sition in Rosemont, IL provided many examples of this
reality. The event is sponsored the Supply-Chain Coun-
cil, (SCC) an association consisting of org a n i z a t i o n s
i n t e rested in applying and advancing state-of-the-art
supply-chain management systems and practices.
The council’s work is centered around a process
reference model for supply-chain management, span-
ning from the supplier’s supplier to the customer’s cus-
tomer. The Supply-Chain Operations Reference model
( S C O R ) 1 is divided into four logical sections: Plan,
Supply Chain Leadtimes
Channel partner Leadtimes (days)
Supply chain A Supply chain B
Raw materials producer 5 2
Raw materials supplier 6 2
Manufacturer 26 3
Distributor 10 2
Retailer 8 2
Total leadtimes (days) 55 11
Figure 4. Supply chain B is clearly outperforming Supply chain A, not
only in total leadtime from raw material to consumer, but also at each link
or level in each chain. Supply chain A will not be able to compete for very
long in this marketplace.
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 U.S. E-Commerce Projections
E-commerce sales, in billions of dollars, for the year:
1998 1999 2000 2001 2002 2003
Consumer e-commerce 8 20 45 68 89 108
Business-to-business 43 100 245 432 711 1300
Total e-commerce sales 51 120 290 500 800 1408
Figure 5. The numbers are based on projections from various industry sources.The author has
attempted to find a mean between conservative and aggressive projections. Sources of e-commerce
forecasts include: Forrester Research, Inc., Warburg Dillon Read, and Giga Information Group.
Source, Make, and Deliver. When the SCC was formed in
1996, the Internet was scarcely included in its vocabu-
lary. However, at this year’s conference, a vast majority
of the presentations centered around the impact of the
I n t e rnet upon supply-chain strategies. Two parts of
Internet impact are considered: 1) e-business — the use
of Internet technologies to integrate processes among
supply chain partners, and 2) e-commerce — actual
sales transactions over the Internet, involving either
business-to-business (B2B) or business-to-consumer
(B2C) transactions.
The term “e-manufacturing” also was explained
as the use of electronic methods, especially the Internet,
to transform the way manufacturing sources, builds,
and delivers products and interacts with its customers.
Some examples of Internet applications that were dis-
cussed at Supply-Chain World North America 2000 are
as follows:
Transistor manufacture r. One of the world’s
The goal is to l a rgest global electronics companies is applying an
maintain on-time Internet-based software program for dynamic modeling
sourcing deliveries and simulation of supply chains. It is using the system
to support supply-chain decisions for thin-film transis-
across varying tor (TFT) production in Asia. Specifically, the company
demands, as well is modeling and simulating alternative material-flow
as lowering configurations and inventory policies. The goal is to
inventory costs maintain on-time sourcing deliveries across vary i n g
throughout the demands, as well as lowering inventory costs through-
out the supply chain.
supply chain.
Virtual manufacturer. This company provides a
look at the “next generation” of manufacturing, or vir-
tual manufacturing. It is not a contract manufacturer
in the traditional sense, because it owns no plant and
equipment. Typical contract manufacturers owning
such assets provide contract services within the scope of
their fixed resources. This provider operates under no
such limitations, but through its web-based activities,
identifies the manufacturing expertise and solutions
required for particular projects, essentially anywhere in
the world.
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In one recent instance, a major manufacturer of
eyeglasses and eye care products had to develop and pro-
duce a low-cost eye lens replacement system. The prod-
uct would provide surgeons with greater surgical accura-
cy and reduce patient trauma. The unique requirement
was beyond the client’s core competency. Through its
web-based collaboration capability, the virtual manufac-
turer was able to identify a high-quality, low-cost source
to do the job, in this case a plant located in Taiwan.
D i s t r i b u t o r. One large distributor of electro n i c
components and computer products is taking the lead in
helping high-tech manufacturers apply digital solutions
to their supply-chain processes. It operates four primary
U.S. distribution centers, and carries 300,000 part num-
bers. Over its website, it provides 24-hour access to its
entire inventory and pipeline, and also enables enter-
prise-to-enterprise requirements management.
The company is also a participant in the RosettaNet
initiative, which some are calling the next generation
EDI. RosettaNet is a consortium of electronic industry
organizations dedicated to developing a common proto-
col for Internet-based transactions. The goal is to provide
a common language, globally, for part n e r- t o - p a rt n e r
interface processes. Completion of the RosettaNet initia-
tive will provide a quantum leap for global e-business.
Chip maker. Another electronics manufacturer is
c a rrying e-business and e-commerce concepts to new
heights in other ways. That company’s vision for supply-
chain management leadership is: 1) operate the right
multiple supply chain driven by business needs, 2) exe-
cute each chain as a single, virtual enterprise enabled by
the Internet, and 3) give the supply chain a competitive
advantage in all its marketplaces for the future.
Last year, the company’s e-commerce re v e n u e s
amounted to one-third of its total annual revenues. The
number continues to grow rapidly, and is spread out
internationally.
On the supply side, e-business with the company’s
suppliers is also growing rapidly. In 1999, just about 50
percent of all supplier interactions were done by e-busi-
ness. The goal for 2001 is for all supplier interactions to
be 100 percent electronic and processed instantly, in
real time.
Putting these developments in perspective, a com-
pany representative noted, “We are moving towards a
world of a billion connected computers and a trillion
connected dollars.”
Those words are supported by growth figures and
projections for e-commerce, as depicted in Figure 5. In
1998, total U.S. sales over the Internet were an estimated
$51 billion. By 2003, the figure is projected to be $1.4
trillion (business-to-business alone comprising $1.3 tril-
lion of that total). Globally, e-commerce sales are
expected to reach $3.2 trillion by 2003. This truly revolu-
tionary trend, combined with the ongoing supply-chain
revolution, promises to radically transform the way busi-
ness and commerce are conducted in a few short years.
1. Version 3.1 of SCOR, available to Supply Chain Council mem-
bers, was announced in April 2000, and Version 4.0 was planned
for later 2000 release.
Ray Kulwiec is a writer specializing in material handling and
manufacturing topics. Based in Arlington Heights, IL, he has cov-
ered the field of material handling for many years as an editor,
and has served on the board of directors of the Materials Handling
& Management Society. Kulwiec has also been a member of the
College-Industry Council on Material Handling Education. He is
on the board of trustees for the Material Handling Institute.
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Additional Resources
Layton, Mark, “.coms or .bombs ... strategies for profit in e-business,” Plano,
TX, Profits in e- Business, LLC, 1999.
Maloney, David, “For this supply chain — one DC is better than five,” Modern
Materials Handling, July 1999, p.38.
Tompkins, James A., Bernie Knill, and Tom Andel, “Time to rise above supply
chain management,” Material Handling Engineering, Supply Chain Flow Sup-
plement, August 1998.
Layton, Mark, “Making profits in e-Business? What a concept!,” The Power of
Change, IBM Global Supply Chain Executive Conference, January 17-20,
1999, The Peabody Orlando & Omni Rosen Hotel, Orlando, FL.
Tompkins, James A., “Beyond Supply Chain Management,” Technical Pro-
ceedings, The International Warehouse of the Future Conference on Innova-
tive Technologies in Warehousing and Distribution, June 15-17, 1998,
Phoenix Civic Plaza, Phoenix, AZ. Distribution, Business Management Associ-
ation, Lancaster, PA.
Tompkins, James A., No Boundaries — Moving Beyond Supply Chain Man-
agement, Tompkins Press, Raleigh, NC, 2000.
Proceedings, Supply Chain World Conference, April 10-12, 2000, Hyatt
Regency O’Hare, Rosemont, IL, Supply-Chain Council, Pittsburgh, www.sup-
ply-chain.org
http://www.daisytek.com
http://www.pfsweb.com
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