How would you like to streamline the relationship between your business and the manufacturers/suppliers you work with? A new study examines the partnership between creator and wholesaler, and proposes methods to facilitate a supply chain process that is more efficient and affordable for all.

How would you like to streamline the relationship between your business and the manufacturers/suppliers you work with?

A new study unveiled at Heating, Air-conditioning, and Refrigeration Distributors International's (HARDI) Annual Conference examines the partnership between creator and wholesaler, and proposes methods to facilitate a supply chain process that is more efficient and affordable for all.

STUDY SESSION

HARDI's Management Methods Committee began searching for a way to quantify the relationship between its distributor members and the manufacturers and suppliers providing the equipment.

Bethany L. Sullivan, of Profitability Analytics Unlimited, suggested HARDI consider using a Supply Chain Scorecard. The scorecard provides a study of metrics that helps define the successful relationship between manufacturer and distributor. The scorecard allows each party to rate each other's performance based on objective measures.

"A supply chain scorecard with objective measures can create a sustainable competitive edge for the HVACR distribution channel," said Sullivan. "It provides a common framework to drive process efficiencies throughout the channel, improve channel performance, and reduce costs for all parties involved."

In 2007, HARDI's Control Council identified a list of potential topics best suited for evaluation and created a vendor survey of subjective measures.

"Just because something can be measured doesn't necessarily mean it should be measured," she said. "Yet, when the right measures are used regularly, they can allow for the improvement of service levels and the identification of new areas of value."

Sullivan's main objective at HARDI's 2012 annual conference was to meet with the organization's Management Methods Committee to discuss the first step: forming an industry vocabulary of recommended definitions of objective measures of supply chain performance.

"A vendor scorecard turns general conversations into specific business discussions on improvement," she said. "It fosters an open dialogue between distributors and suppliers for the communication of key metrics and goals, while driving efficiencies to the bottom line. Furthermore, the use of industry-wide definitions focuses conversations on improvement, rather than discussions on how a particular measure was calculated."

VENDOR REVIEW TOOL

Since 2007, HARDI has used its Vendor Review Tool (VRT) to review the manufacturer-distributor relationship.

The VRT was first implemented in 2007, offering distributors the opportunity to grade their supply chain relationships through a subjective rating system. Each distributor may grade its business relationships from "poor" to "excellent" across 13 categories including: culture, philosophy, and communications; personnel; products; administration; purchase order entry; scheduling and expediting; shipping and invoicing; pricing policies; terms and minimum order requirements; inventory policies; product warranty; training; and telephone or hotline support.

"Objectively, you can measure product quality through parts per million that were rejected," she said. "For example, there are so many mechanical parts in an HVAC unit. The box may look beautiful, but you take it out of the box and it doesn't work because it's been shaken while in transit, or another mechanical failure."

Daniel Miller, chief operating officer, Dakota Supply Group, Fargo, N.D., serves as the chairman of HARDI's Management Methods Committee. He said the addition of objective measurements will help distributors better define and value their business partnerships.

"Using our scorecards, we can objectively measure how many times we put a bid out on a certain project and compare that to how many times we won," he said. "Additionally, we can look at how active we are with the product and whether or not we are successfully moving the products off the shelves. This helps answer the question, 'what can we do together to produce a change that benefits everyone involved?'"

A STANDARDIZED SOLUTION

Throughout the industry, manufacturers and distributors are grading each other based on their own performance scale and expectations. One distributor may award a vendor an A grade, while a similar distributor may award an F grade for the same performance.

Sullivan said it is imperative that participants draft definitions that clearly identify the industry's most commonly used terms.

"Standardized definitions come first; then, each company can use those definitions to customize a scorecard that fits what their company wants to achieve strategically and philosophically."

Members of the National Association of Electrical Distributors (NAED) have successfully used the scorecard to define terms such as business alignment, freight efficiency, return of authorized goods cycle time, and others.

At the annual conference, Sullivan suggested HARDI members consider defining dozens of terms, including fill rate, lead time, overstock inventory, and product quality.

Proposed definitions would be subject to a 60-day commentary period by HARDI members.

Miller, whose Dakota Supply Group also distributes plumbing and electrical parts, is a member of the NAED. Over the last three years, he has successfully used the Supply Chain Scorecard to continually improve his relationship with his electrical suppliers.

"The key is to have objective measures that both the manufacturer and distributor can agree upon," he said. "Firm definitions help form a framework that allows manufacturers and distributors to clearly define how business is being done and how it can be improved upon."

Miller called this data imperative.

"Without these types of measures, a distributor and manufacturer will sit across the table from one another, but will not have directional information on how to make educated decisions on how to make their partnership evolve."

A HISTORY OF SUCCESS

Seven years ago, Sullivan facilitated a similar project with the NAED.

In 2010, the NAED's supplier partners decided to update their scorecard. In response, a task force of distributors has worked most of 2012 adding best practices and simplifying the scorecard to make it easier for distributors to use.

Sullivan referenced several success stories including the chronicles of one supplier who focused exclusively on electronic ordering, online usage, and electronic data interchange (EDI). The supplier now saves millions of dollars annually. The effort was so successful that four of the individuals working on the project received global recognition.

If the project moves ahead, HARDI distributors could benefit from a much quicker turn around than previous industries due to a time-tested scorecard already in use across numerous distribution channels.

"We surveyed 448 HARDI members earlier this year, and 63.5 percent were receptive to some sort of formal evaluation process," she said.

Sullivan said a performance measuring tool complete with an objective rating system, created specifically for HARDI members, along with a glossary of definitions to be utilized industry-wide, will certainly prove beneficial for the HVAC distribution sector.

"The ultimate goal of the study is to improve communications between distributors and manufacturers," she said. "A scorecard can help identify both positive and negative characteristics across the supply chain, and serve as a facilitator for improvement."