The Trend

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The Supply Chain Implementation Series, Guide #1: Using Industry-Compliant Bar Codes

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The Trend: What and Why

The trend that we will explain involves the use of U.P.C. product identification. Over the past few years, distributors and retailers in a number of supply chains have begun requiring suppliers to assign U.P.C. numbers to all levels of packaging and to apply scannable bar codes.

Suppliers are asked to “comply” with company or industry standards or “conform” to industry practices. This is why action-oriented programs are sometimes called “U.P.C. Compliance Programs.”

The reasons for the use of bar code and U.P.C. numbers for product identification as a simple, reliable way to get the number into a computer are straightforward. Companies all along the supply chain need to validate receipts, count inventory and verify that shipped or sold products were priced correctly and deducted from inventory. Furthermore, many companies want to automate the ordering and payment process. Whether a company uses traditional EDI or Internet-enabled electronic catalogs, computer systems and networks work best when simple U.P.C. numbers are used. The best way to record what was sold is to use fast, accurate bar code readers. The number in the bar code is used to look up the right price and reduce the inventory balance. An electronic order can then be sent using the same U.P.C. number. No chance for error. No time lag to update sales or inventory information.

The ability for the supplier to get the information from the wholesaler or retailer at the moment of sale holds a great deal of value. Today, no one wants to hold large inventory or stock that may become obsolete. Sales information reported in “real time” is used to establish manufacturing schedules and/or to determine when to send replenishment orders. The real time information about consumption eliminates bad forecasts that can result in making unnecessary stock. This information is inexpensive to obtain and transmit over the Internet. It allows the vendor to manage the inventory in the supply chain. This is sometimes called Vendor Managed Inventory (VMI). VMI enables a great deal of merchandise to be moved through K-Mart, Wal-Mart, and The Home Depot, to name a few. If you haven’t seen this VMI trend in your supply chain, you probably will.

This trend is driven by the fact that the bar code and the number it represents “enable” all kinds of systems to work. The use of U.P.C. is not just for the distributor or retail store downstream. Customers want their supplier to apply the bar codes and use them. Customers would like suppliers to verify that the item shipped is the item that was ordered. When the wrong thing is shipped, the cost of labor necessary to correct errors robs profits from a customer. One study showed that these errors cost a downstream company $50 each. Many companies need to sell another $1,000 dollars worth of product to make back the profit that they lost because of the supplier’s error. The same study showed that the supplier also suffered about $75 in costs. That means that the manufacturer, in some cases, needs to sell another $1,500 to make back the loss resulting from the error. In this scenario, we see one shipment out, one back, and another out … but no profit yet. In fact, we see a need to sell more to cover the cost of mistakes that could be avoided.

In this scenario, we see one shipment out,

one back and another out …

but no profit yet.

Any company trying to control inventory and reduce stock levels must know that the item received is exactly what was ordered. It must know that it shipped exactly what its customer ordered. It must have 99.9% inventory accuracy in products and transactions. This should not be confused with 99.9% inventory accuracy in dollar value. A company cannot attain that accuracy without the use of bar codes.

In summary, the trend is gaining popularity because it enables the reduction of overhead for all those in the channel: the manufacturer, the distributor, and the retailer. It reduces the possibility of misidentification and re-handling, and it enables electronic ordering and payment along with the ability to obtain up-to-the-minute sales data. Some may not wish to use all the information or even know how to use it but their competitors just might!

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