VHSP

www.vhsp.com.au

Executive Summary

VHSP is one of Australia's largest exporters of salted cattle hides.  The company treats cattle hides to a semi-processed stage where they can then be converted to leather goods such as shoes and car seats.   VHSP is based in Laverton North, VIC and currently employs 120 staff.

The first stage of the e-commerce operation was initiated in 1984 by Executive Chairman, Allan Rich.   Internet technology was identified as a suitable means of collecting data to gain greater insight into customer demand as well as the quality of hides available on the market, whilst automation of the inventory management system was envisaged as a possible solution for improving the manufacturing efficiency.

The automated inventory management system is now the core feature of VHSP's online system.  Once a grader has assessed hide quality, entry of the data into the system enables automatic allocation to the appropriate pallet.  Staff are notified once the pallet is full and can manage the manufacturing schedule accordingly.  As a result, the incidences of stock outages and administration errors have been significantly reduced.

The e-commerce initiative has contributed $450,000 to gross profit in 2001 due to increased sales.  Additional benefits from the online system have been realised in the form of cost savings in inventory, staff requirements and communications.  Overall, VHSP has achieved a net operating benefit from e-commerce of $598,055 in 2001.

The Business

Established in 1966, VHSP is one of Australia's major exporters of salted cattle hides.  The company has established strategic relationships with meatworks businesses to process, market and promote supplier hide brands to international markets.  VHSP has received several state and federal awards for its exporting activities.

VHSP is based in Laverton North, VIC and currently employs 120 staff.

Getting Started

Executive Chairman, Allan Rich initiated e-commerce in 1984 with the establishment of a hide database detailing supplier information and current market conditions.  Internet technology was identified as a suitable means of collecting data to gain greater insight into customer demand and profitability margins as well as the quality of hides available on the market.  In addition, a customised inventory management system has been developed to improve the efficiency in which hides are graded and stored.

Research into suitable Internet technologies was conducted online.  Staff also spent time talking to computer experts to identify possible applications for the proposed system.

Inventory Management

For a manufacturer, an effective inventory management system is critical to ensure that the company can quickly adapt to fluctuations in the business environment.  Automated inventory systems provide businesses with greater visibility of purchasing and demand across the supply chain.  Accuracy in pricing, purchasing and schedule control ensure that incidences of stock outages and excess holdings are reduced.

Over the past three years, VHSP have implemented a customised inventory management system, whereby the grader assesses the grade of hide and enters the assessment into the system.  This contains parameters of hide quality and can identify which pallet the hide should be sent to.  Staff are then notified when that pallet is full and can schedule production accordingly.

VHSP also use an automated purchasing system through a link with their chemical suppliers.  When chemical containers fall to a certain level, an instruction is automatically triggered and sent to chemical suppliers notifying the need for reorder and delivery.

Current E-commerce Strategy

The electronic hide assessment system is a key component of VHSP's electronic system.  Once hides are assessed for quality and a grade entered into the system, this data can then be collected and analysed to assess supply trends compared to customer demand.  Suppliers can then be informed of VHSP's requirements, for example, farmers can be provided with data identifying the size and weight details of popular hide so that breeding and treatment of animals can be adjusted accordingly.

A website has also been developed to promote the business and provide information on company history, manufacturing processes, products and contact details.  Taking into account the company's large export market, the website is particularly convenient for overseas customers to obtain information or submit an inquiry despite time zone and geographical barriers.  Staff in off-site locations also access the website in order to log in to the internal network.

Company staff use the Internet to kept abreast of emerging technologies in product manufacturing and processing.  Online research allows staff to assess how technologies adopted by peers could improve VHSP's own manufacturing processes.  Access to online statistics and industry demographic data provides the means to analyse regional demand, customer purchasing patterns and assess pricing.  VHSP also participates in online auctions for the purchase of chemicals.

Many administrative transactions are now conducted online.  This includes banking, payments to suppliers and payroll.  For everyday correspondence, email has replaced phone and fax as the main form of communication, especially with overseas customers.  The company has also installed an electronic facsimile feature whereby all faxes come through the computer rather than through a fax machine.

VHSP has implemented several security features to protect its online systems.  These include firewall technology, anti-virus software and password access to the network.  In addition to physical security of hardware, business data is backed up on a daily basis with a tape stored offsite.

Revenue and Costs

* Note: Capital Expenditure is amortised over a 4-year period

Financial Analysis

Additional revenue generated from the e-commerce applications contributed $450,000 to gross profit in 2001.  This was mainly due to customers having found the business through its website.

Additional benefits derived from the e-commerce initiative were realised in the form of cost savings, which totalled $442,000 in 2001.  Automatic measuring of hides in pallets has reduced staff time spent correcting assessment errors ($200,000) and significantly enhanced overall staff efficiency for assessment, purchasing and accounts processes ($150,000).  The electronic inventory management system has resulted in more accurate purchasing procedures, leading to a reduction in the level of chemical stock ($7,000). 

Development of the website and use of email as the predominant form of communication has reduced the volume of paper correspondence and marketing material, particularly with overseas customers.  This has resulted in decreased postage/freight ($10,000), photocopying ($15,000), travel ($20,000) and telecommunication costs ($5,000).

VHSP invested $274,180 into establishing the online systems.  Staff time allocated to researching possible applications amounted to $30,000.  The majority of establishment costs were incurred in purchasing hardware to form the network including computers ($9,000), backup servers ($10,000) and office equipment ($5,000).  Other costs were incurred in staff time to implement the technology solutions such as system design ($30,000), maintenance ($40,000) and integration of databases ($10,000).

To establish the electronic hide measuring system, consultants were commissioned to design the hide database ($30,000) and develop electronic hide measurement parameters ($30,000).  Purchase of hide measuring hardware incurred $30,000.

Ongoing costs totalled $293,945 in 2001.  The majority of this figure was associated with supporting the network including system maintenance ($50,000), system administration ($20,000) and ongoing software development ($60,000).   Fees were also incurred for software licences ($25,000), the Internet service provider ($14,400) and for infrastructure financing ($36,000).  In addition, $68,545 was allocated to the amortisation of capital expenditure over a four-year period.

Non-financial Benefits

The online system has achieved several qualitative benefits for VHSP. By automating the inventory management system, VHSP now have greater visibility across the supply chain of customer demand and the company's purchasing needs.  The upgrade to automated hide assessments and monitoring of stock levels has simplified inventory management and improved staff productivity.  In addition, automation has reduced the incidences of stock outs of chemicals required for the manufacturing process and subsequently stock outs of hide to meet customer demand.  These manufacturing efficiencies make a positive contribution towards VHSP's reputation for excellent service delivery.

Use of the electronic grading system has also provided VHSP with the means of analysing data in order to identify new areas of product improvement and application.  This is an important function for developing new business and expanding the current customer market.

Challenges

Due to the use of corrosive chemicals in the manufacturing process, VHSP originally encountered some difficulties with the physical location of network hardware.  This was overcome through re-design of the layout of the plant, standardisation of equipment and commission of Information Technology consultants for advice.  The company also faced staff resistance to the automated system, however this was resolved through education and training.

Future

In the near future, VHSP plan to implement the use of hand held computers containing occupational health and safety training programs.  These e-learning devices would be used to train staff on the factory floor.

Allan's advice to those businesses considering an e-commerce application is to ensure that business requirements are understood.  He believes it is also important to identify the objective to be achieved before investing in new technology.