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The New e-Supply Chain
A look at the online supply chain of the future and how you can prepare for it.
Posted Sep 1, 2000
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The supply chain is being born again.

In another era, one that ended only a year or so ago, the term supply chain conjured up images of manufacturing shop floors, dusty warehouse shelves and cross-country trucking lines. Technology was nowhere to be found. Not anymore. While all those components are still key elements of any supply-chain system worth its salt, the next-generation of these bastions of the old-world is taking the whole concept to new and unimagined heights. To speak theoretically for a moment, supply chains of the future will, for example, facilitate the exchange of information about inventory levels, available shippers and time to product delivery in real time over the Internet. They will allow collaboration also in real time, so companies can use the information produced by their supply chains to make their businesses even more efficient, all the way down to product design, again using the Internet as the communications backbone.

Looking even further out, the back-end systems that comprise supply chains will eventually slam up against what have traditionally been considered front-office applications, like customer relationship management. The result will be what some industry observers have called a supply web, which simply means the line from supplier to manufacturer to customer is no longer straight and asymmetrical. Instead, the parts are interconnected with information flowing back and forth bidirectionally, making all parties happy, as well as keeping profits high and products flowing efficiently.

Moving to the real world, leading-edge companies like Dell, with its made-to-order product operations, Cisco, with its internal B2B procurement and supplier network, and Intel, with its supplier collaboration systems, are coming extremely close to mastering these concepts today. Cisco, for example, conducts 80 percent of its supplier sales transaction over the Internet, and Dell has consistently experienced phenomenal growth, having posted a 38 percent increase in revenues to $25.3 billion last fiscal year, despite last quarter's lackluster numbers.

But these companies are the early birds. The real impact of supply chain reengineering is yet to come and will be measured in the amount of transactions conducted over the Internet using electronic systems. New York-based Merrill Lynch predicts that worldwide B2B e-commerce sales will hit $2.5 billion by 2003. AMR Research, a Boston-based research and consulting firm, is even more aggressive, having recently estimated that B2B e-commerce sales will reach $5.7 trillion by 2004. Analysts there have also not-so-subtly made the point that any company interested in getting in on the e-action must improve its internal supply-chain management practices.

"Companies are no longer competing so much on their products as on their supply chains," says Chris Newton, a supply chain analyst with AMR Research. "The goal is to link your internal operations with your suppliers, logistics providers and even customers, so that you can share as much information as possible as quickly as possible."

Though the hype surrounding supply-chain management and reengineering is growing in volume each day, the truth is, lots of companies are nowhere near being ready to put the kind of system in place that Newton has described, much as they may want to. According to Paul Albright, president of SeeCommerce, a supply-chain management software provider whose customers include such blue-chips as DaimlerChrysler, Nestle, Pfizer and Polaroid, an astounding number of businesses are still in the supply-chain stone Age.

"Overall, the market is at a prehistoric level," says Albright. "Most companies are still using lots of manual processes throughout their supply chains, and you also have lots of situations where business managers and IT departments aren't speaking the same language in terms of moving things forward there."

This is good news if yours is one of the companies that hasn't yet addressed ways in which your supply chain needs to be revamped for the Internet age. Now, however, is the time to move. And, thankfully, enough businesses have already dared explore the territory that a series of proven strategic steps has emerged that are certain to effectively pull supply chains from the old world to the new economy.

Take a Lesson
The first, and perhaps the most important, step is to build a team of people dedicated to developing an e-business strategy as it pertains to the back-end systems and operations that power the organization's supply chain. According to AMR Research, some 94 percent of all U.S. manufacturers have already appointed a dedicated e-business manager, and the rest are sure to follow.

It's also essential, however, to examine what other organizations, both inside and outside of your industry, have done in this area as the strategy is being developed. Much can be learned from the successes and failures of others. The automotive industry, for instance (see case study, this issue), provides ample examples of both. Its first real attempt at an industry-wide supply-chain initiative was the Automotive Network Exchange, or ANX, which was conceived by the Big Three and sponsored by the Automotive Industry Action Group (AIAG) in the mid 1990s.

The idea behind the ANX, which went live nearly two years ago, was to streamline portions of the auto industry's supply chain by allowing parts suppliers to execute trades over the ANX network, a private IP-based network, without having to use more expensive Electronic Data Interchange (EDI) systems. The promise of the initiative was high. However, it was slow to get off the ground and was immediately criticized for being too expensive and complicated to implement from both a network provider and supplier standpoint. At the end of last year, Science Applications International Corporation purchased the whole shebang from the AIAG, which at that time had only 250 of some 10,000 North American automotive suppliers signed up.

The Big Three has since countered with high-profile plans for an online auto industry exchange that is currently referred to as Newco, though it does not yet have an official name. And if recent news is any indication, this project will benefit from some lessons learned from the ANX. First off, the exchange will be completely Internet-based, requiring nothing more of suppliers than an Internet connection and a browser. And second, suppliers are playing an active role in its planning and creation.

"We're doing this [creating Newco] to some degree for the suppliers, so they can all work on the same standard," says Peter Weiss, a co-CEO of Newco. "But we also want to use this to get all the tiers of suppliers connected, so we that have complete communication and connectivity throughout the industry's supply chain."

Once you have carefully studied what works and what doesn't, it's time to tackle internal systems. A new-age supply chain must allow for the exchange of real-time information, and this requires integration across the "information stove pipes" found in many organizations. Business A, for example, may have an ERP system in place for handling transactions and financials, as well as warehouse management software, supply-chain planning and management tools and even forecasting an analysis package in place. Figuring out a way to make those various systems communicate effectively is a challenging but necessary part of this process. For now, this is being accomplished with standards like XML and enterprise application integration software from companies like Active Software, now owned by WebMethods, and CrossWorlds Software.

And though it may seem counterintuitive, do some research on cutting-edge vendors in the supply-chain management space and ask them for an assessment. As AMR's Newton points out, many of those companies, though small, are several years ahead of the market. They can offer the futuristic perspective businesses need in creating what is essentially a giant unknown--a new-age supply chain for a B2B world.

"Everyone is experimenting with these B2B models because it's so new," says AMR Research's Newton. "That also means you want a vendor that's growing and looking to the future--lots of companies are looking to the vendors for a vision."

Marketplace Mayhem
Lastly, don't confuse supply-chain management with e-marketplaces. The two are intimately intertwined to be sure and indeed may be interchangeable terms some day. However, getting your company's internal house in order has to be your first priority, before concerning yourself with which B2B e-marketplace to participate in. Besides, you may end up creating your own version of an e-marketplace as you tie both the internal and external members of your supply chain together.

Office furniture manufacturer Herman Miller, for example, did this when it created a supply-chain portal that gave its more than 500 parts suppliers access to its internal systems. This strategy helped Herman Miller build and deliver products to its customers much more efficiently, because it was able to get real-time information directly from its suppliers about parts availability. Also, the portal was just one of several solutions the company had been putting in place during the last five years to revamp its back-end operations. Lately, the company's hard work has been paying off. For the third quarter of fiscal year 2000, it reported a 20.1 percent increase in new orders to $463.3 million, compared with the same period last year, and net sales increased 13.4 percent to $478.2 million, also during the same period.

"We're encouraged by the improvement, but Herman Miller's greater opportunity lies ahead," says Mike Volkema, Herman Miller's CEO. "We believe the strength of new products coming to market, coupled with our investments in enterprise technology and operations, have the potential to create dramatic new value."

By opening its systems, Herman Miller hasn't lost business but allowed it to flourish, a phenomena that Shai Agassi, president of TopTier Software, whose packages Herman Miller is using in its supply-chain portal, has seen again and again. "Companies are now opening up what used to be the hidden assets to their suppliers," says Agassi. "These improvements in information are helping to create value for businesses and an almost instant ROI."

Though tackling the complex personal and technological relationships that make up an organization's supply chain may seem daunting, it is both doable and necessary. Supply-chain innovations and efficiencies are what will separate the winners from the losers in the budding century. Being counted in the "w" column means taking those first difficult steps toward a new, interconnected way of doing business.

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