Supply Chain Holy Grail
Since the explosion of e-commerce, supply chain professionals have been theorizing about a Holy Grail. Like the knights of Arthurian legends, supply chain software providers have been searching for a mythical system that will seamlessly link the entire supply chain. Many think wide use of these systems are only a few years away, as companies such as Dell, John Deere, and Pitney Bowes are finding ways to connect with their downstream suppliers through Internet tools such as i2's Five.Two and Eventra's Vendorsite.
The questions facing sales forces are, what impact the Holy Grail will have on the way they conduct business, and what changes will they be forced to make to compete in the new Internet age?
The Holy Grail
Beginning in the late 1990s and continuing through today, tools such as public exchanges, auctions and online catalogs have received most of the e-commerce attention. In the background however, supply chain professionals were whispering about the true value of the B2B Internet revolution. The Holy Grail of supply chain management is an integrated supply network where each member of the supply chain has complete visibility into the other member's production schedules and requirements--taking the benefits of ERP and MRP systems and expanding them beyond the walls of the organization.
Orders would flow seamlessly and electronically from end customers to distributors to manufacturers and component suppliers all the way to raw material suppliers (see diagram). Partners at every stage in the supply chain would collaborate on product engineering and new product design.
While disparate systems and the prohibitive costs of electronic data interchange (EDI) made this an unrealistic vision in the past, the rapid adoption of extensible markup language (XML) has turned this vision into a near-reality. A new breed of middleware providers have made it possible for small and medium-size companies to connect to the existing EDI systems of their large supply chain partners, making integration much easier than in the past.
One outcome of this supply chain integration will be the elimination of the Whiplash Effect. The Whiplash Effect states that as one moves up the supply chain, information becomes less perfect, and the degree of variance within an inventory system must increase to compensate for the information gaps. Imperfect information increases the variance of sales forecasts, which impacts production planning. The ultimate result is an ineffective and costly supply chain. By eliminating the Whiplash Effect, the Holy Grail will allow sales and operations to more accurately predict sales cycles, decrease lead times, and streamline manufacturing processes.
A second outcome will be increased interaction between large manufacturers and their second- and third-tier suppliers. As manufacturers interact more closely with upstream suppliers, they will play a greater role in the selection and measurement of those suppliers. In many cases the manufacturers will attempt to consolidate the common purchases of many of their smaller suppliers in order to leverage the volume and drive cost reductions upstream in the supply chain. This will lead to an increased number of private exchanges and trading consortiums. Many upstream suppliers will find themselves selling to their customers' customers and dealing with a new set of technology requirements.
Impact on Sales Forces
So what does the Holy Grail mean for sales forces? Quite simply the stakes will be much higher. Organizations will increasingly aggregate spending and conduct large global sourcing projects. The focus of these efforts will be reducing the overall cost structure of the supply chain. Personal relationships and individual responsiveness will give way to organizational efficiencies and companies will be judged on formal quantitative performance metrics. Companies such as Cherry Corporation, which provides user interface modules and switches to the automotive and office equipment industries, have already seen this occur. As Bob Terwall, president of Cherry Electrical Products (a division of Cherry Corporation), states, "We have been approached by many of our largest customers to be part of private trading exchanges, strategic sourcing initiatives, and other multicompany alliances. Most are in their infancy, but we expect the trend to continue to grow the size and importance of contract awards."
The face of the customer will also change. Small regional manufacturer relationships will give way to large private exchanges governed by major manufacturing companies. The focus will shift to national sales relationships, managed and monitored by large customer teams often consisting of representatives from multiple organizations. "Often the trickiest part of doing business in these multi-firm organizations is the formal processes that the governance models dictate," says Ray Hill, chief procurement officer at Pitney Bowes. "The traditional view of relationship building, sitting courtside at the Knick's game with a single customer, has gone out the window. Today's relationships will be primarily driven by the quality of the supplier's response in terms of service and total cost throughout the supply chain."
Information flow will increase in speed and complexity. The days of faxing orders and responding through mail are over. ERP, SRM, and CRM modules are being linked within organizations and will continue to be linked throughout the supply chain. Companies will be expected to participate in this technology movement and integration of systems will be as important as price (well almost).
How Do Sales Forces Prepare to Respond?
The interesting paradigm that e-commerce has introduced to the business world is as the power of technology and information increases, the more strategies must become grounded in basic business fundamentals. E-commerce has increased the velocity and volatility of business so that if a company loses focus of these fundamentals it will quickly find itself on the brink of extinction. Companies will no longer have years to respond to market changes but rather months and even weeks. Business will trend towards the market conditions seen in the high tech computer industry where products are revolutionized every six months and the company on top can quickly be on the verge of bankruptcy. To avoid extinction and respond effectively to the changing business environment brought forth by the Holy Grail, sales forces must proactively plan strategies that align with the basic business needs of their customers and immediately adjust these strategies as the customer's needs change.
First and foremost, sales forces must understand the nature of their customer's business and the value they bring to their customer and their customer's customer. More than ever companies will be required to customize products, focus on business solutions, and sell to customer needs rather than pushing standard product. The issue will be that customers will not always know what they want, as they are being forced to conduct the same investigation into their customers. Companies will be required to take ideas and quickly transform them into reality. The depth and speed of the solutions companies can bring their customers will eventually define relationships. For this transformation to take place within a sales organization there are a few things that must happen:
1 Companies will be forced to understand their position in the marketplace as well as in their customer's supply channels. Market channels will no longer be linear but rather a complete interlocking web of companies that make up the ultimate end user's supply network. Companies will no longer compete for business only from their current customers, but from multiple companies within the entire supply web.
2 Segmenting the entire supply chain and creating market strategies will not be enough. Companies will need to understand and respond to the needs of their customer's supply chain. Customer focus groups will expand to include customer's customers, other component manufacturers, and even raw material suppliers. The view of joint engineering that involved engineers from suppliers and customers working in isolation will evolve into meetings with participants from across the supply web. New product development will become collaborative across multiple levels of the supply chain and historically unrelated companies will work together in transforming ideas into action.
3 Companies will be forced to differentiate themselves on the value they bring to the overall supply web. For many companies this will be a difficult transition. For years they have been selling their product and company's services but not the value they can provide.
4 Selling will continue to move from individual sales calls to cross-functional team--based selling. The team dynamic will be more important as customers will base decisions on total cost impact rather than lowest price. Often these cost impacts will be unique to the supply chain and include inventory management programs, systems compatibility, design resources, engineering support, and operational efficiencies. Sales representatives will be called on to produce solutions to business problems and will need the support of their entire organization, sometimes even their supplier's organization. The result being that supply chains would compete as virtual vertically integrated companies with the flexibility to immediately replace slow moving or obsolete parts.
New Technology Requirements
Sales organizations will also be expected to respond to the technology requirements of the new integrated supply chains. Often this will mean interfacing with the technology dictated by public or private exchanges. Flexibility of CRM modules will be tested and some components will become obsolete.
Most of today's CRM packages are designed to facilitate the relationship between a supplier's sales force and the buyers from their direct customers. The best tools available today are those that pull information from both the buyer and seller's systems and make it available to the sales force. But knowing that with the realization of the Holy Grail sales forces will increasingly have to sell to their customer's customers, are these systems ready to incorporate information from them as well? The answer in most cases is no.
With XML making real-time data more available throughout the supply chain, from your customer's customers and your supplier's suppliers, CRM providers will be asked to address two key issues. First, are they equipped to handle the new information that is available? In the past CRM tools did not need to incorporate data such as inventory levels, because this information often wasn't available in the back-end system to begin with. Now that the information is becoming more available throughout the supply chain, CRM tools must begin capturing this information.
The second issue is synchronization. One of the most powerful innovations in CRM software has been the ability to take advantage of mobile devices such as PDAs to put information at the sales forces' fingertips while in the field. Most mobile CRM tools in existence today use daily synchronization to keep information up to date, which is sufficient for things like contact information and price lists. However, as supply chain integration makes information such as real-time inventory availability and order status more available on the back-end, real-time wireless connectivity with CRM tools becomes necessary. This is an issue that must be addressed on both a software and hardware front.
How Close is the Holy Grail to Reality?
Most experts believe that the first fully integrated supply chains are probably at least a few years away. Software providers are integrating purchasing, operations, and sales within organizational walls and information is slowly connecting to supplier and customer organizations. Online exchanges are only in their infancy and many of the business rules and partnerships are still being formed. The process has been stunted to some degree due to the recent economic situation and the dot.com collapse.
Although the Holy Grail has been slow in coming, it is coming. The dawn of XML and the development of industry-wide standards for data interchange have put the Holy Grail within reach. Companies such as Dell, John Deere, and Pitney Bowes are already using this technology to connect with their upstream suppliers and influencing the sourcing decisions of their direct suppliers. Likewise, within consumer products, examples of component suppliers marketing downstream to the end customer are evident everyday. Intel, for example, markets its chips to home computer buyers who in turn demand that the computers they buy contain those chips. And in highly engineered products, large manufacturers have started dictating, and in some cases purchasing, raw materials for their component suppliers. Only those sales forces that best adapt to selling downstream will be successful in this new environment.
The positive aspect of the development of the Holy Grail is that sales forces have time to prepare. Companies that take proactive steps will have a competitive advantage when the supply chain becomes the supply web.