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E-business Transformation in the Manufacturing Industry

A Position Paper for The Manufacturing Institute

by

Frank Jones
Vice President, Integrated Supply Chain
Corporate Technology & Manufacturing Staff
IBM Corporation

It's called "e-business," and it’s a phrase seen and heard many times everyday: in the general, financial and industry press, in in-flight magazines, on radio and TV and, of course, in board rooms, conference rooms, factories and business offices around the world.

For companies across the nation and around the world, e-business has become "the next big thing." And senior business executives quickly are learning that regardless of the size of their companies or the industry in which they compete, they must ensure for themselves a working knowledge of e-business: what it is, and what the technological and economic forces are behind the e-business explosion. Armed with this information, they can begin to make reasonable assessments about the value of e-business and how it can be integrated into the strategic future of their companies.

Defining e-business

The most common conception people have of e-business is buying or selling over the Internet. While clearly this is an important part of e-business, it is only one aspect of it, and more appropriately is referred to as "e-commerce." e-business also is more than just having a presence, or Web site, on the Internet, also known as the World Wide Web.

In one sentence, then: e-business is exploiting the combined power of the Internet and information technology to fundamentally transform key business strategies and processes. For manufacturing companies to transform successfully means they will become "digital enterprises" -- using e-business technologies and applications to connect critical business systems directly to key constituencies (customers, employees, suppliers and distributors) via intranets, extranets and the Web.

This succinct e-business definition applies to all businesses, regardless of size, location or industry. Even small manufacturers -- those who have long thought of their marketplace as being "around the corner" -- are fending off competitors from around the world. They quickly are discovering that they cannot remain static and continue to use the traditional business models that have sustained them to date. Remaining viable means transforming the business -- and the business model. And that requires robust, up-to-the-minute information sharing and management processes to keep up with the transformation.

Such new models, systems and processes have been available only for the past few years, as advances in technology finally enabled the merger of computing and communications to create what is often called a networked society. This, in turn, has brought about a revolution that involves nothing less that the rise of a new economy -- a digital economy -- and a new global medium that will be the single most important driver of business, economic and social change.

In the economy of the 21st Century, this new technological structure, and the new business model that it enables, will underpin every nation's ability to drive production, productivity, profitable growth, and ensure the security and prosperity of its citizens. There is a strong correlation between US industry's investments in information technology and the lengthening cycle of economic growth. Federal Reserve Chairman Alan Greenspan recently put it this way: "...the evidence for technology-driven acceleration in productivity is compelling...The breadth of technological advance and its application has engendered a major upward revaluation of business assets, both real and intangible."

While the e-business explosion may be looked on as a matter of survival, it also is a matter of enormous opportunity for businesses, as well as their employees, suppliers and customers. The more fundamental -- the more revolutionary -- and the earlier the implementation of the transformation, the greater the opportunity and potential return.

The technology required to support e-business installations continues to have a price-performance ratio unmatched by any other industry. Power, function, reliability, scalability, availability and quality all continue to improve markedly, while the owner-customer's time-to-value continues to shrink. Further, the technology is becoming increasingly ubiquitous. In 1998, there were an estimated 149 million users of computing devices -- PCs, cell phones, personal digital assistants (PDAs), Web-enabled TVs, etc. By 2003, that number will be 725 million users. And as pervasiveness and "ease of use" improves, many of these people won't even consciously think that they are using a "computer."

And then there are the dollars and cents. Industry analysts estimate that between 1998 and 2003, Internet commerce in general - which barely existed just a few years ago -- will increase at a compound growth rate of 92 percent, from about $50 billion to $1.3 trillion. The business-to-business segment will dwarf the business-to-consumer segment, growing at an 86 percent CGR, from $36 billion in 1998 to more than $1 trillion in 2003. The number of Web users will grow from 142 million to more than 500 million in the same period. But don't hold to these estimates; the analysts revise them upwards almost on a daily basis.

E-business in Action

Before moving into a discussion of the steps and decisions a manufacturing company would take in developing e-business strategies, perhaps an example of an e-business project at a manufacturing company would be helpful.

The following example showcases the innovative and collaborative use, by an IBM customer, of e-business strategies and techniques for its own advantage and that of its business partners and customers.

Case History #1: Sikorsky Aircraft

Just before Christmas last year, an S-92A Helibus prototype lifted off on its maiden flight at the Sikorsky Flight Development Center in West Palm Beach, Fla. A midsize chopper, the Helibus can carry 19 passengers in an airline-style cabin or 22 to 24 soldiers in a utility layout.

Like a growing number of sophisticated aerospace projects, the Helibus is a truly global product. The cabin, designed and built by Mitsubishi Heavy Industries in Japan, is attached to a nose cockpit module designed by Aerospace Industrial Development Corporation in Taiwan. The big fuselage then receives the tailcone from Gamesa in Spain, the vertical fin from Jingdezhen Helicopter Group/CATIC in China, and the landing gear and fuel sponsors from Embraer in Brazil. The Sikorsky Aircraft subsidiary of United Technologies manufactures the Helibus transmission, rotor system, and other high-value components, and then assembles the S-92 in its factory in Stratford, CT.

The Helibus project is not just an international production program based on build-to-print guidelines, where the subcontractor puts together whatever Sikorsky's drawings indicate. Rather, the global partners have the authority to design the details they build. Design engineers in far-distant locations contribute in virtually real time to a three-dimensional electronic mockup that goes together like the real thing.

"This is a leading-edge concept," says Dave Burdick, a vice president of engineering applications at GartnerGroup. "The supply-chain partners are true design collaborators rather than design fulfillers. They have the authority to originate design intent rather than just process it."

The S-92 partners are linked by an international wide-area network (WAN) to a common, digital 3-D model that speeds development and eliminates costly misunderstandings. Easy assembly without the need to rework promises dramatic savings in manufacturing costs and makes possible cost-effective made-to-order helicopters.

At the heart of Sikorsky's business model for the S-92 is the 3-D electronic mockup that reduces the cost of building the helicopter and of developing the option packages, eliminating a lot of prototyping, cut-and-try, and fitting.

When electronic models turned into real parts, Computer-Aided Design (CAD) tools saved the S-92 program an impressive amount of fabrication time and money. For example when the first canopy roof was laid up, only 4 percent of the canopy’s plies or layers had to be changed, versus 40 percent on similar components made in the past. Composite cockpit components were also produced 27 percent faster than comparable parts on earlier programs.

Getting Started as an e-business

This example provides a sense of the transforming potential that e-business strategies, processes and techniques can provide for manufacturing companies of any size. Sikorsky didn't just "do it better" or "do it cheaper." They developed a whole new way to design and build a helicopter that included not only improvements to their own processes, but involved e-business linkages to -- and "e-collaboration" with -- their supplier-business partners, as well. Clearly, Sikorsky and its partners all benefited from the faster, more accurate design process. Most importantly, quality and time-to-market improved significantly.

A company need not be the size of Sikorsky -- or IBM -- to benefit from the application of e-business principles and techniques. Smaller companies of the size of many National Association of Manufacturers members also stand to reap substantial rewards.

Let’s look at the path from traditional business to e-business. How do companies typically integrate the Web, intranets and extranets into their businesses? In other words, how does a company get started as an e-business? Most companies follow a three-step progression:

1. Internet awareness and Web presence -- Generally, companies begin by publishing information. They create a public Internet Web site, for example, or set up an intranet (a Web site internal to the company) for employees. They may even create an extranet site (a site with controlled access for designated users outside of the company) for business partners.

2. Pilot access to core systems -- As useful as publishing is, though, it is still one-way communication. Real business value comes into play when companies lay the groundwork for two-way communication -- when they integrate their Web, extranet or intranet systems with existing business systems, creating new opportunities for customers, employees, suppliers and distributors to interact with them any time, from anywhere. When they do this, they streamline communication. Rather than working through intermediaries, key constituencies are able to get the information they need directly and transact business electronically.

3. Integrate and merge core processes across the business, internally and externally -- Finally, as employees, suppliers, distributors and customers gain greater access to data and are able to interact directly with core business systems, companies discover new possibilities for using their resources. In fact, the data they produce as a result of more direct interaction with their key constituencies becomes a resource itself. They can then leverage institutional knowledge and experience to fundamentally change the way they conduct business. This is the true power of e-business. Paradoxically, change in the technology-related aspects of a business can ultimately lead to change in core business processes -- aspects of a business that may have nothing to do with technology at all.

Once this progression has taken place, other questions emerge: How can becoming an e-business help maximize the value of a company's information technology investment? How can it help you reduce costs and grow revenue?

It is IBM's experience that successful e-businesses operate within a four-stage cycle depicted here in Figure 1. There is no set order or hierarchy here; the cycle can be entered at any of the stages or areas.

For purposes of discussion, let's start with the Transform stage. Companies that succeed at e-business use the possibilities of the Web, intranets and extranets to transform core business processes. As noted earlier, they fundamentally change the way they do business. These companies tend to (1) be very open to changing core processes and (2) have a vision of how such a transformation will improve their business.

Another stage in the cycle is that of Building new applications. Companies that succeed at e-business build applications quickly and easily. And they do so without reinventing the wheel; they build on the systems and applications they already have in place.

The third stage or area in the cycle addresses Running a scaleable, available, and safe systems environment. Successful e-businesses establish a hardware infrastructure that can grow easily with the business. They also understand how to manage a network computing environment and how to keep it secure.

Finally, successful e-businesses take a strategic approach to Leveraging their knowledge and information over time. They capitalize on the information and experience they already have and quickly apply new intelligence as it becomes available. Organizational knowledge is shared and everyone is the wiser.

Chesapeake Display and Packaging is a good example of a manufacturing company that has carefully worked through the stages of the e-business cycle.

Case History #2 --Chesapeake Display and Packaging

Chesapeake Display and Packaging of Winston-Salem, NC, applied e-business strategies and technology to their supply chain management processes to make their operations hum and greatly enhance ROA. A $300 million division of Chesapeake Corporation, Chesapeake Display started as a corrugated paper manufacturer that transformed itself into a national supplier of marketing display and packaging solutions.

As its core business expanded, and more plants were added to the mix, it became harder to track inventory, new services it offered customers, and billing. Clients such as Duracell, meanwhile, were coming under increasing pressure from their national retail customers to provide accurate, up-to-the-minute delivery information – down to the hour of day and loading dock number at which shipments from Chesapeake’s plants would arrive.

Chesapeake’s main goal was flexibility: lead time on projects could run anywhere between six months and six minutes. It wasn’t uncommon for a customer to call one week – or even two days – before delivery of a point-of-sale display or new product package to request changes.

Needing a fully integrated, end-to-end supply chain solution, run on a highly stable platform open to rapid implementations, Chesapeake selected a pre-loaded Enterprise Resource Planning (ERP) package that included software from J.D. Edwards, Synquest, Sire and QSI, as well as Lotus Domino Plant Floor Data Management, all run on an IBM AS/400 server. The ready-to-go solution was necessary to meet Chesapeake’s six-month time frame.

Following the quick implementation, Chesapeake was in a position to capitalize on its new software’s capabilities. With better control of its manufacturing processes, and better visibility of what it already had, the company cut required lead time for corrugated manufacturing orders from seven days to three. A million square feet of warehouse space, about 35 percent of its total, was rendered obsolete, allowing closure of four full warehouses. Meanwhile, overrun went from 10 percent down to between 3 and 5 percent. Most importantly, by manufacturing goods for sale rather than for warehousing, Chesapeake saw a $2 million increase in before-tax revenue from first quarter 1998 to first quarter 1999 on flat sales. Almost all of it came from the operations level, with only a slight change in pricing.

E-business and Manufacturing

IBM's experience -- both internally and with its customers -- suggests that manufacturers are well-positioned to take advantage of the solutions -- and opportunities -- that e-business brings. One of the reasons is that the end-to-end supply chain typically offers manufacturers more points at which to insert e-business solutions.

Case History #3 -- Optimizing Supplier Relationships

On the procurement or supply side of the equation, for example, The McKenna Group and IBM recently conducted a study that included a diversified electronics manufacturer that implemented a secure extranet to communicate with suppliers of non-production supplies. Company management recognized they were not leveraging millions of dollars in collective purchasing power because purchases were dispersed among various divisions. Because non-production procurement was not standardized, the company could not easily trace the multiple transactions that might make up a single purchase or analyze purchasing history for improvement.

The company chose a web-based extranet solution linked to their legacy systems. This provided standard access for all suppliers, a means to link diverse divisional procurement systems and avoided using more expensive dedicated pipelines for data transmission.

The results? The manufacturer conservatively estimates it will reduce annual procurement transaction costs by 75% and save $60 million per year by consolidating its buying power with preferred suppliers.

E-business works equally well for customer relationship management as is evidenced by this example from Flymo, an IBM customer in the United Kingdom:

Case History #4 - Flymo

With nearly half of the UK market to its credit, Flymo, inventors of the hovering lawnmower, has become a household name. But despite its domestic success, the company worried that its network of small and medium-sized dealers felt isolated. While large superstores were in close contact and traded electronically using Electronic Data Interchange (EDI), smaller stores were feeling out on a limb. And Flymo itself was in no way complacent about the issue in-house. It could see the huge overheads involved in processing paper and fax-based documents, the administrative headaches derived from rekeying information, and the waste of allocating skilled helpdesk staff to carry out clerical work.

Based on the feedback from the dealer network, Flymo and IBM came up with a solution. Peter Jarps, technical support manager within Flymo's information services operation, explains: "Our dealers now have two facilities. The first is on a CD-ROM for off-line ordering, which they can save, update and amend as much as they like. Then they simply open up a transmit form screen, make sure they're on-line, and click 'OK'. The electronic form goes straight into the central server." Additionally, dealers can now log onto the extranet with their password and security profile, place an order, check the status of previous orders, make invoice inquiries, and view their full account history with Flymo.

"Now dealers can go on-line anytime day or night, without having to sit at the end of a phone, and without having to type an order before faxing it," says Jarps. "There's no worry over typing in the wrong numbers, whether or not we received it, and whether or not it's being processed. In our point of view, we don't need people to manage all the incoming faxes and other paperwork, or to rekey information and potentially get it wrong. This in turn has freed them up to take phone calls from end-consumers or dealers with technical problems, so we've also resolved a key customer issue in this whole process."

IBM itself competes in a highly competitive, dynamic marketplace -- one that requires speed and customer responsiveness. To meet these requirements and to optimize the supply chain from end to end, the company is transforming its manufacturing, procurement and other supply chain-related operations into e-businesses. Within a year or so, IBM's global network of suppliers, its fabricator plants and fulfillment centers, sales channels, business partners and customers all will be interconnected through and by advanced e-business applications.

In IBM's server business, incoming orders now trigger the final customization and shipment of most products in 48 hours or less. Beyond that, though, the e-business network will cause order-placement activity to signal local replenishment centers to deliver new parts to the fabricator and, in turn, signal suppliers to make delivery of new parts to the replenishment centers -- all on a just-in-time basis. Ultimately, even product design activity in the development labs will be incorporated into the supply chain’s e-business network so that when a new product is ready for volume manufacturing, the parts needed to build it will be there!

For its investment in these e-business technologies, IBM expects to double customer responsiveness and cut inventory/days of supply by half, at least.

Room to Grow...and Other Benefits

As mentioned earlier, one of the principal benefits of e-business is that it gives companies the ability to start small and grow. In the information technology industry, this is referred to as "scalability" -- the ability to "grow" IT systems as business conditions warrant.

In establishing full-blown e-commerce capability, the notion of scalability is very important. Macy's, Walmart and Victoria's Secret each encountered problems when launching their e-commerce Web sites as the number of "hits" -- user attempts to access the sites -- vastly exceeded the anticipated demand. Fortunately, all were able to recover quickly by "scaling up" their systems for additional capacity.

In addition to scalability, e-business offers numerous other potential benefits. IBM has had extraordinary success in enabling its Procurement function for e-business. The cost savings alone clearly have been impressive -- $4.2 billion through 1998 -- and there have been other benefits as well. e-business systems have reduced purchase order processing time from 30 days to one day; contract cycle time is down from 6-to-12 months to 30 days; contracts themselves have shrunk from an average of 40-plus pages to about six pages; "maverick buying" -- going around the Procurement system -- is now less than two percent of buying (down from 30 percent), and internal satisfaction with the Procurement function has jumped from 40 percent to 95 percent.

Further, our suppliers and distributors seem to be just as happy as we are. The e-business systems and links we are building have made them true partners in an integrated team; not just a collection of individual players. The data they need is more accurate and timely, enabling them to plan and execute with greater efficiency. There is consistent experience when dealing with or through the system. And there always is room for feedback and continuous improvement.

For small and medium enterprises, e-business also can be the great equalizer. With its relatively low threshold of entry, it provides a means for small and medium companies to leverage their strengths, as well as the quickness of execution that their smaller size provides. e-business helps maintain a small company’s ability to capitalize on low overhead, while vastly expanding potential market opportunity. The short history of e-business and e-commerce already is filled with examples of companies -- from manufacturers to specialty distillers to "bed and breakfasts" -- who have doubled, tripled and quadrupled their business through not much more than a presence on the World Wide Web.

Summing Up: Points to Remember

For manufacturers, the advantages of adopting e-business strategies and becoming a digital enterprise are real and they are now. But because entering the world of e-business truly involves a fundamental transformation of a company’s strategic direction and operations, it must be approached with care, as well as speed and decisiveness.

In this regard, it is important to remember the "best practices" or characteristics of successful manufacturing e-business enterprises -- no matter how big or small:

First, they take any information and leverage it into digital knowledge available to be shared and used by every discipline -- design, development, procurement, manufacturing, sales and marketing.

These digital enterprises create and sustain their own best practices and leverage them across the enterprise, including suppliers. The goal is to capture and reuse product and people knowledge and not have to reinvent the wheel.

Digital enterprises leverage the opportunities of globalization and advanced networking and communications technologies especially for their design, supply chain and distribution needs.

These companies view the innovation and product design process as a competitive weapon. No company grows simply by being more efficient. They grow by creating new products for existing markets, finding new ways of going to market, and/or creating entirely new markets.

As companies proceed with their e-business transformation, they keep key constituents informed about what is happening and why. Strategic shifts affect company management and employees, as well as suppliers, business partners and customers. It is important to demonstrate or explain to them how e-business initiatives will improve relationships, integrate them in a more collaborative environment, or simply make the company easier to do business with. It also helps to solicit advice, feedback and buy-in from all of the constituents who will be affected.

Vertical growth also needs a good horizontal infrastructure. Successful companies build their e-business systems off a common base and architecture. In fact, it is likely that e-business systems can and will be extensions of systems that a company already has in place. The use of open, industry-standard systems for hardware and software also is important, when considering scalability and, for example, the ability of systems to interoperate with those at business partners’ facilities. Openness also provides the flexibility to utilize new and better function as the rapid advances in information technology make it available.

And lastly, engaging a proven and reputable solutions provider or consultant to help develop e-business plans and strategies can be vital to the overall success of the e-business transformation. IBM offers a wealth of e-business expertise, products and services, and there are many other sources as well.

The bottom line is that e-business can deliver better-run businesses, lower costs with better products and services, satisfied customers and suppliers . . . and more profits and happy shareholders! It's time to act. Waiting until the competition does something is too late. The time for companies to look closely at how they're doing things -- and how they can transform those things to their advantage -- is now!

About the author: Frank Jones has been with IBM manufacturing for 33 years, and currently is vice president, Integrated Supply Chain, on the Corporate Technology and Manufacturing staff. He also is a member of the Board of Directors of the National Association of Manufacturers. IBM strives to lead in the creation, development and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. These advanced technologies are translated into value for its customers through our professional solutions and services businesses worldwide. Information regarding IBM's e-business offerings can be found on the company's corporate Web site: www.ibm.com.

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