04/01/2000 Supplement to Logistics Management & Distribution Report

E-COMMERCE

Transforming the supply chain

Peter Fingar
Technology Advocate, EC Cubed Inc.

What differentiates one company from another in the same market? Several years ago, quality was the key. Then quality and low cost together became the winning combination. But today, quality and cost are givens. Responsiveness is now the key to differentiate among competitors. Armed with the technologies of electronic commerce and the ability to collaborate, the consumer has wrested power from the producer. It is now the fully informed, never satisfied customer that holds absolute power in the marketplace, determining what is to be made, when, where and at what cost. The Industrial Age was about mass production and supply-push. The Customer Age is about mass customization and demand-pull, in real-time. It is about turning a company, and its entire value chain, over to the command and control of the customer!

E-commerce is a completely new infrastructure for a whole new way of doing business, where customers interact with the whole business ecosystem—the whole value web—not just the individual company. With the customer in control, a business must realign its supply chain around the customer, from end to end, squeezing out inefficiencies. They must turn their supply chains upside-down and extend their business processes inside-out to suppliers and trading partners so that when customers touch the resources of a corporation they also touch the resources of the entire value-chain.

The enterprise that responds to customer needs fastest is the winner. Because responsiveness equals cycle time, this new model demands radical cycle time improvements. The focus shifts to important details of pull control methods plus specific methods for designing mixed-model production cells for maximum effectiveness. Answers lie in Kanban pull-type systems, where material is restocked based on usage, not planned consumption. Analyst June Langoff writes, “Members of the supply chain form a new kind of team—the virtual supply chain. Competition shifts from individual companies to the entire chain.” It is not Home Depot versus Lowes, it is Home Depot’s supply chain competing against Lowes’ supply chain. Companies must directly participate in building this new business ecosystem, or competitors will do it for them.

Electronic commerce makes customer-driven, value-chain optimization a reality. The emerging “demand pull” model implies a revolution in supply planning, logistics and mass customization, as well as opportunities to slash massive distribution costs, typically eight percent of sales, through improved planning decisions that match customer and partner needs precisely. An e-commerce platform allows an enterprise to extend supply chain automation to its suppliers’ suppliers and its customers’ customers, forming dynamic trading networks: end-to-end supply grids containing real-time business process facilities and shared data warehouses of information for decision support. Figure 1 portrays the impact of electronic commerce on traditional supply chain management.

Electronic commerce opens up new possibilities to involve small to medium size enterprises (SMEs) in real-time supply grids. Extended Supply Chain Management applications expand the scope of traditional SCM systems by coordinating multiple suppliers, internal/external SCM systems, and SMEs (including 75% of manufacturing concerns) to create collaboration and meet global market demand. An extended supply chain management system differs with traditional SCM systems in the extent to which a company can integrate with its suppliers, their suppliers, trading partners, customers and their customers. By sharing information all the way from the point of sale to the inventory levels of suppliers’ suppliers, all participants in an extended supply chain system can gain competitive advantage, optimizing performance and profits.

The key is that through electronic collaboration—increased collaboration with traditional suppliers, new SME suppliers, multiple supply chains and customers—all participants can gain breakthrough advantage. The holistic view of the entire supply chain is accompanied by a holistic bottom line for the entire channel. Trading partners can go so far as price indexing rather than negotiated fixed prices in order to equally share gains or losses due to price fluctuations.

With e-commerce technologies such as JAVA (“write once, run anywhere (WORA)” ) and XML (the Web’s new universal file system), SCM systems of larger players can be extended to the browsers of SME’s, opening up new sources of supply, providing new channel-wide information sharing opportunities. The Internet affords breakthrough cost savings and enables new business opportunities for both big and small suppliers.

With the goal of optimizing entire supply grids, success requires “systems thinking,” a business discipline derived from general systems theory. Most workers involved in supply chain management, however, are not trained to think of optimizing the whole system, just the parts of the system (silos) encompassed by their responsibilities and activities. Optimizing individual silos, however, does not optimize the overall system —these are lessons learned from a decade of business process engineering, only now these lessons must cross company boundaries, and companies need to recognize that their suppliers’ costs are ultimately their costs. Those that recognize this are able to overcome the natural barriers to information sharing. Figure 2 illustrates the participants and shared business processes of extended supply chain management systems enabled by electronic commerce.

Inter-supply chain collaboration
Multi-divisional companies typically operate multiple supply chain management systems to handle multiple plants and distribution channels. Ralph Szygenda, CIO of General Motors, describes the situation: “A manufacturer, for example, can configure multiple supply chains to deal with the many supplier, distribution and customer service channels needed to reach a variety of customers around the globe. Value chains are being made into multiple-path, multiple-node value Webs. An extended SCM system can allow traditional, tightly linked systems to share information across channels and provide new opportunities for optimization across multiple, external supply chains.

SME collaboration
Small to medium enterprises represent a whole new world of potential suppliers that can be tapped as a result of the Internet smashing the barriers of cost and complexity of traditional EDI-based systems. Supply, demand and production planning and logistics can be optimized by extending automation opportunities to SME suppliers. Even the smallest SME will likely have access to a fax machine and a Web browser. Because these simple touch points can be reached by the Web, SCM business processes can be extended to virtually any SME, anywhere, anytime.

Supplier collaboration
In the future, supply chains will function as a real-time business ecosystem. The richness and low cost of the Internet makes it possible to add new collaboration links with existing suppliers—and their suppliers—for forecasting, logistics, replenishment, bidding and ordering. A given supplier may participate in multiple supply chains, and integrating information from them can give the supplier a consolidated information base for planning and operations. Collaborations can be ongoing or ad hoc in response to market events and conditions.

Customer interaction
Today’s leading businesses are rushing to provide their customers with e-commerce resources. As customer-facing applications come online they must be integrated with the extended supply chain management systems. Ultimately, as such applications go live, the results can be customer-centered supply chain management. Customer information and behavior captured at the point of sale is the lifeblood of customer data warehouses and decision support systems.

Through a customer self-service business model, fewer customer service personnel are needed as customers gain automated access to the overall supply chain. They can independently browse and price products, configure and order them, lookup shipment schedules and track delivery. The result is customer-driven supply chains and increased customer satisfaction. Internal and external logistics functions will blur and, with a robust supply chain infrastructure, “spot” markets will appear as companies respond to actual demand data rather than soft forecasts.

Conclusion
Companies that master electronic commerce will transform themselves into dynamic supply grids and dominate industries. Companies that do not will be severely diminished. “They will lose out, and won’t be able to effectively compete in a growing global marketplace,” declares Harvey Seegers, CEO of GE Information Services. Companies that do not aggressively pursue extended supply chain initiatives will be deserted by customers seeking faster delivery of customized goods and services.

Adapted from the book, Enterprise E-Commerce, written by Peter Fingar, Harsha Kumar, Tarum Sharma. The book can be found at www.amazon.com/exec/obidos/ISBN=0929652118/pfingarA

Footnotes
1 June Langhoff, “Chain of Command: Forging New Partnerships, Building Bigger Profit Margins,” Oracle Magazine, Profit, November, 1997. http://www.oramag.com/profit/97-Nov/chain.html

2 Ralph Szygenda, “Information’s Compet-itive Edge,” Information Week, February 8, 1999. http://www.informationweek.com/720/gmcorp.htm

3 “Manufacturing Systems Orders From Chaos,” Information Week, June 23, 1997.

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Logistics Management & Distribution Report   April 1, 2000

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