Supply Chain

Go Your Own Way

In the race to embrace online trading exchanges, companies could be inflicting irreparable damage on their supply chains. For one thing, many suppl...
Janet KersnarMay 1, 2001

“Which idiot bought the first fax machine?” quips David Heede midway through a conversation about the Internet’s impact on corporate supply chains. It’s an unexpected — not to mention puzzling — question. But, pausing briefly, the director of purchasing at Bass Brewers, the UK beer maker owned by Belgium’s Interbrew, explains: When it comes to implementing the latest Web-enabled supply chain tools, managers today are in the same predicament as the person who bought the first fax machine. Those high-tech tools, he explains, are useless without partners, suppliers and customers to connect to. “There’s no first-mover advantage,” insists Heede.

Perhaps, but that hasn’t stopped the stampede over the past two years to move supply chain management into the Internet era. From simple portals that provide up-to-the-minute planning and purchasing information for suppliers to complex trading exchanges that aim to bring together hundreds of buyers and sellers of all sorts of goods and services, there’s no shortage of demand for Web technologies promising to revolutionize how businesses manage their supply chains.

The truth of the matter is that most companies reckon that E-enabling at least some part of their supply chains isn’t a luxury, it’s a necessity. After studying 600 Fortune 1000 companies, Thomas Koulopoulos, founder of US consultancy Delphi Group and author of a new book called The X-economy, concludes that use of electronic trading networks has been growing so fast since the late 1990s that if the pace continues, nearly all business transactions will take place over some form of electronic exchange in four to five years.

That puts supply chain experts at Bass and other companies center stage. As a recent report from consultants McKinsey & Company notes: “Because the costs of managing the supply chain — inventory, the warehouse and distribution center, and freight — can represent 10 percent to 15 percent of sales in most industries, the savings that B2B exchanges promise could have a genuine impact [on businesses].” According to McKinsey’s consultants, such initiatives could in turn improve margins by 1 percent to 2 percent of sales.

No Refund, No Exchange

But privately, many companies wonder how well their supply chains can cope with the transition to the Web. For one thing, says a supply chain director of a large European retailer who asked not to be identified, many suppliers are just getting to grips with electronic data interchange (EDI) — the precursor to today’s Web-based data exchange technology. Because EDI requires companies on both ends of a transaction to buy specialist software, switching to a different, Web-based form of data exchange would mean that they’d have to forgo that investment.

Quite apart from technological hurdles, many supply chain endeavors can pose a threat to suppliers. One need look no further than the auto industry to understand why. Ever since car giants General Motors, DaimlerChrysler and Ford Motor Company joined forces to form a so-called consortium exchange named Covisint, to slash their procurement costs, their suppliers and their suppliers’ suppliers have been feeling pressure to cut their prices.

On top of that, moving planning, sourcing, fulfillment, and the like to the Internet is a lot of work. Each part of a company’s supply chain — from upstream (the customers) to downstream (the suppliers and partners) — needs to be involved in the development of a web initiative. After all, says Peter Dommers of Mummert + Partner, a German consulting firm, “it doesn’t make sense to have straight-through processing on one side [of a transaction] and ‘straight-through printing’ — that is, everything ends up on paper — on the other.”

Then there’s the data from the various parts of a supply chain that has to be downloaded on to the Web. For example, E-procurement requires preparing all sorts of paper-based catalogues from suppliers for the Web. For someone like Bass’s Heede, who pioneered an electronic requisitioning system for indirect goods in the late 1990s, that’s a big headache. “If more of our suppliers had electronic catalogs, life would be bliss,” he sighs, adding that the lack of E-catalogs explains why only £40 million ($57 million) out of a total £1 billion ($1.4 billion) of annual spending on indirect goods at Bass takes place online.

Even after data goes online, companies can’t relax. As Maria Jiminez, a senior consultant with Gartner Group put it at a recent supply chain conference: “Information sharing becomes critical because supply chain collaboration and visibility are so important. … If you have data inaccuracy, you’ll be in deep trouble … and out of business quickly.”

That’s a sobering thought. And one that has made many companies check their initial enthusiasm for the big public trading exchanges that were unveiled last year. “The optimism isn’t totally gone, but it’s turned into realism,” observes Jaap Favier, a senior analyst at Forrester Research in Amsterdam. The realism is that building up those exchanges takes a lot more time than anyone thought it would when they were announced last year. Given the current state of play, Forrester reckons that it will take until 2004 before trading exchanges begin generating substantial amounts of business.

Caution: Speed Bumps Ahead

But what if companies don’t want to wait that long to introduce their supply chains to the Internet? Many are starting now with a more cautious approach. “People have been saying that if you don’t spend a lot of money on exchanges, that you’ll fall behind,” says Andrew Cox, a professor and director of the Center of Business Strategy and Procurement at the Birmingham Business School. “That’s just nonsense.” He goes so far as to argue that companies don’t necessarily have to move their entire supply chains to the Internet. “The key requirement is understanding where in your supply chain technology can make the greatest impact,” he notes.

He has a point. Consider Premier Paper, a UK subsidiary of M-real, the E6 billion ($5.3 billion) Finnish pulp and paper maker and supplier formerly known as Metsä-Serla. To Premier’s executives, it was abundantly clear where their supply chain was inefficient — order processing. With 6,000 customers from all over the UK placing orders over the telephone, Premier was struggling to keep track of what needed to be sent and by when.

Until recently, that is. Starting in late 1999, it began working with a UK-based software company called Deliver-e to Web-enable its order processing, so that customers can view the firm’s inventory levels online and make orders. Deliver-e’s application “provides a sort of bridge so that our data about stock levels and so on can be accessed via a browser,” explains Robert Lockwood, business development director of Premier Paper. One of the main attractions of using Deliver-e, he adds, is that Premier didn’t have to sweat over reconfiguring any part of its ten-year-old enterprise resource planning system. “Deliver-e software just sits on top of our ERP system,” he notes.

That’s not to say that Premier didn’t have some hard work to do. Namely, it went through a painstaking, three-month process to move all the information about its products to online catalogs, even hiring extra staff to help it do so. But Lockwood says the effort was worth it. “Within a year, the increased business will cover the cost of the project,” which was around £100,000 ($142,000), he reckons. While he says that many of Premier’s 6,000 customers still want to pick up the phone when they place an order, several larger customers now make Web-enabled services a mandatory part of their tenders.

As a case in point, he cites a recent deal with a big printing group where “we showed them that we can take their orders 24 hours a day and deliver their supplies within three hours. Without the Internet, I’m sure that we wouldn’t have won the contract.” Now, M-real is looking at how it can roll out Premier’s order-processing system to other parts of the group around the world.

In the Driver’s Seat

Likewise, other companies are taking parts of their supply chains global. That’s the case at BMW, the E35 billion ($31 billion) German automaker. Last year, it was conspicuously absent from the roster of auto makers announcing plans to join consortium exchanges such as Covisint. “These big e-marketplaces are too slow, and they’re not flexible enough,” sniffs Horst-Henning Wolf, director of technical purchasing at BMW. “We think that there will be so many marketplaces in the future, so we want to be able to go to whichever one we want, to pick and choose the best ones,” rather than committing to just one exchange.

In the meantime, however, BMW has any intention of being left behind. In fact, it’s been working on an ebusiness strategy since 1999. And according to the company, it led the way among the world’s automakers in using an extranet to develop a “build-to-order” strategy: “The buyer can [log on to a PC] and change the color or the content of the car up to 12 days before it goes into production,” says Wolf. “Eventually, we want to get that number down to ten.”

In another vein, Wolf, who oversees the purchasing of E3.1 billion ($2.7 billion) of indirect goods every year, has been a central figure in the development of another Internet project. The centerpiece of his work is a global electronic procurement platform that will eventually handle 90 percent of all of the firm’s maintenance, repair and operations (MRO) purchases.

With the help of Ariba, one of the larger B2B procurement software vendors, and consultants from KPMG, BMW completed a four-month pilot project in March this year, which involved several hundred BMW staff in Germany and a whole host of suppliers.

Now, any one of 6,000 authorized employees at BMW can buy any good or service, each worth up to DM50,000 ($23,000), by accessing the multilingual, multicurrency platform from their PCs. Eventually, the platform will be used by all 72,000 of BMW’s staff to buy indirect goods.

For Wolf, the most notable development so far is the saving in time. In the past, staff needed 60 minutes to complete the whole purchase-to-pay process when buying office equipment or other supplies. Now because everything is automated, it takes less than 20 minutes. With between 100,000 and 120,000 MRO transactions every year, that’s a massive saving. “We concentrated on reducing the processing time, but we’re convinced that we’ll have cost savings,” he insists. Now, Wolf is aiming to replicate the work he’s done in the MRO arena in BMW’s direct-goods purchasing department — “we will transfer to auto parts where appropriate over the next few years,” enthuses Wolf.

Privately Held

Whatever combination of e-supply chain management strategies companies pursue, online exchanges will continue to hold a powerful attraction. To that end, say B2B experts, the next biggest trend will be a shift from large, many-to-many exchanges to smaller, one-to-many private trading exchanges (PTXs). Easily mistaken for glorified EDIs, PTXs are marketplaces controlled and operated by just a single company — as opposed to a consortium of companies — to benefit both itself and its suppliers and customers.

Though B2B experts are generally enthusiastic about PTXs, they sound a note of caution. In particular, warns Forrester’s Favier, PTXs aren’t necessarily a shortcut to a Web-enabled supply chain. “You’re still talking about E100m ($88 million) to get an exchange up and running to a reasonable level with, say, full integration with at least one tier of suppliers. And it’s going to take a company one to two years to build.” (Other B2B experts are less conservative about the level of investments that PTXs require.)

What’s more, adds Favier, firms need to fit certain criteria. First, they need to be big, in order to have the clout to develop both the sell and buy sides of the exchange. They also need to have competitive products, “where time to market and collaborative design — or joint design — are issues”, and the supply chain is reasonably complex. Such firms should also operate in concentrated sectors, such as aerospace or pharmaceuticals, making for easier integration of all the various supply chain players. So in Favier’s view, which companies have already met the criteria? “There are few companies that have made the transition” — notably Dell, Cisco and Volkswagen.

Another company joining those ranks is Hagemeyer, the E8.2 billion ($7.2 million) Dutch B2B distribution-services group, which specializes in shipping electrical and MRO goods from its subsidiaries in 40 countries. Since the beginning of the year, Peter Hagedoorn, Hagemeyer’s CIO, has overseen MRO4all.com, a trading portal from Intentia, a Swedish E-collaboration software vendor. Under a five-year contract worth around E50 million ($44 million), Intentia has installed both a platform for the group’s distribution centers and a PTX platform for Hagemeyer.

Like other exchanges, Hagemeyer’s PTX makes real-time procurement, ordering, production planning, and fulfillment information accessible throughout a company as well as to external suppliers and customers. But according to Intentia, its portal product differentiates itself from others because it stores all internal and external business-processes and planning tools in a central repository, to which all portal participants have access. That in turns makes it easier for the various bits of software — from customer relationship management to business intelligence tools — to work in unison and be updated.

Essentially, Hagemeyer wants to use this technology to turn itself into a one-stop shopping hub, helping it to bring together in one place the 9,000 companies from which it sources its products and its 150,000 customers. Because Hagemeyer will serve as the meeting point, its customers can place a single order for several products from different vendors. The idea is that each of its customers worldwide “has one point of entry to our company via the Web site, and everything is covered by one contract”, says Hagedoorn.

The result? “Via one system, we can provide a broad range of products, with one invoice a month,” he enthuses. And apart from better customer service, Hagedoorn cites other benefits. “For the first time, Hagemeyer is working on an international project,” he comments, noting how he put together five global task forces — one each for customer relations, supplier relations, logistics, IT and finance — to get the project up and running. “Now we see all these teams working together, and they like it,” he says. And with its newfound focus on service, there have also been several organizational changes, including the appointment six months ago of a chief procurement officer at the executive level.

Asked whether public marketplaces pose a threat to the Dutch company, and Hagedoorn is adamant that its PTX offers something that the public ones don’t — service. “We can hardly see our customers switching to public marketplaces, because it’s not necessarily lower prices that they’re looking for, but service.”

Indeed, the combination of the Internet with supply chain management is about more than simply cost-cutting. Over at Bass, Heede agrees with Hagedoorn, and adds: “It has to be mutually beneficial [for both buyers and sellers]. If I had to sum up what the company’s philosophy is, that’s it.”

Janet Kersnar is the editor-in-chief of CFO Europe.

Interdependence Day

The original players in the ecommerce arena include: Ariba/i2/IBM, SAP/Commerce One, and Oracle. But competition is heating up as new technology vendors begin to muscle in on niche areas of supply chain management.
Source: The Butler Group

Procurement

Buy-side: Ariba, Commerce One. Features: sourcing, requisitioning, and audit trails
Sell-side: Oracle, BroadVision, Ironside. Features: catalog management, order entry, configuration, inventory management, marketing, and analytical tools

Planning

i2, Manugistics, Atlas Commerce, Saltare. Features: production optimization, delivery, demand forecasting, transportation, manufacturing

Transaction

Market makers: Moai, Siebel Systems, BizBots, ePropose, @theMoment, Bidland. Features: trading mechanisms that include auctions, real-time bid/ask and catalog-based fixed pricing
Transacting business: Oracle, Ariba, Commerce One, i2, Ventro, VerticalNet, NextSet, Idapta. Features: manage registration, roles, buyer and seller privileges and transacting rules

Fulfillment

E-marketplace analytics: Broadbase, Informatica, AlphaBox.
Logistics: i2, ClearCross, GT Nexus, Celarix, Logistics.com
Payment contract, management, and settlement: VeriSign, Tradenable, I-many, Aceva, diCarta, OrderTrust
Customer relationship management: Blue Martini, Cogit, Kanisa, Anuncio

Integration

webMethods, Vignette. Features: translation software interprets different communication standards, such as XML (Extensible Markup Language) and EDI.

X Files

There are four types of B2B exchanges.
Source: AMR Research

1. Independent vertical exchange (IVX). Connects many buyers to many sellers in a vertical market segment. Examples: Steelscreen.com, CargoNow.com, leatherXchange

2. Independent horizontal exchange (IHX). Similar to IVX, but not aimed at a single industry. Examples: e-exchange.com (now closed), for procuring high-tech goods; buyingTeam, for procuring travel, HR and financial services, catering, telecoms

3. Consortium trading exchange (CTX). Brings together major industry players, seeking mainly to reduce transaction and product costs. Examples: Transora (food industry; investors: Danone, Campbell Soup, Nestlé) and CPGmarket.com (consumer products; headed by Nestlé, Henkel, SAP, and Danone)

4. Private trading exchange PTX. Owned and maintained by one company to better manager its trading-partner relationships. Examples: Cisco, Dell, Volkswagen

Chain of Command

When Bass Brewers of the UK set up a new subsidiary, called Barbox, to manage its portal last year, expectations were running high. “We wanted to use our understanding of Bass customers to build an electronic market,” recalls David Kessler, managing director of Barbox. The idea was that the portal’s main feature would give Bass’ customers the ability to place orders online, anytime of the day, rather than phoning them in every few days.

But in the weeks following barbox.com’s launch last July, the response disappointed Kessler and his 30-member crew. The portal was generating some traffic, but not at the level they were hoping for. Their aim was to have 10,000 of Bass’ 35,000 customers using the portal. By September, they were far off the mark.

That sent Kessler and his crew back to the drawing board. Along with their portal designers — Isis Technology — they looked long and hard at what Barbox had to offer, even gathering Bass customers into focus group so that they could get some feedback. The good news, as they found out from the meetings, was that their customers wanted more of Barbox, not less.

Now, for a subscription fee that starts at £1.50 ($2.10) a week, pub owners can log on to barbox.com and use a whole host of services. “We attacked every aspect of the business,” says Kessler. As well as placing orders, customers can access inventory-control software, download advice on marketing promotions and even use a special promotion with Eastern Electricity, a local utility, to help cut electricity bills. “You can input the tariffs from your existing supplier, and we can automatically calculate if [Eastern Electricity] can provide a better deal,” Kessler explains.

But extra services or not, one big barrier remained: the technology. Many of its customers liked the idea of Barbox but had little or no experience using the Internet So Kessler enlisted the help of the Bass maintenance staff, who were already visiting customers onsite to repair equipment. After being trained up, Bass’ staff now help Barbox customers install the requisite hardware and software. Bass’ call-center staff have also received training to give advice. What’s more, along with personalized assistance, Barbox now arranges for customers to order PCs, at a discount, and has just set up an application service provider (ASP) arrangement, so that customers can download new and upgraded software directly from the web.

Needless to say, Barbox is going from strength to strength. Less than a year since its launch, it has 6,500 customers, with £1.6 million ($2.3 million) of orders coming in every week. The lesson learned? “We’ve really had to take the customer along,” says Kessler.