Supply Chain

Supply Chains: In the Nick of Time

Cutting-edge supply-chain management is emerging as the cornerstone of successful E-business. But managers at companies as diverse as Cathay Pacifi...
Adam LincolnMay 1, 2001

Dot-coms may be history and tech stocks in retreat, but CFOs are ever keen to find ways to boost productivity through investments in information technology. If anything, the downturn just makes the pressure to make the best strategic investments greater than ever. Certainly, the pace of innovation has not slowed. Finance managers need look no further than supply-chain management (SCM) for proof that the IT sector — and in particular the much-maligned Internet — is still very much alive and kicking.

Indeed, some industry watchers believe that while business-to-consumer (B2C) E-commerce has its merits, emerging supply-chain software tools for business-to-business (B2B) collaboration and online procurement will prove to be the Net’s real killer app. A recent survey of senior executives by US-based AMR Research found that 84 percent of companies plan to sustain or increase their budgets for supplier management systems in 2001, despite the unfolding economic slowdown.

Managers at Hong Kong carrier Cathay Pacific Airways certainly seem to be sold on the idea. Buoyed by record annual profits in 2000 and an award for world’s best airline Web site from UK-based business travel information company OAG, Cathay has embarked on an ambitious three-year, US$250 million assault on its supply chain, aiming to wring millions in costs out of the system by moving up the IT ladder. As a first step, the US$4.5 billion airline is taking procurement of thousands of items, from stationery to mechanical parts, online.

Cathay has also signed on as a member of several E-procurement marketplaces. One of these, Aeroxchange, was set up last year by a consortium of 12 major airlines. Companies in the aviation industry can use the Web site to build and search interactive catalogs, conduct online auctions, make requests for quotations, and complete transactions.

The idea is that Aeroxchange will provide a collaborative environment that lets all the players forecast future requirements and respond effectively by adjusting their manufacturing and inventory management processes to match real demand. Cathay has also signed on to Hong Kong-based PCCW’s MartPower, a more generic marketplace where companies from different sectors can source from each other online.

To integrate the whole program, the airline recently spent two months installing Internet procurement software from California-based Oracle, chosen because it would integrate Cathay’s accounts and receivables systems with these E-markets. The result should give Cathay a real competitive advantage.

“We are one of the first airlines in the world that connects to marketplaces from our own purchasing platform,” boasts Greg Hughes, Cathay Pacific’s general manager of airline purchasing.

The system, dubbed “CXeBuy”, is currently being used by a select group of Cathay staffers and suppliers in Hong Kong who can communicate directly over the Internet. Following the completion of the pilot phase, Cathay will roll out CXeBuy to operations across the region and then globally. The Oracle-based system standardizes and simplifies Cathay Pacific’s procurement processes, according to Hughes, and puts the airline in a better position to leverage its corporatewide buying power. He says suppliers will also benefit from a more efficient, integrated, payment process. Better yet, a purchasing intelligence tool will provide Cathay with improved information on expenditure and give the company an eagle-eye view of how its suppliers are performing.

Expectations concerning the return on this investment are sky-high. Within the next few years the company reckons it will take 35 to 50 percent of its purchasing onto the Internet. This process, Cathay says, should produce savings of more than US$38.5 million a year by 2003.

Not So Fast

If such results came easy, of course, everyone would be doing it. Clearly, they are not. Almost half of the managers in charge of procurement who were recently surveyed by US-based researcher Jupiter Communications said they would do less than 20 percent of their procurement online through at least 2003. In March, US consultancy Gartner Group scaled back its forecasts for worldwide business-to-business commerce to US$8 trillion by 2005 from US$9.3 trillion it had forecast last year.

“Although their bosses tout the benefits [of online procurement], the buyers in the trenches are held back by lack of knowledge, lack of trust, and most of all, the fact that their current, favored suppliers do not transact online,” the Jupiter study says. Forty-five percent of respondents said that a lack of trust in unknown suppliers prevents them from making online transactions. “Procurement [managers] are not only nervous about Internet procurement in general, but they also view qualifying new sellers as expensive, time-consuming and risky,” the report concludes.

The personal issues don’t end there, says Chris Sawshuck, director of E-procurement at Answerthink, a US-based technology consulting firm. Sawshuck believes a big reason procurement managers resist the Internet is because it makes their jobs more difficult. He says technology frees up time, placing more strategic decision-making responsibilities on procurement managers — something they are not used to. “They haven’t had to do all the cost-modeling and analysis that they should be doing,” Sawshuck adds. “There’s a lot more complexity to procurement now than there was before.”

But as complex as the supply chain options have become, the core issues still boil down to some simple truths. “It’s easy to sit on two months’ worth of inventory and deliver good service,” says Singapore-based Debashish Chatterjee, director of SCM business development for SAP, the German enterprise resource planning (ERP) giant. “The question is, can it be afforded? The CFO needs to decide on the tradeoff.” Besides, if Asia’s rank-and-file manufacturing companies want to be a part of the global economy, they don’t have a whole lot of choice. “If a channel master (the dominant company in a supply chain) sees value,” says Chatterjee, “SMEs will be forced to comply.”

Modern Times

Hong Kong-based Chung Nam Watch faces that very dilemma. Founded in 1935 by Chong Ching Um, today the company employs more than 6,000 people in six countries and produces more than 50 million items a year. It’s not a household name, but it makes finished timepieces and components that are sold under world-famous brands. Like many other OEMs (original equipment manufacturers) in the region, Chung Nam cannot name its customers. That’s because these companies spend millions on marketing campaigns, aiming to convince the consumer that his wristwatch was assembled in a workshop in the Swiss Alps — not a factory in China.

So, while its name may not be global, Chung Nam must confront the new demands of global economics. “We have to be flexible, time-wise, price-wise and design-wise,” says Bob Chong, the group’s managing director. This means bringing its IT systems into the 21st century, and re-engineering its business practices where necessary.

Through the 1990s the company relied on a system developed by staff programmers, which was complemented more recently by accounting software from California-based Accpac. This got the job done — up to a point. Far from providing managers with an organizationwide view, the systems were built around the needs of individual departments and were not fully integrated with one another. On the factory floor in Shenzhen, Guangdong province, and in the two administrative offices in Hong Kong this meant duplication of effort, reduced productivity and slower corporate growth.

As the calendar ticked over into 2000, Chong knew that whatever the company’s successes, it was time to get up to date. He drew together a team from the finance, management information systems and the operations divisions to evaluate the options. He admits they started by looking at the cheapest options, but these came up short. “Gradually they moved towards the medium price range — and then they recommended the more expensive options,” he chuckles.

From a shortlist of three,, Internet-ready enterprise software from SAP, was chosen last February. A project team of a dozen or so Chung Nam staffers was formed, including a newly hired executive with experience in SAP implementations, and a Hong Kong-based consultancy called SLI was contracted to assist with the project. Chong took key staff to meetings with other companies that have undertaken similar projects; he describes this approach as “psychological preparation” for those charged with driving the project. “They know they have tough days, weeks, and months ahead,” he says.

As for results, it’s still early days. Implementation of began just last month in the company’s finance and complete watch divisions. The company’s two chief accountants have been packed off to SAP training courses. If all goes to plan, in the first week of October, sales and distribution, materials control (including procurement and production) and finance and cost control tools will come on-line with leased lines connecting servers in Hong Kong with the factory in Shenzhen.

As a safeguard, the new software will run in tandem with the incumbent proprietary systems for a three month pilot phase. Even though the system’s launch is some way off, Chong says his expectations of the system are: “time-saving; better inventory control; less chance of making mistakes.” The two-month inventory barrier should be cut to between 35 and 40 days, he says.

“In the past, the sales department had to call the purchasing department, who in turn had to call either their colleagues at the China factory who are responsible for calling our suppliers. Or, they had to call these vendors directly,” explains Christina Lai, operating manager for Chung Nam’s watch export department. “Under the old system, they had to manually assess who the best vendor would be,” she says. The new system will expedite the process by maintaining up-to-date information on each vendor’s track record.

Chong estimates investment in the first phase of the project to be about HK$5 million. Across the group, the total might top HK$25 million. Ultimately, this will be moot if the system doesn’t hook up with other companies in the supply chain, but integration with the company’s 100 or so component suppliers — most of them small Chinese companies — won’t happen overnight. “It will take time to educate them,” Chong says.

More likely, the first connections will be made with other vertical divisions in the company and then with its customers — the Japanese and European brand owners with greater IT resources. For now, Chong says news of his software investment has been well received. “Business partners have welcomed the move and said it would enhance our relationships. Information flow and communication should be better. In the future, they should be able to access our computers and see the process for themselves, and know the status of orders,” he says.

Just Don’t Do It

While Chung Nam enjoys the flush of engagement, others are trying to figure out where similar efforts went wrong. Take US-based Nike, the US$9 billion athletic footwear maker. At a conference call with analysts at the end of February, they had to concede that — of all things — problems implementing cutting edge supply chain management software from Dallas-based i2 Technologies would cause the company to miss earnings projections for the third quarter. Complicating matters, the company was knee deep in projects to install an ERP system from SAP, and customer relationship management (CRM) software from Siebel Systems, at the same time. All up, the ambitious IT push had cost an estimated US$400 million over the past year.

Nike’s reasons for spending the money were laudable. i2’s software is designed to provide a company with a detailed view, in real time, of all the constraints it must contend with — access to raw materials or components, production capacity, logistics, and of course financials. This information helps executives to fine-tune dealings with suppliers and, ultimately, customers, by identifying unforeseen developments as they happen, and alerting staff to the likely impact on other links in the chain. The idea is that greater flexibility though the planning, execution and delivery process results in better forecasting and more profitable order fulfillment.

But Nike says the software has so far failed to properly match its inventories, sourced from manufacturers in Asia and Latin America, with customer demand in big markets such as the US. Instead, the company has been left with excess inventory of some product lines, and shortages in others — nothing less than a nightmare for one of the world’s most successful marketing operations.

Hype Cycle

Beyond the chat with analysts, Nike officials are keeping mum, although a spokeswoman says the company expects to resolve its software issues “by the end of the calendar year, if not sooner.” Others, however, are willing to chip into the fray. “I don’t want to claim that we’re 100 percent responsible,” says Bill Beecher, CFO of i2. “Both companies knew [the implementation] was going to be complex. Both companies put a lot of resources against it.”

It will be small consolation to Nike, but experts say expensive hiccups like this will only become more commonplace. “I don’t think this is going to be an isolated event for any of the vendors,” says Karen Peterson, an analyst with market researcher Gartner Group. “We’re going to see a lot more failures in the future. That’s not necessarily knocking i2.”

Indeed, Gartner cites i2 as a market leader. But Peterson believes that technology itself, coupled with resistance in some companies to change business processes, will plague installations of complex systems. “We’re in a hype cycle,” she says. “A lot of people are claiming a lot of things, but functional maturity of the applications has not caught up. So we have immaturity of processes and technology,” Peterson says.

Nike’s plans came unstuck because retail is inherently a complex industry to implement supply-chain management software, whether i2’s or that of rivals such as Manugistics. That’s because of the many product variations such as size and color that each need to be managed. And while i2 has some 1,000 customers, the retail business processes are still relatively new to the company. “Not everything that Nike wanted to do was available in the software,” says Wilson Rothschild, senior analyst for applications-delivery strategies at US-based consultancy Meta Group and a former i2 employee.

Nike was trying to shift all the data from its existing systems, including some that it had written. In addition, analysts say the data Nike was entering into the system was inadequate for the forecasts it was trying to make. “If you don’t fuel i2 with the right information, it’s not going to have the right information for you,” says Credit Suisse First Boston analyst Brent Thill, who says he’s been talking with people inside Nike. “I think that’s been the biggest issue behind the scenes.” Thill adds: “It was like a pipe that had a leak in it. Unless you capture every drop of water, it doesn’t play right.”

To be fair, Meta Group’s Rothschild says, it’s not unusual to make tradeoffs in the data used when some is not available. It’s just that in the pressure to go live, Nike may have used data that didn’t reflect the business as well as the company had thought. It didn’t help that Nike’s IT staff was already stretched to the limit by two other projects. “They underestimated the kind of talent that they needed,” says Rothschild.

Beecher, CFO of i2, concedes his company’s consulting team could have done better. Problems arose because Nike “didn’t follow standard methodology,” he says, choosing not to use a template for the apparel industry. The resulting customized implementation “put the software under strain.” In hindsight, Beecher says i2 could have been more forceful in directing the implementation.

Despite Nike’s missteps, installing an SCM system need not be a nightmare. “It’s like crossing the street. If you look both ways, crossing is not at all risky,” says Tom Harwick, research director at Giga Information Group. “However, if you just step out there, it’s a very risky activity,” he says. Among the precautions: companies need to budget time and resources properly and structure the needed business process. “If you install the software without changing the process, you’re going to have problems,” says Harwick. “Best practices are well known in the industry. You have to willfully ignore them to screw up,” he says.

Adam Lincoln is executive editor of CFO Asia based in Hong Kong. Reporting on Nike by Craig Schneider of in New York.

Evolutionary Links

The use of IT to grease the supply chain is nothing new. Electronic data interchange (EDI) has long provided companies with a way to interact with business partners — albeit using proprietary software over pricey private networks that many could not afford to hook into. In the 1980s there emerged a breed of applications known as materials resource planning. MRP software helped companies tighten their planning, procurement and distribution processes, but by today’s standards the approach was static. In-house planning systems were relatively disconnected, leaving companies in reactive mode.

In time, MRP became ERP to reflect the broader scope of corporate software applications. In the past couple of years, vendors in this space have been adding supply-chain capabilities to their suites. At the same time, specialist supply-chain software houses have grown their functionality into areas previously the domain of ERP. As Alvin Leung, Hong Kong-based director of extended enterprise services at Dutch outsourcing company Atos Origin, observes: “A rapid convergence between ERP and SCM software is taking place.”

Both groups are making sure their products link into business-to-business (B2B) E-marketplaces, based on technology from the likes of US-based CommerceOne and Ariba. The new catchword is “collaborative commerce.” According to US-based AMR Research: “The private trading exchange (PTX) will steal the spotlight from the public and consortium exchanges that received most of the attention in 2000, becoming the corporate command center for B2B commerce. Every company will need to develop a PTX strategy if they do not already have one.”

Origin’s Leung agrees: “Ecommerce has a significant impact on the supply chain by enabling smaller suppliers to be cost effective. This gives them the same advantages as larger players, previously the only companies that could afford to invest in EDI technology.”