The Supply Chain's Future in the e-Economy ...And Why Many May Never See It

By Dow N. Bauknight -- Supply Chain Management Review, 3/1/2000

The emergence, direction, and success of e-commerce is arguably the hottest topic in the business media today. At the same time, supply chain management has become a priority item on the agenda of executives as they search for sources of competitive advantage.

Both of these forces of change are inextricably interwined. Certainly it is true that the Internet is an incredible enabler, providing radical improvement to the performance of many supply chain activities. It is also true that the physical nature of most products means that exceptional supply chain management has an equally crucial role to play in the success of any e-commerce venture. This codependency will only become tighter. The Internet provides the perfect communication channel for the tight coordination that is the hallmark of superlative supply chains. As the evolution continues, the Internet-connected systems of supply chain partners will become the medium in which the essential processes of managing and synchronizing supply chains are carried out.

Future visions are generally provocative and stimulating. But to be useful they must be constructed around changes that provide significant value and can therefore build a momentum toward achieving the vision. So any vision of the supply chain future begs the question, "Can supply chain management create competitive advantage and deliver significant value?" There is a resounding "Yes" ringing in most industries as companies turn to their supply chains to compete in increasingly complex and rapidly changing markets. Witness Dell Computer's value proposition of buying a customized product via the Web, supported by a direct distribution model. Or consider Ericsson Mobile Communication's drive to provide the best products to the customer through its time-to-customer program.

Each company's value proposition and supply chain strategy will be unique. A review of the Food and Consumer Packaged Goods (FCPG) industry, for example, shows that there may be different successful strategies even within the same industry. Wal-Mart's value pricing depends on the logistics optimization generated by its powerful distribution network and tight Web-based links to suppliers. Fresh Express' freshness-oriented approach relies on its control of the "cold" chain for its success. (The accompanying sidebar lists six different types of strategies identified in a recent FCPG study.)

A look at these leading companies quickly confirms that an enterprise's supply chain strategy is a key enabler of overall business strategy and competitive advantage. But do these supply chain capabilities convert to value? For the supply chain leaders, their strategies have yielded powerful financial results, and Wall Street eagerly rewards them. What's the connection? Effective and innovative supply chain management affects four levers of shareholder value: revenue, cost, working capital, and fixed capital. Revenue is affected by customer service and fill rates, which can increase market share and price premiums. Effective supply chain management yields cost savings by reducing cost of goods sold, transportation, warehousing, handling, and distribution. By reducing raw-material, in-process, and finished-goods inventory, supply chain management also can free up working capital. Finally, by designing supply chain processes that optimize such physical assets as trucks, warehouses, materials-handling equipment, and manufacturing assets, companies stand to affect their fixed capital substantially.

The supply chain leaders are enjoying significant gains because supply chain management is front and center in the minds of executives. It attracts the mindshare, talent, and investment that create the momentum to make any future vision a reality. This article will lay out some of the jolting changes that companies, supply chains, and indeed whole industries can expect to see in the very near future. Significant opportunities for value creation will be the lubricant that makes that change happen.

The world of business is being changed forever by new forces—global competition, increased information availability, educated consumers, rapid innovations, and increasingly complex products. No industry is left untouched. From the commoditization of mobile phones and personal computers to the shift in responsibility from automotive OEMs (original equipment manufacturers) to tier-one suppliers ... companies everywhere are faced with significant challenges and opportunities. In response, they are learning to shift their focus from production to customer demand. They can no longer consider consumers as homogenous groups; with the never-ending advances in technology, customer offerings must be increasingly customized and differentiated. Large-scale and long-term capacity must make way for rapid "infrastructure turns" that match the customer's changing needs. The value proposition a supply chain delivers no longer is based on the product alone but also is based on the company's total offering, including services and complementary products. The ability to compete in the face of such rapid changes finds its basis in supply chain management.

Ericsson Mobile Communications is one such company whose supply chain has undergone a massive transformation in response to market changes. Even now, the market continues to shift. Usage rates for mobile phones are slowing from an average annual increase of 40 to 50 percent to about 20 to 30 percent, and supplies are starting to fall more in line with demand.

Ericsson's leaders saw this change coming as early as 1997, well before mobile mania reached its zenith. More importantly, the company realized that a leveling off of demand would cause the mobile phone market to become even more competitive. This would subsequently compress margins, increase product commoditization, and redirect most marketing efforts from product-centric differentiation to customer service. To thrive in such an environment, Ericsson needed a leaner, more efficient organization that could fill orders quickly, mass-customize products as needed, and provide outstanding support throughout the product lifecycle.

In effect, Ericsson Mobile Communications needed to change the way it did business. And because customer service was driving the change, a global network of highly consistent, customer-driven, flexible fulfillment operations was positioned as the transformation's centerpiece. New capabilities, such as build-to-order manufacturing, supplier-managed inventory, and streamlined logistics, ensured that Ericsson achieved the highest levels of supply chain performance. And the change is paying off. Just months into the new program, inventory was slashed in half and supplier performance increased by 25 percent. In addition, delivery accuracy—a measure of on-time and accurate performance—improved to levels close to 100 percent. Ericsson's supply chain strategy is key to providing superlative customer service regardless of whether the phones are coming from Lynchburg, Va., or Kumla, Sweden.

Like Ericsson, every company must understand its customers. Every company needs to recognize its own unique competitive position in the marketplace and the value it can deliver to those customers. The common theme across all industries is that a strong customer focus underpins opportunities to create value in the supply chain. Yet a typical supply chain all too often is a sequence of disconnected activities, both within and outside of the organization. The linkage between these activities and the needs of the end-consumer is frequently weak, especially at the lower supply chain tiers.

This lack of cohesion destroys value in the supply chain. Across all industries, redundant inventory abounds, needless processes are carried out, leadtimes lengthen, and obstacles hinder efforts to provide consumers with exactly what they want. Each industry has its own specific issues as well. To illustrate, the Andersen Consulting study of the FCPG industry found problems such as high merchandising costs, end-of-period channel loading, idle and slow-moving inventory, and ineffective promotions and product launches.

Tackling this inherent lack of coordination is the value-creation opportunity that will drive supply chain management over the next five years. Grasping the opportunity requires tight coordination of supply chain activities—initially within the enterprise and then extending beyond to the entire supply chain. This need for intercompany coordination is at the heart of the supply chain-Internet link. Successful supply chain management depends on tight coordination between supply chain partners. The Internet provides the perfect communications channel for the information, decisions, transactions, and processes that form supply chain management.

It is a journey of change that is already under way. To keep up with the evolution of supply chain management—and remain competitive in their markets—future supply chain leaders will need to simultaneously exhibit tight coordination at three levels of coordination: integration, collaboration, and synchronization.

Integration is the coordination of supply chain activities such as purchasing, manufacturing, distribution, spares management, and customer service within a single enterprise. Many leading companies have made great strides with internal integration. Although integration now provides a competitive advantage in some cases, that advantage will erode quickly over the next few years.

The next level of coordination, collaboration, can be found outside the enterprise. Collaboration involves sharing operational and planning information with strategic business partners to coordinate supply chain activities between the company and its direct customers and suppliers. The arrival of the Internet has encouraged many companies to experiment in this area and begin developing their collaboration capabilities.

Texas Instruments (TI) is one company that has successfully achieved collaboration. The Winter 2000 issue of Supply Chain Management Review's Global Supplement described how a groundbreaking enterprise resource planning (ERP) system is positioning TI for global business-to-business collaboration with customers, distributors, and suppliers worldwide. The new system successfully integrates software components from different vendors to manage TI's complex semiconductor supply chain network. Based on hardware and software from Sun Microsystems, SAP, and i2 Technologies, the system provides TI with crucial e-commerce capabilities that cut production times dramatically, increase customer control, and allow for order-anywhere, ship-anywhere services. TI currently handles more than 70 percent of its orders electronically. Distributors can place orders, request quotes, and find order-status and distribution information through a secure Web-based interface. The system also features a host of leading-edge e-commerce functions, such as real-time views of capacity at all factories, tools to improve utilization of manufacturing equipment, and easy access to order/ship information for distributors via the Web. The new system not only benefits TI but also its distributors and suppliers. The result is a truly collaborative supply chain that would have been impossible without the Internet.

Synchronization extends the scope to the entire supply chain. The ultimate goal is to synchronize the activities of all supply chain participants, both within and outside the company, to the demands of the end-consumer. There are only a few early and incomplete examples of synchronization. New Web-based entrants, however, are beginning to demonstrate synchronization capabilities. Companies like garden.com are, in fact, virtual. They own no warehouses but, rather, depend heavily on partnerships with their suppliers, which ship directly to garden.com customers. The whole process is seamless to the consumer. This e-commerce business model, with its significantly reduced costs, presents a competitive challenge to traditional garden stores. At the same time, it demonstrates the value of strong partnering relationships and supply chain disciplines.

As reported in the book Achieving Supply Chain Excellence Through Technology (visit www.ascet.com), Cisco Connection Online (CCO) is another early example of synchronization. CCO is an award-winning interactive Web site that is a key component of Cisco's Global Networked Business strategy. Through CCO, users are linked to Cisco's internal operational systems and databases and can gain access to a wide variety of support materials and applications. Product and technical information, assistance from technical support engineers, software downloads, order tracking, and electronic commerce are available from anywhere in the world—24 hours a day, 7 days a week. The value is undeniable. According to Cisco's CIO, Peter Solvik, "Cisco's Internet-based business model has been instrumental in our ability to quadruple in size from fiscal 1994 to fiscal 1998 ($1.3 billion to more than $8 billion), hire approximately 1,000 new employees per quarter while increasing their productivity, and save $560 million annually in business expenses."

No organization has yet created a truly synchronized supply chain. A significant constraint is the shortage of other organizations to interact with because few have developed the sophisticated collaborative capabilities required. But those organizations that are ready to move to this level of sophistication have a powerful incentive to seek companies among the less advanced and assist them along this journey. Once a critical mass has been achieved, the pace will accelerate—and the laggards will be shut out.

Having accepted the challenge to create a synchronized supply chain that can compete in the future e-economy, what concrete capabilities must then be mastered? Although it is impossible to prescribe the exact supply chain architecture a company will need without first assessing its specific circumstances, certain core elements are critical for future success. They are operational excellence, optimization, and e-enablement. By exploiting new Internet-enhanced capabilities and bringing world-class supply chain disciplines to bear, these elements—taken together—can ultimately build the Web-based supply chain of the future. (Exhibit 1 depicts these elements in terms of the magnitude of the change involved and the scope of coordination required.)

A company's supply chain brings together multiple areas of the organization—customer service, product development, manufacturing, distribution, transportation, procurement, and service management. Leaders must excel in conducting basic operational activities in all of these areas with efficiency, consistency, and accuracy. Mastery of the disciplines and best practices that lead to such world-class performance is no longer a source of competitive advantage; it is a competitive necessity. World-class product quality, accurate inventory tracking, lean operations, customer-focused service, and a rationalized supply base all will be expected as the entry price to synchronization.

Companies striving to master these techniques have looked to supporting changes in the technology platforms. ERP systems and best-of-breed software packages such as warehouse management systems and transportation management systems are helping to define, standardize, and automate operational processes at world-class levels. Such standardization will provide rapid "plug and play" collaboration when working with supply chain partners. Other processes crucial to a company's competitive advantage will remain unique and proprietary. It is crucial to the supply chain strategy to recognize the difference. In many cases companies will find that they do not want to own the process outright or do not have the right levels of capability in certain areas. Accordingly, they will outsource to specialists such as third-party logistics providers and manufacturing outsourcers.

Mastering Supply Chain Optimization

The widespread introduction of ERP systems has provided shared data and operational processes across the supply chain functions that can be the bedrock of integration. Building on this foundation, supply chain optimization techniques have become the catalyst for integrating each functional area of the enterprise into a finely orchestrated operation. Sophisticated forecasting, scenario planning, constraint-based planning, optimization algorithms, and order configuration are among the advances made in supply chain planning software.

When correctly implemented, these innovations can provide the decision support and planning tools to manage the complexity of an integrated global supply chain. Companies need to learn how to master these tools—and quickly. This implies shifting the company's outlook from a functional orientation to a supply chain—wide view to ensure that the technology implementations are matched with changes in operating processes and organization structure. Examples of such changes are implementing global sales and operations-planning processes or providing incentives to salespeople based on the needs of the supply chain.

Innovations in these technologies continue to evolve and be refined to provide ever-greater support for the specific management issues of an industry or supply chain model. Although many companies may have implemented or are contemplating such systems, they are doing so mainly for their key facilities or functions. This is just a beginning. The near future will see an accelerated development and rollout of these tools and techniques, which soon will become commonplace in all aspects of managing the supply chain.

The breakthrough to collaborative relationships requires an open, economical, and flexible communications medium. Whereas EDI (electronic data interchange) has found only limited uses, the Internet has created a wealth of potential for enhancing many supply chain processes. Further technical innovations such as XML (extensible markup language), the development of broadband communication, and ubiquitous access through "Internet appliances" will continue to drive progress. These developments increasingly will affect every functional area of the supply chain by enabling new business processes and capabilities.

In the purchasing area, the most well-developed e-enabled capability thus far is e-procurement. Software companies such as Ariba, Commerce1, and Netscape are helping to facilitate, integrate, and streamline the procurement process. When applied to buying nonstrategic operating resources, e-procurement projects can create substantial value quickly at very little risk. For example, a leading provider of energy and petrochemicals is implementing an e-procurement system across its international operations so that its 100,000 employees will be able to purchase goods and services over the Internet at the simple press of a button. By controlling preferred supplier agreements, capturing key purchasing information for contract negotiations, and standardizing the purchase-to-pay processes, the company expects to save several hundred million dollars annually.

The next e-procurement frontier will be to support direct materials. This capability promises some significant rewards for the companies that get it right. After all, direct materials represent the most important linkage between supply chain partners. As such, direct materials hold the key not only to revenue and bottom-line benefits but also to fostering tight partnerships with key customers and suppliers.

The Internet also is affecting supply and demand planning processes through new processes and applications such as Collaborative Planning, Forecasting, and Replenishment; Efficient Customer Response; and Vendor Managed Inventory. These and similar initiatives, coupled with the extension of supply chain planning software functionality in this area, promise to unlock a significant amount of value. Andersen Consulting's Customer-Driven Demand Network study estimated that the value of such initiatives for a representative personal computer supply chain could reach $330 million. In addition, our FCPG industry study showed that the highly profitable companies were much more likely to share a wide range of information on sales, forecasts, and inventory levels than the lower-profitability companies.

In the spares management side of most businesses, e-commerce is just beginning to have an impact. Companies now are working to consolidate spare parts demand with demand for finished product and capture the potential gains from combining planning and production activities.

In manufacturing, e-commerce will force many companies to evaluate their build-to-order capabilities. In fact, traditional build-to-stock models are becoming obsolete for some product types because of the massive inventories required to support constant SKU (stock-keeping unit) expansion. The build-to-order model and its various incarnations have arisen as mechanisms for reducing inventories while increasing flexibility of manufacturing operations.

In the product design arena, new Internet tools will allow a variety of parties to participate in a concurrent collaborative design process. Electronically linked in real time, key suppliers, manufacturers, engineers, marketers, and designers will be able to accelerate the collaborative design process faster. In a world of shortening product lifecycles, it is crucial that products be rolled out faster—without the "silo" issues inherent in traditional, sequentially oriented design activities. The impact of collaboration on profits is demonstrated by the FCPG study. The findings reveal that the higher-profitability retailers were much more likely (46 percent) to collaborate on new products and services than the lower-profitability retailers (19 percent).

Although the order process for e-commerce models may be virtual, whenever there are physical products, there are hard "bricks and mortar" supply chain implications. e-Fulfillment is a term being used to describe the unique aspects of providing products and services to e-commerce customers. The performance levels demanded by these customers for availability, choice, and delivery accuracy will filter down quickly. And even those companies not operating in the virtual world will see the pressures on their supply chain increase in order to compete. A recent Andersen Consulting study of online holiday purchases highlights this performance gap. More than one-quarter of the sites explored could not take orders because they crashed, were blocked, or were otherwise inaccessible. Further, traditional retailers with an online presence were only able to give accurate delivery estimates 25 percent of the time. The next few years will see many companies stretching to create, buy, or outsource e-fulfillment capabilities.

In response to these changes, the software vendors whose applications support the various supply chain functions have recognized the value of collaborative processes and are continuing to extend their products to support these activities. Other companies such as Extricity, STC, and Vitria are creating products that enable companies to automate intercompany business processes and link with each partner's information technology (IT) systems.

These examples illustrate that across the supply chain's functional areas opportunities exist both for making Internet-based performance enhancements and for modifying traditional supply chain operations to support e-commerce businesses. This represents the first significant impact of e-commerce on the supply chain.

The new rules of e-commerce will have a profound impact on the underlying assumptions and principles upon which traditional supply chains have been built. (See accompanying sidebar on Page 33 for more on the new rules.) Thus the second, and probably greater, impact that e-commerce will have on supply chains is to energize or create entirely new business models. New types of companies and current leaders will opportunistically fill gaps in the changing supply chain structures that support these new business models.

Much change and innovation already has taken place in the business-to-consumer marketplace. Recent years have seen the rise of the consumer-direct model for all manner of products, from computers to toys. This has resulted in a huge revenue growth, much of it benefiting package shippers. Online grocery services such as Webvan and Streamline intend to build new channels of physical distribution to the consumer.

Even more opportunity exists for innovation and change in the business-to-business portions of supply chains. Forrester Research expects business-to-business transactions over the Internet to reach $1.3 trillion by 2003. Goldman Sachs estimates that total business-to-business revenue will grow to $1.5 trillion in 2004, up from $114 billion in 1999—a rate of 67.5 percent CAGR (compound annual growth rate). In a variety of industries, there will be innovative solutions from new start-ups or alliances as well as current leaders recasting themselves.

It is difficult to predict the nature and success rate of these ventures because they will opportunistically answer value propositions that emerge as supply chain structures change. However, a review of some of the early examples of the new business models (see sidebar on Page 35) illustrates how different and aggressive the new players might be. Any company that believes e-commerce is simply a way to update and enhance current capabilities may be jeopardizing its very survival. Companies must be alert and monitor the emergence of new types of partners and competitors. They must not only build their capabilities to collaborate with current partners but also rapidly form relationships with new players as they emerge. And, of course, each company needs to be aware of its own potential and capabilities to take the lead in building new business models.

In reviewing the elements of this vision, the circular nature of the links between the supply chain and the Internet becomes evident. Supply chain management is crucial to the success of the physical aspects of any e-commerce venture. Likewise, e-commerce capabilities can enable incredible improvements in the way supply chains function. And at the heart of the matter, the Web's capability to support tight coordination between business partners means that all the information, transactions, and decisions that are the essence of synchronized supply chains will flow through the Web.

In charting a course to this future, speed is crucial. There is not enough time to wait for a grand plan. Rather, a rapid step-change improvement approach is necessary. The mantra should be "Think Big—Start Small—Scale Fast—Deliver the Value." That means rapidly building an understanding of best practices and key trends to create a vision and leadership for the organization's future. It means using simple but proven pilot models supported by the most experienced staff to gain insight into what will and won't work. And then it means applying the right resources to solve problems quickly so that a solution can be rolled out rapidly, companywide. Ultimately, value is the metric that must be used to develop and define an initiative's business case and to monitor the success of its implementation.

One final important change imperative relates to organization and people. The new supply chain environment will be very different from traditional modes of operating. To guide your company into the future, you will need high-caliber people who have a vision that extends beyond functional silos and who can manage the complexity of a supply chain—wide viewpoint. Mastering the recruitment, management, and development of supply chain personnel will become crucial to future success.

Supply chain management will continue to have a significant influence on company success and shareholder value. Supply chain disciplines and Internet innovations will combine to synchronize all supply chain activities tightly to best satisfy the customers' needs. Those leaders that enhance their supply chain prowess with e-commerce capabilities and bring supply chain skills to bear in the e-economy will be unstoppable. Those companies that do not will likely face a much bleaker future.