Escalating inventory costs. Commitment dates that fail to satisfy customer expectations.Mini-stores of parts that collect outside the production mainstream. Last-minute surprises that make delivery performance unpredictable and erratic. Demand and supply management via spreadsheet, e-mail, and phone. ...

These are the symptoms of the formidable challenges global supply chain managers face today. Of the numerous remedies that exist to address many of these symptoms, one of the most powerful is the Web-enabled supply chain strategy. Executed properly, such a strategy can overcome these problems while creating previously unachievable value for all trading partners involved. Put another way, in a brave new world where connectivity and collaboration are the watchwords, the "old economy" supply chain must give way to an Internet-enabled "new economy" supply chain.

This article recounts the experiences to date of Honeywell Aerospace as we migrate our supply chain processes to the Internet—in effect, creating a new-economy supply chain. The discussion unfolds from a non-technical and primarily strategic point of view. It offers a practitioner's perspective of conventional, non-integrated supply chains. Point by point, it shows how this old-economy approach fails to deliver the value offered by Web-enabled supply chain management. The pivotal roles and relationships of EDI (electronic data interchange) and XML (extensible markup language) also are examined. Finally, we share the lessons learned from this instructive journey.

By way of introduction, Honeywell International, a $24 billion a year multinational corporation and member of the Dow Jones Industrial 30, has embraced the power of the Internet in the name of our customers and shareholders. We view this technology as a competitive measure to increase the potency of our supply chains. What follows is a summary of several years of experience that many teams have accumulated in our aerospace business as we migrate our supply chain management processes onto the Web. The strategic components discussed below are all in various forms of deployment. Some already have been implemented; others are in the process of being implemented.

Honeywell Aerospace represents roughly half of Honeywell International's revenue. We have a complex demand profile; we serve original equipment manufacturers, the aftermarket, the military, airlines, maintenance depots, leasing companies, distribution centers, pilots, and authorized dealers. Our manufacturing process profile is equally diverse. We produce precision-machined components for turbofan engines in one unit and industry-leading avionics in another. Our low-volume, high-mix discrete manufacturing processes require us to employ production techniques ranging from single piece flow "lean" lines to traditional kits for lot manufacturing. Our large global supply base uses a combination of supply management techniques, including traditional purchase orders, forecasts with ship triggers, electronic kanban, and replenishment programs. From an information technology perspective, Honeywell Aerospace's internal systems are primarily disparate legacy platforms with some commonality for our MRPII (manufacturing resource planning) engine.

Our definition of the supply base embraces both the external suppliers and the internal factory. In establishing a Web-enabled supplier strategy, we make no distinction between the two.

The American Heritage Dictionary defines technology as "the application of science, especially to industrial or commercial objectives ... and the entire body of methods and materials used to achieve such objectives." From this definition, it's clear that supply chain management is a legitimate form of technology in its own right—just as the Internet and the Web are forms of information technology. Failure to recognize this parity artificially constrains the synergies of both. The challenge then becomes to skillfully combine, leverage, and complement both forms of technology for the mutual benefit of all trading partners. Supply chain management and technology should not be treated as mutually exclusive.

Within the context of this relationship, it's instructive to review the influences that drove Honeywell to embrace Web-enabled supply chains. Conventional, non-integrated (old-economy) supply chains fail to satisfy customer demands. They also deprive trading partners of valuable efficiencies. Further, they are intolerably slow, expensive, inaccurate, inconsistent, inflexible, non-scalable, and plant-centric. In contrast, Web-enabled supply chains deliver superior customer and shareholder value in ways that conventional supply chains cannot. (Exhibit 1 contrasts the characteristics and results of the two approaches.)

These are seven warning signs that an old-economy supply chain is not delivering sufficient value for customers or shareholders:

Slow. . .

Like a dinosaur whose central nervous system was so large and complex that it could take minutes for the creature to realize that its foot was on fire, old-economy supply chains take entirely too long to register and communicate important changes in customer or market demands. Precious time is wasted in communicating information that the rest of the chain needs to respond to new requirements. Meanwhile, in the absence of this information, factories blissfully execute to a now-broken plan and produce material that consumers may no longer desire. Two factors cause this: (1) a lack of systems integration that gets as close as possible to real customer demand and (2) a lack of decision-support and analytical tools to understand and formulate new supply responses quickly.

We need a central nervous system that immediately tells us when our foot is on fire.

Expensive. . .

In the absence of accurate and timely information on demand changes, trading partners "protect" themselves against fluctuations with inventory. Imagine a chain with five links, with slow demand signals, and with inventory building at every point in the chain. When inventory is compounded in this manner, it's easy to understand how much excess inventory and expense are created in the chain overall.

There's also a productivity penalty that comes into play here. A lack of systems integration between trading partners breeds a plethora of informal and manual communication processes. We see the effect of these inadequate processes when supplier delivery performance fails to match the production plan. Why does this happen? Typically, only one link exists between the supplier and our ERP/MRPII (enterprise resource planning/manufacturing resource planning) system—the buyer. Yet buyers rarely have the luxury of time to keep the system current, being hard pressed just to manage material flow. This situation cascades into other problems, such as compromised supplier delivery metrics that could affect long-term negotiations, unpredictable material release patterns for the shop floor that invalidate capacity planning efforts, and unrealistic inventory predictions. In addition, the system's capacity to calculate available-to-promise (ATP) data that customers expect to obtain 24/7 over the Web becomes crippled.

By responding faster to changes in the customer demand signals, we can avoid these kinds of productivity hits.

Substituting information for inventory takes cost out of the entire chain, not just the suboptimized links of that chain.

Inaccurate. . .

There is a classic yet maddening situation where factories execute reasonably well to plan only to watch inventory climb and fill rate plummet. Typically, this means that precious production resources have been spent on a plan that did not meet customer expectations. Once again, the "central nervous system" failed to recognize and respond to a true signal from the customer, thereby creating frustration right out of the gate. The ability of the supply base, internal and external, to execute is first and foremost determined by the accuracy and integrity of the master production schedule.

Inaccurate data exert a heavy toll on inventory costs and productivity. At some point, the organization will suspect that demand signals are outdated or inaccurate. Once this happens, planners and buyers begin to second guess and pad supply. The odds are that this manual demand/supply management will compound at multiple levels throughout the chain. As an extension of this condition, orders are rarely de-expedited—a situation that increases inventories and further compromises system integrity. Worse yet, "managing" the supply chain outside of the formal transactional system degrades the credibility of that system and creates untenable risk. There's an excessive reliance on "tribal" knowledge, emotion, and intuition to make decisions.

We cannot build a successful Web-enabled model on top of formal transactional systems that have poor data integrity. Customers and suppliers simply will have no confidence in such a model.

Inconsistent. . .

Informal process management translates into inconsistent deliveries. One major issue here is the inability to capture commitments from the internal and external supply bases formally. This also affects fill-rate performance, as there are no formal means of understanding when finished product will be shipped to the customer. Today, this process of capturing commitments typically is managed outside the confines of ERP/MRPII. The reason: This technology inherently lacks an efficient means of collecting and organizing the human intelligence required to publish production commitments. Traditional ATP algorithms are based upon what schedules should look like, not what the factory actually commits to producing.

In this type of environment, factories hold production meetings once or twice a day to manually track the proverbial 20 percent of the part numbers that account for 80 percent of the revenue. Usually, these items are managed by stand-alone spreadsheet and database applications. This cumbersome offline process not only wastes precious resources (production planners must spend significant amounts of time to assemble these data and, by default, become reporters), but it also fails to capture all the execution intelligence that might threaten fill-rate performance. Managing the production commitment process offline also makes it more difficult to identify opportunities and expeditiously take any required course corrections.

Use technology to manage "what is" (factory commitments) and "what should/could be" (the plan/potential plan) in the same formal systems environment.

Inflexible. . .

Traditional customer- and supplier-facing technology like EDI relies upon standard translation protocols to define the interaction experience. Those comparatively few companies that have the financial and technical resources to participate in EDI are forced to adopt a "one size fits all" approach regardless of their relationship with the trading partner. This outdated system leaves few, if any, options with regard to content and format management. Consequently, it forecloses on valuable opportunities to enhance the relationship through an optimized Web experience. Further complicating matters, these limitations effectively preclude any meaningful collaboration between trading partners.

True supply chain integration can only happen when the connecting Web technology enhances—not dictates—trading partner relationships.

Non-scalable. . .

How easy is it to add customers or suppliers to the chain or remove them from it? If the business acquired a new product line today, would there be a direct correlation between new suppliers added and the number of employees needed to maintain those relationships? Or could the business absorb the new suppliers with minimal additional headcount?

These questions speak to the difference between managing a number of suppliers and managing supplier relationships. When the focus is on micro-managing material flow, buyers spend most of their time in the tactical execution mode—expediting orders, checking on supplier commitments, communicating commitment dates to the factory, and so on. Their productivity ratios are low, indicative of a non-scalable supply chain.

By contrast, when buyers are given the technology to manage relationships, they can be much more productive with many more suppliers. Web-based technology can free them from constantly operating in the tactical mode. It allows them to invest in nurturing supplier relationships by collaboratively working on process improvements, seeking ways to reduce suppliers' costs, or collaborating on strategic supply chain initiatives. Once again, the buyer is the sole link between the supplier and the formal systems that form the bedrock of business-to-business (B2B) strategies. In the absence of new Web-based technology, there is no feasible way buyers can perform effectively as this mission-critical conduit.

We need a systems environment that allows buyers to focus on building supplier relationships, not micro-managing material flow.

Plant-centric. . .

In the old-economy supply chain, production plans typically are built from the inside out. As such, they are suboptimized for that enterprise and its material and capacity profiles. External input primarily comes from order backlog and forecast predictions. The production plans rarely, if ever, incorporate feedback from the internal (factory) and external supply base. Production schedules are imposed upon the supply base, which has no active voice in the schedules' construction. Once again, conventional systems lack a formal and closed-loop feedback process to capture execution exceptions that might alter the plan.

Given that the master production schedule drives every requirement for every factory and every supplier at every lower level, it is far too important to be constructed in a vacuum.

If an old-economy supply chain contains all of the negative traits enumerated above, what are the key characteristics of a new-economy supply chain—a chain that does deliver value to customers, shareholders, and trading partners? Stated inversely to the old-economy characteristics, new-economy supply chains are responsive, efficient, reliable, predictable, agile, scalable, and customer-centric. They leverage both supply chain management and information technology to remove inventory, cycle time, and hidden cost while improving customer delivery performance. It's important to note here that the "old" or "new" economy descriptors apply to the supply chain, not necessarily the corporation. It is entirely possible to have an old-economy corporation use a new-economy supply chain and vice versa.

Here are the key characteristics of a demand-responsive new-economy supply chain:

Responsive. . .

The new-economy supply chain pinpoints significant differences in supply or demand quickly and accurately. How? By obtaining customer demand data as far upstream as possible through an integrated Web solution and by using the Internet to collaborate with every supplier and not just swap data with the "chosen few." To give an example from Honeywell Aerospace, our advanced planning and scheduling/supply chain management (APS/SCM) engine collects execution exception data over the Web and applies rules-based filtering mechanisms to distinguish noise from true signals. This desensitizing capability, combined with our daily net change process, allows us to efficiently poll supply and demand every day. Through the daily net change process, our system recalculates demand daily based on the changing signals.

Three principal activities enable this capability. First, we collaborate with our airframe manufacturers to obtain direct access to their production schedules (which gets us further upstream from the traditional purchase-order arrangement). Second, we use a Web-enabled demand management application to manage our sales, inventory, and operations planning (SIOP) process. Lastly, we augment our demand statement with algorithms that predict variation for that demand stream and factor the results into our production requirements.

After obtaining airframe production requirements, we use our APS/SCM engine to power the Web-enabled SIOP demand-management module to check for demand and supply variation. This is done every day. We also conduct an ATP analysis for customer orders and check the integrity of our master production schedule using analytical tools like capable-to-produce (CTP) to test for material and capacity constraints. All executive, strategic, and tactical SIOP processes are managed in this fully integrated Web environment. Additionally, because a proven engine powers the application, we enjoy rapid simulation and analytical capabilities that help us make accurate and objective daily course corrections. This enables us to arrest inventory growth and improve our master production schedule integrity.

Exhibit 2 illustrates the relationship between access to customer demand data and supply chain performance. To design production plans that start with our customer (rather than taking the "inside out" approach), we deployed our process improvement experts (known as Six Sigma Plus "Black Belts") to develop proprietary algorithms that analyzed customer demand variation using one of four grades of data—Honeywell's actual shipments, Honeywell's forecast of customers' sales, customers' forecast of their own sales, and actual consumption. The quality of the demand data improves as you move from actual shipments to actual consumption—but the data also become more difficult to obtain.

We apply the results of the variation analysis to our stated demand profile to predict how much movement we could expect to see within a given window. We then use that analysis to determine what inventory our assemble-to-order manufacturing model needs to offset the variation without relying upon finished-goods inventory.

Direct Web access to raw customer demand, daily net change capabilities, rules-based filtering mechanisms to distinguish noise from a true signal ... these are among the advantages of a responsive, Web-enabled "central nervous system."

Efficient. . .

Inventory is the very antithesis of efficiency. Typically, businesses hold inventory at various levels along the chain to insulate against demand or supply uncertainty. Uncertainty exists because businesses are effectively blind, seeing only within internal production facilities with little to no visibility to the trading partners. Web connectivity gives partners insight into each other's operations, enabling them to drain this expensive multilayered inventory buffer across the supply chain. In this context, the Web enables evolution from passive data ("Here is the purchase-order number with quantities and dates") to actionable information ("Here are all of the days-of-supply positions for all part numbers that you manage for us").

This superior visibility allows companies to construct production schedules that have more integrity than was previously possible. So, in addition to removing buffer inventory, trading partners improve their production mix, which reduces exposure to excess inventory.

The Web lets us see beyond the four walls of our factories. This extended vision leverages information instead of inventory to deliver product and services to our customers efficiently.

Reliable. . .

By using Web connections that successfully integrate both ends of the supply chain with the appropriate internal systems, enterprises can rapidly and more reliably move demand signals from one link through another with minimal distortion. This capability reduces the number of opportunities for internal and external suppliers to build the wrong products from faulty or out-of-date demand signals. The result? The cleaner demand signal gives every supplier a better starting position. The suppliers now have a better plan against which to execute. And this translates into improved material flow and reduced costs.

Improved demand signals also will reduce second guessing and supply padding, once the enterprise understands that these signals are accurate and timely. Once again, Web-powered information works to remove unneeded inventory.

Suppliers can improve their material flow with timely and reliable access to cleaner demand signals.

Predictable. . .

Predictability fosters credibility. There are few things more frustrating than suppliers who don't live up to their commitments. (Customers don't tolerate unpleasant surprises very well.) In the new-economy supply chain, a number of components work together to improve execution consistency. First, the Web-enabled "central nervous system" manages demand or supply changes that might invalidate production plans. From there, APS/SCM engines perform material and capacity constraint analyses to predict potential problems that could restrict delivery performance.

The Internet, in conjunction with e-mail alerts provided by the APS/SCM engines, lets companies proactively monitor their execution performance and avert disconnects before they affect the customer. Business rules can test for potential failures each day as the system comes online. For example, the system can understand a message that tells it, "If any of the following supplier codes have scheduled receipts that are more than five days late, automatically send an e-mail to the supplier." Escalation policies also can be built, creating a second-level alert that says, "If any of these same supplier codes have scheduled receipts that are more than 10 days late, automatically send an e-mail to the supplier and the buyer." Third-level alerts might trigger automated e-mail messages to management after a given number of days. These Web systems also can build alert capabilities for internal processes like inventory and workload management.

Rules-based e-mail alerts enhance supply chain predictability and call attention to potential performance failures before they affect the customer.

Agile. . .

To stay current with a dynamic global economy, supply chains must rapidly adapt and reconfigure themselves. This mandate pertains to both supply chain design and infrastructure. Just as cities require a solid infrastructure to grow and thrive, so do supply chains. Visualize a city attempting to grow and build its economy in an environment where basic social services, roads, and telecommunication needs are neglected. Supply chains are subject to the same pressures. Infrastructure components traditionally include systems and their related business processes. Now, they also include new linkages with external trading partners. These linkages happen through the Internet, which means that the Web becomes a critical component of supply chain infrastructure.

Web content is just as important as the infrastructure that carries it. The chameleon-like ability to change content quickly to satisfy collaboration requirements becomes a self-defense mechanism. There is no such thing as a "finished" Web site, because these sites must constantly evolve to meet a variety of growth requirements. In the B2B world, the challenge then becomes how fast and frequently businesses can optimize sites and how much control they have over the content. The message here is to stay flexible.

Web-enabled supply chains give trading partners the agility to modify content quickly and easily to meet ever-changing demands.

Scalable. . .

There are two components of scalability: internal and external. Internally, enterprises must plan and manage demand and supply across multiple factories. Within Honeywell Aerospace, internal scalability is tricky, as we have minimal common linkage between our transactional processing systems. Consequently, we use the multisite capability provided by our APS/SCM engine to aggregate disparate sites into one integrated planning environment. All of our supply chain professionals have access to the APS/SCM engine for decision support and analytical benefit.

Externally, every supplier must have access to relevant supply and demand data and information. Again, the strategy is to collaborate with the entire supply base (don't forget the factories!), not just the "chosen few." The Web is the perfect environment for engaging the supply base because there is no entry cost for suppliers. They only need an e-mail account and an Internet service provider to participate.

Web-enabled supply chains easily accommodate removing or adding customers and suppliers.

Customer-centric. . .

The last new-economy supply chain characteristic is a culmination of the preceding topics. Creating value for the customer—and by definition the supply chain, which is an extension of our enterprise—is the primary motivation for pursuing Web-enabled strategies. Businesses create value by actively engaging in their customer's demand stream—and they now expect their suppliers to do the same for them. When this mentality permeates every link of the chain, the collective "central nervous system" will quickly and cleanly process customer demand signals.

The Web makes customers an active component in our supply chain management processes.

In addressing the convergence of supply chain management and Internet technology, it's important to ask one central question: What roles do EDI and XML play in new-economy supply chains? The short answer is that EDI lacks the technology to propel supply chains to the next level. Why? EDI is built on a foundation of standard translation protocols (such as X12 and EDIFACT) that are governed by a third party—the American National Standards Institute (ANSI). The issue here is not whether EDI has a Web interface, but rather how the technology manages the content within those Web sites. (Exhibit 3 contrasts the two technologies.)

About 30 years ago, EDI delivered breakthrough capabilities by allowing disparate mainframe computers to talk to one another, even though they spoke different languages. Translation protocols provided the common language required to connect these mainframes in a value-added network (VAN). Today, EDI service providers have replaced the VAN with the Internet and browsers to reduce transaction costs significantly while reaching a broader audience. Although this represents significant progress, incorporating a browser does not improve the underlying communication method. Instead, it only provides a better user interface to pass the same transaction sets.

Enter XML. In concert with certain other enabling technologies, XML has delivered the critical mass to open a new frontier. A derivative of hypertext markup language (HTML), this next-generation Web technology does not merely resolve the difficulties associated with translating foreign languages. It eliminates them by allowing desktop-to-desktop communication over the Web by shipping universally accepted "metadata" (data about the data) with each message. Translation is no longer protocol dependent, as the technology is now the translation protocol.

Another important difference between the two technologies is that EDI standards are content driven, while XML standards are format driven. Specifically, EDI standards control the content passed within transaction sets, while XML standards ignore content and focus on browser format. As a result, EDI standards are the domain of the trading partners, whereas XML standards are the domain of the solution providers. This means that XML solution providers really do not care what we choose to send over the Internet. ANSI, on the other hand, has complete control over the content we choose to send to a trading partner. The EDI 850 transaction set is the 850, and it may never change. Worse yet, trading partners cannot communicate anything that does not have an equivalent transaction set. In contrast, XML allows businesses to express purchase-order data any way we see fit, depending upon the nature of the supplier relationship. No more "one size fits all."

Is EDI obsolete with no station in the new economy? Of course not. Large enterprises have invested substantial sums over the decades to build this infrastructure, and they are not likely to walk away from that investment. Furthermore, EDI and XML are not mutually exclusive and can be used to complement each other. In such an arrangement, EDI is the integrated pipeline to move transactions between trading partners (the brawn). XML sits on top of that structure to provide decision support and collaboration, helping us determine which transactions (the brains) we choose to move through our EDI pipe.

In short, transaction costs are not the issue they were 30 years ago. The burning issue today is custom content management on our terms. If we do not own our content, then we do not own our Web sites—which means that we do not own our supply chains. This is an untenable situation that artificially constrains the full power of the Internet.

Although Honeywell Aerospace is still exploring the potential of this new technology, key customers and suppliers support the concept of Web-enabled supply chain management and continue to help us refine our strategy and assist with its deployment. Their valuable input helps us design Web sites and processes that collapse cycle time and remove inventory from all of our businesses. Our early pilot activities underscore the clear potential for accelerated supply chain velocity to remove this inventory and cycle time. (For more on one initiative under way, see the accompanying sidebar titled "A Week in the Life of a Web-Enabled Supply Chain" on page 55.)

The Internet and related next-generation technologies have ushered in an exciting new era for global, integrated supply chain management. Competition today is supply chain vs. supply chain, and only fully integrated supply chains can effectively compete in this new arena. The Internet and collaborative Web-based tools, successfully integrated with internal systems and business processes, provide the enabling infrastructure that allows supply chains to behave more like a single entity than suboptimized and disconnected components. Successful integration promotes growth for the entire chain and superior value for consumers.

Our ongoing effort to combine the two technologies of supply chain management and the Internet have been at once challenging and rewarding. On that journey, we've encountered some valuable "lessons learned" that may be useful to other supply chain practitioners embarking on a similar journey. Among the most compelling are these:

• Actively engage key customers and suppliers when designing e-business strategies.
• Do not exclude factories from the strategy. They are part of the supply base, too.
• Poor data integrity will cripple the benefit offered by this new technology. (As Jim Shepherd, senior vice president of AMR Research, has said, "Nothing exposes business systems deficiencies faster than e-business.")
• Do not use the Internet to blindly formalize a process designed around outdated system capabilities.
• Make certain that every e-business initiative supports a strategic manufacturing or supply chain management requirement. Don't do e-business simply for the sake of doing e-business.
• Aggressively develop a demand-management strategy that allows you to get as far as possible into your customers' demand stream. If the strategy passively relies upon customers to push purchase orders and forecasts, the "central nervous system" will never be able to react in time.