The Real-Time Supply Chain
By Sandor Boyson and Thomas Corsi -- Supply Chain Management Review, 1/1/2001
Case 1. A customer-service representative in Atlanta is reviewing an incoming order over the Web. Are the products available to promise to the customer? The representative clicks the "search inventory" icon. Immediately, a software agent interrogates the global database, which includes inventories not only in the company's own warehouses across the United States, but also in the warehouses of its supply chain partners in Europe and Asia. The software agent locates the requested products, calculates the guaranteed leadtime to source and assemble these items, and determines the optimal transport route to the customer's site. All of these transactions occur within three seconds.
Case 2. For a large shipment, an importer in Singapore has to get approvals from 18 agencies that handle customs and trade approvals. The trader logs onto TradeNet, a 24/7 Internet-based system developed by the Singapore Trade Development Board, makes the request, and fills out the necessary forms online. The forms then are routed through 18 different agencies simultaneously. The whole permitting process is accomplished online within 15 minutes.
These real-world scenarios show the power of the real-time supply chain. They highlight the emergence of global online supply chains that:
- Connect customers, distributors, manufacturers, and suppliers.
- Enable information processing simultaneously among all partners.
- Create Web-based business models whereby a single event—the placement of a customer order—can trigger multiple actions at once across the supply chain.
Companies that are tapping into the power of the real-time supply chain are achieving quantum leaps in productivity. Increasingly, the great divide separating industries and companies within an industry is between those that are upshifting to real-time supply chains and those that are not.
The Real-Time DriversThree fundamental technology trends are driving the real-time supply chain: enhanced connectivity and expanded bandwidth, the transition to smart networks, and the desire for real-time total asset visibility. Each of these interrelated developments is discussed below.
Enhanced Connectivity and Broadband Networks
Huge investments in fiber and satellite infrastructure capacities will cause the speed of communications to double every three to six months. At the same time, the sheer volume of bandwidth is increasing exponentially. Communications provider 360networks Inc. expected to have laid 56,000 miles of fiber on three continents by the end of 2000. Global Crossing is installing 97,000 miles of fiber on five continents. Qwest is building a fiber-optic network of 48,000 miles. In addition, trans-Atlantic fiber capacity has expanded 10 times between 1998 and 2000.
In fact, we now are verging on a bandwidth glut in key economic corridors. It is estimated that only 6.5 percent of installed fiber in the United States is even "lit" and in use. The remainder is "dark," awaiting the higher demand to come.1 This burgeoning bandwidth availability has created downward pressure on long-distance telecommunications charges to corporate customers. To cite just one example, over the past three years, the price of a call from the United States to Israel has dropped from 32 cents per minute to eight.
In addition to the enormous increase in available bandwidth, connectivity is expanding on several other fronts. Low-orbiting satellites, provided by companies like Teledesic, will offer wireless Internet access anytime and anywhere at speeds up to 1,000 times faster than present-day modems. Meanwhile, core engineering obstacles to high-speed Internet satellite delivery are rapidly dissolving. For example, a Microsoft/Gilead Inc. partnership announced a technology for uploading data digitally via satellite, significantly boosting transfer rates while freeing users from their landline phone tethers.
Governmental operations are positioning themselves to take advantage of the expanded bandwidth availability in their logistics and supply chain operations—and commercial organizations are expected to follow suit soon. The U.S. Department of Defense, for example, has an enormous amount of global bandwidth available through big outsourcing contracts with telecommunications giants like AT&T. According to James Eccleston, DOD's assistant deputy undersecretary of supply chain integration, "We are striving for high-bandwidth, real-time supply chains that can respond to the surge of war or other missions and that can assure our war fighters of dynamic logistics support so they can move fast and with concentrated force."
Despite this expanding bandwidth availability, constraints to fully exploiting this resource still remain. One of the most restrictive is governmental and bureaucratic interference with the user community. Bandwidth access is still subject to control and excessive rents by state telecommunications authorities. In some cases, these authorities can use this power to restrict bandwidth use. Then there are the persistent last-mile problems—such as the fire hose of bandwidth pouring into the needle-size lumens of connector devices. Reflective of this problem, the U.S. military still has to strip away graphics from PowerPoint presentations when relaying data files to submarines at sea because of antennae limitations.
Given these types of obstacles, the idealistic notion of the early 1990s that information wants to run free will remain just that—an idealistic notion—well into the future.
The Transition to Smart Networks
We are witnessing a transition from individual packaged software applications purchased and installed on local machines and internal corporate networks to integrated suites of applications managed remotely by third-party application service providers (ASPs). ASPs such as Digex, USinternetworking (USi), Corio, and Exodus are leading the conversion of software to hosted applications. These third parties replace the customer's IT infrastructure by transferring applications and data onto the ASP servers. All that is left on the customer's site are the desktop PCs or terminals, which are connected to the ASP servers via a phone line or the Internet. Typically, the ASP will provide 24/7 customer support and ongoing system and software upgrades. The provider's fees usually are based on the number of concurrent users and the amount of use. For example, Corio will charge a daily user between $595 and $895 per month for access to hosted applications over a wide-area network. By comparison, the charge for an occasional user accessing applications over the Internet would only be about $20 month.
Software providers such as SAP, Microsoft, PeopleSoft, and Oracle already are hosting enterprise resource planning (ERP) modules remotely via ASPs. For example, USi's suite of Internet-managed applications includes financial management and human resources management software powered by PeopleSoft, customer relationship management software powered by Siebel Systems, and e-commerce software powered by BroadVision and Microsoft.
The telecommunications providers, whose bandwidth carries the data and supports the ASP networks and user-communities, are positioning themselves to be part of this revolution in computing and Internet-based services. Qwest, for example, signed a $500 million deal with Hewlett-Packard to equip Qwest's CyberCenters with hardware and software to support a new SAP/ERP outsourced service. In June 1999, Qwest launched CyberSolutions, a joint venture with KPMG, to develop ASP hosting and management services for software such as ERP and Microsoft BackOffice Applications.
GTE has collaborated with the Sun-Netscape Alliance to create its Network Commerce Platform, which the company bills as a "Web-based application rental platform for any hosted application." This application-neutral operating system will include security features such as digital certificates and user authentication.
We're now seeing other major telecommunications players like MCI and AT&T entering into alliances with application service providers such as Digex and USinternetworking. These telecom players are attempting to absorb software-hosting services right into their networks—a transitional phase on the way to smart networks with on-demand intelligence and functionality. Other companies envision networks becoming "application switches" that enable users on an as-needed basis to source and use specific software functionalities from different ASPs. Thus, the smart network will sense when one provider's application servers are reaching overload and will automatically roll users over to another application server that has available capacity. A variation on this vision is to extend—via a real-time global satellite—one server's operating system and applications to another server in the same corporate network and then take over ("body snatch") that remote server's capacity.
As the transition to real-time supply chains continues (see Exhibit 1), there soon will be smart global networks with enough bandwidth availability to enable instant point-to-point connections anywhere on the network. In this environment, customized data and applications can be delivered to individual users instantly.
Yet a concerted effort is under way to address these kinds of issues. One such initiative is the ASP "ecosystem" of some 127 technology companies being pulled together by Cisco. The participants range from providers of Web-hosting services to companies that have developed intelligent agents that migrate to desktops and monitor use of rented software over the Net.
Cisco is even reengineering its core product, IP routers, for the smart networks to come. The company now is embedding Tibco Inc.'s middleware and real-time messaging/publish and subscribe technology into its new generation of intelligent routers. Eventually, these routers will become business message traffic cops, extracting real-time data from heterogeneous databases and dynamically addressing vital business data and messages to corporate users across the network.
Such innovations can extend computing power and offload complexity from in-house corporate managers and management systems to outsourcing specialists. But at the same time, these innovations bring with them certain dangers. An obvious one is the possible subversion of mission-critical hosted servers by hackers intent on mischief or terrorism. One can envision a scenario where hosted systems become slave systems under the control of intruders for short or extended periods of time.
Real-Time Total Asset Visibility
In the very near future, organizations will be able to link and effectively monitor, in real or near-real time, disparate remote assets and devices—from inventory in transit to sensor devices out on remote grids. This capability will flow from the following developments:
- The spread of protocols for the inter-communication and networking of pervasive devices. An example is Sun Microsystem's Jini network technology, which enables a device to register itself on a network and update its location and systems status in real time. Another is Intel's Bluetooth, which lets disparate wireless devices communicate.
- The spread of standards for industrywide transactions processing. Two such standards are RosettaNet's XML (extensible markup language) consortium for the electronics industry and the Data Interchange Standards Association's XML consortium for the financial industry.
- The rise of new, integrated operating platforms for electronic processes. IBM's Supply Chain Development Initiative is a prime example.
- The rise of more reliable and cheaper radio-frequency tags, I-buttons, and other field sensors. For example, Dallas Semiconductor produces thermocron I-button devices that attach to shipments of fresh produce and seafood. These devices take constant temperature readings to assess shipment safety and can be scanned and read by handheld devices.
Taken together, these emerging protocols, standards, operating platforms, and sensor technologies will enable an organization to track and monitor highly distributed resources in real time. This functionality will allow them to rapidly reconfigure and deploy joint resources with extended enterprise partners and to conduct global transactions with less "friction." And this, in turn, will translate to lower costs and fewer delays.
It would be wrong to assume, however, that real-time visibility will arrive automatically or as the result of one dominant standard's or platform's ultimately prevailing. More likely, it will flow from a series of highly labor-intensive efforts to connect diverse information sources with whatever evolving technologies seem most reliable at the time. The message here: Access to more advanced technologies notwithstanding, visibility in the year 2001 will be hard won.
Transformation of Business ProcessesRegardless of the IT architectures employed, the application-level transport protocols used, or the basic message constructs, the need for underlying business process integration and system documentation of the rules governing that process integration will remain constant. The underlying business processes themselves will likely be transformed and will be radically different from those that dominate industries today.
As bandwidth expansions and the multimedia Internet transform the way whole industries conduct business, a fundamentally new set of business/transaction processes and embedded business rules to support those processes will have to be developed. RosettaNet calls these process descriptions "choreographies."
One of the best descriptions of choreographies comes from industry analyst and author Rik Drummond. The following is from an article he wrote in E-Business Advisor:
A simple choreography might be where a message is sent to a server and a response is received. These two messages together form the choreography of the transaction. The complexity rapidly increases as the choreographies that must be supported increase. The choreographies are often business sector- or application-specific so that the only people who know them well are the business process experts in that application and industry. We see choreographies all the time in information gathering on the Web. More sophisticated transaction choreographies need to be supported, such as those used in Internet credit card purchase transactions, including, for example, issuing the request to buy, verifying the credit card, and confirming the purchase. The shipping facilities are contacted and the product shipped. However, the transaction is not completed until all of the above steps have been completed, perhaps over an extended period of time. One of the most complex choreographies comes from the travel industry, where a single transaction may be composed of airline, car rental, hotel, and other bookings that occur across multiple industries and organizations.2
Yet when we try to visualize real-time supply chain business processes and transaction choreographies, we mostly see a patchwork quilt of technology pieces and programs. Exhibit 2 depicts this. It portrays how companies are cobbling together self-service customer order portals; ERP systems across internal processes; middleware links to disparate trading partner systems; collaborative planning/forecasting systems to aggregate supply chain community inventory/materials positions and requirements; and purchasing/auction portals to forge a real-time supply chain.
Lessons From the Leaders
Until today, very few organizations have succeeded in seamlessly integrating all of these technology pieces to achieve quantum leaps in their business processes. Those that have are reaping big competitive rewards and offer us a window into net-centric business processes operating across the supply chain. Three of these leaders—Federal Express, Cisco Systems, and Sun Microsystems—are discussed below.
Federal Express: Simultaneous Processing Across an Extended Chain
Key data points:
- Army of portable bar-code scanners feeding a centralized database.
- 400,000 customer-service calls, 2.5 million packages daily.
- A business model dedicated to increasing speed of information and logistics flow.
- Large amounts of available bandwidth enabling simultaneous, rather than serial, processing. (A single event will trigger multiple real-time actions throughout the chain.)
FedEx today is a leading model of simultaneous processing across an extended supply chain. The company employs real-time data transmission to assist in routing and tracking packages. Information recorded by portable bar-code scanners is transmitted to a central database and can be made available to all employees and customers (not just managers in the traditional decision-making roles). The FedEx corporate communications network is one of the world's most sophisticated and most reliable. Each day it processes nearly 400,000 customer-service calls and tracks the location, pickup time, and delivery time of 2.5 million packages.
Federal Express is as much an information company as it is a transportation company. Its business model is now dedicated to:
- Increasing transaction speed (a single transaction triggers multiple enterprise actions).
- Connecting systems and customers globally.
- Reducing costs (by shifting the processing burden to customers).
- Improving information control.
- Providing solutions beyond the immediate business case (through reengineering the supply chain and alliance strategies).
The best example of this model in action can be seen in FedEx's alliance with Proflowers.com, an Internet company that runs a portal for ordering fresh flowers. When Proflowers receives a Web order, the Proflowers Web server simultaneously records the transaction and sends a message to FedEx. Acting on this message, FedEx generates both a shipping label (which is returned to the Proflowers Web server and downloaded to the grower) and a request to pick up the order at the grower's site. When the truck arrives, the FedEx shipping label with all the requisite customer information is already on the carton of flowers to be shipped.
In essence, FedEx and Proflowers.com are using a single shared trigger event—the placement of a customer order on the Web—to generate multiple supply chain transactions. This is a completely new supply chain paradigm. It's a "Webbed" model, as opposed to the traditional sequential model based on serial handoffs. The net result is a quantum leap in time and administrative processing cost savings.
Cisco: End-to-End Internet Integration
Key data points:
- Online support: Customers submit support requests on Web site. They also can download software updates and diagnostic tools.
- Electronic commerce: Customers use Web-based applications to price, configure, validate, and order products.
- Software distribution: Software is downloaded from Web site.
- Expense reporting: Employees file expense reports electronically.
- Supply chain management: e-Commerce application notifies suppliers when incoming orders deviate from forecasts.
Cisco Systems has more than tripled in market value in just a few short years. This valuation reflects not only the quality of Cisco's router products and the dynamism of its core market (with Internet traffic doubling every three months) but also its mastery of the Internet in supply chain and e-business processes.
In becoming a global networked organization, Cisco has used the Internet to reengineer processes across its whole span of operations. Every link in the Cisco supply chain, from customer order self-service/product configuration to supplier management, employs Internet-based processes.
Cisco now receives more than 50 percent of its orders via the Internet. Customers use 24-hour Web-based applications to price, configure, validate, and order products. By increasing customer responsiveness, Cisco has been able to improve bottom-line revenues by $100 million annually. By automatically trapping errors at the configuration stage, the company has reduced the number of orders requiring rework from 15 percent to 2 percent. On the supply side, Cisco's e-commerce applications automatically notify a group of suppliers when incoming orders deviate from forecasts. By integrating suppliers earlier in the ordering process, the company has reduced leadtimes from an average of 40 days to 7–21 days.3 In its reengineering efforts, Cisco has had to cobble together functionality and best-of-breed technology applications from providers such as Ariba and Extensity. Integration will be enhanced even further as new initiatives come on line. These include customer order self-service portals, Web-enabled "demand driven" production and inventory-replenishment processes, CPFR (collaborative planning, forecasting, and replenishment) programs with suppliers and distributors, and online purchasing/marketplace exchanges. As these initiatives come on stream, the synergies among them will intensify.
The bottom line is that Cisco Systems has reaped huge benefits from successfully and seamlessly integrating the Internet's fundamental technologies and components on an enterprisewide basis. The company has leveraged the Internet to reduce its cost of doing business by more than $560 million per year, while growing at an annual rate of 400 percent for the past five years. Cisco now has three times the revenue per employee that its nearest competitor has.
Sun Microsystems: The Network Is the Supply Chain
Key data points:
- Sun Peak network links 50,000 employees, suppliers, and distributors.
- Sun Peak supports a $250 million reengineering project designed to cut five weeks out of the 14-week product cycle time and 25 percent of supply chain costs.
Sun is an industry leader in the scalable servers that power PC networks and Web sites. Fully 88 percent of its total revenue is server hardware sales. The company's supply chain vision is embodied in Sun Peak, a Web-centric infrastructure of servers and Java workstations linking 50,000 employees, suppliers, and distributors. (Sun's last mainframe was unplugged in January 1999.) Sun Peak provides the foundation for future growth and the flexibility to compete while demonstrating Sun's leadership role in networking. This new infrastructure will help Sun transform itself to a net-centric way of doing business. It will help Sun reduce the time and cost of product planning and testing. Sun Peak also will facilitate supply chain collaboration with suppliers and resellers based on a real-time view of market and customer data.
Sun's management is grappling with many challenges. First, it must develop better surge-management techniques to cope with a marketplace volatility that can see spikes in product demand of 480 percent from one year to the next. Understandably, the company's motto for coping with this is: "It is better to be flexible than right." The answer is not to be better at forecasting; instead, the Sun supply chain must be better at adapting to real-time demands on a chainwide basis. One way to do this is via a shared extended enterprisewide data network and more collaborative relationships that exploit available real-time data.
To achieve these ends, the Sun Peak infrastructure is being used to support a $250 million supply chain reengineering project designed to take five weeks out of a 14-week product cycle time and to cut 25 percent of supply chain costs. This supply chain-reengineering project is vital, given the speed and volatility of the high-tech marketplace.
Sun has plans under way to implement Jini-enabled supply chains that automatically adjust networked assets, production equipment, and inventories to real demand. Once plugged into a network, a Jini-enabled device can broadcast its location and capabilities to other devices in the network. Internally, Sun is attempting to use Jini to implement a "virtual merge" functionality in the supply chain. This involves real-time synchronization of all components so that they arrive into production/distribution staging areas at the same time. As Anil Agarwal, director of Sun's I-Apps Competency Center, noted in an interview with these authors, "Sun is taking all of its networking experience and genius to reinvent the very essence of how a supply chain is conceived and operates."
Themes for the Real-Time Supply ChainThe pioneering organizations described above provide valuable insight into the direction and character of the real-time supply chain. The experience of these and other leaders points to three inter-related themes that center on simultaneous processing, systems integration, and real-time product design.
- Simultaneous Processing. Real-time supply chain business processes capitalize on enormous amounts of available bandwidth through simultaneous, rather than serial, processing. As shown in the FedEx example, a single event will trigger multiple real-time actions throughout the chain. Simultaneous processing facilitates the transition from a highly linear paradigm of supply chain operations to a new "Webbed" model.
- IT Systems Integration. More seamless technology integration across supply chain activities enables the "straight-through processing" of customer orders. Customer self-service portals are setting the pace for the whole supply chain. They provide clear real-time market feedback and signal inventory requirements directly to the supply base. This capability has great potential for cutting the enormous costs generated by the buildup of chainwide buffer stock to hedge against unknown demand patterns (for example, the "bullwhip effect"). This is the lesson of the Cisco story.
- Real-Time Product Design. Real-time extended enterprise architectures will lead not only to new transaction efficiencies among trading partners but also to new strategy and product planning efficiencies. The Sun example underscores this point.
As they strive to forge a real-time supply chain, organizations need to take a number of critical steps. First, in making the transition to completely interoperable networks and applications, they need to develop a middleware and real-time messaging strategy capable of extracting from—and linking to—disparate legacy, ERP, Internet, and other data sources across the organization and its extended enterprise partners.
Second, corporate supply chain planners should "portal" supply chain applications and services much more comprehensively than they have to date. To achieve more distributed real-time computing, they need to migrate their organization's IT bases to a new architecture of centrally managed servers and much thinner, more pervasive clients. While pursuing centralized portaling and hosting strategies, the organization must simultaneously focus on a diffusion strategy to distributed users in order to ease the last-mile constraints. Two-way digital satellite-based Internet connectivity is one tool that can be employed here.
Next, senior supply chain managers need to do the following: establish a shared supply chain portal to support business units in a leveraged and efficient manner, distribute new supply chain technology upgrades instantly across the network, and maintain a single enterprisewide supply chain deployment visibility. These executives also should be working with global telecom providers and ASPs to ensure the availability of suites of hosted supply chain applications needed for their distributed transactions.
Finally, organizations should actively pursue linkage to a range of industry- or commodity-specific procurement portals to benefit from scale efficiencies in purchasing. At the same time, however, they need to monitor any negative effects this could have on core suppliers. Don't endanger a critical supply source in the pursuit of short-term operational gains.
The real-time supply chain is here. And as the industry leaders have demonstrated, the advantages of leveraging this powerful new capability are compelling. Organizations that fail to recognize these advantages court competitive disaster.
| Author Information |
| Sandor Boyson and Thomas Corsi are directors of the Supply Chain Management Center at the Robert H. Smith School of Business, University of Maryland. |
| Footnotes |
| 1 Wall Street Journal, "Some See Fiber-Capacity Glut," March 23, 2000, B6. |
| 2 Drummond, Rik. "XML: The Only Chance for a Worldwide Standard," E-Business Advisor, April 2000. |
| 3 Cisco Systems. "Building a Global Networked Business," January 2000. |
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