A Reality Check on the Collaboration Dreams
By Kevin O'Marah -- Supply Chain Management Review, 5/1/2001
It's been said that competition is no longer company against company but supply chain against supply chain. A growing number of companies are outsourcing design, manufacturing, logistics, and service as they concentrate ever more intensely on developing and exploiting their core competencies to build shareholder value. Companies ranging from Boeing to General Mills are creating value as they bring new products to market. They're doing so by relying on a matrix of sophisticated suppliers whose business, in turn, depends on demand created by these well-known OEMs (original equipment manufacturers).
In this context, the belief is that manufacturers will naturally work together for their own benefit and, in so doing, advance the greater good. Hence the allure of collaboration. In fact, it is sometimes viewed as the magic pill that will painlessly make everything better.
Central to collaboration is the principle that both (or all) parties must benefit from joint solutions. Many technology vendors are busy weaving tales about collaborative software that is supposed to deliver the "win-win." Apparently, people are listening. AMR Research estimates that the collaboration software market will grow from $1.1 billion in 2000 to $8.7 billion by 2004 as companies pursue the collaborative vision.
Unfortunately, software alone is not the answer. Technology platforms can (and must) enable users from different companies to see the same information at the same time and to manage a workflow that supports collaborative processes. But these platforms alone are no more likely to deliver collaboration than a pile of bricks is likely to jump up and build a house. As with any tool or building block, you have to know how to put the technology to work.
How Can Collaboration Make More Money?Collaboration can create value in two ways. The first way is embodied in the familiar saying, "Two heads are better than one." Harnessing intelligence about both the sources and uses of any product (or service) will tend to increase satisfaction for both buyer and seller. The answer to the following question illustrates the point: How much better off are an OEM and a tier one supplier if they work together on the final product design? Answer: So much so that entire supply chains have been built on this collaborative principle. In the personal computer industry, for example, where collaborative manufacturing processes have evolved rapidly, total productivity growth has averaged a staggering 4.6 percent per year for 15 years. Collaborative value in this case has been a product of bilateral problem solving.
The second, and more elusive, way in which collaboration creates value can be summed up in the axiom, "United we stand, divided we fall." The essential ingredient is trust. Trust matters because it lets trading partners eliminate wasted resources that otherwise serve as insurance against supplier gouging (or incompetence) and customer bullying (or indifference). These behaviors are realities that manifest themselves in bad forecasts from buyers and capacity overbooking by suppliers. The cost of disruptions due to change orders from buyers can represent as much as 10 percent of total revenue. Some of this waste is the result of poor forecasting methods. But a substantial portion represents buyers' hedging their needs and pushing uncertainty back to suppliers. Collaboration value here is a product of full disclosure.
If the value-creation mechanisms described above are isolated and understood in terms of impact on operating margins, it is possible to estimate the total value potential. A number of studies in recent years have addressed one or more elements of collaborative practices in business-to-business (B2B) processes. AMR Research has reviewed this research as well as a number of case studies as a foundation for estimating the range of value creation possible through B2B collaboration in the supply chain. In the U.S. manufacturing economy alone, we believe that the incremental operating margin achievable through collaboration could be as high as $390 billion per year.
A Collaboration FrameworkA collaboration strategy must encompass a technology platform. The architecture for that platform incorporates two key enabling technologies from which specific collaboration applications can be devised, implemented, and operated. The two key types of technology are information and interaction:
Information. Collaboration is about decision support—more specifically, making decisions across enterprises. To accomplish this intercompany decision making, the collaborating parties must be working from a common view of the information so that the basis for input is consistent. The information model can range from highly structured, such as tabular data with specific schema definitions, to loosely structured, such as repositories of graphical content.
Interaction. Also key to reaching decisions is consensus on how the decision-making process will unfold and be communicated. This is the interaction part. As with information, interaction can be highly structured with specific workflow and event notification or loosely structured in the form of threaded discussion or chat technology.
These two enabling technologies and their level of structure define the principal types of collaboration applications. (Exhibit 1 depicts the four application categories—educate, mediate, create, and coordinate.) Each category yields different types of applications, and each carries a significant business benefit. The respective applications and benefits are discussed below.
Loosely structured information and interaction produce applications that are useful in educating across the supply chain. These applications help share knowledge with both employees and external constituents. Education can yield numerous business benefits including the professional development of human resources, more consistent business process compliance, and faster new product introductions through salesperson, distributor, and retailer training.
The information model usually takes the form of multimedia training materials that can be kept in a course repository and used on an ad hoc basis by the participants, much like a textbook in a classroom setting. Interaction also is loosely structured. However, some real-time interaction is desirable, particularly in formal training scenarios.
"Mediate" Navigates Consensus
Applications that assist multiple parties, acting in their own self-interest, to reach a resolution belong in the mediate quadrant. This would include collaborative applications that support price negotiation or dispute resolution. The business benefit lies in the reduced cycle time and cost of these historically inefficient processes. An intangible benefit is the perception that resolution is reached in a more equitable fashion, thereby contributing to better relationships.
Interaction is loosely structured in this category. Although a process of claim/counterclaim typically exists, there is no requirement for a definitive workflow and end point. Information, on the other hand, will tend to be more highly structured. Proposal or invoice line items are best represented in a tabular structure with well-understood semantics.
"Create" Collects Early Input
One of the applications discussed most often is collaborative product design. The business case is familiar. Identification of supply issues and customer requirements early in the process by involving all of the parties minimizes cost and maximizes product marketability. Design collaboration isn't the only possible application, however. Anything that supports the creative process also applies and brings similar benefits.
The information model is more loosely structured in this category, typically involving a repository of various types of content important to the finished creation. Interaction tends toward more structure as version control requires check-in/check-out and approval processes.
"Coordinate" Calibrates the Supply Chain
Another much-discussed application is collaborative planning, forecasting, and replenishment (CPFR), which lies in the coordinate quadrant. The promise of lower inventories and costs and higher customer satisfaction has established CPFR as the mother lode of business benefit in an e-business strategy.
CPFR and other applications in this category are characterized by highly structured information and interaction. Demand data, inventory status, and production resources all lend themselves nicely to a structured information model. Interactions within this category produce specific commitments from the parties involved, necessitating a highly structured workflow. While these applications deliver the most in direct benefits, the nature of both the information and interaction structure also make them the toughest applications to implement. Though the advent of trading exchanges has increased the probability of successful implementation, there is still a long road to travel.
Business Models Matter MostThe meteoric rise and cataclysmic fall of dot-com B2B marketplaces says a lot about the role of technology as midwife to the collaborative business quest. Exhibit 2 gives a quick history of the hype, players, and lessons learned surrounding B2B marketplaces. The cycle of experimentation has been very fast, and attention has been acutely focused by the stock market's roller-coaster ride. What has emerged is that technology—specifically the many-to-many data model inherent in exchange-based applications—can substantially enhance business relationships that are already collaborative.
Whatever the potential of technology to help and despite the large payoff that awaits, collaboration still faces a significant cultural hurdle. The "customer is king" attitude driven into the subconscious of business during the 1980s has created a master-servant relationship that is fundamentally adversarial. Emerging collaborative models call for reversing this philosophy. Today most B2B interaction is focused simply on transaction efficiencies. Even with tools to broadcast buyers' needs upstream in ever-greater detail, value will remain elusive until supplier intelligence is given equal importance in the equation.
Collaboration between trading partners must be a bilateral relationship where win-win transactions are the norm. Accounting standards treat suppliers as a cost of goods sold and thus as something to drive down. Maybe the transition will be complete when suppliers are measured instead for their contribution to gross margin. The timeline looks to be a long one.
| Author Information |
| Kevin O'Marah is service director, supply chain strategies, at AMR Research Inc. |
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