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Supply Chain Management
Few business fads have peaked and plummeted with the rapidity of Internet
technology, in general, and B2B e-commerce and e-marketplaces, more specifically.
Energized by the success of consumer auction sites and by savings from early
e-procurement efforts, industry exchanges took off in mid-1998. By the end
of the year 2000 more than 1,500 e-marketplaces had been announced. They ranged
from independent, multi-industry exchanges to vertical consortia led by industry
giants, and most were aimed at direct, strategic materials. Business plans
for these e-marketplaces often consisted of nothing more than a press release,
but the visions were grandiose.
Then reality hit. As early as 1999, analysts began to warn that even the largest
industries could support only a handful of e-marketplaces. It increasingly
became clear that the path to value would be measured in years, not months.
Helped along by the bursting of the Internet bubble and a suspicion of all
things B2B, the creation of e-marketplaces slowed. Announcements of failures
and consolidations replaced notices of new launches. However, research firms
that closely watch this sector are far from writing off e-marketplaces or the
B2B revolution. The Gartner
Group recently revised its near-term projections downward, but still expects
Internet B2B commerce to reach $8.5 trillion worldwide by the year 2005.
There is one significant change in the new projections—today, analysts
are saying that much of this business, perhaps as much as 85%, will not go
through public marketplaces but instead will be conducted over private marketplaces
that cross a wide range of applications. Many say that there is little difference
between the basic technology employed in public and private marketplaces. The
only real distinction appears to be the model of participation. That model
is one reason that private marketplaces offer a faster path to value. One-to-many
(1:M) networks are easier to make work than the many-to-many (M:M) model of
consortia exchanges that are predicted to offer no more than auction, spot-buy,
and excess inventory services for at least the next two years. The real power
of the private exchanges lies in streamlining existing relationships, including
those with resellers, distributors, and logistics providers.
The Changing Face of Business
It was Ralph Waldo Emerson, the American philosopher, poet and essayist who
wrote: “If a man write a better book, preach a better sermon, or make
a better mousetrap than his neighbour, though he build his house in the woods,
the world will make a beaten path to his door.” Even if this were true
a century and a half ago when Mr. Emerson expressed his views, a manufacturer
would build an extremely large inventory waiting for today’s market to
beat a path to her door, whether her facility were located in the woods or
in a modern industrial park. Today, a passive approach will not get a better
product to market.
Following the traditional approach, no matter how good the product, the first
step is to get the supply chain in order. Next, a business must hire a seasoned
purchasing manager to aggressively deal with material and service providers
so that costs can be brought in line. Then the enterprise must find dynamic
sales and marketing personnel to drive finished product into the hands of the
consumer. Tweak the system every now and then and watch while product flows
out and profits flow in. That is basically how things have worked in the past;
businesses maintain heavily push-driven, sequential supply chains, based on
fundamentally adversarial relationships with their suppliers. Success hinges
on outmanoeuvring, outperforming, and outwitting everyone perceived as competition.
Although this may be the traditional approach, it’s not the only way.
A lot of forward-thinking companies are beginning to look at an approach that
defies convention. The new approach involves making allies of suppliers and
customers alike, embracing them in value nets instead of coercing them into
precarious supply chains. Many consider this the next evolution in the supply
chain. This emerging value net business model starts from the premise that
a better product is no longer your ticket to success, but merely your entry
fee into the game. In fact, if a business puts a better product at the centre
of its efforts, this strategy demonstrates that the company has missed the
point of the value net approach altogether. The idea is to put customer priorities
at the centre and design the value net around them. Moreover, it is important
to recognize that customer priorities stem not from some amorphous group called
the customers, but from individuals that have unique needs and wants.
Where the traditional supply chain would push out a fixed line of one-size-fits-all
items, hoping that customers would buy them, the value net in contrast allows
unique customers to choose product or service attributes that they value the
most; in effect, to design their own product. Then the value net configures
itself, its suppliers, its manufacturing services, and its delivery capabilities
to meet the needs of each customer or at least of each customer segment. It
differentiates itself to supply one-size-fits one or customized products for
each customer or customer grouping. It leverages operations and customer choice
to drive strategic advantage.
The Supply Chain
Traditional Supply Chain
The traditional supply chain often includes more than one company in a series
of supplier-customer relationships. It is often defined as the series of links
and shared processes that involve all activities from the acquisition of raw
materials to the delivery of finished goods to the end consumer. Raw materials
enter into a manufacturing organization via a supply system and are transformed
into finished goods. The finished goods are then supplied to customers through
a distribution system. Generally several companies are linked together in this
process, each adding value to the product as it moves through the supply chain.
Effective supply chain management is the act of optimizing all activities
throughout the supply chain, and it is the key to a competitive business advantage.
Consequently, an organization’s ability to gain a competitive advantage
is heavily dependent on coordination and collaboration with its supply chain
partners. Yet, even today, a typical supply chain is too often a sequence of
disconnected activities, both within and outside of the organization. To remedy
this situation, it is important that an organization and its suppliers, manufacturers,
customers, and other third-party providers engage in joint strategic planning
and operational execution with an eye to minimizing cost and maximizing value
across the entire supply chain.
Exchanging Data is Critical
The underlying enabler of supply chain integration is the fast and timely
exchange of information between supply chain partners. This information may
take the form of transactional documents such as purchase orders, ship notices,
and invoices, as well as planning-related documents like demand forecasts,
production plans and inventory reports. It is this sharing and coordination
of information and planning activities that can enable cost reduction, value
enhancement, and the execution of advanced collaborative planning activities.
In the past, the cost and complexity of executing electronic data interchange
(EDI) transactions made this type of information exchange suitable for only
the largest corporations. The ubiquity of Internet-based communication tools
now makes it possible for organizations of all sizes to exchange information.
However, challenges still exist and being able to successfully deal with all
the new technologies is one of these challenges. The good news is that this
data exchange challenge can be overcome; and the opportunities become endless
once companies are able to exchange information efficiently with their suppliers,
customers, and partners. Applications like vendor-managed inventory (VMI),
collaborative planning, e-procurement, shipment tracking and tracing, electronic
order management, and bill presentment and payment can be built upon a core
data exchange platform, enabling companies to reap true cost reduction and
service improvement within their organization.
Supply Chain Innovators
A recent magazine ad opened with the following headline, “Why lobster
tastes better from a Web-based store.” A major maritime seafood supplier
has been in the business of providing top-quality seafood to wholesalers and
fine restaurants around the world for more than 25 years. The company decided
it needed to expand its market base and begin offering its products to consumers
to attract an untapped market via the Internet. E-commerce also allowed this
supplier to automate the order taking process that was previously done manually,
speeding up the process and wringing costs out of the system. Through e-mails,
ordering patterns, and other on-line comments, they are now able to tailor
their marketing strategy, to analyze marketing initiatives, and to react almost
instantly to shifting market demands.
Several third-party, for-hire carriers have launched customizable web pages
that enable customers to access real-time shipment information and customize
their data output. These websites also provide information on standards and
pricing data as well as the ability to inquire and track responses relating
to freight bill invoicing or rating issues. Users can also obtain rate quotes,
proof of delivery, and cargo claims status reports. One particular carrier
set out to create personalized web pages where their customers could access
all the information that they needed to effectively manage their own transportation
operations. They have created over 1,000 personalized websites and receive
well over 4 million hits per month.
Growth of E-Marketplaces
Several financial institutions and telecommunication companies recently joined
forces to create one of Canada’s largest B2B electronic marketplaces.
The proposed company will offer business products, equipment and furniture,
computer hardware and accessories. They will also offer business services such
as travel, personnel, promotional items, and courier services in a quick and
efficient manner at a reduced cost. The newly formed company will produce value
by combining procurement expertise and significant purchasing volume with the
advantages of the e-marketplace. This will allow participants to save time
and money and stay focused on their strategic priorities and core competencies.
The exchange will also create opportunities for suppliers to increase sales
by enabling new relationships between buyer and sellers.
Another Canadian example is a specialized e-commerce hub for the North American
agricultural community, bringing together grain producers and traders, processors,
input sellers, and brokers to transact day-to-day buying and selling online.
Farmers enjoy faster, easier price discovery, lower transaction costs and greater
market reach, while sellers, brokers, and retailers can use the power of the
Internet to save time and money as they reach new customers and markets through
the rapidly growing world of B2B e-commerce. This particular industry hub plans
to expand in the near future to add both cattle and hogs to their site.
There are specialty e-commerce hubs for almost all major industries throughout
Canada and North America including one that provides information and the ability
to buy and sell online for participants within the oil and gas sector. Another
e-commerce hub offers Internet-based crude oil trading using state-of-the-art
technology to provide a secure platform for transacting business anonymously
in real-time with the assurance of guaranteed commodity delivery and payment.
These services are augmented by the benefits of timely access to current and
historical market indicators. This hub fosters a liquid, efficient marketplace
for buying and selling crude oil through instant access to a wide market audience,
price transparency, and lower processing and administration costs.
E-Marketplaces’ Business Model Needs Change
Many industry experts predict that the majority of these B2B e-marketplaces
will not survive the “dot-com shakeout.” A major stumbling block
stems from manufacturers that were connected with suppliers through systems
that created duplicate, rather than complementary, distribution channels. Whether
for coalitions of brick-and-mortar companies or independent Net markets, this
method fostered a lack of collaboration among customers and channel partners.
This lack of collaboration resulted in companies having to manually input transactional
data. The benefits of participating in public e-marketplaces require precise
Buyers, meanwhile, grappled with the lack of connectivity to their back-end
systems. Sure it was great to be able to search multiple suppliers for the
lowest prices on goods and services, but when it came time to close the deal,
buyers, more frequently than not, used the phone and/or fax to avoid paying
e-market transaction fees. This points to the flaw in the public e-marketplaces’ business
model…most public marketplaces were not able to move beyond the transaction
simply because transaction fees formed the core of their revenue streams.
The Rise of the Private E-Marketplace
Businesses are beginning to move to a more commonsense approach to using online
marketplaces. Suppliers are beginning to ask several questions that read like
a checklist for manufacturers:
- How can I make it easier for my customers to do business with me?
- How can I take care of my existing channel partners?
- How do I ensure my return on investment (ROI) for my technology investment?
- How do I increase my market capitalization over the long term?
The answers to these questions leads to just one logical outcome…the
rise and eventual domination of private e-marketplaces. Private e-marketplaces
(whether consortium-based or centred around a single, large supplier) will
dominate in the future because they have the capacity to co-op existing channel
partners (distributors, retailers, service centres, sales representatives)
rather than exclude them. Buyers will benefit from this because they will receive
greatly improved service before and after the sale, while realizing the kinds
of transactional efficiencies the public marketplace promised.
Ultimately, private e-marketplaces will dominate because they provide greater
control over branding, marketing, and transaction data that ensures long-term
customer satisfaction. This is not to say that public marketplaces will disappear.
The public e-marketplaces will become merely another sales channel for the
suppliers, instead of the one and only distribution channel.
Why the Internet?
Now that the hype is over, it is time to look at what the Internet does or
makes capable from a practical point of view. In a nutshell, the Internet is
a unique medium that allows fast, two-way, secure communication. What makes
the Internet different from electronic data interchange (EDI), a technology
that has been around for more than 20 years? Essentially, the Internet performs
the same function as EDI at a fraction of the cost. Moreover, it has capabilities
that EDI does not possess, namely, real-time versus batch processing, transmission
of unlimited data types including graphics, forecasts and computer-aided design
(CAD) drawings, and an open, non-proprietary network. If carefully exploited,
these Internet characteristics can lead to significant value creation.
To identify potential sources of value from B2B e-commerce, a good starting
point is to think of the number of ways in which your company interacts with
both customers and suppliers. These interactions can be categorized as one
of the following:
Thus, three distinct categories emerge where B2B e-commerce can be applied to
- executing a transaction
- determining optimal prices
- discovering available supply and unmet demand
- supply chain planning for new and existing products
- Reduced transaction charges
- Improved market efficiencies
- Enhanced supply chain benefits
Prior to making any investment in B2B e-commerce, a company has to identify
the value created and the effort required for implementation under each of
these categories. The relative position of these categories will not be the
same for all firms but will vary based on the supply chain strategy and competitive
environment. A company must tailor e-commerce implementation to support categories
where the value created is high relative to the cost of implementation.
Transaction changes are those costs incurred during the process of completing
a transaction. This includes the cost associated with handling proposals and
quotations, processing orders, staffing the procurement function, operating
the call centre, and so on. Traditional channels of communication such as phone
and fax require high staffing levels on both the buyer’s and the seller’s
side. They also typically have high error rates because of multiple data entries.
As companies move towards electronic processes, error rates decline, fewer
staff are needed to process orders, and order placement speeds up, leading
to lower overall transaction costs.
Companies using EDI already have achieved many of the benefits in this category.
Given the high set-up cost and proprietary nature of EDI, however, they have
only established links with their largest suppliers and or customers. The Internet
with its open access and lower cost of participation allows all participants
the opportunity to reduce transaction charges. In addition, the Internet allows
real-time processing and electronic data retrieval and storage, which are essential
components to reduce order cycle time.
Market efficiencies offer two avenues for a company to extract value: (1)
the price paid when soliciting bids from suppliers, and (2) the ability to
match surplus capacity in its supply chain with unmet demand. The Internet
offers an opportunity in both instances. The Internet facilitates the aggregation
of orders across all divisions of a company and makes it easier to bring in
more potential suppliers for the bidding process. This translates into a better
price for the buyer because of increased volumes and greater competition. B2B
e-commerce also provides a mechanism by which a company can move its demand
across suppliers based on available capacity. In the past, suppliers may have
had idle capacity while original equipment manufacturers (OEMs), with unfilled
demand, were searching elsewhere. A better matching of available capacity and
demand provides value by improving the utilization of available capacity.
Supply chain activities include the flow of information, materials and finances
between different stages of a supply chain from suppliers to customers. When
different stages of the supply chain plan locally without sharing information,
the result is the “bullwhip effect”, whereby small fluctuations
in consumer demand lead to large fluctuations at the manufacturer and supplier.
In some supply chains, orders to suppliers can fluctuate 10 to 20 times more
than orders placed by the ultimate customer. The increased variability leads
to long supply lead times, excess capacity, high transportation and warehousing
costs, large inventories and dissatisfied customers.
B2B e-commerce can create value in a supply chain at two levels. First, by
increasing visibility across the supply chain, the Internet can help dampen
the “bullwhip effect”. The resulting decrease in variability allows
a supply chain to improve customer service while reducing costs. Second, the
Internet can provide value from increased collaboration. Collaboration is the
ability of different stages of the supply chain to make decisions on product
design and introduction, pricing, production and distribution that will allow
all partners to participant. For example, a major North American retailer and
one of their key manufacturers increase visibility when the retailer shares
point-of-sale data. However, the partners only realize full value when they
use this information, along with capacity information at the manufacturer’s
facilities to decide the best timing for promotions and resulting production
plans. If decisions are made independently, the retailer may run the promotion
at a time when production costs for the manufacturer are the highest. Through
collaboration, constraints on both sides are considered in determining a schedule
that maximizes profits.
The Internet also facilitates collaborative product design. This is a key
capability planned for the automotive industry exchange operated by major carmakers.
Currently, CAD drawings of product components are designed by engineers in
one country, distributed by courier to engineers in another country, and then
finalized at a joint meeting in a country somewhere in between! B2B e-commerce
promises a “virtual product workplace” where engineers can collaborate
with suppliers and customers in real-time from their desks, saving cost while
speeding up product development cycles and time to market.