Building A Collaborative Supply Chain
Introduction
The past two years have been a wild ride for the B2B sector: The euphoria of dot-com IPOs in 1999 turned to despair as e-marketplaces like MetalSite and Rooster.com went belly up and the stock market took a tumble. But despite this turmoil - and the current economic downturn - firms are charging ahead with their B2B plans. Many of these firms are targeting their supply chains. Leading companies continue to use Internet-based technologies to develop new collaborative relationships with suppliers.
Firms Continue to Expand Their Online Efforts
Forrester and the Institute of Supply Management (formerly known as the NAPM, or National Association of Purchasing Management) conducts a quarterly survey of supply management executives that demonstrates how firms are actively moving online: The Internet remains important. Despite citing tough economic conditions as their biggest obstacle to moving online, 84 percent of interviewees see the Internet as important - the same number as in the second quarter. Large buyers rated the Internet as either very important or critical almost twice as often as smaller buyers did (43 percent versus 24 percent).
Indirect purchasing is commonplace. The average amount of indirect materials bought online remained at 7.1 percent, but most firms participated in this activity. Of the bigger buyers, 82 percent used the Internet for these purchases — an increase from 77 percent in the second quarter, and a significantly higher usage level than smaller buyers (82 percent versus 70 percent).
Smaller buyers were caught up in direct materials. Firms that spend less than $100 million per year made the greatest advances in online procurement of direct materials - expanding their usage from 51 to 57 percent.
Larger buyers expanded online auctions and RFPs. The number of companies using the Internet as part of their RFP process rose across all segments of buyers. Online auctions showed a moderate expansion within larger purchasers (from 29 to 30 percent) but dropped significantly at smaller buyers (from 14 to 7 percent). E-Marketplaces lost buyers. Fewer firms reported using e-marketplaces — a drop from 25 to 23 percent. Large buyers showed the biggest decline (from 30 to 25 percent).
Collaboration went wild. Fifty percent of buyers collaborated with suppliers on the Internet — an increase from 44 percent in the second quarter. Large buyers (from 46 to 64 percent) and manufacturers (from 40 to 52 percent) led this growth in online teamwork.
Collaboration and Process Changes Define Success
In our survey, we found that large companies tend to be the most active on the Internet. So is it only size that matters? No. Forrester believes that two dimensions drive online success: collaboration with suppliers and internal process improvements. To understand the impact of these two items, we analyzed the responses from 225 manufacturing firms and found four distinct Internet buying personas: Renovators achieve the best results - Firms that both collaborate with suppliers and change their processes make the most online progress. These renovators not only buy more online, but they also use RFPs, auctions, and e-marketplaces more than other groups. The effort pays off - most of these dynamic buyers view the Internet as very important, and more of them capture cost savings than their peers do.
Re-engineers capture limited internal gains - Buyers that change their internal purchasing processes but don't collaborate are the second most active online group. While the internally focused re-engineers outpace most other buyers, they fall far short of the online pace set by renovators.
Missionaries get frustrated — Purchasing groups that collaborate with suppliers but don't change their internal processes don't get too much from their online efforts. Instead of relishing their e-business success, these missionaries get irritated - reporting the least success with cost savings and expressing the lowest satisfaction levels with their suppliers' online capabilities.
Monoliths don't even try — Organizations that don't collaborate with suppliers and don't change their processes don't do much else online either. Only seven percent of them view the Internet as a very important part of their procurement efforts. As a result, these firms buy just 2 percent of their indirect goods and 1 percent of their direct materials on the Internet - and only 13 percent of these e-business slugs report cost savings.
Building a Private Hub
To propel the Internet into their supply chain activities, many Renovators build private hubs — like Volkswagen AG's Supply.com initiative — to connect with their suppliers. But these efforts don't come cheap. Forrester created a model of the software, integration, and internal change management expenses required to build three increasingly complex levels of private hubs (Figure 1):
Figure 1 - Private hubs require varying levels of investment.
• Monitor — To reduce delivery delays and errors, firms should invest
in a baseline hub that provides basic visibility with their suppliers.
• Manage — Buyers seeking improved inventory control and change-order
management with suppliers should invest in private hubs that support cross-company
coordination.
• Optimize — The highest level of investment helps buyers improve
process efficiency, such as faster time-to-market, by supporting real-time resource
allocation across a network of partners.
Monitor Hubs: $6.8 Million to Enhance Visibility
Monitor hubs provide the basic connectivity and visibility that serve as the foundations for all collaboration activities. Firms can expect to spend nearly $7 million to build out the hub over six months as they:
Create order transparency — A basic monitoring hub will need to let buyers spot exceptions early on. Applications from vendors like Yantra that can trace purchase orders and produce delay alerts will cost $250,000.
Expose internal workflow — Providing basic visibility will require that buyers prepare their data for sharing with suppliers. But this won't come cheap: More than 25 percent of upfront monitor hub costs — $1.9 million — will stem from the 140 days of personnel time needed to prepare internal processes for software applications.
Install basic integration pipes — To enable buyers to plug into their suppliers' existing data, firms must establish data integration pipelines that translate supplier data coming in formats ranging from Excel to XML. License and maintenance fees for integration software from firms like Tilion will make up 13 percent of total monitor hub costs.
Manage Hubs: $19.8 Million to Coordinate with Suppliers
To capture benefits like lower contract execution costs and reduced supplier miscues, firms can augment their basic hub with coordination tools in a manage hub. Buyers should budget an incremental $12.9 million and six more months of project time to:
Focus on joint contract execution — Manage hubs make it possible for buyers to share data that supports joint decision-making for processes like order execution and fulfillment. But to handle these procedures in a hub, firms must devote more than 260 days of personnel effort to map their work patterns across multiple instances of ERP - adding $5.4 million to the project bill.
Install externally facing software —- To aggregate and transact data across multiple suppliers, firms will install purchasing and forecasting applications from firms like Ariba and HAHT Commerce. The license costs and maintenance fees for this software will be $2.9 million - more than four times the cost of monitoring applications.
Expand internal connections — To deliver dynamic data like demand forecasts, buyers need to tap into multiple internal systems —- and then integrate this information with their network of suppliers. Firms will spend an additional $8.1 million to create code that grabs data like product requirements and connects this information to suppliers' systems.
Optimize Hubs: $52.9 Million to Streamline Time to Market
To create new operating efficiencies like reduced time-to-market, firms should build an optimized hub that automatically coordinates production resources across a network of suppliers. Built on top of the features of a manage hub, an optimize hub will add 14 months of project time and tack on $33.2 million in cost as buyers:
Harmonize internal activities — Private hubs help firms capture new efficiencies through activities like collaborative logistics and design for manufacture. But these processes require a high degree of coordination across internal departments, such as inventory management, marketing, and purchasing. What's the cost of this coordination? To create the architecture that connects touchpoints between these internal organizations, firms should budget an additional $8.5 million.
Exploit Internet-native software — A single piece of software can't support complex activities like capacity planning or strategic sourcing - so new tools will be needed that are capable of working with multiple firms. Buyers looking to Web-centric vendors like webplan and eBreviate will need to budget an additional $5.5 million over four years.
Connect with external partners — With internal process mapping for activities like collaborative design in place, companies will need to invest in infrastructure technologies to share both structured and unstructured data with partners. Because firms will need to integrate complex processes more deeply with their suppliers, they should plan to double integration spending to $12.5 million.
Collaboration Requires New Applications
As collaboration-focused companies expand their private hub efforts, they'll push the limits of most software vendors' current products. Existing Web-based B2B applications like mySAP.com were designed to support large corporations operating in a mature environment - with stable demand and a captive supplier network. But the world is changing. As firms increasingly collaborate with partners, they'll need a new underlying infrastructure to support:
Rich, real-time collaboration — Web-anchored supply chain applications like those from i2 Technologies can't rapidly reflect changes in partners' production schedules because their centralized databases need hours to collect and process such scattered information. So, high-velocity businesses like Cisco Systems that use these batch-based applications are forced to make decisions based on historical data. To continually track and improve its supply net's actual performance, Cisco needs B2B applications that enable real-time collaboration by exploiting a distributed data architecture.
Everything, not just everyone — Although a Web-enabled CRM application from a vendor like Siebel Systems can manage the cross-company information flow associated with order management, it doesn't tie that data to the physical assets used to fulfill that order — like the shop-floor equipment that manufactures the product or the container in which the product is shipped. To provide customers with more accurate and up-to-date order-status information, firms need B2B applications that can monitor all of the production and transportation assets within their fulfillment network.
Rapid responses to unforeseen events — Web-based B2B applications like e-procurement rely on a rule-based workflow engine to automate routine transactions between partners. But, these applications aren't designed to let firms proactively spot unplanned events like delayed parts or a looming equipment failure in a contractor's plant - let alone resolve these exceptions in real time. To provide preemptive customer support and continually optimize their asset use, firms need B2B applications that can sense and respond to unforeseen events — without human intervention.
Extended — XRM applications extend to multiple tiers of supply and distribution and within a single software installation.
External —- XRM applications and services are built on top of a Internet-native architecture that is hosted externally.
Viral — XRM applications create efficiency that partners will introduce
to their other customers and suppliers —- spreading the
efficiency like a virus.
XRM Applications: Get the Right Products to Market
To innovate continually, firms need to draw design insight from their partners. XRM applications will allow firms to synchronize distributed development efforts and get the right products to market fast by:
Monitoring unexpected shifts in customer demand — Firms that sell products with short lifecycles (like electronics and apparel) are challenged to actively detect even the slightest changes in buying patterns. Apparel-maker Zara has tied together all of its stores' point-of-sale systems and product-design applications through the Internet- allowing its designers to track buying patterns changes in real time. Zara then can decide when to incorporate a new color or cut into its products —- right up to the last week of its impressive three-week concept-to-store cycle.
Managing structured and unstructured collaboration — Besides exchanging structured data like RFPs and drug molecule designs, distributed development teams will also want to spontaneously communicate with each other. Vendors like Oculus Technologies and Annexient offer instant-messaging-based XRM applications that can support ad hoc interactions and rule-based collaboration within a multi-tier development network.
Optimizing new products' manufacturability and serviceability — Most product designs can't be manufactured as is, because of shop-floor constraints. But, these product deficiencies typically are detected only after a physical prototype has been created, or during the volume production cycle - resulting in costly design reworks and delayed product launches. Using Tecnomatix Technologies' XRM application, which helps firms model their contractors' shop-floor processes, BMW's R&D team can simulate its new X3's design against supplier Magna International's plant model — to spot and fix manufacturability problems upfront within seconds.
Figure 2 - Community management is the core of XRM application architecture.
Create Responsive Supply Networks
Technologies like Web Services will simplify partner integration and connect
more physical assets — from the supplier's tooling device to logistics
carriers' pallets — to business applications. The result: manufacturers
will finally gain real-time visibility into their supply and demand as their
XRM applications:
Monitor supply-net performance for exceptions — Manufacturers frequently
face "fire drills" in their plants as they desperately attempt to adjust their
production to address sudden swings in demand or unexpected supply constraints.
With Savi Technology's XRM application, which uses RFID tags to track the movement
of inbound materials, a Dell Computer plant manager can be alerted instantly
if the container carrying CD players for the day's production hasn't been delivered
— giving him enough time to reallocate his just-in-time production capacity.
Manage roles, relationships, and dependencies across a network of allies — Given their proprietary interfaces and centralized data architecture, today's supply chain applications like i2 Technologies can't support complex B2B interactions, like negotiation and mediation, across a multi-tier partner network. But XRM applications like Xebic and Living Systems will exploit semantic translation services based on emerging standards to support complex supply chain interactions — improving firms' responsiveness to partners.
Optimize entire supply nets by decentralizing their control — Supply chain planning applications like Oracle's that rely on batch-mode processing and forecasts won't cut it in the future when environmental data needs to be gathered and acted on in real time. But XRM applications from vendors like WorldChain and Valdero that exploit agent-based adaptive-planning services will let firms sense and respond to changes in their supply nets on the fly.
Enable Active Customer Service
Firms learn about their customers' problems after the fact — when they get an angry phone call. But XRM applications will let manufacturers actively spot performance degradation of their products installed at customer sites — making it easier for firms to engage partners in serving their clients.
Monitor pending customer issues — Most defective products, like Ford's Bridgestone/Firestone-equipped SUVs, are spotted only after customers start using them, costing their manufacturers millions in liability or warrantied maintenance. But once manufacturers like Maytag start selling sensor-embedded products, they will use XRM applications from eMation and Critical Reach to remotely monitor their machines' performance — and will alert customers when a thermostat or washer arm is likely to go.
Manage partner engagements in serving end customers — To provide cross-firm customer service or product bundles, firms today have to laboriously integrate their hardwired systems with alliance partners' back-office applications. But using an XRM application that exploits TransactPlus' partner-integration service hub, insurance giant American International Group (AIG) will be able to syndicate its underwriting services to multiple insurance exchanges and affiliate Web sites.
Optimize outcomes to operational bottlenecks — Even if firms can gain forward visibility into looming operational issues that could negatively affect their customer service, they still lack decision-support tools to resolve these bottlenecks rapidly. But XRM applications like Agentis will use agent-based adaptive-planning services to assist firms' decision-making when they face a critical customer-related crisis. For example, a software agent that monitors a BP refinery in Saudi Arabia detects congestion in one of the valves. It rapidly identifies and locates a BP-certified engineer in Venezuela and seeks his advice. The BP agent then links up with the valve's control system to activate the expert-recommended corrective action.
Preparing For Collaboration
Firms won't build collaborative supply networks overnight. Here are a few steps
that will help firms prepare for emerging XRM-enabled capabilities:
Practice private hub pragmatism — Private hub investments must fit within
today's constrained budgets and offer up demonstrable ROI. Proponents should
follow Ford Motor Company's lead and select achievable goals. Although the auto
giant spends $80 billion annually, Ford's private hub initiative with Newview
attacks just the $1 billion that Ford spends with 125 steel suppliers and stampers.
Ford deployed this pilot project in just six months —- this quick demonstration
of benefits makes approval of the next project much more likely.
Make change management job Number One — To realize e-business productivity
gains, firms can't simply throw technology at the problem. Instead, they must
work smarter through more efficient and effective management of existing resources.
Firms will need strong executive commitment to change management to ensure that
intercompany processes will work. Executives should create a leadership team
comprised of business unit heads — not just IT — to prioritize and
champion all e-business projects, and ensure that outside help providers like
eCommerce integrators have strong process management skills.
Experiment with Web services — While firms should focus on building their
e-business foundation over the next two years, they should also prepare for
the next wave of productivity by piloting a Web-based service project. Within
the next year, companies should:
1. Identify one internal business process that offers valuable capabilities
in the marketplace, like distribution warehousing or design simulation
2. Characterize the business activity in XML and publish to a trusted partner
3. Codify both technology and business-performance lessons learned
4. Push application vendors to build XML interfaces using standards like SOAP
and force infrastructure vendors like IBM and BEA Systems to provide a credible
Web services path
Forget about forecasts; feed suppliers with POS data — Twenty-four hours after the September 11, 2001, terrorist attacks, Wal-Mart could already report that its stores had sold 116,000 American flags. Because of its heavy investment in Internet-enabled point-of-sale systems, Wal-Mart and its suppliers can track daily store-level data. But its rivals' store-level data is at best 12 days old by the time their suppliers get it. To catch up with the number one retailer, Wal-Mart's rivals must stop engaging suppliers in protracted forecasting exercises; instead, they should upgrade their POS to Internet-based systems like IBM SurePos 700 and feed suppliers with live sales data.
Unify access control now, or watch client retention rates drop — A typical Global 3,500 firm has more than 180 directories. Without integrated access control, companies can't provide uniform access to partners and customers. Instead, firms must invest in a new security infrastructure that Forrester calls unified access control, which can link security and logic across heterogeneous applications in a multipartner setting.
Prepare for XRM's next frontier: thing-to-thing (T2T) interaction — While early-stage XRM applications focus on improving interactions within communities of people and computer systems, they yet have to extend to devices like trucks and shop floor equipment. However, if the MIT Auto-ID project sees the light of day, here is a plausible scenario for 2004: as a consumer picks the last six-pack of Dove off the shelf in a Tesco shop, the empty rack signals this information to the store, which notes it has run out of Dove and beams a signal for replenishment. A "destination-less" Unilever truck in the vicinity picks up the signal and delivers extra Dove packs to the store.
Conclusion
The initial wave of the Web has come and gone with much fanfare. In the wake of this enormous online surge, many firms have figured out that they can use the Internet to beef up their collaboration with suppliers. To cultivate these connections, companies can invest more than $50 million in a private hub. As corporations increasingly craft these collaboration venues, they'll find that traditional applications aren't well suited for the evolving supply chain relationships. The result? A new class of applications will emerge that Forrester calls extended relationship management, or XRM.
