Connectivity, Collaboration and Customization: New Benchmarks for the Future
The new business alphabet requires a glossary to clarify and interpret the meaning of the many new and newer acronyms. B2B and B2C are not shorthand for Shakespeare but the new language of the Internet. Terms such as EDI, HTML,WMS, CPFR, and many more have invaded the business vocabulary. To some extent they signify the rapid change that technology has brought to the business environment. These terms and related terms suggest that managing business in the 21st Century will be significantly different than earlier management approaches.
The business decision-maker will not have to wait several decades to feel the impact of these seismic changes to the business environment. The decade of the 1990s was a foundation decade for building and testing new business models. Some of the new business models worked to plan and others did not. By the end of the decade many of the high flying dot-coms had burned through their investment capital and learned that regardless of how ingenious the product offer, the firm still had to earn a profit. Bright-eyed software entrepreneurs broke their pick on the hard rock of competitive reality.
All this is not to suggest that the work and innovation of the 1990s was somehow a failure in moving the business process to the next level. On the contrary, there was probably more positive change in the decade of the 1990s than in any decade since the beginning of the industrial revolution. The Internet became an accepted innovation by both small and large industry alike. New software platforms allowed the decision-maker to see more information more quickly. The Internet facilitated low cost communication between buyer, seller, and logistics support agencies. All of these changes and more had their roots in the decade of the 1990s.
One could argue that the turning point to the 21st Century was also a turning point in the basic business processes. Business firms of different sizes and in different industries found exciting new ways of providing value to their customers. The competitive playing field was changed, and the competitive bar went up a few notches. In their anxious quest to keep up, many firms invested in what they thought would be a "silver bullet" only to find that the magic was not in the technology but in the application of the technology to forge new relationships and new value equations.
The Study
This discussion focuses on the period from 1998 to 2004. The underlying thesis for the discussion is that this is an important period of transition in the practice of management by the business firm. The study results are based on a mail survey directed to a limited number of logistics and supply chain managers, directors, and vice presidents who were members of the Council of Logistics Management. The study was conducted during late summer, 2000. The 118 respondents were from a wide variety of industries but the consumer packaged goods, chemical, electronics, and healthcare were dominant.
The reader that is interested in more details on the sample should consult the 2000 Career Patterns Study, which is available in the CLM Annual Proceedings and posted on the CLM website.
The survey response data is not presented as a statistically significant cross section of industry. The fact that all of the respondents belong to CLM probably biases the sample. The writer believes that this membership provides a positive bias in the sense that it is the response of engaged and active executives. The data collection process is designed to identify broad trends in best practices. The estimates for the years 2002 and 2004 are estimates. These estimates are what a select, informed cross section of executives will target in their business planning process.
As noted earlier, one objective of the research was to identify best practice trends in logistics/Supply Chain Management. Three broad trends emerge in the relationship segment of the research: 1) Connectivity; 2) Collaboration and 3) Customization. In the sections below, each of these trends will be discussed and some of the supporting data will be presented.
Connectivity
It is safe to say that one of the key relationship trends of the 1998 - 2004 period will be connectivity between all of the key partners in the supply chain. In Figure 1, the trend in "Purchase Orders Submitted Electronically" is presented. There are several interesting results illustrated in Figure 1. First, the trend is overwhelmingly positive. The results suggest that over 85% of purchase orders will be submitted electronically through either the Internet, EDI or an industry portal. Second, the Internet is the fastest growing segment of the electronic connectivity portfolio. Third, the Internet is not replacing EDI but is slowing the growth trajectory of EDI. Fourth, the industry portal will have some significant growth potential during the first half of the first decade of the 21st Century. Certainly, one could argue with the numbers. The actual number in 2004 might be 65% instead of 85% or even 55%. The overpowering takeaway from the chart is that the slope of the curve is strongly positive.
Figure 1 - Purchase orders submitted electronically (mean)
In Figure 2, the actual and forecast calculations for "Domestic Customer Orders Transmitted Electronically" for the period 1998 to 2004 are presented. The results from this figure mirror the results of Figure 1. Approximately 83% of domestic customer orders will be transmitted electronically either through the Internet or through EDI systems.
Figure 2 - Domestic customer orders transmitted electronically (mean)
Internet or EDI transaction with Third-Party Support Agencies show similar patterns in terms of electronic transaction as a percent of total transactions. However, electronic transactions with third parties will be dominated by EDI rather than the Internet.
These results on connectivity in the supply chain should be interpreted with caution. The results are not meant to suggest that all firms will be connected to suppliers, customers, and third-party providers. Initially at least, it is also likely that electronic connections will be with key accounts and important business partners and then migrate to lower tier customers, suppliers and third-party providers.
Collaboration
Collaboration can have different definitions for partners in the supply chain. The term usually has the following element to some degree: 1) Mutual trust; 2) Sharing of information; 3) Sharing of knowledge; 4) Relatively long planning horizon; 5) Multiple-level relationship and 6) Process for sharing benefits and burdens. Collaborative relationships usually take years of resource investment on both sides of the relationship to really test the limits of cooperative processes. It should be recognized that it is much easier to be a partner when the economy is booming than when the economy is on a downward slide.
The study explored best practice in the channel relationship between buyer, seller, and third party. In Figure 3, the percentage of respondents declaring that they either had or planned to develop a strategic partnership with their key customers, key suppliers, and key third-party providers is presented. It should be noted that actual mean percentages for 1998 and 2000 are almost identical for all three of the potential supply chain partners. In the estimated period (2002 and 2004), the numbers for the key customers and key suppliers remain identical and the third-party provider percentage lags behind the estimates for key customers and suppliers. Overall, the mean percentage increases between two and two and one-half times in the six-year period between 1998 and 2004. Almost two-thirds of the respondents expected to have strategic relationships with their key customers and key suppliers by 2004. Over half of the firms expected to have strategic relationships with their key third-party provider by the year 2004.
Figure 3 - Strategic partnerships with key customers (mean)
The types of collaboration continue to expand as the relationship between partners becomes more robust. Figure 4 is illustrative of this changing degree of collaboration. The number of respondents reporting that they either had or expected to collaborate on the co-design of a product with key suppliers more than doubled during the six-year period from 1998 to 2004. By 2004, fully a third of the respondents expected to be doing some type of key design with key suppliers.
Figure 4 - Co-design of products with key suppliers (mean)
Collaboration is a work in progress. It is dynamic and entrepreneurial and is frequently the outcome of trial and error between the partners. At the present time there does not seem to be any real agreement on what constitutes a supply chain partner. As one executive explained to the writer, "As long as the supplier has the best price and the best service, they are our partner." Clearly not a widely held view for building a long term customer relationship!
Customization
The strategy of molding a product service strategy to more precisely fit the value expectation of a specific account has gained supporters during the latter half of the 1990s. A customized approach might include everything from building customized pallet loads on a day by day basis to large scale CPFR integration with the trading of specialized personnel between the partners. New manufacturing and information technology and new ways of analyzing customer value have made it possible to more precisely balance resource investment cost and potential individual customer revenue streams. Customization is not a single decision point where the firm finds the customer's "sweet spot" and the firm continues to exploit this knowledge as a competitive advantage indefinitely into the future. The competitive playing field is dynamic and the care and feeding of a long-term relationship requires the continuing attention of the partners in the relationship.
In Figure 5, the percentage of respondent firms that either have or expect to customize an approach with key accounts is identified. In the six-year period from 1998 to 2004, the percentage of respondents expecting to develop a customized relationship with key accounts more than doubled. Over six out of 10 of the firms reported that they would try to develop a customized relationship with all key accounts by 2004.
Figure 5
The ability of the supply chain partners to customize a value proposition depend, in large measure, upon the factors noted in the collaboation section above. If the basics for building a relationship are not present, then the prospects for successfully building a customized value package are unlikely.
The Challenge of Change
The transition from a competitive to a cooperative business process offers a set of difficult challenges to the firm. First, the idea that a customer or a vendor could indeed be a partner and that traditional channel bargaining could be a non-zero sum game activity, could be a difficult proposition for most management cultures to accept. This transition is more than simply the CEO waving a wand and ensuring a culture change in the organization. It requires a change in the incentive system for the organization and in many ways a re-tooling of the mindset of the entire organization.
Second and related is the difficult internal sell of freely sharing information with vendors, customers, and third parties. In the traditional organization, information is power and there is a reluctance to share knowledge or information with anyone external to the firm (and often not even those internal to the firm). The thought that it is possible to do collaborative forecasting with a customer or supplier and to share our "numbers" or ideas on new products is a stretch in most organizations. It requires instilling in the organization a sense of shared mission and an element of mutual trust. This is not a natural evolutionary path for the organization but requires a careful nurturing and educational process within the entire organization or the firm.
What is truly striking about the data presented in Figure 1 through Figure 5 is the optimism of the respondents on the current and anticipated success of these new collaborative efforts. These findings, while subject to all of the limitations noted earlier, might suggest new competitive leadership benchmarks for the next decade and different ways of driving new business processes for the first decade of the 21st Century.
