Creating Value from Business to Business Integration

The return on investment (ROI) for business-to-business integration is high­often in the range of five to fifteen times the investment or more, with a payback period typically measured in months, not years. This is considerably higher and quicker than for internal integration projects (ERP) where ROI is usually in the range of 1.5 to 2 times the investment and payback periods are typically in the two- to three-year range.

Figure 1.	Business-to-Business Integration

High returns from external integration can be achieved even when internal integration is not very sophisticated. When a complete suite of enterprise applications is in place, extending the infrastructure to integrate with business partners leverages and multiplies the ROI on that investment. The message here is that it isn't necessary to wait until your internal integration efforts are complete to begin external integration initiatives.

Early Adopters will be Market Leaders
To get ahead of competition, forward-thinking corporate executives will put a very high priority on implementing business-to-business integration initiatives. They will leverage relationships with partners to reduce time-to-market, increase responsiveness, improve quality, shrink inventories and expand to global markets.

Leading companies that are taking advantage of business-to-business integration today can be found across industries. Companies such as Dell, Wal-Mart, Cisco, Federal Express and Amazon.com have received a great deal of publicity for tightly integrating their value networks. Companies that implement efficient and effective business-to-business integration now will survive and prosper. You cannot afford to be left behind.

Highly Coordinated Communities of Trading Partners
As markets globalize, competition intensifies, and technologies such as the Internet reduce the cost of interactions between organizations, whole new virtual corporation business models are evolving where many companies interdependently deliver innovative products and services to the market.

Figure 2.	Business-to-Business Solution Requirements

Business-to-business integration is the enabler of highly coordinated communities of business partners and customers, all with shared business objectives, collaborating together with the speed and agility of a single, well-run organization. In this model, customer orders trigger real-time interactions between multiple companies that coordinate their actions to fill the customer's needs. The virtual corporation model becomes even more potent when combined with value network principles: using parallel simultaneous interactions between trading partners rather than serial, one-step-at-a-time, sequential activities.

Enterprises that successfully implement the virtual corporation model will realize a profound improvement in their ability to compete. No executive can afford to postpone this fundamental transformation of business if the goal is to survive and succeed in networked economy.

Drivers of Business-to-Business Integration
The need for increased business-to-business integration is being driven by a number of interrelated factors:

• Global markets:
  To compete in global markets, companies leverage international partnerships for sourcing and to serve unique local markets. A high degree of integration is needed to ensure smooth operations across geographies.
• Product and supply chain complexity:
  Many products, such as computers and automobiles, are being delivered by an increasingly complex network of partners, requiring a high degree of automation and integration. The complexity of supply chains has left billions of dollars in synergy opportunities available across enterprise boundaries.
• Increased outsourcing:
  Many companies are sticking to what they do best and outsourcing critical functions to service providers. The outsourcing partner must coordinate as closely as if they were an internal division.
• Time-to-market requirements:
  To get products to market swiftly, businesses are being driven to collaborate with their suppliers in joint engineering, collaborative demand planning, and coordinated supply chain management.
• Reducing inventory levels:
  Traditional business models result in large excess safety stocks to compensate for lack of information about actual supply and demand. To reduce inventory while improving service levels, trading partners must collaborate, integrate and share a range of information that has traditionally been considered proprietary, such as forecasts, demand data and production data.

All these factors are driving companies to form close-knit value networks by implementing business-to-business integration.

Types of Business-to-Business Integration
There are a wide variety of areas across a value chain's operations where business-to-business integration can have a dramatic impact. Each of these areas of partner interaction delivers its own set of benefits. The relative value of these interaction types to an individual company will be dictated first by the industry they belong to and then by the company's unique value chain strategy. Each company should develop an inter-enterprise integration strategy, targeting those areas that will deliver the highest ROI.

Figure 3.	Synchronizing Demand and Supply

Business-to-Business Solution Requirements
The virtual corporation business model requires an automated technology underpinning. Manual processes are too slow and error-prone to support this new business model. Solutions should support the following functionality:

• Shared complex interenterprise interactions/processes:
  Automated shared processes involving real-time interaction between multiple trading partners, often with multiple steps and decision points.
• Integrated enterprise applications:
  Trading partners' enterprise systems tightly linked to support information sharing, transactions, and collaboration despite their heterogeneity.
• Rich information sharing:
  Sharing a variety of important nonstandard information that may have been considered confidential in the past. For example, sharing forecasts rather than just placing orders.
• Extendibility:
  Ease of quickly deploying many complex processes with many trading partners without loss of autonomy or requiring major redesign of internal systems and processes.

Technologies traditionally used between trading partners will continue to be used, but are not sufficient to meet the requirements of business-to-business integration. Methods such as mail, phone, fax, e-mail, and the Web cannot handle complex automated interactions or high transaction volumes and are prone to error. Electronic data interchange (EDI) can handle higher transaction volumes, but cannot handle transaction complexity or a rich variety of data.

What is needed is a secure, scalable, extendable, reliable interenterprise solution that can handle high volumes, high transaction complexities, high levels of automation and integration with enterprise applications, and rich data/information sharing.

Figure 4.	Multiple Automated Processes Involving Multiple Systems

Case Studies in Business-to-Business Integration
Today, companies around the world are finding the benefits of true business-to-business integration. These companies have increased their competitiveness in the market by offering new products and services or dramatically reducing the time and cost associated with delivering quality existing products to the market. In these examples, the tangible ROI achieved from business-to-business integration is in the range of 5 to 15 times the investment. Typically, the strategic, intangible ROI is far greater.

Chrysler Corporation
Chrysler Corp. recently merged with Daimler-Benz to form DaimlerChrysler, the fifth largest automaker in the world, with annual revenues of approximately $130 billion. The automotive value chain is a complex one, with multiple tiers of suppliers and distributors delivering products, which are often built to order. One of Chrysler's main strategies for increasing profitability and shareholder value is to continually improve their working partnership with their trading partner network.

Each vehicle Chrysler makes has an average of about 4,000 parts that are purchased from suppliers, accounting for approximately 70% of the total components. Therefore, the effectiveness of supplier relationships is a major driver of cost, quality, and product development time. Chrysler's approach is to structure collaborative processes with suppliers that yield results.

In 1997, Chrysler began using electronic material releases to coordinate production with four suppliers. The program was successful, and Chrysler now synchronizes electronically with 117 suppliers, covering about 90% of its business. These changes have dramatically reduced the propagation time from one week per supplier down to, in some cases, a few hours.

• Industry: Automotive
• Problem: Production not well-synchronized with suppliers. Materials release propagation took too long.
• Solution: Electronic materials release process between Chrysler and multiple tiers of suppliers. Integrated with their enterprise systems.
• Benefits:
  -Reduced materials release propagation from one month to less than one week
  -50% lead-time reduction.
  -20% expedited freight reduction
  -$2 million to $3 million per year savings for each large supplier.
• Next steps:
  Receive demand information electronically from dealers.
  Propagate demand information directly throughout multiple tiers of supply network.

Taiwan Semiconductor Manufacturing Company
Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest contract manufacturer (foundry) for integrated circuits, with revenues greater than $1.5 billion. With operations in the United States, Europe, and the Far East, TSMC's 400 customers include fabless semiconductor companies and integrated device manufacturers (IDMs). TSMC offers turnkey services: taking a client's product from design through to testing and assembly.

TSMC's competitive advantage has traditionally come from technology, capacities and pricing. As competition increased, TSMC realized it must focus on superior customer service as a differentiator. TSMC was looking to get closer to their customers, so the company would not be considered merely for short-term capacity, but instead seen as an integrated and essential part of their customers' businesses­a virtual manufacturing facility.

TSMC wanted to improve its performance for the two top criteria on which customers judge contract manufacturers: visibility into the off-site manufacturing process and order lead time. TSMC could not support the virtual fab model. The company's customer service representatives needed to extract information from the TSMC order management system, manipulate it into the desired customer format, and then share the information with customers through rudimentary methods such as fax, e-mail, and EDI. These manual processes caused information sharing to be infrequent and error-prone with limited customer visibility into the decision-making process.

To achieve service excellence, TSMC needed to provide its customers with the same level of information as an in-house production manager would provide to its own logistics department. TSMC also wanted the relationship to be reciprocal; information that a product manager would require to function effectively should be available to them.

TSMC selected a software package­a configurable "business-to-business application" ­that supports shared automated processes linked directly with existing enterprise systems. The software was designed to flexibly accept all forms of information and integrate with each company's business applications. The package enabled TSMC's customers to get the information they wanted directly from TSMC's system more frequently in the form they wanted, and it placed the information directly into the customer's own enterprise systems whenever needed. The software automates the processes between the companies rather than just transferring data from one place to another.

• Industry: Semiconductor
• Problem: Customer visibility into manufacturing process
• Solution: Business-to-business software package to link with customers Order management
  Work in process (WIP) tracking
  Forecast sharing
  Engineering design and test
• Benefits:
  14 times ROI in three years
  High customer loyalty
  Eliminated manual processes
  25% reduction in customer lead times
  Reduced WIP inventory
  Improved capacity planning
• Next steps:
  Rollout to 80% of customer base
  Add new processes
  Integrate with suppliers

Nabisco and Wegmans: Leaders in the Food and Grocery Industries
Nabisco Holdings Corp. is a leading food manufacturer with $8.7 billion in sales, 50,000 employees, and a presence in more than 70 countries. Nabisco, the largest cookie and cracker maker in the United States, has been under fierce competitive pressures recently from competitors with low-cost, similar-concept products. Nabisco is focusing on better management of its direct-store-delivery distribution system as one of the key factors for improving its position in the market.

Wegmans is a $2.4 billion grocery chain with 56 stores. Wegmans has become an influential leader in the grocery industry, noted for its innovation and use of technology. For example, Wegmans was a leader in the use of EDI-enabled vendor-managed inventory (VMI) partnerships with suppliers. Wegmans is striving to achieve substantial revenue growth.

Nabisco/Wegmans faced the same problems as most retailers and consumer packaged goods manufacturers. For a single product, retailers and manufacturers typically have multiple forecasts­each developed for a special purpose­and no agreed integrated view between them. Each company makes decisions based on its own view, and each worries that "the others" are not going to hold up their end of the process. This causes uncoordinated actions along the value chain and a mismatch in supply and demand. Product shortages lead to lost sales, while excess inventory leads to expensive waste.

The manufacturer/retailer relationship can become adversarial under these conditions. Second-guessing exacerbates the already suboptimal operational decisions. Manufacturers build up "just-in-case" inventory to give themselves a safety margin against unpredictable retailer demand. Retailers overorder from manufacturers because they have come to expect only partial deliveries.

If VMI is being used, as with Nabisco/Wegmans, then the retailer often requests a higher number of days of inventory in stock than is actually necessary. Ironically, both retailers and manufacturers often have access to very sophisticated decision support systems, but these systems are not fully integrated with the current forecasting and replenishment processes across the value chain.

To address these problems, Nabisco and Wegmans decided to implement CPFR, an approach where companies create shared processes that cut across their organizational boundaries. CPFR involves both parties agreeing to a common business plan, sales forecast, and order forecast and then automating replenishment.

Participants exchange forecast data and manage exceptions to the forecasts together, mutually adjusting common forecasts as conditions change. To streamline this collaboration between companies, a technology infrastructure is needed to gather information from enterprise systems, send data to partners, and view it jointly.

• Industry: Food/grocery
• Problem: Uncoordinated value chain resulting in excess inventories and moderate service level
• Solution: Demand and supply coordination using the Collaborative Planning, Forecasting and Replenishment (CPFR) processes
  Three-month initial effort
  Forecast sharing/coordination
• Benefits:
  Sales up 47% in three months
  Inventory reduced 17%
  Warehouse service levels increased from 93% to 97%
• Next steps:
  Establish a more scalable technology infrastructure
  Expand to other categories
  Expand to other companies

Technology Requirements
While business models and interactions may differ across organizations and industries, many common technology requirements emerge as business-to-business integration standards. When selecting an effective solution, companies must identify and consider the following criteria:

• Extendibility:
  Ease of process design and tailored deployment with many trading partners. The solution should provide an easy way for multiple companies to participate in shared process design, review, testing and rollout while each maintains autonomy over its internal process decisions. Ideally, the solution includes prepackaged libraries of industry-specific, best practice process definitions.
• Application integration:
  The infrastructure should support a modular, easy-to-deploy approach to integrating with ERP, supply chain management and legacy application systems.
• Security, scalability, and robustness:
  Many interenterprise processes are mission-critical. The system must be highly robust and reliable, with tight, integrated security. It must scale to support many processes, many trading partners and high volumes of interactions.
• Heterogeneous environments:
  The system must support a wide variety of data formats, systems, protocols, databases, and operating and messaging systems.

There are robust commercial business-to-business integration solutions available today. These solutions should be considered, since the right package can dramatically shorten implementation time and costs while ensuring high levels of availability and security.

CONCLUSION
The Power of Business-to-Business Integration
In most trading partner relationships, there is a significant amount of unclaimed "money sitting on the table" because of many gross inefficiencies. The case studies show that progressive companies are integrating closely with their trading partners today and receiving substantial benefits. Well-executed business-to-business integration creates extremely loyal customers and reliable, cost-effective, responsive suppliers.

Companies are using business-to-business integration as a powerful competitive weapon. New technologies enable entire value networks to join forces and synchronize their businesses as one unified virtual corporation with unparalleled resources and global reach.

Companies that wish to survive into the 21st century are not procrastinating. Many have already implemented high-ROI business-to-business integration solutions. They are already learning from and improving these experiences. Forward-thinking enterprises are taking the virtual corporation model to new levels of responsiveness, efficiency, profitability, and market domination. The time for change is now.

About The Author
Ken Ross
President and CEO
Extricity Software, Inc.

Ken Ross co-founded Extricity™ Software in April of 1996 and serves as president and chief executive officer. He is responsible for defining the strategic direction for Extricity Software.

Ken has over 20 years of experience running successful enterprise application companies prior to founding Extricity. Most recently, he served as CEO of Pillar Corporation, a leading enterprise budgeting software company. Earlier in his career, Ken founded and grew Ross Systems to be the largest vendor of financial software applications for the DEC VAX. He has also served as CEO of Documentum and a consultant to a variety of companies in the computer industry, including Enterprise Integration Technologies (EIT).

Ken holds a SB degree from MIT and an MBA from Stanford University.