Dynamic Trading: Supply Chain Networks Driving the E-Commerce Revolution
Supply Chain Evolution
Many early Internet success stories build on the medium's highly effective communication capabilities to enhance current ways of interacting and doing business. Consumers now have the capability to research, browse, and order a wide range of products and services. Businesses can now simply and economically share all kinds of information, ranging from employee benefits to material requirement forecasts, and annual reports with their suppliers, customers, employees, and shareholders.However, beyond those capabilities, something more fundamental is happening. Businesses are discovering that the ease of communication inherent in e-commerce can change the nature of business relationships. New specialist companies or departments can undertake specific logistics activities that were previously integrated into a company's core operations. The impact on the way the supply chain operates is far-reaching: the supply chain as it is known today will effectively disintegrate; the management of supply chain activities will become far more dynamic and decision-making will occur faster and will be based on real-time information.
This disintegration and the increased speed of decision-making create the opportunity for dynamic trading. The disintegration effect will often include the separation of the logistics information from the physical flows. Specialist logistics groups will not own any traditional logistics assets, but rather will manage the systems and make the decisions related to the supply chain network. The existing distribution companies will own the assets and execute the plans.
This disintegration comes at a time when most logistics professionals are focusing their time and their investment dollars on integrating the different components in their supply chain - internally, across functions within their companies, and externally with their trading partners, including both suppliers and customers. As companies will need to rely on the ready access to information contained in their transactions systems, this effort is a prerequisite to the emergence of dynamic trading.
In the longer term, specialist logistics companies may not remain independent operations, but could be bought and folded back into the operations of leading companies. If the new logistics companies can position themselves to generate premium profits and gain the power in the supply chain, then larger organizations will seek to take them over. Looking past the disintegration, the next stage in the evolution of the supply chain will more than likely be the reintegration of power and ownership of the supply chain. The current phase of disintegration represents the start of that process.
Dynamic Trading Networks
Understanding the impact of disintegration and reintegration of the supply chain in an individual company can be difficult because there are so many variables generated by other players. For one particular company, linking up with an industry-based service organization may be the best choice; for another, focusing on interaction with selected customers might provide the greatest source of value; while for a third, taking the bold step of creating an industry-level supply chain solution to generate a new revenue stream might offer the most attractive business outcome.The initial consideration for most companies is to determine which trading partners provide the best opportunity (or greatest real threat) for changing how business is conducted. From a supply chain perspective, there are two groups of trading partners: upstream partners such as suppliers, or downstream partners such as customers and consumers. Other partners operate in a parallel sense in the supply chain, such as third-party logistics providers or competitors. These partners tend to focus either on supplier-related or customer-related activities and therefore fall into either the upstream or downstream relationships described above.
The second consideration is the nature of the changing relationship. Will the e-commerce opportunities be used just to impact the way information is exchanged or will there be a fundamental change in the delivery mechanism as well? Information exchange alone can be as simple as automating current paperwork, such as Internet-based ordering and invoicing, but most companies take the opportunity to provide new services that are not possible in the old world. Examples of these services are collaborative planning, provision of supply and forecast information, and vendor-managed inventory.
In the examples above, the delivery activity has not significantly changed. The same truck leaves the supplier's warehouse and delivers product to the customer even if the delivery frequency and reliability has improved. More ambitious companies are pushing the possibilities further and are considering what new delivery mechanisms are possible. What about consolidating all deliveries for the industry by dealing with multiple suppliers or goods produced by other companies? Why not find alternative delivery networks that cut out intermediaries and deliver directly to the end customer or use third parties (for example franchisees or even customers) to act as stocking and delivery agents on behalf of the company?
Taking into account these two dimensions of the type of relationship (supplier or customer) and the nature of the relationship (changes in information or in information plus delivery), four supply chain models emerge from the use of e-commerce technology: purchase, service, supply, and delivery.
Figure 1.0 Four supply chain models
One feature of dynamic trading networks will be an increased focus on the function of logistics. In fact, a lack of logistics skills may be the limiting factor to the development of e-commerce rather than any paucity of technology skills. All types of networks have a large impact on supply chain processes, and companies will need managers with experience in supply chain planning, distribution, customer service, or procurement - the core skills of logistics - if they wish to implement successfully.
Let's look at each of the four dynamic supply chain networks in more detail.
Dynamic Purchase Networks
Dynamic purchase networks initially will be the most common form of supply chain e-commerce. Today, the technologies and processes that form these networks are known as e-procurement. E-commerce technologies and new-generation software packages used to redefine communication occur with suppliers. Typically, catalogues are made available online for an organization's employees to select items and make purchases with fully automated purchasing transactions and supplier communications. Central databases and effective control and approval processes provide improved coordination throughout the business. The unparalleled access to information given to purchasing departments enables them to select and manage suppliers in line with the objectives of their business.
The critical success factor for dynamic purchase networks is to ensure that the procurement strategy and the new e-commerce-enabled approach to purchasing are synchronized. The most common mistake is to apply a one-size-fits-all approach - to implement an online catalogue and put everything in that catalogue. Purchasing professionals in the company must reconsider the existing purchase strategies for each commodity group and supplier in the light of new technology and develop the new approaches to purchasing that best serve the objectives of the company.
Purchasing may be conducted through the enterprise resource planning system, with transactions communicated through the Internet rather than with paper or electronic data interchange. Alternatively, users may be provided with purchasing cards to order through the Internet, by telephone, in person, or by automated transaction. Another solution might use a browser-based catalogue from which users select items. The order transactions can be automated by the system with external communication being conducted over the Internet. The catalogue can be maintained either by the supplier or by the company making the purchase.
Supplier networks typically demonstrate a particularly quick payback of benefits . The required automation and simplification of processes reduce both labor and transaction costs. Collation and greater visibility of purchasing information improves decision-making and negotiation. Clearer information reduces cost by enabling the consolidation of orders and transportation activities. And finally, the inherently tighter purchasing controls maintain compliance with negotiated contracts.
Dynamic Service Networks
Dynamic service networks leverage the ability to easily communicate with customers through e-commerce to offer (and often charge for) value-added services. The ability to process and communicate information readily with customers enables companies to link themselves into their customers' systems and processes and start to undertake services that were once thought of as in-house activities. The services then provide a differentiating factor when the customer assesses alternative suppliers when the contract is up for renewal. The customer's decision about best supplier becomes determined less by product price and more by service capability.
The most important elements for developing dynamic service networks are deep understanding of the customer's business and the capability to develop advanced logistics services. Companies typically miss this opportunity because they only understand their customers' businesses through the eyes of the purchasing officer they deal with, and rarely get the chance to interact with senior operational or logistics managers. This leads to the self-reinforcing view that only price is important in the relationship, and the supplier quickly puts itself in the position of lowest-cost provider, which usually means razor-thin margins.
Most companies deal with a large number of customers, but often these multitudes can be grouped into a few customer segments, each of which has different service needs. Successful service providers recognize these different needs and tailor service offerings to each segment. The services typically reduce cost or add value to the customer's supply chain - for example, by reducing transaction costs, reducing stock-outs and production downtime, or freeing up the customer's management time.
Companies often dedicate resources to managing inbound supply and often have mixed results. Suppliers, therefore, have the opportunity to offer to conduct the inbound logistics activities on behalf of their customers. This might mean undertaking or supporting the planning function for the customers' inbound logistics. It might mean executing transactions such as inventory management, purchasing, reporting, or replenishment activities. There is potential to provide support information on costing, product performance, or manufacturing process advice.
For the supplier who has relatively sophisticated customers who value logistics and business services, there is an opportunity to gain efficiencies in intercompany transactions as well as to lock the company into the customer's business.
Dynamic Supply Networks
Dynamic supply networks change the nature of the supply model covering several companies or even an entire industry. These networks tackle the inefficiencies that build up when no one company has visibility to the potential synergies in supply. For an example, consider two companies with operations in the same region that are ordering items from overseas. Each will be placing orders with similar logistics requirements (similar pick-up point, similar destination, similar time-frame) but no one has the network visibility to see the logic of bundling the products together to reduce transport costs and provide an improved service.
The critical aspect of creating dynamic supply networks is to recognize the industries in which supply inefficiencies have built up and then establish the capability to manage a more effective network. Trucks, ships, and planes are being underused by companies that manage their supply chains as two-dimensional logistics activities. Each supply replenishment transaction is treated as an independent order generated deep within an ERP system. The purchasing department then acts on the order with limited consideration of consolidation opportunities.
Dynamic supply networks operate on the basis that there are multiple points of supply and multiple points of delivery that must be actively managed as a network. The network managers create value by gaining complete visibility across the network, and, therefore, can make decisions to maximize the efficiency of the total network. Once established, dynamic supply networks are often popular with all participants. The customers of the network see the reduced costs and better service of the system. They tend to be comfortable participating with their competitors as inbound logistics is rarely seen as a point of differentiation.
The capabilities needed to manage dynamic supply networks are deep logistics skills with a particular focus on systems development, planning and customer service. The first challenge is to create and maintain the network through the effective use of systems. Internet-based systems are critical for capturing the transactions and communicating with transport providers and suppliers. The transactions are then summarized into databases supported by decision support systems. The managers of dynamic supply networks conduct the planning activities based on the output from the decision support systems, coordinating with transport providers and suppliers to deal with any exceptions. The supply network will continually evolve as customers, suppliers, and products change. Therefore, a strong focus on customer service is needed to innovate and continuously improve the service, ensuring that the network continues to add value to the participants.
The benefits from dynamic supply networks come from the combination of greater automation of processes and the ability to consolidate purchase orders across supplier and transport providers. An early benefit is the reduction of administrative costs for each transaction. The major cost reduction target is transportation - by consolidating loads and reducing unplanned shipments. However, improved visibility of demand across several companies creates the opportunity to drive down procurement costs through not only volume price breaks with customers, but also a more powerful negotiation position. Further, tighter control of the supply side allows managers to gain other efficiencies elsewhere in the supply chain. Lower inventories, fewer stock outs that lead to lower production losses, and better customer service are some of the secondary benefits that may be achieved.
Dynamic Delivery Networks
Dynamic delivery networks redefine how a group of related products are delivered to the marketplace. Like supply networks, there are multiple sources and multiple delivery points so that the benefit is in the effective management of the total network. Unlike supply networks, strong competitive pressures are often at work as companies compete for access to the marketplace. Within dynamic delivery networks, customers order a wide range of products from a single organization, which then coordinates delivery from a variety of supply sources. Customers place orders to a central point either across the Internet or to a call center that then routes the order to be fulfilled from the most economical supply point. Electronic commerce is critical to provide connectivity across the network and to allow players to join without great expense.
Creating a delivery network is perhaps the most challenging of all the dynamic trading networks, but also perhaps the most rewarding. The opportunity to take on the role of network manager undoubtedly will attract interest from companies that either hold or have an ambition to hold the balance of power in the market. The key to becoming a network manager and achieving competitive advantage will lie in creating a recognized brand and achieving excellent execution.
Logistics will be the core capability of the network manager. The ability to set up, operate and develop a complex multi-company network requires deep skills across the full suite of logistics functions. Strategic skills are required to develop the optimum network configuration, alliance management is needed to marshal a large number of companies around a common economic imperative, and planning skills are needed to ensure that inventory and supply arrangements are in place to meet demand. Many of the operational activities may be outsourced to third-party providers, but the network manager will still need a strong capability in distribution and transportation management.
Success in creating a delivery network will have significant economic benefits. The network manager will hold the balance of power in the industry and over time will be able to generate premium profits from its operations.
The New Players in the Network
The new supply chain networks will play out quite differently in various industries, depending on the current logistics inefficiencies and areas of supply chain complexity. For consumer companies, delivery networks will be a major strategic consideration. For resources companies, supply networks will provide early benefits. For industrial suppliers, service networks will apply. Most companies will benefit from purchasing networks.The critical role in the new supply chain networks will be that of the network manager. In most cases, this is the position that will hold the power in the network and will extract a premium profit. The network manager initiates the network relationships, controls admission, and manages the information that makes the network function. The key success factors for becoming a network manager are being the first to build critical mass operations in the network or having some of the capabilities to effectively manage and develop the operations. These capabilities include:
- Service management culture
- Strong business and logistics management skills
- Systems development capabilities
- Working in partnerships or alliances
- Speed of change delivery
In theory, third-party logistics providers should be steaming into the new world based on their expertise in transportation and distribution. But, with a few exceptions, this is not proving to be the case. The logistics companies seem to be the laggards in developing the capabilities to manage dynamic networks - it might be a case of the people closest to the action being among the last to see it coming.
Many of third-party logistics companies are traditional companies with a deeply ingrained view of logistics based on their transportation and warehousing past. Managing contracts, managing assets, and managing industrial relations have been the traditional competencies for many of the industry leaders. The required information technology, planning, and service development competencies are harder to come by. In fact, many logistics providers are well behind in the information technology race, still lacking the generation of client/server business systems that are common in most of their customers' systems.
Capturing the Value from a Dynamic Trading Network
The development of a dynamic trading network should be thought of as a new business venture run by entrepreneurs rather than as a traditional change project. This creates a more iterative and practical approach that can achieve earlier results. Particularly valuable is early feedback from the market to start-up activities so that adjustments to the business model can be made. Andrew Berger's article "Leaders of the Web.com - Accelerating the Transition to the Web-based World" discusses how this might be achieved.The combination of e-commerce and logistics is driving the next stage of supply chain evolution. Fast, secure and seamless transmission of information between groups of suppliers and groups of customers is reshaping the business landscape by creating dynamic trading networks. These networks enable companies to offer superior customer service, reduce costs, and better manage their operations. Ultimately, the network manager will occupy the leading profit position in supply chain networks - that role will go to the organization that combines the business, logistics, service, and information technology skills needed to effectively manage the complex interplay of a trading network. Companies that can understand the extent of change underway in the supply chain and quickly reposition their organizations for network trading will be those that capture the value from dynamic trading networks.
Copyright 2000 Accenture LLP
