E-Commerce and the Supply Chain Director

Transcription

1 Putting the e in partnership How do some organisations use e-commerce as a major positive factor to grow alliances while others use it to damage partnerships? Roger Pudney and Mike Malmgren investigate. Roger Pudney is a tutor in international strategic management at Ashridge. He teaches and consults extensively in the area of creating competitive advantage from strategic collaborations and the integration of mergers and acquisitions In the pre-internet days there were electronic as pricing and order status. Additional Internetbased applications will be added as its customer pre-cursors of e-commerce. The best known of these is electronic data interchange systems (EDI). In industries evolve. many cases EDI led to a real improvement in The supply chain director of one of the world s collaborations between companies. It acts as a major paper companies, which is paying very close symbol of openness and the task of transfer of attention to improving the efficiency of its supply knowledge and data can be made automatic. chain management processes, believes firmly that However, some companies are now using both "you can t be good at supply chain management EDI and Internet-based applications to help build without good e-linkage it s like having your house e-partnership. There are differences between the two in order". One of the key benefits this company has approaches interactions via the Internet tend to received from e-linkages is much better forecasting take place in real time whereas typically EDI is more of future demand and much stronger links to of a batch process; the Internet works on a global customers own planning systems, including basis, while EDI tends to work more regionally and financial planning. "It s a new way of thinking," says is more expensive than the global low cost, more the supply chain director. standardised approach of the Internet. The EDI This comment is echoed by a global drinks approach is usually only viable with large businessto-business customers whereas the Internet can be Extranets open to its distribution partners. They company which has built password-protected adopted by any size of business. contain, among many other things, all brand In the past two years, down cycles in industries manuals. However, the company is adamant that such as telecommunications, compounded by one of the risks of e-commerce is that "you forget to problems in agreeing Internet standards, seem to go and see your partner the Internet should be have slowed the adoption of Internet-based additional, not a substitute for personal contact". e-partnering applications. Some companies have One key question related to e-commerce is opted instead to build on their past investments in whether it will bypass distribution channels because EDI systems. For example, ITT Canon, a global producers of services may go direct to their major supplier of electronic connectors and switches to customers instead of through existing distribution companies such as Motorola, Concept and TRW, channels. In the electronics industry (as in many uses both approaches. EDI is still its main other markets), distributors for companies such as e-partnering method, with Internet-based Hewlett-Packard (H-P) face competition from direct communication used for specific applications such e-business sales to corporate customers instead of

2 through designated distributors which H-P calls channel partners. H-P has a record of strong channel relationships and this will mitigate against large scale bypassing because of the added value provided by the distribution channel partners in the appropriate market. In the electronics market this can include systems integration, specialist software development and easier access to customers. From the distributor s point of view, their defence against direct e-commerce is through increasing the cost to corporate customers of switching from the current supply arrangement. These switching costs include the actual cost, disruption and the loss of the close relationship which comes from working in a true partnership with the manufacturer and distributor. In this sense, partnering may be under threat from e-commerce in distribution channels, but it also constitutes the best defence against such a trend. As one type of e-commerce between businesses, e-procurement has particular advantages to purchasers of standard items/services and components. Indeed, we believe the most obvious impact of e-commerce is on customer supplier relationships, particularly through e-procurement, the online web-based purchasing of products and services from suppliers. Examples indicate that there is very substantial scope for cutting costs by automotive manufacturers General Motors, Ford, Renault, Daimler Chrysler and Nissan (whose annual aggregate total purchasing bills amount to well over $250 billion). Similarly, in the aerospace sector, Boeing, Lockheed Martin, BAE Systems and Raytheon, working with the e-commerce company Commerce One, have created a web-based exchange called Exostar which aims to handle a large part of the founders procurement total of around $70 billion. The initial focus of Exostar was described as rationalising the four companies procurement, particularly for low cost off-the-shelf components. Other exchanges exist in the global retailing, chemicals, paper and steel industries. In the past 18 months however, the rate of growth of these e-markets seems to have been below the initial predictions. This appears to be due to a combination of lower spending by companies on IT, natural reluctance by suppliers to participate and difficulties in developing the underlying services such as forecasting and replenishment systems. The Chief Executive of a major global engineering component company has had, in his own words, "mixed experiences" of using e-exchanges. As he said, "our strategy remains to develop and sell highly engineered, added value products, which can't be bought and sold like a bag of coal." streamlining buying activities through e-purchasing. IBM has cut some $7 billion on its purchasing in the last five years, according to a Beyond commodities senior director of procurement in Europe. However, relying solely on e-procurement is less appropriate for higher specification goods where tight relationships between buyers and suppliers may be more important. Some of the biggest savings are being created by electronic trade exchanges, for example COVISINT, which was set up by five of the world s largest But what about the impact on relationships where the products are not commodities? One of the features of the exchanges and, increasingly, of individual company purchases is that they make use of e-auctions. Many of these are auctions where the suppliers are invited to submit bids, starting from a low figure and where the price Mike Malmgren is a programme director at Ashridge working on strategy and organisational development with a particular focus on the emergence of the Internet and its implications for business strategy. He works with a range of international clients as well as Internet start-ups and new ventures. 11

3 Putting the e in partnership 12 escalates on a regular timed basis with the first bidder winning the contract. One example of an industry where we have concerns about the impact of e-procurement is the supply of specialist chemicals (in the form of flavours and fragrances) to global consumer goods companies such as Unilever, Nestlé, Procter & Gamble and the major cosmetic companies. In some cases the flavours and fragrances are standardised and with low R&D costs. However, in many other cases, they are a critical added value component to the final product such as a ready meal or a shampoo and result from substantial R&D and joint collaboration with the customers. The most obvious impact of e-commerce is on customer supplier relationships. Historically, the global flavour and fragrance houses have worked in close core supplier relationships with their major customers to supply them on a global basis with innovative products. One recent trend in this industry could be described as bipolarity, with some major global companies using e-commerce to get closer to joint development with the flavour and fragrance houses, while others are taking their suppliers high value innovative products and submitting them to electronic auctions, in which, in some cases, the suppliers decline to participate. Apart from major cost savings on standard items and e-procurement, what are the other critical uses of e-commerce in partnering? Two areas stand out. The first is the powerful impact of e-commerce on product development. For example Boeing s computer-based development system, which was first used to develop the 777 aircraft, made heavy use of electronic contact for its design. The centre of the system was an online electronic prototype on which Boeing s R&D organisation, manufacturing units, suppliers and airline customers could operate simultaneously in a parallel development process which helped dramatically to accelerate the development cycle for the new aircraft from a normal timeframe of three to five years down to 18 months. Second is one of the unsung advantages of e-commerce building internal partnerships within organisations. For example, the Swedish company ABB has used its electronic "Pipeline" internal product development and project management system to globalise the company s R&D. This involves eight major laboratory centres on three continents and is providing it with a competitive advantage against significantly larger companies such as GE. The company regards it as a critical milestone in enhancing its innovation processes by making global innovation possible. Motorola has used a digital simulated design and testing process for new products and has extended this from focus on the design/test part of the process to the entire development process. Advantages are high speed and low cost compared to previous systems and a rapid merging of tests which were previously sequential and which can now be integrated with other parts of the innovation process such as technology development or market research. In the air freight business, Lufthansa Cargo has built electronically integrated alliances with its partner airlines to provide a more global network and to integrate vertically with freight forwarders and logistic service providers to form what it calls a "virtual integrator". Hewlett-Packard is reputed to have saved over $100 million a year by extending its production planning Intranet to its suppliers. Real electronic integration of large companies is now becoming much easier to establish because of Internet-based approaches. Returning to the issue of internal partnerships, the use of electronic commerce is perhaps particularly important in industries where the development and product lifecycles are

4 shortening inexorably, for example, the mobile telecommunications market. One major player has accelerated its global development process between its operations in Northern Europe, the US and the UK by having twice-weekly Internet-based meetings between the R&D engineers in the three locations. The meetings include presentations, designs and complex spreadsheets which are worked on simultaneously. Face-to-face meetings take place every quarter in addition to the electronic meetings. Will e-commerce eventually take over the whole process of transactions between major business entities? The Marine Alliance; the global strategic alliance between BP Marine and Unitor (the Norwegian chemicals and technical supply company) exists to provide ships with a whole range of products such as lubricants, technical ship supplies and safety services on board. The view of a senior Director in the Alliance is that "the impact of e-commerce may change the way that customers buy but it will not take over the whole process for example if I'm a customer, who do I call if something goes wrong, and who delivers the stuff to my ships in Hong Kong? The CEO of one of the Alliance's transaction portals added: "e-business won't replace customer service. But in the future, in major customer-supplier relationships it will help crystallise common needs and lead to development of common business processes with much better joint data. "The concept of the "extended enterprise" meaning that organisations are increasingly dependent not on their own resources but actively seeking the use of those of other organisations has proved helpful in furthering understanding of partnerships. This brings forward the underlying question of how to move the mindset from a competitive position to a collaborative relationship. There is limited evidence of successful collaborative relationships in competitive environments. This explains the proliferation of new electronic relationships and begs the question: are organisations and managers ready to forego some short-term gain for the long-term competitive advantage that collaboration can create? PROCEEDO GO A new and increasingly important aspect of electronic connections between organisations is the development of electronic market places, e-procurement companies and software companies such as Commerce One, SAP, Oracle and IBM. In the Nordic region the most successful independent e-procurement company is Proceedo ( It is a classic dot-com start-up, raising venture capital in 1998 and then surviving and thriving in the years during and after the dot-com boom. Proceedo provides three types of services: Proceedo Process a web-based e-procurement solution with support for the whole procurement process, from requisition to payment.the solution includes functionality for purchase order, goods receiving and invoice handling as well as change management, operations and support. Proceedo Market a private marketplace with access to the company's own suppliers and business conditions. Proceedo Market can be integrated with the company's e-procurement tool.the solution includes supplier content management, change management, operations and support. Proceedo Connect streamlines communication of electronic business documents, mainly orders and invoices with the company's suppliers. Proceedo ensures the communication with the supplier with respect to all existing formats and standards for transfer of electronic business documents, for instance EDIFACT and XML. 13

5 Putting the e in partnership Our view of the overall impact of e-commerce is that it seems to be potentially a major enabler of further rapid extension for those organisations seeking genuine partnership. That is the positive use of e-commerce in partnership. However, the warning signs are that it can also be used to gain short-term economic advantages which can positively damage long-term strategic relationships. One of the preliminary findings in an ongoing Ashridge research project has identified an important aspect of the new relationships that companies such as Proceedo facilitate between the seller of products and services and the buyer. In fact, we describe companies such as Proceedo as Electronic Relationship Integrators (ERI). The figure below is deceptively simple. However, behind it is a highly complex and intricate set of sequential electronic (computer-to-computer) connections making sure that the systems can communicate, are correct at time of transaction, and that there is a clear understanding among the three partners of how the system works, who does what and, importantly, what are the business control procedures, the procedures for nonstandard processes and the location of documentation. Experience from both buyers, sellers and Proceedo confirm that switching from a traditional buying relationship to buying electronically (direct or via an ERI) changes a traditional competitive view to a collaborative relationship to ensure success and importantly, to enable recovery of the costs associated with the investment in the electronic connections. A model of the information flow in the IT enabled relationships Contractual agreements Seller Goods and services Payments Buyer Invoice Data on products and prices specific to the buyer Invoice Purchase order based on the information in the ERI's database ELECTRONIC RELATIONSHIP INTEGRATOR 14

6 Among the important points to consider: 1. Make sure the Electronic Relationship Integrator is a truly collaborative working partner. 2. As a buyer, discuss in detail with your suppliers how together you can benefit from the relationship investment. Do not just use your buying power to push prices down. 3. As a seller, work closely with the ERI and your customer base to establish a standardised way of operating. By being proactive you can ensure that you actually reduce cost and improve efficiency rather than having to set up a multitude of systems for different customers. 4. Discuss and agree a detailed agreement in cases such as if an order is lost in the system, if the data is not updated or is incorrect, if the server is down; then who is responsible for what, who does what, and what are the commercial relationships between the three parties. In particular the last point makes clear the importance of selecting a truly collaborative relationship integrator. It is inevitable and healthy that the buyer has more than one supplier of a product or service and that the seller should compete vigorously for the best possible price. Hence in this context, if the ERI is a trusted integrator with integrity, both seller and buyer can open up their internal business systems and procedures in a collaborative spirit, gain maximum cost effectiveness and minimise the risks in the relationship. Are organisations and managers ready to forego some short term gain for the long-term competitive advantage that collaboration can create? Further Reading De Man, A; Stienstra, M and Volberda H. (2002). E-Partnering, Moving Bricks and Mortar Online, European Management Journal, August Cooper-Jones, T and Macklin, C. (2002). Buy by Wire, Financial Management, April Pudney, R. (2002/3). Collaborate to Compete, Directions, Winter 2002/03. Brunn, P; Jensen, M and Sprovgaard, J. (2002). E-Marketplaces, Crafting a Winning Strategy, European Management Journal, June IBM.com. (2002). Case studies in electronic collaboration. SAP.com. (2002). White Papers on supply chain management Proceedo.com (2002). Barua, A; Konana, P and Yin, F. (2001). Driving E-Business Excellence, Sloan Management Review, Fall Understanding E-Procurement the Online Revolution in Corporate Trading, Financial Times supplement, Winter Einhorn, B. (2000). B2B is the Password, Asian Business Week, 22 May Chappell, L. (2002). Automotive News, 16 December