Keywords: electronic commerce, supply chain management, business networking, supply chain operations reference model, distribution channel redesign Copyright 1999 Electronic Markets Volume 9 (3): 169 173. www.electronicmarkets.org SPECIAL SECTION: ELECTRONIC COMMERCE AND LOGISTICS A b s t r a c t As part of The Swatch Group ETA SA supplies watch movements and spare parts to all Swatch brands and other customers such as retailers and watchmakers. To improve the quality and the efficiency of the customer relationships ETA started a Business Networking project in cooperation with the University of St Gallen. This project focused on the complementary application of two Business Networking strategies that are usually treated separately: supply chain management and electronic commerce (e-commerce). Both concepts allow for establishing direct relationships to the customers. Supply chain management enables direct deliveries to the customers at lower costs and improved reliability. E-commerce provides centralized catalogues and order entry procedures with significant advantages in time and cost. This highlight s the importance of understanding the interrelations between both strategies in creating mutual benefits between ETA and their customers. A u t h o r s Dr Rainer Alt (Rainer.Alt@unisg.ch) is Project Manager of the Competence Center inter-business Networking (CC ibn) at the Institute for Information Management, University of St Gallen, Switzerland. His research focuses on business networking, electronic commerce, and supply chain management. Dr Hubert Österle (Hubert.Oesterle@ unisg.ch) is Professor for Information Management at the University of St Gallen and concentrates his research on business engineering, business networking and business knowledge management. Christian Reichmayr (Christian. Reichmayr@unisg.ch) is the Research Assistant responsible for the ETA project within ccibn. Dr Rudolf Zurmühlen (Rudolf. zurmuehlen@eta.ch) is Head of Customer Service at ETA SA Fabriques d Ebauches, Switzerland and responsible for the business networking project. Business Networking in the Swatch Group RAINER ALT, HUBERT ÖSTERLE, CHRISTIAN REICHMAYR AND RUDOLF ZURMÜHLEN ESSENC E AND RELEVANCE OF BUSINESS NETWORKING The Swatch Group is a globally operating producer of watches such as Blancpain, Omega, Rado, Longines, Tissot, Certina and the Swatch watches. The group consists of a number of individual companies, which focus among others on finished watches movements and component production and research and development. Producing watches for the individual brands involves various group companies. ETA SA Fabriques d Ebauches in Grenchen, Switzerland supplies the movements for watches calibers in the industry s jargon to all Swatch brands. As the world s third largest manufacturer of movements, ETA has over 15 production sites in Switzerland, Germany, France, Thailand, Malaysia and China. In 1997, ETA produced more than 135 million movements with more than 10,000 employees. In order to ensure a customeroriented and efficient production of watches, a coherent management of the relationships among the relevant group companies is one key success factor. We will refer to the management of internal and external relationships and the development of cooperation strategies as Business Networking. Business Networking assumes that production occurs not within large vertically integrated companies but in networks where different partners concentrate on their core activities. Higher coordination requirements are met by information age technologies, which enable interfacing among various ERP systems, efficient and distributed management of large information volumes and the like. In the case of ETA, Business Networking enables increased customerorientation, cost-efficiency, reliability and global presence. This was achieved by using two Business Networking strategies, which are closely interrelated: supply chain management and e-commerce. Although, both strategies are often used independently from each other, the example of ETA shows the potential of both strategies to cut costs and to streamline customer-service processes. Together with the Institute for Information Management, University of St Gallen (IWI-HSG), ETA has conceived and is launching a new solution for the procurement of spare parts and sales products (i.e. calibers) which encompasses supply chain management on the one hand and e-commerce on the other.
ELEMENTS OF BUSINESS NETWORKING: ELECTRONIC COMMERCE, SUPPLY CHAIN MANAGEMENT In view of the flurry that has been surrounding e- commerce (EC) and supply chain management (SCM), it appears appropriate to define how these concepts interrelate and complement each other. Since they both support the management of business relationships, they represent practical strategies for Business Networking. Following Ellram (1991), SCM may be described as the integrated management approach for planning and controlling the flow of materials from suppliers through the distribution channel to the end user. All major SCM initiatives, such as just-in-time (JiT), zero inventory (ZI), efficient consumer response (ECR), vendor managed inventory (VMI), and continuous replenishment (CR) aim at providing efficient management of the supply chain (Kalakota and Whinston, 1997: 286). As Klaus (1998: 434 41) shows, this involves three areas that have to deal with by SCM: All order processing activities originating at the customer: order acceptance, input of orders into internal order processing systems, calculation of production and material forecasts. All material activities of the supply chain directed towards the customer: materials management, production, distribution and order fulfillment. All order-related financial activities: invoicing, billing and funds transfer. Unfortunately, many SCM definitions and projects are ignoring this area and, consequently, the benefits of close coordination of financial flows, e.g. the reduction of the amount of capital committed. Various models from software vendors and industry organizations exist for the modeling of supply chains. An established model is the Supply Chain Operations Reference Model (SCOR) from the Supply Chain Council, an American industry association with 73 member companies. In the first place, SCOR provides a standardized language for the description, analysis and measurement of supply chains among multiple partners. As shown in Figure 1, in the SCOR model supply chains are built using the four generic supply chain functions, viz. plan, source, make and deliver. 1 Table 1. Differentiation between EC and SCM Electronic Commerce Figure 1. How EC and SCM connect How does EC relate to SCM? In the first place, a product s entire supply chain consists of a number of individual supply chains on the way from the supplier of raw materials to the end consumer. In general the transactions linking the supply chains of individual companies are used to define EC. For further analysis the transactions are broken down into various activities. During the information phase, customers make their choice among a variety of goods and vendors. This is followed by negotiation and decision-making on a specific product in the contracting phase. Finally, in the settlement phase, the selected goods are delivered to the customer who, in turn, pays a consideration for them. For EC to take place, it is necessary that at least one of these phases rely on electronic means. Apart from this functional criterion, ECsystems are classified according to the context in which they are used. A distinction is made between interorganizational (B2B), intra-organizational (EC within a company) and business-to-consumer (B2C) EC-systems. There are four essential aspects where SCM differs from EC (Table 1). First, all major SCM solutions, such as JiT in the automotive industry or ECR in the retail industry, are based on the cooperation between (internal or external) business units. SCM usually does not involve direct arrangements with end-customers. For instance, a CRscheme operates at the interface to the customer, but contractual arrangements are made between the retailer and the supplier. Second, with SCM designed to streamline order processing, material management and financial processes, the starting point of an SCM solution is an existing order. Consequently, while settlement processes are at the heart of SCM, EC centres on the design of information and contracting processes. This is also Supply Chain Management Activities Information, Contracting, Settlement Plan, Source, Make, Deliver Scope Inter-business relationships and customer relations Inter-business relationships only Perspective Transaction Business functions Focus Design of information and contracting activities Design of planning processes and flow of goods Cooperation intensity Low High Duration Short-term relation Mid to long-term relation Alt et al. Business Networking in the Swatch Group 170
Electronic Markets Vol. 9 No 3 reflected in the SCOR model, which does not include distinct sales or marketing activities. Third, every supply chain focuses on internal processes, i.e. processing of orders, scheduling, production and distribution. When supply chains are linked, forecasts, orders, invoices etc. are exchanged in the settlement phase of a transaction. Finally, all SCM-solutions to date have been implemented in midto long-term relations with high cooperation intensity whereas in the case of EC the emphasis is inherently on (short-term) spot contracting. An analysis of either concept EC or SCM reveals a complementary relationship with some overlaps. EC concentrates on shaping information and contracting activities (e.g. design of electronic catalogues and matching functions) whereas SCM is primarily concerned with planning processes and the organization of various flows of goods. Specifically, SCM has developed techniques and methods for efficiently designing, implementing and operating settlement processes. Indeed, both concepts are bound to have an important impact on day-to-day business. According to Kalakota and Whinston (1998: 286): The integration of electronic commerce and supply-chain management is changing the way businesses work internally and work with each other. SUPPLY CHAIN MANAGEMENT AND ELECTRONIC COMMERCE AT ETA At the outset of the ETA project in 1996, three main problems were encountered: The individual brands of The Swatch Group were more and more insisting that all outputs associated with the introduction of a new caliber were actually available in time. The distribution costs of spare parts and movements had to be reduced in order to remain competitive. An important component is the reduction of inventories that are held on The Swatch Group -level i.e. at ETA, the brands and the brand s customers. The ordering process had to be streamlined, because inconsistent product master data, i.e. numbering and naming of parts, among the individual brands were causing time and labor-intensive matching processes. ETA addressed these challenges from a Business Networking perspective. In a first phase, the Business Networking potentials were analysed for the redesign of the supply chain. In the next stage, a new electronic distribution channel for B2B sales of spare parts and movements is being established. Phase I: Reengineering the Supply Chain ship analysis were conducted at the beginning of the first phase. 2 The main problems discovered were: a lack of availability of technical documentation at the right moment and place; no simultaneous presence of necessary outputs such as specimen movements, spare parts and movementsspecific tools when a new caliber is introduced on the market; long cycle times for the repair of movements and the delivery of spare parts; poor transparency of ETA-Customer Service (ETA-CS) outputs and little communication between ETA-CS and its customers. Two projects were launched to address these problem areas. The first concerned the redesign of the introduction process of new calibers (IONC) and the second the distribution process of spare parts within the Swatch Group. Both processes require a time- and cost-efficient distribution of products. However, existing distribution processes involve a complex network of warehouses. Brands of The Swatch Group such as Tissot, Rado and Omega, order spare parts from ETA-CS and deliver them to their customers, which are mainly The Swatch Group - country organizations (CO) and independent agents. These COs receive the parts from ETA-CS and store them in their own warehouses. In order to simplify the distribution process and reduce costs, the reengineering will consist of the elimination of the inventories at the brands and direct delivery to the brand s customer. All movements and spare parts, which are standard, i.e. not personalized for a specific brand, will be delivered directly to the brand customer (Figure 2). However, the eliminated warehouses represented buffers allowing for rapid deliveries. The brands only agreed to direct deliveries once ETA guaranteed the same cycle times as the brands offered to their customers. ETA-CS will establish two distribution channels, Distribution A and B with cycle times of 24 and 120 hours, respectively. Phase II: Electronic Commerce (EC) Sales Channel As a second step, ETA conceived an EC solution that will go live in April 1999. Using a Web-based electronic catalogue, customers will be able to get specific 171 To explore the networking potentials and problems, a number of customer workshops and a customer relation- Figure 2. Changes in the flow of spare parts
information about (new) products, prices, discounts, etc. over the Internet. On the next level, the desired components will be put into the customer s shopping basket. For repeatedly ordered items it will also be possible to create individual customer shopping. The EC-solution calculates taxes, discounts, etc. and therefore the customer directly sees his total order amount. After the completion of the order the customer chooses a payment method (e.g. credit card payment) and the order is sent. As Figure 3 shows, the EC solution concerns information and contracting activities and provides all information via one communication channel. Establishing the electronic sales channel meant that ETA had to deal with incoherent product master data. In the past, the translation of an order into the ETA order processing system was time consuming. For example, it took hours to find out the article number of a nonspecified toothed wheel smaller than 2 mm. This required coherent product master data in order to avoid the programming of complex matching procedures. The matching problem will be solved within the next few months with the homogenization of the master data. It will then be possible to trace a validated purchase order during the entire order cycle by customers and ETA themselves. In the initial phase selected Swiss pilot customers will be able to order spare parts and certain sales products (i.e. Flatline and Normflatline movements) using the ECsolution. This avoids the complexities involved in shipping abroad (shipping costs, VAT etc.) and these customers are known to be ready for electronic ordering. Figure 3. Convergence of information flow Table 2. Benefits of SCM and EC for ETA SA Benefits of SCM BENEFITS OF BUSINESS NETWORKING FOR ETA Applying both, SCM and EC to the distribution of sales and spare parts has important advantages for ETA. As Table 2 shows, the main benefits are time reductions, enhanced customer focus, inventory reductions, and improved accuracy of information. The reengineering of the supply chain is expected to result in a reduction of distribution costs provided that one warehouse level will be eliminated and that stocks at ETA headquarters will be centralized in a new high-bay warehouse. Consequently, there are smaller inventories in the entire distribution system, which also implies that there is less bufferage in the system. To meet the guaranteed delivery times the new high-bay warehouse centralizes in-house stocks and allows for improved inventory management as well as higher availability of parts. Concerning EC the main advantages are reduced ordering cycle times, new functionalities to the customer, improved forecasting, and more accurate information. In the old days it was only after the interpretation of an order that the corresponding delivery processes such as picking, packing and transportation could be started. Reducing order processing times adds additional time and bufferage to the physical delivery activities. In the second place, forecasting can be improved with better knowledge of the customer s behaviour. The convergence in the information flow brings ETA closer to its customers and will allow systematic customer profiling by monitoring past order behaviour (Hagel and Rayport, 1997). This helps ETA to develop a better understanding of what customers really desire and to derive demand profiles and production forecasts. A decrease of the order cycle time and increased knowledge of customer s behaviour results in guaranteed delivery times, which may be the greatest benefit for the customers. Compared to the traditional distribution channel all operational contacts are now using the same communication medium and benefit from additional functionalities Benefits of EC Speed/time advantages Optimized commissioning and packing processes Faster order validation process in centralized high-bay warehouse Reduced search times for inventory Customer focus Guaranteed delivery times New functionalities (electronic order confirmation, electronic order tracking, electronic catalogue, download of technical documents, credit card payment) Customer profiles and individual customer shopping baskets Inventory Reduced inventory (High-bay-bay warehouse, Reduced inventory due to improved forecasting elimination of several internal and external warehouses) Correctness/accuracy Unambiguous order information Improved matching of master data Alt et al. Business Networking in the Swatch Group 172
(e.g. download of technical documents, credit card payments, open order tracking, individual customer shopping baskets). Especially online credit card payments help in dealing with the large number of small retailers, watchmakers etc. which ETA has worldwide. Handling orders from dilatory customers was time-consuming and sharing these risks with a credit card organization is of significant benefit for ETA. Migrating the order entry process on the EC solution frees capacities that can be used more effectively. The electronic catalogue provides information about the parts list, the interchangeability of parts (i.e. parts may be used in more than one movement) and assigns the unique article number to ordered items. This standardized ordering process also helps to sustain the corporate identity and to reduce set-up cost for establishing ETA s presence in a new market. CONCLUSION In the ETA case SCM and EC yielded more direct customer relations. By eliminating inventories and introducing direct delivery SCM supported immediate customer contacts regarding the physical goods. The EC solution brought product and financial information to the customer. Indeed, EC was the trigger for starting SCM since it offered new possibilities in distribution and information management. Streamlining the supply chain and implementing a globally available and standardized electronic sales channel were complementary concepts in establishing closer contact to the customer. For the future, ETA has high expectations in the implemented solution and assumes that 30 to 40 per cent of all customers will be using the electronic channel in the next three years. ACKNOWLEDGEMENT We acknowledge and appreciate the work and the input of our colleagues Roger Benz, Elgar Fleisch and Karl-Maria Grünauer who have been involved in earlier stages of the ETA project. Notes 1. For further information on SCOR see http:// www.supply-chain.org 2. For the documentation of phase I see Benz et al. 1999. References Benz, R., Fleisch, E., Grünauer, K.-M., Österle, H. and Zurmühlen, R. (1999) Entwurf von Prozessnetzwerken am Beispiel von zwei Business Networking-Projekten der Swatch Group, in Proceedings Wirtschaftsinformatik 99, Saarbrücken March 1999. Ellram, L.M. (1991) Supply Chain Management: The Industrial Organization Perspective, International Journal of Physical Distribution and Logistics Management 21(1). Hagel, J. and Rayport, J. (1997) The Coming Battle for Customer Information, Harvard Business Review (January-February): 53 65. Kalakota, R. and Whinston, A. (1997) Electronic Commerce: A Manager s Guide, Reading (MA). Kalakota, R. and Whinston, A. (1998) Cited in text. Klaus, P. (1998) Supply Chain Management, in Gabler Lexikon Logistik, Wiesbaden, 434 41. Schmid, B. and Lindemann, M. (1998) Elements of a Reference Model for Electronic Markets, in R.W. Blanning and D.R. King (eds), Proceedings of the 31st HICSS, Vol. IV: 193 201. Electronic Markets Vol. 9 No 3 173