A firm making its way through the second wave must answer some important
questions. First, with which other firms should it ally its resources, given that
no single firm is going to dominate an industry? In the future, the competition
will be between competing value chain networks and weak links will be fatal to the best of business organizations. Selecting the right business partners is a crucial event to be completed in Wave 2.
Consider the situation emerging in retail sales. To gain leverage by aggre- gating individual buying power, Auchon, Best Buy, CVS, JCPenney, Kmart, Walgreens, and others have joined forces in the Worldwide Retail Exchange.
100 The Supply Chain Manager’s Problem-Solver
Not to be left out, Sears and Carrefour, the French retailing giant, have formed the Global Net Exchange. Meanwhile, the largest of the giants, Wal- Mart, has introduced its online private trading hub. Clearly, the competition is lining up with network alliances as a new order of differentiation. There will be suppliers participating in multiple networks, but they will be working to help that network gain coveted new sales. This trend will continue as the automotive, aerospace, banking, consumer goods, healthcare, high technol- ogy, and other industries sort through the options and enter into network alliances they believe will enhance their future prospects.
What we are witnessing is the appearance of spheres of confluence. Partners and exchanges are still working on value propositions and the myriad of details required to establish such entities. But the desire to use the Internet and associated technology and software to gain the next level of advantage is implicit in the actions. Old enemies are expected to col- laborate to make the savings. At the center of this development will be the use of the newest business tool — collaborative commerce — the logical extension for sharing the best practices emerging from the first wave via the Internet.
The second question goes to the heart of what faces firms in the second
wave of cyber activity. Firms must determine what the impact will be to their
business from the unstoppable attention being given to e-commerce and supply
chain. They will have to sort through the remaining hype and the reality of
what can be done to enhance what is fast transitioning into the value chain of connectivity from primary supply to consumption. They will need to decide what percentage of future business will be Web-based by the year 2004 or 2010, as well as how ready they are for the transition.
The third question concerns what percentage of future revenues and profits
will be at risk if a firm does not project a cyber capability. This requires
knowing industry trends, what firms will demand Web access to data, what market segments will be dominated by Web activity, and more. Established companies must be alert to the nontraditional customers they could secure via the Internet as well as those they could lose by not having such a presence. The fourth issue relates to the fact that, because all channels of distri- bution require both physical assets (trucks, warehouses, packaging equip- ment) and cyber capability (order placement, inventory visibility, order tracking), both areas need to be technically enhanced. No firm can perform
all process steps; therefore, each must decide what new partners will be needed
to complete an e-business model. As mentioned, we might select suppliers
servicing other networks, but for our effort, they must help us bring enhanc- ing values to differentiate us in the marketplace.
Mistake 7: Misunderstanding the Internet 101
The issues described above are not easy to address, but delaying too long to find the right answers can exclude a firm from the best networks and place it at a disadvantage. Getting to solid answers also leads to the creation of a framework for competing in the brave new digital world. Sunil Chopra et al. have provided such a framework, illustrated in Exhibit 8.3. (Source: Chopra et al., Northwestern University.)
According to Chopra, “The Internet’s unique characteristics will allow businesses to create significant value in the future. The value of B2B e- commerce, however, will vary depending upon the supply chain strategy and competitive environment that a company faces. Successful companies will be those that can tailor their e-commerce initiatives to support those areas where maximum value can be extracted. Three distinct categories emerge where B2B e-commerce can be applied to extract value. These are reduced trans- action charges, improved market efficiencies, and enhanced supply chain benefits” (Chopra, 2001, pp. 50 and 51).
Using ease of implementation and value created as the two dimensions for his model, Chopra positions the three categories between easy to imple- ment and low value created, to hard to implement and high value created, respectively. Beginning in the lower left quadrant, transaction costs are
Exhibit 8.3 Wave 2 framework. (Source: Chopra, Sunil et al., Northwestern University, Evanston, IL. With permission.)
Low High
Easy
Hard
Value Created
Ease of Implementation Reduced Transaction Charges
• Lower cost of procurement • Improved contract management
Market Efficiencies
• Improved marketplace information
• Buyer and seller aggregation • Match shortages and surpluses
Supply Chain Benefits
• Increased visibility • Collaboration
B2B Value Proposition
102 The Supply Chain Manager’s Problem-Solver
those associated with completing a buy or sale. They include handling proposals and quotations, processing orders, staffing the buying function, operating call centers, and so forth. Using telephone and fax access requires more people for both the buyer and seller, and they contain historically high error rates. As firms introduce a fail-safe, electronic system, the errors and reconciliation go away, fewer hands are needed to process orders, and the process takes less time. Savings from these improvements are the first level in the value proposition.
Chopra elaborates, “The magnitude of the savings will vary depending on each company’s specific situation. i2Technologies estimates that compa- nies can achieve transaction savings of close to two percent of sales by using the Internet. Eastman Chemical estimates transactional savings of close to four percent of sales, while British Telecom claims to have reduced transac- tion costs associated with procurement by ninety percent using e-commerce” (Chopra, 2001, p. 53). Certainly, a company can expect to reduce the cost of order entry from $25 to $100 to something less than a dime. They will also save almost all of the time and cost now going into reconciliation.
Market efficiencies, near the center of the model, offer several areas of opportunity. Improved marketplace information can be leveraged to move closer to optimized conditions as buyer and sellers find what is really available in a particular market. The Internet offers a unique opportunity to aggregate what is being sought and what is being offered. Through this medium of communication, there is an ability to match surplus capacity in the supply chain with demand. Companies in the automotive and heavy-machinery industries have reported savings from 2 to 20% through use of auctions, for example. Per Chopra, “The value of matching surplus supply and unmet demand is likely to be the greatest in industries that experience highly uncer- tain demand and where flexible supply can be diverted. General Mills saved seven percent of its transportation costs by implementing a backhaul exchange with its business partners” (Chopra, 2001, p. 53).
Supply chain benefits, in the upper right hand quadrant, represent the highest order of potential. Here we find activities relating to the increased visibility of critical information and the opportunity to collaborate electron- ically with valued partners. Chopra elaborates:
Collaboration is the ability of different stages of a supply chain to use the common information obtained from visibility to make decisions on product design and introduction, pricing, production, and distribution that will allow all partners to profit. For example, Wal-Mart and P&G increase visibility when Wal-Mart shares point-of-sales data. The partners only realize full value, however, when they use this information, along with capacity
Mistake 7: Misunderstanding the Internet 103
information at P&G, to decide the best timing for promotions and resulting production plans. If decisions are made independently, Wal-Mart may run the promotion at a time when production costs for P&G are high. Through collaboration, constraints on both sides are considered in determining a schedule that maximizes profits (Chopra, 2001, p. 52). Exhibit 2.1 in Chapter 2 compiles a full range of the potential savings from supply chain activities.