Internet tools allow manufacturers to join forces to enhance individual strengths.
New models for manufacturing are emerging globally, principally among firms that are able to leverage the ease, speed, and affordability of Internet collaboration. Among those collaborative efforts are outsourcing of noncore processes and Web-enabled procurement and product development. The scope of the trend toward outsourcing -- and the related need for more intimate collaboration among manufacturing partners -- is especially pronounced in the high-tech sector. One example is Brampton, Ont.-based Nortel Networks Corp.'s four-year outsourcing agreement with Solectron Corp., Milpitas, Calif. Under the agreement, Solectron will buy seven of Nortel's manufacturing facilities and provide new-product introduction, prototyping, manufacturing, and repair services for optical, carrier, enterprise, and wireless products. Another is a deal between Solectron and IBM Corp. in which Solectron assumes both new-product-introduction and manufacturing responsibility for the printed-circuit-board assemblies manufactured in IBM's Greenock, Scotland, operations for Netfinity servers. In the last 18 months, such events have become increasingly typical of Agile Software Corp.'s high-tech electronics customers, reports Carol Schrader, vice president, marketing, for the San Jose provider of business-collaboration software tools. She says more and more organizations are engaged in soul searching aimed at restructuring operations around a sharply defined core competency. "Increasingly, they are concluding that the value-added is in product development, sales, and the marketing channels they have developed over the years. That means outsourcing manufacturing -- a process step that more electronics companies are treating as a commodity." The new collaborative model also is refocusing solution providers. With the advent of the Internet, business software firms that once offered solutions for integrating the enterprise have moved to offerings that integrate companies with their outsourcing partners and other constituencies. Agile, founded in 1995 by CEO and chairman Bryan Stolle, is one example. The inspiration came when Stolle and Schrader worked at a software company that was narrowly focused on solving companies' internal product-data-management problems. "With the advent of the Internet he saw that there was a bigger problem -- and opportunity," says Schrader. Stolle realized that the Internet's ability to sharply reduce the cost of business collaboration was a watershed event that would lead to new business models and new opportunities. "Our primary customers use our products to share product content and to collaborate with their suppliers on changes to product content during new-product introduction and the production phase," Schrader notes. The software became available in 1996 and she counts 500 customers, including Agilent Technologies Inc. and Lucent Technologies Inc. "Our initial market focus is on high tech -- to reach customers whose survival depends on success with very short product life cycles and a very rapid pace of new product introductions." Beyond time and distance Internet collaboration amplifies the issue of core competency in a new way with new consequences for corporate structure and strategy. "Know the soul of the company," posited C. K. Prahalad and Gary Hamel in Competing for the Future (1994, Harvard Business School Press). But that was before Internet-enabled collaborative tools gave managements the power to really do something about it. Today, Internet-enabled collaboration is creating a fundamental divide in the practice of global business and the management structures that guide it. To see as great a sea change would require revisiting the 19th-century invention of the telegraph. Before that time people collaborated across distance only as quickly and easily as the fastest horse or ship permitted. Best of all, the lower transaction costs of the new collaboration can facilitate far more than outsourcing. Big savings accrue in transactions with any business constituency -- supplier, customer, stockholder, or government. The savings not only benefit the cost of procurement, but also time to market, innovation, and customer intimacy. "As with any disruptive technological innovation, few managers yet suspect that the new collaboration has revised the rules for how tomorrow's businesses will be focused and how they will grow," says Marc Singer, principal, McKinsey & Co., San Francisco. "Consider that today's business structures and strategies are compromises that may only be rational when considered on the basis of yesterday's high interaction costs. The risk for managers is that attributes of old strategies do not constitute sustainable competitive advantage in the age of the Internet. To understand the future of manufacturing, begin by identifying the fastest-growing competitors in your industry. You will find that they share two characteristics. They are lowering interaction costs with the Internet and are focused only on the part of the value chain where they have a special advantage." In Singer's analysis every business is divided into three core processes: customer relationship management, product innovation, and infrastructure management. In traditional organizations all three are bound together by high interaction or transactional costs. From a strategic point of view, Singer sees the collaborative power of the Internet empowering manufacturing managements to creatively seek alternatives. He says that with the collaborative capabilities that exist today, there is little reason to insist on business structures that always contain the traditional three core processes. Consider how upstart Amazon.com Inc. began upsetting apple carts in the book business in July 1995. (Although credited with outsourcing everything except customer relationship management, the bookseller does maintain a distribution infrastructure.) Software solution providers find themselves with more strategic options, too. A very visible impact of the new collaboration is their scramble to leverage the benefits across all the external relationships of a manufacturing company. For example, at the last CA World, the user conference of Computer Associates International Inc., Sanjay Kumar, president and COO, emphasized that the company continues to reinvent itself to leverage the collaborative power of the Internet. "The new collaboration that is now possible brings ERP vendors to the most important decision point they have ever faced," adds David Caruso, vice president of enterprise application strategies, AMR Research Inc., Boston. "Their challenge is to provide applications that accommodate both new business processes and new technologies." Vendors that adapted early are now finding their rewards in the market. For example, Oracle Corp., which began to Internet-enable its enterprise solutions five years ago, reported an 80% gain in third-quarter adjusted net income for fiscal year 2000 vs 1999. In addition to positioning itself as the software engine of the Internet, Oracle's own financial benefit from using its Web-enabled software serves as an example for other companies, notes Bruce A. Bond, group vice president, GartnerGroup Inc.'s enterprise and supply-chain management practice, Stamford, Conn. "We're eating our own dog food and it tastes great," Oracle CEO Larry Ellison told analysts. Speedier sourcing Typical of the manufacturers that have found rewards in Internet-based collaboration is Dynacut Inc., a Springtown, Pa., producer of diamond saws, abrasive saws, and cutting systems. It needed to find a source for a high-speed, high-precision, aircraft-aluminum rotary seal housing with a tolerance of 0.0005 in., explains Russell Slegel, prototype development specialist. Unable to find a local source, he turned to SupplierOne.com Inc., Houston. "I was able to fill out the online request for quote, upload the blueprint, and complete my total submission in about 15 minutes. Within a week, I received four quotes from qualified suppliers. Without the Internet, we usually allow two months to chase local suppliers, send out requests and wait for a price quotation, which may take weeks to receive," says Slegel. Pricing also was a pleasant surprise. Slegel says Dynacut paid $7.50 each for the part six years ago. This time, he estimated $16, "but when the bids returned from SupplierOne.com we got quotes for $18, $17, $19, and one for $6.95. The winning bid, from QED Manufacturing Inc., was even lower than the last time we ordered the part six years ago." Slegel chose the sealed bid approach from SupplierOne.com's three options, which also include reverse auction and open competition. Slegel received the first suppliers' responses within four days. Once Slegel began to receive quotes, he could collaborate with suppliers on part design, ask questions, and seek advice from other experienced professionals by using the site's online message board. Manufacturers such as Dynacut are spurring growth in Web-based procurement. In 1998 U.S. companies did $43 billion in Internet sales to one another. That's expected to grow to $1.3 trillion in four years, says Forrester Research Inc., Cambridge, Mass. Another market researcher, the Aberdeen Group Inc., Boston, estimates the B2B market as having 10 times the potential of B2C activities such as Amazon.com. That doesn't mean that the technology's benefits are purely tactical. Far more than a way to cut costs, collaborating via Internet-based procurement can be an important steppingstone to corporate growth and success. For example, by taking procurement to the Web, IBM saved an estimated $240 million in 1998, but far more importantly demonstrated that effective procurement and customer satisfaction are not mutually exclusive terms. Part of an integrated product-development initiative, IBM's Web procurement update was able to pare time-to-market by as much as 70% for PCs and midrange computers. One element in IBM's success was its ability to satisfy procurements 85% of the time with just 50 preferred suppliers. IBM uses market analysis software tools from Aliah Inc., Pittsburgh, to assess its product portfolio and cost out new products. The opportunities for strategic benefits abound in the typical procurement process, concludes a study by the Aberdeen Group. It found that more than half -- 52% -- of the cycle time is taken up by the search process, 20% by screening and sorting proposals, and 10% by contract negotiations. With online trade exchanges such as SupplierMarket.com, buyers post requests for quotes and suppliers respond with bids, thus eliminating steps that add little value to the procurement process. "E-commerce leaves more time for managers to concentrate on the big picture and to build customer relationships," says Sean Heenan, manager of e-commerce at Olympic Steel Inc., Bedford Heights, Ohio, one of the first steel service centers to integrate the technology into its daily business. "The amount of time that can be saved is immense," Heenan adds. Joint product development Another strategic imperative for collaboration is emerging from a basic transformation in discrete manufacturing. As the build-to-demand model replaces yesterday's build-to-stock paradigm, the ability to collaborate with customers and suppliers at a product engineering level becomes a primary competitive tool. It is a need that has been transforming the product strategies of companies that were once known only for their ability to deliver CAD/CAM solutions. One example is Parametric Technology Corp. (PTC), Waltham, Mass. Once a one-product company known for its success with Pro/ENGINEER design software, it has greatly expanded its market focus. The new strategy leverages the Internet with a new category of products and services that market analysts term Collaborative Product Commerce (CPC). "We're talking about empowering customers to reach into product databases and configure a product that may not have existed before," says Stacy Lawson, senior vice president marketing. Windchill, the company's CPC solution, is based on a model that enables users to find, manage, and use information from a broad array of resources across the product development life cycle. Based on browser/Internet technologies, it eliminates the problems associated with developing, deploying, and learning proprietary client/server applications, adds Lawson. Among the early adopters of Windchill are SKF AB, the Sweden-based bearing and seal manufacturer, and PTC itself. Both are global operations and share the same objective -- to accelerate information flow within an organization to help it meet business objectives, says Steven C. Walske, PTC's chairman and CEO. For SKF the challenge is magnified by the customer collaboration needs of 50 business units at 130 sites. Its focus in adopting Windchill was to reduce customer-response time from days to hours, explains Utrecht, Netherlands-based Jacques van Zijp, SKF's group project manager. The Windchill solution involves a collaborative portal infrastructure that can serve departments within a company -- suppliers as well as customers, explains Lawson. "Windchill can link ERP and supplier data bases, including legacy systems, and make that information easily available via a Web browser. A single product information structure replaces multiple disconnected systems," Lawson adds. All of the new tools of collaboration promote a model for manufacturing in which an enterprise is no longer inhibited by size or lack of it. And the collapsing of time and distance means that many of the old rules for corporate structure and strategy are being rewritten. John Teresko is senior technology editor for IndustryWeek. He is based in Cleveland.