Value-Chain Report -- The Internet Has Changed Everything

Dec. 21, 2004
Has your supply-chain strategy responded?

It would be impossible to underestimate the growing impact of the Internet and Web-based technologies on supply chains. Forget, for a moment, the potential for reaching new customers and markets. These are certainly real business opportunities. The eye-popping rise of notable B2B and B2C players, such as, eBay, Dell, and Cisco, demonstrates the potential for top-line impact. However, much of the real benefit of the Internet for most companies -- particularly those companies whose fortunes are determined by the effectiveness of their procurement, manufacturing, and distribution operations -- is much more likely to result from the power of Web-based technologies to significantly compress time and reduce costs throughout the supply chain. Companies not embracing these new tools and actively seeking ways to exploit them in the marketplace will find themselves at a severe competitive disadvantage in a very short time. The connectivity and speed enabled by the Internet and exploited by new technologies has created some significant challenges for supply-chain managers. In an earlier article, we discussed the evolution of supply chains into supply webs in response to these new capabilities (The Supply Chain of the Future Looks More Like a Web,, May 2000). The need for this evolution is being driven by numerous forces, including: 1. Blurred Geographical Boundaries Geographical proximity of supply-chain participants is becoming less and less important. The ability for nearly instantaneous communications between trading partners eliminates much of the need for relative nearness. 2. More Efficient Markets Customers are becoming increasingly powerful as search engines become more robust and the cost to identify and qualify potential new suppliers continues to fall. Global reach, whether buy-side or sell-side, is available to all. 3. Reconstructed Value Chains Entire supply and demand chains are being reconstructed around Web-enabled technologies in an effort to maximize efficiency and minimize costs. Coordination and collaboration are replacing physical assets as the drivers of value. 4. Customer-Centric Offerings Suppliers are tailoring their offerings to meet the unique preferences of individual customers. The distinction between a product and the services surrounding that product has disappeared. 5. Compressed Cycle Times The connectivity enabled by Web-based technologies radically reduces communications, transactions, and other time-based activities. Cycle times decrease as the entire supply chain moves in parallel. 6. Unbounded Competition The global reach of the Internet creates increased competition as new buyers and suppliers become connected. Visibility of marketplace inefficiencies and lower barriers to entry attract new participants. The competitive pressures being driven by those forces just described is creating a change in the strategic context for supply chains. Focus is shifting from internal process integration to a broader external trading community. Separate products and services are being bundled into offerings tailored to the needs of individual customers. Hierarchical supply chains are giving way to fluid, distributed supply webs. This shift in strategic context drives new approaches in all the underlying processes supporting supply-chain operations. In evaluating your own supply chain, consider the following: Demand and Supply Planning. This is the process that turns strategy into action. Leading firms are using Web-based technologies to migrate from centralized, intra-enterprise planning to distributed optimization based on the synchronized capabilities of all trading partners. One-to-one buyer-supplier relationships are quickly being replaced by inter-enterprise collaboration enabled by horizontal and vertical marketplaces. Recognizing that agility and responsiveness bring competitive advantage, rather than planning for products, they are planning for capabilities. Defined products and services are giving way to dynamic, customer-configurable offerings, where products and services related to those products are bundled to meet the unique requirements of individual customers. In addition to efficiently balancing demand (orders) with supply (availability and capacity), effective demand and supply planning significantly impacts the bottom line. Optimization of the planning process can drive revenue growth, reduce inventory investment, and lower operating costs. Procurement. Procurement activities are likely to impact a significant proportion of the total costs and value of the company. Yet many firms continue with traditional, costly purchasing practices. Fortunately, new technologies are rapidly being adopted that enable companies to not only reduce the costs for materials and services they purchase, but also reduce the operating costs associated with the procurement function itself. Leading firms are quickly migrating to e-procurement solutions. In many cases, these can be easily deployed and do not require a significant investment in infrastructure or training. MRO purchases are a particularly susceptible area for improvement, typically yielding 7%-15% cost reductions or more. These technologies also reduce the labor associated with the acquisition process, yielding productivity gains. More complex, but potentially more beneficial, are the B2B marketplaces that are being formed to bring efficiency and collaboration to entire industries. Examples include Covisint (automotive), ExoStar (aerospace), and Envera (specialty chemicals). These exchanges promise to deliver end-to-end collaborative capabilities, from product development to fulfillment. Logistics. This is the physical movement and storage of products that nearly every manufacturer, distributor, and retailer must manage. And an area where the Internet and Web-based technologies are having a significant impact. Leading firms have replaced production-driven "push" models with customer-centric tailored delivery programs. Web-based technologies enable buyer and supplier to operate more efficiently, as a result of visibility of orders throughout the entire distribution network. Transactional outsourcing for transportation, warehousing, packaging, and related activities is being replaced by network outsourcing, where these individual functions are managed integrally by a third-party provider. For those firms who do choose to manage their own logistics activities, the emergence of robust portals bringing shippers and carriers together yields benefits for both. Warehouses are being transformed from cost centers to value-adding facilities, enabling customized assembly or kitting, packaging, labeling, or other services to be completed in a rapid fashion. Summary The Internet and Web-based technologies have irreversibly changed the game. Competitive pressures driven by these changes are creating a new strategic context for supply chains. Focus is shifting from internal integration to connected, collaborative supply webs, which drives top-line growth, operating efficiencies, and reduced working capital investment. Adoption of these new methodologies and participation with trading partners in electronic marketplaces will separate the winners from the losers. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.

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