The Exchange Promise

Dec. 21, 2004
Linking business systems is the key to the success of online exchanges.

Last year, changing requirements caused a Hewlett-Packard Co. supplier to air freight more than 100,000 lb of plastic resin to its molder. Guess who paid the price? To evaluate the impact of simultaneous communication of shifting supply and demand requirements to all members of its supply chain, HP connected them -- contract manufacturer, component supplier, molder, and plastics vendor -- to a pilot extranet that mimics a private trading exchange. Since the site went live last fall, no resin has been air freighted, and HP's costs have been reduced 3% to 5%, because suppliers no longer are faced with unanticipated demand. "We are using the Web to form a kind of integration to each of those companies," says Don Schmickrath, vice president, product processes organization, at HP in Palo Alto, Calf. "Now every time I change my numbers to the first node of that supply chain, it automatically changes it to all of them, right down to the resin supplier. My plan is that Converge [the electronics industry consortium trading exchange that HP helped form] will do this for me, because I'll never be able to set this up with all my customers." In the '90s manufacturing companies worked hard to weed out inefficiencies, improve information flow, and foster collaboration within their own organizations by streamlining business processes and deploying ERP systems. In this decade Web-based trading exchanges can provide a platform and opportunity to accomplish many of the same objectives between trading partners in a supply chain, as the HP pilot demonstrates. Judging from the experiences of three leading manufacturers -- HP, Lubrizol Corp., and Ford Motor Co. -- online exchanges offer a great deal of promise, but significant payoffs still lie in the future. These companies are committed to exchanges and are wagering significant elements of their e-business platforms on their success, yet at the same time are supplementing their efforts with private exchanges and highly functional extranets. Still in their infancy, some trading exchanges are only now building connections that facilitate automated transactions. Others are a step ahead, integrating enterprise-resource-planning (ERP) systems. Time will tell if these and other system-to-system links are completed and the exchanges that survive consolidation begin to provide the value promised by seamless information flow. The key to exchanges reaching new levels of value lies in the integration of business systems between companies -- ERP systems, plant-floor systems, financial solutions, and product-development platforms. More than just computer technology and translation of data into industry-standard protocols, integration encompasses business process definition and workflow, as well as alerts, signals, and event triggers that help manage relationships among buyers, sellers, and other collaborators. "Integration is changing the minimum of information across a network, and when it reaches the opposite side of the customer or supplier it triggers a tremendous number of internal activities," says Yannick LeCouedic, vice president, MIS and e-business, Lubrizol Corp., Wickliffe, Ohio, which is a founding member of the chemical and petrochemical industry consortium exchange Envera, headquartered in Richmond, Va. "It is programming across companies." Tightening Up Electronics industry exchanges promise to address one of the market's major sources of cost: inventory management. On one hand there is an extremely high cost of obsolescence because assets depreciate so quickly. On the other, market conditions often make forecasts just another bad piece of data. "So like a bullwhip, you make a small tug at the OEM end, and down the line in a supply chain you suddenly end up with thousands of pounds or units of surplus or shortage," says HP's Schmickrath. "We get huge variations." HP began doing business over the Internet selling excess parts. Formerly brokers had been used, and HP realized only about 30 cents return on the dollar. Internet auctions, however, increased that up to threefold and reduced expenses as well. The company then started acquiring parts in a similar fashion, but sources were limited. Participating in the Converge exchange could have a profound effect on that. "The problem is, how can I get lots of people to come to the party [as part sources over the Internet], if it's just HP?" asks Schmickrath. "The answer is, I can't. To get the deep liquid markets, you need a broad range of buyers and sellers. That's when we decided we needed to go outside, so we set up the exchange with Compaq and others to create a supermarket for parts." On Converge, HP plans to reach three and four levels down into its supply chain to production and sourcing supply-chain members that also will connect to the exchange. Changing requirements then will flow to all members of the supply chain simultaneously, reducing if not eliminating the errors that have resulted in the excess and shortages of parts and raw materials. Eventually, the HP ERP system will create a bill of materials for a production run of 50,000 ink-jet printers, for example, and Converge will extract the BOM through its integration link. The exchange can then direct information to the ERP system or other connection linkages of suppliers (including makers of electronic components, memory, plastic parts, printing engines, memory units, power supplies) that need to react to the call for goods. As transaction data build in a Converge database, HP can attack inefficiencies in the supply chains and mine out costs all can share. "Today I do it supplier-by-supplier, which is tiresome," says Schmickrath. "What the exchange can do is integrate me with them one time. Then at exactly the same time we send an order to the contract manufacturer, it is sent to [all members of the supply chain]. If one member can't meet the schedule, then we have time to do something about it. That is the kind of collaboration that will be moved to Converge." While HP is currently doing auctions via Converge, it will be several months before seamless transactions across the exchange are a reality. "It will probably be April before we have a significant interface, with nothing touched by hand," he says. In addition to its e-business activities with Converge and the extranet pilot the company is running in its plastic-parts supply chain, HP has developed a software architecture running on another extranet that allows Web connections with ERP systems of other companies. While Schmickrath expresses no worries about security of exchanges, one of the reasons the company is setting up these connections is to provide a way to do business with organizations that are concerned about security. "Even if we are comfortable about putting business through a public exchange, if the other party is not, we will deal with them in a private exchange." The first of these private connections was made with Agilent Technologies Inc., a division of HP spun off at the end of 1999. Established before Converge was set up, the link allows what used to be intracompany transactions between the two. "Agilent was running a legacy system, we were using SAP, [and they] did not talk to each other," says Schmickrath. The company currently has ERP-to-ERP connections with four other large organizations operating over the same system and handling orders directly out of the HP ERP system. Automatic order confirmations and alert responses result from these connections. HP has been linking about one new company per month this way since October. "When Converge starts developing some functionality I don't have, I'll jump on that rather than develop my own," says Schmickrath. Leverage and Learn For Lubrizol Corp., a $5 billion chemical and lubricant-components manufacturer, participation in the Envera trading exchange allows it to leverage its ERP investment in a cost-effective manner, influence the nature of transactions in its industry, and improve its own business processes. "We believe eventually all the business will be done across our industry electronically," says LeCouedic. "We have decided to jump in as early as possible. Envera has given us a wonderful platform that allows us to participate with peer companies, to leverage our resources, and to learn in the process. We already have seen some opportunities for business-process improvements." Since December Lubrizol has included a couple of trading partners in its production process via ERP-to-ERP connections made across Envera. "This is not a text environment. It's actual, it's live, it's real," says Mark Sutherland, Lubrizol's e-business manager. "We are executing purchase orders and receiving purchase-order acknowledgments. These are the initial documents that we need to start system-to-system transactions." The company transacted several hundred thousand dollars worth of business with several integrated trading partners in December 2000. Those same partners will account for millions of dollars in business this year. "These are just initial partners, and we have plans to expand that list considerably." Cost-effective linking of ERP systems via the exchange is one of the big attractions for Lubrizol. "What appeals to us is connecting once and having access to all members of the Envera exchange," says Sutherland. "It would simply be too expensive for us to build the infrastructure for point-to-point connections [to ERP systems of other trading partners], to make all the contacts and develop all the partnerships. One of our Envera members quoted a seven-figure number to create just one point-to-point connection. So Envera gives us tremendous leverage of an infrastructure." Like HP, Lubrizol is giving customers and suppliers an alternative to trading exchanges as a way to connect into its organization, especially for those without ERP systems. Late last year Lubrizol launched a global extranet platform, designed to improve customer empowerment and self service. The extranet includes online ordering functionality, but not system-to-system integration at this time. Currently, customers must key data into the extranet, which is then fed into the Lubrizol ERP system, though an option for an ERP-to-ERP connection option is under investigation. "With the extranet we are looking to enhance collaboration in all areas, including product development, marketing, supply chain, operations -- a whole range of activities," says Sutherland. With the help of the consortium exchange e-STEEL, Ford Motor Co., Dearborn, Mich., is integrating the entire value chain for its tier-one metal stampers on a private exchange. That includes Ford's global network of steel suppliers, service centers, and stampers. Due to go live next month, the infrastructure links member ERP systems (or other small-company systems) to automate processes such as purchasing and logistics transactions, materials specification, claims adjustment, and audit reporting throughout its global manufacturing and assembly operations. Up to five million tons of steel is scheduled to move through the exchange over a three-year period. "This electronic raw material acquisition [eRMA] initiative will take a variety of business processes and legacy systems that were once loosely connected and tightly integrate them," says Karen Kish, Ford's project manager, eRMA, raw material purchasing. In addition to savings realized from operational efficiencies, Ford sees the exchange as a clearinghouse for regular feedback from the supplier base as well as real-time input from a variety of Ford functions integrated into the system (ultimately procurement, manufacturing, financial, product development). Relative performance of all members of the chain from suppliers to stampers can be assessed by the entire Ford organization. This "report card" will allow shifting of specifications and requirements around within the supply chain to better align capabilities of sources and stampers, according to Ford.

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