Think Before You Link

Dec. 21, 2004
The right IT infrastructure is vital to value-chain success.

Now that manufacturers have Web sites, browser-based software, and e-mail, many executives think their technology job is done. They're convinced that because the wiring is in place, it's time to move forward and embrace the value-chain concept. Prepare for a shock. While it may be Web-enabled, and there's even something like e-commerce going on, your company may not have invested in the technologies that are most essential in taking business to the next level. "Lots of companies think that if they have a Web site, they're there," says Peter Smith, global practice codirector in the Atlanta office of Deloitte Consulting. "They have no idea what's really needed to address the full scope of operations that a value chain entails." At the same time, companies seem to sense that they may be their own worst enemies. IndustryWeek's Value-Chain Survey, conducted in association with Ernst & Young, asked manufacturing executives which party poses the greatest barrier to value-chain optimization -- suppliers, customers, or their own organization. Of the more than 2,000 respondents nearly half (43.7%) said their own companies are the culprits. But were respondents able to pinpoint exactly what in their operations is to blame? When asked about internal barriers to value-chain optimization, almost three times as many respondents chose "pricing pressure" as chose "technology incompatibility." In fact, the specter of systems that can't communicate with each other is not keeping many executives up at night: Only 16.8% cited technology incompatibility as a major problem; every other option was cited by significantly more respondents. But are other barriers cited in the survey, such as lack of trust and corporate philosophical differences, really what are preventing companies from sharing information and reaping the rewards of more efficient operations? Perhaps they find themselves in a situation similar to one that McWhorter Technologies Inc. encountered last year. Despite a hefty investment in new technology, information still wasn't flowing to the right people quickly enough. And with internal needs going unsatisfied, enhancing the supply chain by elevating it to a value chain remained squarely on the back burner until recently. "We had put in an ERP system," says Robin Mechelke, vice president of IT for the Carpentersville, Ill.-based manufacturer of resins and paint products, "but we learned the hard way that certain types of information, especially sales and purchasing data, were hard to [generate]." McWhorter turned to new Web-based software from Vanguard Solutions Group Inc. that extracts information from the ERP system and displays it graphically to any approved employee with Internet access. Mechelke believes it will fill the information gap. "I think people are underestimating the difficulty of technical barriers," says Kevin Poole, Ernst & Young's partner, eCommerce Team, San Francisco. "Especially when you consider that only 25% of respondents [in the IW survey] believed that their systems are compatible with those of suppliers and customers, it's clear that there's a disconnect here." Giving employees access to the information they need is a rudimentary but essential first step toward establishing a value chain. In a broader sense, putting the proper IT infrastructure in place is a fundamental part of establishing an effective value chain. But the necessity of such an infrastructure often eludes executives: If customers are hitting the Web site and suppliers are tied in via some form of electronic communication, they figure their work is done. Not even close. Notes Robin Palmer, partner in charge of supply chain management for KPMG Consulting in New York: "There's an entire range of 'middleware' that's essential to the value-chain effort, especially EAI [enterprise application integration] and XML" (an extension of HTML, which is the language that most Web pages are written in). EAI is a new type of software that can pull relevant data from many applications and aggregate it or move it along the supply chain to other links that may need it. That's essential to serving customers. According to Meta Group Inc., an IT consulting organization in Stamford, Conn., a typical large corporation depends on 49 different software applications to run its business, and spends up to a third of its IT budget getting those applications to communicate with each other. Imagine trying to get companies to communicate with suppliers' systems and with the plethora of e-commerce systems springing up to serve customers. Any technology that smoothes those connections is a valuable tool. XML, for example, provides a standard way for applications to understand each other and pass data back and forth. "These are the technologies that make it possible to participate in trading Webs, which are at the heart of the new economy," Palmer points out. "Yet many organizations aren't working hard enough to embrace them." Yet companies clearly want to do the things that such technologies make possible, such as conducting an increasing number of business processes over the Web. Given a list of more than a dozen such processes, respondents to the IW survey indicated they are well on their way to conducting most of the processes over the Web now, or plan to by the end of 2000. "What's often lacking," says Lance Travis, vice president of e-business infrastructure services at AMR Research Inc., Boston, "is a 'Net-centric infrastructure. The same problems that led to the well-publicized failures at E*Trade, eBay, and Victoria's Secret also affect business-to-business e-commerce, but they tend to be less visible." At issue are problems such as security, which entails not only hacker prevention but also a system that can authenticate users and provide only the appropriate access. With customers and suppliers reaching into your systems, establishing a reliable method of granting each user the right level of access is vital. And, with so many partners potentially connecting to you and even through you, scalability is key. That means that systems must be designed to cope with increasing volumes of activity, avoiding the crashes and freezes that plagued so many online retailers this last holiday season. "If you suddenly allow customers to come in and check order status," Travis says, "and a huge number take you up on it, can you handle the volume? If the system goes down and customers get frustrated, that is not good for business." Deloitte Consulting's Smith suggests that there are no fewer than six key building blocks in a 'Net-centric infrastructure: a solid ERP presence, high bandwidth, browser-based Web access throughout the organization, proper security, a means of data warehousing, and a framework for integrating applications in a Web environment, such as XML. It may sound like a tall order, but business improves with each block a company adds. Many companies are struggling to build that infrastructure. Nabisco Inc.'s Richmond, Va., facility already has implemented Web-based business processes with many of its business partners, but still is trying to improve the flow of information within the company. "We'd like to implement some sort of daily management system," says production manager Dennis Zielinski. "The Internet has become a huge part of our business in the last 18 months, and it may provide us a way to distribute information from daily meetings, quality control efforts, and other things we need to stay focused on." The fact that Nabisco has not let imperfections in its internal systems slow down its efforts to reach out to partners may be a valuable lesson for other companies. "I don't think [companies have] the luxury of getting their own houses in perfect order before they begin approaching their partners and trying to establish stronger electronic ties," says KPMG's Palmer. "In fact, you could take the contrarian view: The need to link outside drives what you do inside." Ernst & Young's Poole agrees. "It's vital to have the skills and staffing part of the equation up to speed," he says. "People need to understand the possibilities and how to make them happen. But you don't have to have everything running smoothly in-house first. There is a lot of value in establishing whatever ties to partners you can, by whatever means you have available." Something along those lines happened at Adolph Coors Co., Golden, Colo., where a need to better link to 70 manufacturers of licensed merchandise prompted the company to invest in new technology that provided strong electronic ties. Once a year the company had been producing a paper catalog of branded merchandise -- everything from baseball caps to dart boards to belt buckles. Products were manufactured by six dozen companies, and distributed through almost 700 more. But reliance on a paper catalog meant that Coors couldn't produce many seasonal items or engage in special promotions. The cost of additional catalogs was too high, and getting all those partners to respond to changes posed a challenge. Coors tapped Digital River Inc., an applications services provider (ASP) in Minneapolis, to create a Web-based system for both publicizing the availability of merchandise to consumers and helping manufacturers stay current on order information. Distributors and restaurants interested in Coors merchandise now order through a Web site, which passes the order information to whichever manufacturers handle the products in question. The Web site, run by Digital River on behalf of Coors, also processes payments, handles the logistics of delivery, and addresses all the other business processes involved. "In a sense it's an almost instant value-chain right out of the box," says Matt Voda, senior marketing director at Digital River. "In the past," Voda says, "you'd have to get the catalog and make a separate call to each manufacturer just to order, say, two signs and a few T-shirts. Now it's faster for everyone." For its part Coors makes more money on an ancillary endeavor, avoiding distractions from its core business: brewing beer. Analysts expect the ASP model to solve many similar e-commerce problems. "It's a route more companies are taking," Voda says, "especially manufacturers that see outsourcing as the best approach to e-business. They're good at making stuff, but lousy at most forms of e-commerce." ASPs put together packages of applications and Web access and rent it as an integrated solution, usually for a monthly fee. They will subcontract the Web-access portion from an ISP (Internet service provider) and often create custom solutions for clients by integrating applications from different vendors into a suite that meets the customer's needs. The approach has a lot of appeal, especially for small and midsized businesses. International Data Corp. predicts the ASP market will explode, from $296 million in 1999 to a whopping $7.7 billion by 2004. Larger companies are embracing it as well, usually, like Coors, for a noncore business application. But Oracle Corp. and SAP AG, among others, see so much potential that they have formed their own ASP units. Now you can rent ERP rather than buy it, along with many e-commerce applications. But that still is a long way from a total, end-to-end solution. "Most big companies right now are forced to cobble together a bunch of point solutions," says AMR's Travis. "They often approach it piecemeal, one problem at a time, which ends up creating more complexity down the road when you try to integrate everything." But not streamlining the value chain can lead to even bigger problems. Last December Antec Corp., a Duluth, Ga., manufacturer of power-generation and optical equipment, announced lower than expected earnings and a one-time charge of $16 million due to restructuring and the elimination of certain product lines. Under those conditions many companies would retrench and tighten IT budgets. But Antec viewed a drastically improved supply chain as important to its future success, and partnered with TRW Management Consulting to overhaul its processes. "We needed a new supply-chain organization," says Robert J. Stanzione, Antec's president and CEO. 'We needed to link various systems, from sales forecasting to factory loading to inventory control to customer service, into a streamlined production and delivery system." The primary aim, he says, is to get a better handle on customer demand so that factories can plan production schedules more efficiently. In fact, that need to get closer to customers is in large measure what separates a value chain from a more traditional supply chain. The need for closer connections to customers is becoming more apparent every day. More than 90% of respondents to IndustryWeek's Value-Chain Survey said that customers actively participate in new-product design. But when asked what specific business processes are currently Web-enabled, or will be in 2000, only 20.6% said they currently conduct new-product design over the Web, and only 13.2% said they plan to in 2000. Fully 66.2% said they had no plans to make new-product development part of their e-business portfolio. But there is a glimmer of hope on the technology front. Already 21.3% of companies have implemented customer relationship management systems. And another 33.1% say they have plans to implement such systems. What gives? McWhorter Technologies' experience may be illustrative. Last year "we were integrating five or six legacy systems into our new ERP package," Mechelke says. "At the same time, with raw materials so essential to our business, a lot of our effort has been on the supplier side. We're only now looking toward the customer in terms of e-commerce." As companies put a Web face toward the world, the situation is changing quickly. Customers are quickly becoming accustomed to interfacing via the Web, and companies are responding. The key, experts say, is to make sure that those front-end systems tie into all the back-end systems that are so vital to information flow. "Too often," KPMG's Palmer says, "companies create a separate e-commerce division. Later when you need to integrate you find that the decisions the e-commerce group made are out of sync with what the rest of the organization is doing." Because business-to-business e-commerce affects so many processes within an organization, moving forward can be difficult because of the complicated synchronization involved. Travis of AMR Research believes that manufacturers are in for some pain, in part because "their mind-set is that they have to own all the technology. They want to create a pure internal solution, when ASP-based approaches make far more sense." But the specific approach companies take is far less important than the imperative for manufacturers to quickly gain an understanding of the core technologies needed to optimize the value chain -- and get their arms around them one way or another.

IW Value-Chain Survey: The IndustryWeek research project examining value-chain strategies, barriers, and perceived performance was conducted in association with Ernst & Young, the New York-based management consulting firm. To gather the information, 30,000 four-page questionnaires were mailed to upper- and middle-level executives on IW's subscriber list. In all, 2,108 responses were returned.

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