Collaborative data sharing among partners and implementing pull-driven or response-based supply-chain models may well be the answer to the rising demands of the e-commerce world, but making such a dramatic shift in supply-chain orientation is a tough nut for many businesses to crack.
"You drive product through your supply chain based on what the customer actually needs at any given point in time. - Rob Sweeney of Industri-Matematik International
"E-commerce will set the new standard by which companies will be measured in the supply chain," concludes AMR Research, the Boston-based research firm. And in a white paper on the pull-driven supply-chain model, supply-chain software developer Industri-Matematik suggests that how these organizations get measured - namely around the reliability and responsiveness of their fulfillment processes and customer service - testifies to the depth of the business challenge e-commerce poses.
"Accommodating e-commerce introduces new levels of supply-chain complexity, volatility and opportunity that compel companies to manage and share information across a virtual enterprise of employees, suppliers, partners and customers," IMI concludes. To keep pace with these changes, companies must adopt more dynamic business models, ones that can profitably drive customer satisfaction at the internet pace.
Charles Poirier, a partner in the National Supply Chain Practice at Computer Sciences Corp., says it a bit more bluntly: "If your business model is more than two years old, it's out of date. There's nothing else to say about it."
The emerging business model designed for the unique characteristics of the fast-paced and highly variable e-commerce world is called "sell-source-ship." Companies leveraging the sell-source-ship model, sometimes called the S-cube, use information and collaboration rather than inventory to effectively service their customers. According to IMI, a company utilizing sell-source-ship sells its products, often before they are made, and then leverages its supply chain, including its extended enterprise, to serve and satisfy its customers.
As companies "re-invent" themselves for the internet economy, says Forrester Research, they must emerge "ready for dynamic trade, with fundamentally more agile and flexible business operations built around an internet core that runs in real time, can change business direction on a dime, and interconnect easily with third parties." In short, Forrester Research makes the argument that companies must start to take the painful steps toward new business models now, challenging and changing basic assumptions about the supply chain, customers and technology as they go.
The common element in any description of these new, emerging business models is the principle of pull-driven logistics, a tightly integrated, highly responsive supply chain oriented to the "pull" of the customer's needs, IMI says. In pull-driven companies, every action of the end customer is met by highly automated and tightly integrated responses across the supply chain to meet that need. The catalyst of the pull-driven enterprise is information.
In the traditional world of buy-hold-sell, businesses often invested time, money and labor at the front end of their supply chain to manufacture or purchase finished goods, then stored them in warehouses or distribution centers until they were sold. Inventory was viewed as a key asset, and an inventory-centric strategy for manufacturers meant building and maintaining safety stocks, while for distributors and retailers it meant buying and holding inventory to ensure ready product availability.
The strategic value of inventory was bruised considerably throughout the last decade, with the overused yet effective example being Dell Computer, where Michael Dell turned the traditional supply chain on its proverbial ear with his S-cube, pull-driven supply-chain model.
Dell showed the world "new and better ways to make and move product and satisfy customer demand" and illustrated that finished-goods inventories tie up critical working capital, IMI notes. As product life cycles shorten, particularly in high-tech markets, and with customers requiring higher levels of personalized service and customization, holding these inventories no longer serves its original purpose, IMI officers say. IMI markets the Vivaldi software suite, which combines three applications - Customer Relationship Manager, Supply Chain Execution and Advanced Order Management - to provide a solution for fulfillment and customer service in an e-commerce environment.
Rob Sweeney, director of product strategy for IMI, says that in the past 18 months, he has seen the most focus on pull-driven supply-chain modeling in consumer products and goods (CPG) manufacturing, wholesale distribution, and retail.
"The companies that are most susceptible to a pull-driven system are the companies that are closest to the consumer," says Sweeney. The retail marketplace has to focus a lot of its energy on this, he says. Wholesalers supplying the retail market are the next most susceptible.
CPG manufacturers are less susceptible, but for a different reason: In many ways they have been going through this migration for a longer period of times, just based on a different set of drivers, says Sweeney. "The obvious driver now is the internet, but four or five years ago, the driver for CPG companies to move to a pull-driven environment was the edict of the mega-retailers and the technology driver was EDI," he explains. "The mega-retailers were Wal-Mart and Kmart saying to their suppliers, 'This is how we want to receive our goods from now on, this is how we want them packaged, and this is the day of the week and time that we want your trucks to show up at our receiving dock.' So the CPG companies already have gone through a phase of this evolution, but a lot more companies are being affected by this next wave, which is being driven by the internet."
According to Sweeney, what drives people to a pull-driven environment is that companies are coming into very highly competitive markets when customers are becoming much more demanding. In this atmosphere of change, three elements become increasingly critical to a business: How can they differentiate themselves with their customer base; how can they protect and retain this customer base; and how do you create loyal, repeat customers?
"We believe a lot of it is driven because everyone is becoming more demanding because they have so many more options now than they ever did," says Sweeney. "From a consumer perspective, the internet gives people so many more options, and the proliferation of different store brands in the brick-and-mortar world give people more options." He cited the growth in specialty clothing shops for teenagers in the past decade. "This is making them much more demanding of the companies they buy from and changes the equation that determines who they stay loyal to."
That same analogy is true with business-to-business relationships, he adds. "Now, for many products, a company can go almost anywhere in the world and get alternative products or materials. There are just many more options for both the consumer and the business."
Consequently, if a company wants to be a player and a leader, "you have to be able to
treat each one of those customers on a very unique basis, and create a unique relationship - a unique value process for that customer," says Sweeney. "To do that is a major push towards pull-driven logistics. The whole theory behind pull-driven logistics is that you do business based on the customer's terms, and you drive product through your supply chain based on what they actually need at any given point in time."
A company can't be set up to be very responsive to its customer if they are in a push environment, he says. "If you have already made the purchase of the product and it's already sitting in your warehouse, that's what you have to sell to the customer. In a pull environment - or sell-source-ship - you service the customer the way they want and you have the infrastructure in place that allows you to profitably serve that customer - source the product, ship it to them, and service them - the way they want."
Pull-driven economic models are the buzz in the high-tech world, says CSC's Poirier, but there is widespread interest among other industries, he says. "Unquestionably, companies are starting to copy the Dell model, particularly in the business-to-business sector," says Poirier. "The high-tech guys are into it. Hewlett-Packard, Sun Microsystems, Microsoft all have programs. There's this kind of continuum, and it's being led right now by the high-tech people, with the auto companies close behind and a few of the consumer products companies, of which Procter & Gamble is so far out ahead of everybody else."
Poirier, who spends much of his time pitching pull-driven systems to business interests and formulating game plans for system implementations, has a thesis that there are several levels of the supply chain. "The first two are all internal, where companies look at sourcing and logistics and start working to break down interdepartmental and inter-functional barriers and focus on internal excellence. Every company I know is working on level one and two," he explains.
"A real barrier prevents you from going into level three, which is an external view of things, where you start to build a network. Now you have to start relying on suppliers you trust, and looking at customers and asking what they really need, and building a network - I call it a value chain - that is going to deliver what is needed." Only a few companies are at that level, but whenever a company gets to that level, one of the immediate things they do is take what they call their intranet and start to expand it with suppliers and customers and build this connectivity, says Poirier.
"When they do, they look at it like Michael Dell does: If I can't be the best at making one of these components, I'm subbing it out. So they become configurators - final assemblers. Most of the stories currently are in high-tech and telecommunications, but the car people are starting to rapidly move, building these extranets now. Ford is determined to have fewer assemblies and more subassembly, so the time it takes to put a car together goes down dramatically."
Donald Bowersox, the John H. McConnell Professor of Business at Michigan State University, prefers to view the model less in terms of the word "pull" and more in terms of linking the customer into the loop. "You could technically say that is the pull point, but we are accommodating an expression of demand, so I like 'response' and 'anticipatory' a lot better than 'push' and 'pull'," he says.
Regardless of the term, other industries clearly are trying to make the transition. "Part of what lets Dell do this so well is that they have a high-value transaction. There's a relatively small couple of boxes with a lot of bucks involved," says Bowersox. "Dell can afford the premium transportation. It becomes a more difficult process though as you get involved with complex products."
Bowersox expects to see the first real breakthroughs of the response supply-chain model on highly valuable products like high-tech, pharmaceuticals and high-end machine tools, which are well-suited to the response-based business model.
"The end result of a sell-source-ship model is the potential for a negative cash-to-cash cycle," he points out. "This always has been the entrepreneurial dream, to be collecting money before you have to buy parts, and to be able to pay your suppliers in a manner that lets you have a negative accounts receivable/accounts payable inventory equation."
This doesn't mean that low-value product segment of the economy will be left out on the supply-chain efficiency front. "That segment of the economy will streamline its supply chain in other ways, such as reducing consecutive inventories being held, and maybe making particular businesses more responsive to the performance of certain value-added services," he says.
Economies of Scale
For example, companies may choose to implement form postponement as opposed to time postponement. "The Dell model is a time-postponement model, but it postpones the time of buying until a sale, and then reacts quickly because they have the product value to move it. But there are other models where you could move undifferentiated products forward in the supply chain and then customize them quickly, which would retain the economies of scale of the lower value item and add the expensive accessories by choice."
These activities could be performed at warehouses or distribution centers or at the dealer location or, in some rare circumstances it could be done in the home. Bowersox notes that the fundamental difference in a series of models of dishwashers that make up individual SKUs generally consists of the front panels and the accessories the purchaser chooses to activate. "If you had a more flexible installation service, you could maybe serve the entire market with six overall SKUs and then modify those particular units to do different things based on what the customer wants," he says. It's often easier and cheaper to put almost all electronic components on the circuit board when it is mounted in the machine than it is to build 10 different boards. In short, the manufacturer builds in the circuitry and then activates the various programs depending on the features the consumer wants. "Now we are postponing all the way to the point of installation, so we have the potential to cut SKUs from 100 to six or eight and just ship those basic units forward."
It's all about time-based competition, he adds. "The internet technology lets us put our arms around both information transfer and information analysis. In one sense I am saying the difference between the web and EDI-type systems is like the difference between the transmission of data versus the computing of data."
Convincing companies to make the commitment to collaborative, pull- or response-driven supply-chain models can be a tough sell, Poirier says.
Is he finding a lot of receptivity? "No, I wish I were," he says. "Change management is a hard sell."
Often consultants come in to make a presentation and are faced essentially with three generations of business managers, he explains. "Bear in mind that these are generalizations and there always are exceptions, but usually you have the older more comfortable executives who don't want to disrupt the company's stock price or rock the boat, the middle level of people who have been with the company for seven to 15 years and know that something has to change but are not sure exactly what it should be, and the young turks who say 'come on, try it or I'm out of here.' The challenge is identifying the visionary, or at least the manager who recognizes that the web is going to change what we do whether we like it or not, and work with that person."
A Hard Sell
Often when he's working with a company's executives, he can sense that the general feeling in the room is "this is all B.S.," says Poirier. "They say, 'The next thing you're going to want me to share is my cost,' and I say, 'Yes.' In the future, costs are going to be transparent. And with all the guides and auctions and exchanges popping up in the internet, you think people don't know what your costs are?"
The point is, a couple of people in the room generally like what they hear. "When you start at the top, you won't get full buy-in, so you take the couple of people who gave you the biggest buy-in, and you move down their vertical slice of the corporation," says Poirier. "As you move down through that vein and people know that the top person is behind it, the sale becomes easier. But even there, you have to sell yourself down through that vertical slice."
The easiest people tend to be down closer to the bottom, he says. Why? "Maybe they are more susceptible to change and are tired of people banging them over the head on cost reduction, having reached diminishing returns where that's concerned. Then here I come down talking about top-line improvement and they are receptive and start coming up with ideas how they can share with trading partners and what type of issues or activities they should be talking about, like how to share ERP systems."
Once he achieves a foothold, Poirier encourages the managers to build a pilot with their two or three closest business partners, the vendors or suppliers with whom they have the most trust. "You want to do two things you never have done before: share proprietary information, and share the savings." One solid customer who is willing to listen is added to the equation.
"Once I get them to this point, there's not too much trouble getting people to come to a diagnostic lab, where we really start looking at the sharing experience," he says. With this select group of partners together in a room, and with confidentiality agreements as well as agreements to share in the savings signed, the general procedure is to assemble a flow chart and detail all the transactions, including order processing and communications, that occur between the partners.
"The primary purpose of this endeavor is twofold, to illustrate the level of activity and to shock the hell out of the people in the room at the sheer magnitude of the paperwork. Companies want to be paperless and embrace EDI, but 80 percent of the communication between companies usually is on the telephone or in the mail."
Then the partners start looking for savings. Typically, the manufacturing guy wants to know more information on distribution center releases and what the retailer is actually pulling through the stores, which leads to store data. "Forecasts take on much less meaning when you are working from actual replenishment data," says Poirier. "Now you share that upstream with your supplier, and in many cases he can cut his inventory in half when he knows what the actual shipments to the stores are. Working together like this, you can come up with a list of deliverable initiatives that provide the basis to form joint teams between the supplier, manufacturer and customer and actually make it a paperless system and do away with purchase orders and all this reconciliation that goes on.
"How can they automatically bill, and how can we make this system react to what the consumers have actually taken out of the stores? Pretty soon everyone realizes that everybody has been saving extra safety stock....we could cut the heck out of inventory if we only could put it online and know where it is."
Once this part of the project gets up and running, the object is to build more trust, and go from three or four partners to half a dozen. "Suppliers often are relieved that corporations are interested in taking a tack other than the conventional mentality of ramming cost reduction down their collective throats. "It does makes it an easier sale on the supplier side," says Poirier. "You get to the point where the supply base gets tired of you beating on them for cost reduction and may actually withhold new ideas. But it's that up-front sale that is really hard."
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