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September 14, 1998

Their Own Brand Of Supply-Side Economics

Consumer goods makers are using the Web more for improving the supply chain than for selling goods

By Gregory Dalton

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CONSUMER GOODS

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With data from Hoovers Online

While many companies are keen to sell directly to consumers via the Internet, makers of consumer products are holding back on using the Net as a primary conduit for sales. Instead, these companies are using the Internet to manage supply networks while employing other types of IT to improve customer service and efficiency and stay competitive.

Typically, new technologies are adopted first in the supply network, and the use of the Internet is no exception. Consumer goods makers in the InformationWeek 500 and their suppliers are forging tighter relationships than ever by using the Web to exchange information that they once held closely or provided only through means such as faxes, regular mail, and telephone calls.

Colgate-Palmolive Co., the $9.1 billion maker of such products as Colgate toothpaste and Palmolive soap, is following this trend by making inventory and production schedules available to its suppliers on the Internet. This effort, which is just beginning, should allow for more efficient delivery times.

"The more you can integrate the whole supply chain, the better," says Ed Toben, VP of global IT at Colgate-Palmolive. Toben says consumer goods manufacturers and retailers have been reengineering their internal processes. The big challenge now is for both the makers and sellers of these products to connect their efforts and tighten the links along the value chain, which is perhaps more accurately called a supply network because value no longer flows in a simple linear fashion.

The integration of the supply network is possible because Internet technology has made such significant advances in just a few years. Although it is still developing and there remain some concerns about security, the Internet inspires much more confidence now than ever before. Toben says there are not many fundamental questions about Internet technology beyond the few key issues of security and bandwidth-issues that are being addressed by vendors and telcos.

According to a survey by InformationWeek Research, 75% of the InformationWeek 500 consumer goods companies are providing customer service, selling products, or selling services on the Web. As a whole, the consumer goods companies of the InformationWeek 500 are devoting an average of 5% of their annual IT budgets to such electronic business.

Coping With Change
The real challenge in moving supply-network management to the Internet is dealing with change management, which is how companies handle innovation in their technology and business practices. "I don't know that the Internet itself is the issue," Toben says. "It's the business practice and change management." In other words, these days companies are most likely grappling with management structures and with how to improve the way people work in light of new technologies. The next step is to help companies and their employees adapt to better ways of interacting with suppliers and with partners such as transportation and logistics companies.

Protecting entrenched procedures is one reason Colgate-Palmolive is keeping its Internet efforts focused on the supply side and away from direct sales to customers. Increased selling directly to customers would bypass its distributors and retailers, thereby upsetting relationships important to its operations.

Other companies in this sector are also focusing on the supply side, where one emerging initiative is the Collaborative Planning, Forecasting, and Replenishment initiative, which would standardize the organization of supply-chain data and make it available to participating companies' trading partners over the Internet. Companies such as Kimberly-Clark and Procter & Gamble are backing the effort along with retailers including Kmart and Wal-Mart. Other consumer goods companies, such as Fruit of the Loom and Levi's, are considering joining the initiative.

Even companies not participating in CPFR are rethinking their supply networks because of changes that have been prompted at least in part by the Internet and its ripple effect on corporate operations. "We see the nature of supplier partnerships developing into what truly is a whole partnership kind of arrangement," says Bob Alston, CIO of Amway Corp, the $7 billion producer of personal- and home-care products in Ada, Mich.

Plastic-products maker Rubbermaid, for example, used to supply plastic containers to Amway. Now the two companies have an alliance in which Amway sells co-branded products. Alston says he anticipates more situations in which suppliers become partners, instead of simply selling their products to another company.

Key Alternative
Other consumer goods companies are beginning to take the Internet seriously as a business tool. "The Internet really is becoming more of a viable alternative" for key business systems, says Dan Abell, VP of IT at Chicago-based Fruit of the Loom Inc., which uses dedicated networks to exchange manufacturing and administrative data with both its company-owned and independent factories.

"We have not yet used the Internet in a production manner, but we probably will soon," Abell says. Fruit of the Loom already operates an extranet, which hosts distributors' catalogs for reference by retailers, and provides online software and support for distributors. Increasingly, the company is acting as a technology provider to its partners. But like many consumer-products companies, the clothing manufacturer is careful not to cut out intermediaries.

"We recognized that the middlemen do add value," Abell says. Return on investment for the extranet is difficult to calculate, but Abell says the company's presence on the Internet is valuable.

Fortune Brands Inc., an Old Greenwich, Conn., company that makes a wide range of products from Titleist golf balls to Moen faucets, is also easing its way into electronic commerce by focusing first on internal processes. The intranet for the $4.8 billion companyhas improved collaboration between sales and marketing and engineering and manufacturing, although it doesn't have any firm way of measuring these tighter relationships.

"You know you are doing the right thing, whether or not you have a number around it," CIO Len Hendrickson says. He plans to engage distributors in partnerships using Internet technologies but is focusing first on making sure the company's intranets work as smoothly as possible.

Net Strategy
NuSkin Enterprises of Provo, Utah, which like Amway relies on independent sales representatives to market its products, is more aggressive in using the Internet for sales and distribution. "I don't think we fully appreciate the impact of the Internet," VP of IT Brent Ririe says. "But my sense is, we cannot be behind on this one, because the Internet is so strategic to the company and to our competitors."

The $953 million maker of lotions, vitamins, and supplements already accepts orders from consumers via its Web site and operates an extranet so distributors can check their individual sales volumes. Like many companies that have gone far in incorporating the Web into their core business strategies, NuSkin also continues to refine its Internet presence.

"We're still struggling to create a united, single strategy," Ririe says. The company is moving in that direction by merging the Web sites for the public and its distributors, who will go through a security and authentication layer to get to their section.

But not everyone in the consumer goods sector is keen on incorporating the Web. "The Internet is great on promise, but short on functionality," says Ed Wojciechowski, VP of IT at Maytag Corp., the $3.4 billion appliance manufacturer. "We have looked at opportunities with customers and suppliers, but haven't found a good business proposition yet that says we should make those kind of investments." Over the next 18 to 24 months, Wojciechowski expects Maytag to stay with electronic data interchange as the primary means of interacting with suppliers and distributors.

Despite hype about EDI being replaced by the Internet, most Web sites are still used essentially for gathering information rather than for conducting transactions. Wojciechowski says very few companies, aside from booksellers, can move their whole distribution channel to the Internet.

Maytag does, however, appreciate the Internet's value as a transportation layer. The company is using the Net to provide an internally developed sales-force automation application to several hundred people later this year.

More Than The Net
Not all the IT activity in consumer goods pertains to the Internet. IT executives are also spending considerable time deploying enterprise resource planning software, shortening development and deployment cycles, and moving even further away from the mainframe.

"Our major emphasis on a worldwide basis is SAP," says Toben of Colgate-Palmolive. The company has rolled out the full suite of SAP applications in 13 countries in Europe and Asia and is moving it into Latin America. SAP deployment is also a top priority at NuSkin, which has used the suite at its U.S. headquarters and has lined up its offices in 27 countries to follow. Management of the company's product lines, which are all made in the United States, has become increasingly complex. SAP was chosen to manage that complexity largely on the strength of its forecasting functions. "It's making a significant impact by giving us a handle on inventory," says VP Ririe.

One common theme underlying the deployment of Internet technologies and complicated ERP packages is that executives are overwhelmed by the rapid pace of business. Even companies that aren't moving toward the Internet are traveling at Internet-like velocity.

"The major trend I see in IT is fast response to business needs," says Maytag's Wojciechowski. To satisfy the need for speed, Maytag has given its project teams authority to implement as quickly as they deem appropriate. "We unshackle them from the IT bureaucracy and allow them to work with users."

Speaking of speed, how quickly will moving toward the Internet cause the mainframe to be condemned to the scrap heap? Maytag's Wojciechowski has a simple answer: "The mainframe is out of the picture. We'll be mainframe-free by the end of the first quarter of 1999."

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