InformationWeek

March 6, 2000

The New Economy:
Tighten The Supply Chain
E-business technology promises quicker information flow through the tiers of a supply chain, allowing faster response and smaller inventories

By Pete Janak

Pete Janak -business is expected to transform the global economy, and the evidence seems compelling. Dot-com companies that have never done business any other way are rapidly populating the economic landscape. Many brick-and-mortar companies are adopting the click-and-mortar model as they expand their E-business capabilities.

While most of the click-and-mortar action has been in the business-to-consumer area, less attention has been paid to the benefits of business-to-business commerce. In particular, there has been limited coverage of E-business applications in manufacturing companies, such as those in the automotive industry.

The recent announcement by DaimlerChrysler, Ford, and General Motors that they intend to drive their huge material purchases, and those of their suppliers, through a single online trade exchange has created lots of excitement. This aspect of E-business may provide significant material cost reductions, but it's only the beginning in terms of efficiencies that may be achieved in the supply chain.

A large manufacturing company's supply chain includes thousands of suppliers in several layers, or tiers, of business relationships. Information flows to each supplier and, in turn, each tier is generally slow. Thus, it may take weeks for a change in market demand to be transmitted by the original equipment manufacturer at the top of the supply chain to the lower-tier suppliers. Because the ability to change production in response to the new information is slow, each tier tends to store extra inventory in case of unexpected increases in demand. This inventory represents waste in terms of underutilized capital and associated carrying costs. Even inventory-efficient heavy manufacturers may have total inventory equaling 5% to 7% of sales.

If these inventories can be diminished, the supply chain will experience lower overall cost, manifested as either higher profitability distributed across the tiers or lower cost to the customer, and capital can be released for more productive uses. E-business technology, along with new business processes, promises quicker information flow through the tiers, allowing faster response and smaller inventories. The enabling E-business technology will go beyond Web technologies to include advanced planning and enterprise resource planning systems across the entire supply chain. A first-tier supplier could "explode" the bill of material for his products to all participants in his supply chain, eliminating time delays for material analysis at each level. Web portals will be the preferred mechanism for quickly promulgating information up and down the supply chain.

GM, Ford, and Toyota are planning to deliver cars to customers five to 15 days after the customer has selected a model, color, and options. This is called build-to-order capability. These automakers are betting that a significant number of customers will prefer build-to-order vehicles, giving companies that have this capability an advantage over those that don't. It won't work, however, unless the responsiveness of the supply chain increases drastically, since the buildup in inventories necessary in the current business model would erode profitability.

A group of companies working together in an electronically supported environment could be viewed as a virtual enterprise-or, to borrow a concept from the Japanese, an electronic Keiretsu. For relationships in a virtual enterprise to work effectively, the enterprise must take on certain characteristics of a Keiretsu. For instance, there must be stability in the relationship, and companies must share in the wealth. Stability in the business relationship must exist to justify investment in the enabling technological infrastructure. Additionally, if the biggest or controlling member of the supply chain absorbs all the benefits, there will be little incentive for others in the chain to participate. The ability to establish and maintain cooperative strategic relationships may therefore prove more important than the enabling technology in supply-chain optimization.

E-business is at a critical point in manufacturing. Industry leaders that learn to optimize the supply chain and build necessary relationships will achieve competitive advantage. Companies that fail to move quickly may never catch up and, ultimately, may not survive.

Pete Janak is VP and CIO of Delphi Automotive Systems in Troy, Mich., and can be reached through the company's Web site at www.delphiauto.com/contact.cfm. He will be a featured speaker at the InformationWeek Spring 2000 Conference, which will be March 5 to 8 at Amelia Island, Fla. For information on the conference, point your browser to informationweek.com/events.

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