Sept. 11, 2000

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Extending The Supply Chain

Delivering the goods to consumers when they want them

By Diane Rezendes Khirallah

More on consumer goods:

Industry Charts: Consumer Goods (PDF file) sidebar: 'Tis End Of Seasonal Woes, Toymaker Hopes Internet Week Portal To Manage Promos Online (7/17/00) Internet Week When Promotions Get Messy (6/19/00)

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emand shifts in the consumer-goods market occur in an instant. Case in point: Try to find an air conditioner on the fifth day of a heat wave and you'll have some appreciation of what retailers, distributors, and manufacturers are up against.

So what do the forces of supply and demand have to do with information systems? Plenty, as it turns out. The IT departments at many consumer-goods companies are underdoing a maelstrom of change to help companies better track shifting business conditions and respond more quickly to the fickle demands of consumers.

These IT departments face particular challenges that set them apart from their counterparts in other industries, namely providing systems that can deal with the enormous volumes, narrow margins, and low prices that typify this market segment. In some consumer sectors, margins are so small that a 1% increase in the profit margin is a cause for celebration.

One of the biggest challenges consumer-goods companies face is the sales cycle, which usually occurs over the course of a few days, not months or years. Products move rapidly from the shelves, creating accelerated manufacturing and delivery requirements. In short, IT departments must help the various lines of business meet time and price pressures and get goods into the hands of consumers when they want them.

How are the InformationWeek 500 consumer-product-goods companies responding? Many companies invest heavily in enterprise resource planning systems to integrate not only their internal processes but to extend the supply chain to business partners. That means extending the ERP system to take full advantage of the communications and collaboration benefits of the Internet.

Implementing a business-to-business infrastructure to carry out extended supply-chain processes is a big priority at the larger consumer-goods companies. A growing commitment to more pervasive business-to-consumer initiatives may be on the horizon as well. But many companies remain skittish about circumventing the time-honored sales channel by going directly to customers over the Web.

Panasonic USA, a subsidiary of Matsushita Electric Corp., a maker and distributor of consumer electronics, is redesigning its supply chain from the ground up. The redesign is part of a companywide migration to SAP R/3 that started two years ago, says Panasonic CIO Robert Schwartz. The project is almost complete and touches every aspect of the firm.

"Initially, our ERP system was divisional and each group was autonomous," Schwartz says. There were so many systems in place, it was difficult to implement a companywide strategy. The redesign puts in place a strong foundation that should lead to tighter integration between divisions and with trading partners. In addition to the supply-chain overhaul, Panasonic is migrating from a host environment to a distributed Unix environment.

One of the most dramatic changes during the last several months resulted from a change in Panasonic's working relationship with major retail accounts. Until six months ago, Panasonic's retail partners worked on a monthly reporting and delivery cycle. Using SAP R/3 and i2 Technologies Inc.'s Rhythm platform, reporting has been accelerated to a weekly cycle.

The early results are promising. One of Panasonic's largest accounts witnessed a dramatic upswing in on-time deliveries, rising to 98% from 60% a year ago. This initial success has led Panasonic to roll out the same process to all of its major suppliers.

Schwartz is quick to point out that Panasonic couldn't have done it without the cooperation of its suppliers and customers. Without the forecasts developed by customers, it wouldn't have happened. "The opportunity to work more closely with our partners has created the advantage of better planning of the manufacturing schedule," Schwartz says. In-stock availability at the retailer has increased to 88% from 35% during the last six months, which no doubt will engender greater customer satisfaction and loyalty.

This experience speaks to a growing trend: business partners collaborating more closely than ever to win consumer trust. Through joint technology initiatives, forward-thinking companies are partnering at every link in the supply chain.

Large retailers such as Wal-Mart Stores Inc. exert intense pressure on manufacturers and distributors to help them meet their just-in-time inventory replenishment goals, says Mark Wheeler, CEO of Aspen Technology Inc., a systems integrator for manufacturers. Retailers demand more responsive inventory-replenishment processes from suppliers, who in turn look to the IT function to help provide the competitive edge.

Merchant demand spurred Fruit of the Loom Co. to put a similar system in place for its 10,000 accounts--more than 90% of which are major discount chains and mass merchandisers. Today, distributors input their forecasts for the year and merchants feed point-of-sale inventory data each day to Fruit of the Loom. As information is sent across the system, data informs manufacturing and distribution, keeping replenishment up to date automatically.

The Web application that supports this new process was fairy simple, taking a mere three months to implement, says Dan Abell, VP of MIS at Fruit of the Loom. "The real benefit comes from having the right product at the right place and the right time," he says. "It's so simple to think of, but so hard to do."

Managing the supply chain takes on a different meaning at Avon Products Inc., where the first-line distributors (no longer referred to as Avon Ladies) are also the retailers. The cosmetics company relies heavily on its 500,000 U.S. representatives and 2.8 million overseas reps to sell Skin-So-Soft moisturizer and other products on a one-to-one basis. The biggest challenge is constantly balancing high tech with high touch, says Avon CIO Harriet Edelman.

Although customers may purchase a limited number of products online, most sales--by far--are handled by the customer-service representatives. To that end, Avon will relaunch the Web site for its representatives at the end of September.

Since 1997, representatives been able to place orders online, but the site's capabilities were fairly rudimentary by most standards. Soon, reps will have their own personalized Web sites. This is part of a broader plan to bring the corporate IT infrastructure up to date, Edelman says.

The site will let reps create their own sites and personalize them for their customers. They will get training and help-desk support to design the sites. Training will be available online, too. This is a timely move. Avon's annual sales convention in Las Vegas in May recently drew 13,000 reps, and 12,000 attended seminars on E-commerce, Edelman says. She reads this as a strong indicator that salespeople are eager to embrace the Internet as part of their business.

Industry observers expect consumer-goods companies to make significant improvements in their customer-service initiatives, and customer-relationship management systems are expected to play a big role in those plans. While integrated CRM systems haven't yet been widely deployed, sales-force automation applications and customer-support systems are being adopted. Expect continued adoption of individual applications rather than integrated suites, as well as CRM systems during the next 12 months.

Sales-automation tools are pretty common in forward-looking consumer-goods companies, but they've only touched the tip of the iceberg, says Ellen Libenson, VP of marketing at Thinque Inc., a developer of field automation software for consumer-goods and other companies. The smartest companies move automation into the field. In the case of appliance maker Maytag Corp., when service people on call see that a warranty will soon expire, they can sell an extended warranty on the appliance. "These companies realize that field personnel should be viewed as a revenue center, not a cost center," Libenson says.

Another area that's expected to grow is the online business-to-consumer marketplaces, but not without some growing pains. Panasonic and others want to reach out to customers but don't want to alienate their distributors in the process. Panasonic has spent years carefully building relationships in its sales channel, which has historically done the heavy lifting when it comes to moving product. Alienate them and the money dries up.

Panasonic portals offer customers information and pricing, but, for now, online direct sales will be limited to a secure site where customers may order parts and accessories for existing products, says Schwartz.

That's typical. Manufacturers are more inclined to create business-to-business portals to increase supply-chain efficiency than business-to-consumer portals to reach consumers directly. "The trend so far has been for manufacturers to create consumer Web sites that are marketing tools," says Libenson. But that's likely to change. According to Gartner Group research, only 16% of consumer-goods companies sell directly via the Web, but that's predicted to go as high as 50% by the end of next year.

That trend is being driven by consumers. Individual consumers have become far more Web-savvy than they were last year. No longer is it sufficient just to have a cool-looking Web site that dispenses marketing information.

Polaroid Corp. CIO Tom Hennigan thinks he's found a way around the dilemma. The Cambridge, Mass., company, known for pioneering instant photography, has also been known as too research-intensive for its own good. Polaroid used to throw all its marketing weight into single products; this year the company plans to introduce as many as 40 products--and push them strategically to specific markets. Part of the marketing effort involves making them available through the company's Web site.

Once visitors to the site have decided on the product they're ready to purchase, a "buy now" button presents a list of online retailers that sell the product. Because it's generated randomly each time the page refreshes, the list order won't favor one seller over another. When users choose one, it links directly to the retailer's buy page for that product.

"The hard part is qualifying the retailers," says Hennigan. On the marketing side, naturally, they must be familiar with the product and its service requirements. On the IT side, he says, "we want the user's clickstream experience to be as smooth as possible."

Polaroid's Web-design goal was to add just one click to buy, but not every online retailer has that capability. To qualify, each retailer's Internet technology has to allow direct access to the relevant product page. In addition to IT capability, each retailer must be familiar with the service requirements for each Polaroid product it sells.

So far, this capability is only available on the portion of the site that's dedicated to professional users--law enforcement and medicine, for example. The rest of the site is typical of most consumer companies--lots of information and diversions, but nothing to buy.

Colgate-Palmolive Co.'s site is chock-full of such content. Dentists can link to American Dental Association conferences and other professional sites; consumers can get product information and an extensive KidsWorld section that includes games, coloring, and other activities.

Colgate-Palmolive CIO Ed Toben agrees that business-to-consumer presents a problem. "We could create a site to sell toothpaste, but then we'd have to get it to your door," he says. The company would rather not be in the business of distributing directly to consumers. "We're more about information and education," he says.

Toben's main concerns center on the IT infrastructure. "If there's anything we've learned, there's got to be something behind the curtain," he says. "It doesn't matter whether you're talking business-to-business or business-to-consumer." That's a big part of the reason behind the $9 billion company's wholehearted SAP R/3 effort. Colgate-Palmolive is an SAP development partner. Within the last year, the company completed its core SAP rollout to 42 countries in North America, Asia, Europe, Oceania, parts of Africa, and Russia, and soon will roll it out to South America.

The greatest challenge will be collaboration across the supply chain to be sure it all works. In addition to faster manufacturing and delivery cycles, consumer goods are subject to spikes in demand because of coupons and seasonality. "Business-to-business exchanges will come to the fore, because a lot of them supply the same people," says Aspen's Wheeler.

However, business-to-consumer manufacturer sites may be reserved for the distribution of one-of-a-kind products or regional items that manufacturers can't get into retail outlets on a national basis. Some of these products have demand but don't do well in the retail environment.

Consumer-goods companies are in their E-commerce infancy, and they have just begun to explore the possibilities the Web will eventually engender. Some observers predict that the difference between brick-and-mortar and online marketplaces will disappear.

Anatole Gershman, associate partner at Andersen Consulting's research and development center, says physical and online distribution channels will become more integrated--all with the goal of enriching the customer experience.

Illustration by Jeffrey Fisher
Photo of Edelman by Catrina Genovese
Photo of Schwartz by Chriss Wade

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