Sept. 11, 2000

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World Beyond The Assembly Line

Electronic links redefine trading relationships for manufacturers

By Alorie Gilbert

More on manufacturing:

Industry Charts: Manufacturing (PDF File) sidebar:Take My Post-It, Please And Electronic Paper, Too EETimes Manufacturers move beyond small-footprint displays (8/21/00) EETimes Capable foundries offload traditional manufacturing job (8/14/00)

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n a cold and blustery day in Chicago last February, 30 top executives at Textron Inc. convened at a Hilton hotel on an urgent mission. The $11.58 billion global manufacturer of airplane, automotive, and industrial equipment was determined to jump-start its E-business strategy with an intense five-week, off-site meeting. Industry experts, consultants, and executives from Internet startups were brought in to advise. The goal: emerge with a plan to adapt and grow Textron in the new world of business-to-business E-commerce.

"We took a snapshot of E-business projects across the company," says Ken Bohlen, Textron's chief innovation officer. "We realized we weren't doing a lot."

The IT projects that manufacturing companies focused on a few years ago, such as year 2000 remediation and enterprise resource planning implementations, have been completed or are no longer considered a top priority. Manufacturers are also moving beyond the creation of Internet brochureware--static online marketing material that's ineffective for customer relations and does little to generate Web sales.

Instead, most manufacturing companies have spent the past year developing strategies to more effectively market their products, serve customers, purchase and manage supplies, and design products using collaborative online tools and electronic links to trading partners. Companies are creating those links in a variety of ways: via direct technology integration with business partners; private extranets that reach multiple trading partners; and online marketplaces, or trading exchanges, that bring many buyers and suppliers together in a virtual trading hub.

In this brave new world, the goal is to eliminate inventory buffers between buyers and suppliers that create waste and cost throughout the supply chain. It's also about quick response to changing market conditions, which requires cooperation and communication among all members of the supply chain. Companies that prove to be efficient and collaborative trading partners will triumph over those that cling tightly to internal information and shield themselves from business processes outside their own walls. "It's no longer about manufacturer competing against manufacturer," says Tom Orlowski, VP of IS at the National Association of Manufacturers. "It's a supply chain competing against a supply chain."

For companies to tighten the links in the supply chain, they must have E-commerce-ready trading partners. That's a major hurdle for manufacturing--an industry entrenched in more traditional forms of communications such as telephone and fax. Superior Essex, a Fort Wayne, Ind., manufacturer of wireless and cable products, tried to auction off magnet wire on business-to-business auction site FreeMarkets, but didn't find any takers. "It's a widely accepted standard to call," says Brian Sickafoose, senior manager of information technology. "Manufacturers love the telephone."

The goal of supply-chain efficiency isn't new, but companies are under more pressure than ever to developE-business strategies because of the growing number of Internet startups with their own plans for revolutionizing the manufacturing industry. Traditional manufacturers know that if they leave the revolution up to someone else, they may lose market presence and customers. "You no longer have years to plan and execute," says Textron's Bohlen. "With the threat of college-campus MBA programs creating business models to replace your distribution channel, it's more like months and days."

Meanwhile, industrial giants such as Boeing, Ford, General Motors, Honeywell, and Lockheed Martin are creating online trading hubs for procuring supplies, and pushing their E-commerce agendas onto trading partners. Those partners are left with the task of determining which online trading efforts are most viable and deservingof their time and investment.

As a supplier of automotive exterior trim and fuel systems, Textron has been solicited by Ford, General Motors, and DaimlerChrysler to sell its wares on Covisint, an E-marketplace being developed by the three automakers and scheduled to go live later this year. The company has no immediate plans to participate in Covisint, but Bohlen says that the nearly 500 E-business projects Textron has under way--including an implementation of Ariba Inc.'s E-procurement applications--could lay the foundation for participating in Covisint and other E-marketplaces down the road.

But with nearly 1,000 online trading exchanges competing for transactions, Textron is trying to determine how the E-marketplace frenzy will play out before it proceeds. "We're cautious because the market is saturated with so many exchanges," says Bohlen. In addition to investing time and resources, the manufacturer is also trying to determine exactly how trading on an exchange will impact its business. For example, can exchanges--which rely on price-driven auctions or static product catalogs--support complex contract negotiations?

Of all the E-business trends, it's questionable whether any have created more confusion and uncertainty than E-marketplaces. Whether led by an independent startup or a consortium of industry players, marketplaces introduce a new set of virtual intermediaries into what was once the strict domain of distributors, creating a potential conflict. According to AMR Research, two-thirds of the materials and dollars shipped out of the North American manufacturing sector go through third-party distributors. "So much of business-to-business activity is incumbent on the distribution channel," says Dave Caruso, an analyst with AMR Research. "Businesses say distributors are one of the most influential factors in their E-business strategies."

Exchanges also redefine trading relationships, sometimes turning what was once a cutthroat competitor into a partner in a collaborative purchasing pool. United Dominion Industries Ltd., a $2.1 billion manufacturer of industrial and building products in Charlotte, N.C., is exploring a partnership with its biggest competitor, Ingersoll-Rand Co., to set up a trading exchange in September for bidding on supplies. "It's a tough challenge to change and help competitors out in manufacturing, but E-business is driving us to that," says Greg Wilson, CIO of United Dominion.

While predictions abound about the ultimate impact of these virtual bazaars, no one's really certain yet where all the E-marketplace hype is going. Perhaps their greatest impact so far is to get companies thinking about how to transform trading relationships through Web channels. Whether the most prevalent method is via marketplaces, virtual private networks, or one-to-one links remains to be seen. "It's a little like the Wild West--you make up your own rules, to some extent," says Wilson.

Some manufacturers use extranets to streamline their selling channels. 3M Co. in St. Paul, Minn., is working to improve communication with customers and distributors by building nearly 150 extranets. For instance, customers linked into an extranet can configure and order brand graphics for product packaging over the Web from 3M.

Snap-on Inc. is similarly focused on improving electronic connections to distributors and customers. The Kenosha, Wis., toolmaker is setting up an extranet that will make it easier for distributors to order products, check inventory and order status, and view promotions. By early next year, Snap-on plans to set up 6,000 hosted Web portals that will let distributors extend online ordering to their customers. Snap-on doesn't see any value in joining a broad E-marketplace. "We're not too anxious to put the Snap-on brand out there with a lot of lower-quality products," CIO Al Biland says. "Managing the brand on some of these sell sites is a real issue."

The role of distributors is foremost in the minds of many manufacturers. Although it's tempting to consider Web trading as a means to cut out distributors, most manufacturers rely on them for marketing, shipment, and fulfillment of products.

Parker Hannifin Corp., a $4.96 billion manufacturer of hydraulic and pneumatic motion-control equipment in Mayfield Heights, Ohio, is in the process of "E-certifying" thousands of suppliers and distributors so they can accept and receive orders as well as provide inventory, catalogs, and delivery information electronically. The company pushes trading partners to work with its E-commerce infrastructure provider MRO.com Inc., which hosts E-commerce storefronts and electronic catalogs, to support those functions.

The goal of the effort is twofold--to automate and aggregate purchasing, and bring its distributors into E-commerce initiatives with big accounts, such as Boeing and General Motors. For instance, as GM moves to aggregate its purchasing online, it has approached Parker directly for a national contract and electronic catalog content, which would circumvent the distributors. "We're saying, 'Wait a second, what about our distributors?'" says Paul Carson, CIO of Parker Hannifin. "We've pulled back to work on our content and get our distributors on board."

United Dominion also pushes hard to get distributors and contractors on the Web. It deals with a lot of small distributors in the building and construction industry, some of which don't even regularly use PCs. But United Dominion is working to replace telephones and paper for the codevelopment of engineering projects--a tedious and lengthy process--with Web portals that let engineers collaborate online. The company also helps distributors connect to the Web. "We're trying to get distributors to look like a unit of our business," says Wilson.

Online design collaboration is a goal for Exostar, an aerospace/defense marketplace debuting this fall and developed by BAE Systems, Boeing, Lockheed Martin, and Raytheon. "This exchange is a big step toward the business-to-business capability we were looking for with suppliers," says Joe Cleveland, CIO of Lockheed Martin Corp., in Bethesda, Md.

For many companies, the ability to create and manage electronic information about products, customize it for specific accounts, and link that information to back-office inventory systems is a daunting hurdle to effective E-business. Several leading manufacturers, including Parker Hannifin and 3M, are creating vast content repositories that they plan to make available online to customers, distributors, and E-marketplaces. That's no easy feat for Parker Hannifin, which has 500,000 parts numbers across 60 business divisions, or 3M, which has 40 divisions, each with its own requirements for product information.

3M is making sure that data in its content repositories is stored on a common infrastructure that's linked to each division's order-management system, an NCR Corp. data warehouse, and its i2 Technologies Inc. supply-chain management system. "The same data that's used on the Web is used in our transaction systems; we don't want two different sets of information," says 3M CIO David Drew.

When it comes to sharing sacred business information, managing data quality is just the tip of the iceberg. Much of the hesitation companies feel about E-commerce has more to do with human factors of trust and confidence than technology. Some companies fear that proprietary information will fall into the wrong hands and are reluctant to share such information with suppliers that also work with their competitors. Or they fear the exposure of weaknesses, such as inefficient processes and out-of-date systems. Analysts say companies can't be insular for long. Best-in-class companies will consider everything about E-business and will tear up processes to improve efficiency.

Illustration by Jeffrey Fisher
Photograph of Bolen by Stephen Sherman
Photograph of Carson by Roger Mastroianni
Photograph of Cleveland by Jeff Blanton

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