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10:42 AM
Rick Whiting
Rick Whiting

In Their Orbit

What drives business-technology innovation? Look to large companies' supply chains, not just tech vendors.

When Wal-Mart Stores Inc. told 100 key suppliers this year that they need to be able to track pallets of merchandise using radio-frequency ID technology by January 2005, it did more than send research and development teams scrambling. It offered the latest example of how supply chains increasingly will become the innovation chains that shape business technology.

Wal-Mart didn't discover RFID, and there are companies farther down the path to exploiting it. But the ongoing interconnection of supply chains and the role that technology plays in enabling them, means the largest—and smartest—companies at the center of those hubs have greater power than ever to shape the pace and focus of technology development.

Look at McKesson Corp., a $50 billion-a-year distributor of health-care products that's no slouch when it comes to innovative use of technology. As a middleman, McKesson works with drug manufacturers, health-care institutions, and large pharmacy chains. But it's the retailers, foremost Wal-Mart but also innovators such as Target Corp., that are the most sophisticated users of IT, says Keith Mallonee, CIO of McKesson's pharmaceutical group. And it's those companies that drive suppliers like McKesson. "They cast a big shadow—in a good way," Mallonee says.

McKesson already was working on its RFID plans when Wal-Mart declared its mandate. The 2005 time line, though, will likely speed RFID adoption and not just among Wal-Mart's immediate suppliers, Mallonee predicts. McKesson will most likely work with its pharmaceutical suppliers to apply RFID tags to shipments at the point of origin. "You start to get a domino effect," Mallonee says.


Collaboration makes compatibility even more important, GM's Scott says.

Photo by Bridget Barrett
An industry's 800-pound gorilla has always had the power to dictate terms of doing business. But as companies push for more real-time business, demanding better and more-timely information and distributing tasks such as product development along the supply chain, the value they get from setting the technology agenda grows. At General Motors Corp., requiring suppliers to use specific applications and IT standards is critical because trading partners are an extension of the automaker, doing many of the things it used to do in-house. "We're relying more and more on collaborative partnerships, joint ventures, and outside suppliers," says Tony Scott, GM's chief technology officer. IT systems-compatibility has always been important. "But now it's even more important," he says.

Case in point is the computer-aided-design and product-data-management software each of the automakers uses and requires of their top-tier suppliers. GM does it with EDS's Unigraphics, and it requires major suppliers such as Dana Corp. and ArvinMeritor Inc. to use it as well for designing auto parts and subsystems. GM can design and produce a vehicle in about 18 months today—down from 48 months a few years ago—and that wouldn't be possible if its suppliers used incompatible CAD systems. "The time-to-delivery impact of that is just huge," Scott says.

This growing emphasis on setting the technology agenda can be painful for companies downstream. Wal-Mart CIO Linda Dillman made it clear that she hoped the company's decision to pursue pallet-level RFID tracking would help focus the industry, so suppliers weren't juggling initiatives to track goods at the item level as well, for example.

But it's rarely so clear-cut, as suppliers downstream have to judge carefully how deeply to invest in a supply-chain giant's latest imperative. In the auto industry, for instance, each of the major automakers uses a different CAD system. "At the end of the day, we have to support all these systems and be sure we comply with all of their design standards. It's very costly," says Yomi Famurewa, senior director of product design and supply-chain E-business at automotive-component maker ArvinMeritor. GM's Scott acknowledges that the automaker's demands on its trading partners can be pretty rigorous, whether for a specific application or encouraging them to adopt emerging communications standards such as ebXML (E-business XML).

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