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
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).
Dealing with market influencers, such as Wal-Mart or GM, can be difficult for rivals and suppliers, but there's a downside to not having this kind of driving force in an industry as well. The fragmented nature of health care, for example, makes it more difficult to create information-sharing systems that could save big money—and lives. The process of adoption is slowed by the fact that there isn't a dominant health-care provider driving standards around emerging technologies.
Industry giants can be most influential in emerging technology, by getting widespread experimentation started. Leaders of those companies realize they don't necessarily know the business obstacles and technology hurdles that await with the use of unproven tools. When Wal-Mart first broached the January 2005 deadline in private meetings with suppliers in February, it asked those suppliers to develop the RFID technology along with the retailer. "To be honest, in February, we didn't know what the definition of 'live in January 2005' meant," CIO Dillman said when announcing the deadline. "But it at least got some activity going."
One of those suppliers, Gillette Co., didn't need any prompting. The razor maker has been among the leaders pursuing RFID and was one of the first sponsors of the Auto-ID Center for research at MIT. But Wal-Mart's plan provided focus: Shortly after the retailer said it would pursue pallet-level tracking, Wal-Mart and Gillette canceled a previously announced joint experiment to test shelf-level tracking in a Massachusetts Wal-Mart store.
Procter & Gamble Co. CIO Steve David predicts the impact of Wal-Mart's initiative will be felt largely in terms of speed, with companies embracing RFID technology much more quickly than past supply-chain innovations. He contrasts that with bar-coding, where retailers took 15 years after its debut to widely adopt it.
Tom Dubay has been doing business with Wal-Mart for about 25 years as president of Sulyn Industries Inc., which makes glitter, sequins, and other craft-supply products that Wal-Mart sells. He knows RFID will become a requirement for doing business with Wal-Mart at some point, and he expects little difficulty in meeting Wal-Mart's demands for RFID adoption. And he plans to apply what he learns. "My experience is, when you work with Wal-Mart, your business improves, not just with them, but with all accounts," Dubay says. "They make you better."
RFID is only the latest example of this kind of market influence. McKesson is working with its major retail customers to adopt a standard for EDI called Electronic Data Interchange-Internet Integration Applicability Statement 2 (EDIINT AS2). Last year, Wal-Mart asked its nearly 10,000 suppliers to begin using the standard as an alternative to expensive value-added networks.
Wal-Mart's actions even influence its big-retailer competitors, says Eric Peters, senior VP of products and strategy at Manhattan Associates Inc. Manhattan Associates develops applications for supply-chain and trading-partner management that companies such as Sulyn Industries use in their relationships with big customers such as Wal-Mart to comply with their technical requirements, including RFID and EDIINT AS2. Peters says Wal-Mart's competitors with which he works say they can't let Wal-Mart get more than six months ahead in adopting new business-technology practices. They're comfortable letting Wal-Mart take a lead in adopting technology such as RFID, as long as they can be close followers. "As competitors to Wal-Mart, they can't let them gain too much of a competitive edge," Peters says.
With its relentless chip innovation, Intel has done as much as any company to explore what's possible with IT. But as a major market influencer, Intel also leverages its sway with its suppliers to try to modify how businesses use technology.
Intel is a strong proponent of RosettaNet, a set of XML-based standards used to automate business-to-business transactions that it's increasingly using with customers and suppliers. Since 2000, when Intel began using RosettaNet, the company has adapted 28 of its transaction systems, including ordering, payment, and inventory status, to support the standards.
Intel provides tech support to trading partners, program manager Pfost says.
Photo by Angela Wyant
Intel's evangelism for RosettaNet goes beyond cheerleading or arm-twisting. In addition to pushing information about possible productivity gains, the company provides technical support, including sending Intel staffers to supplier and customer sites to help them implement RosettaNet technology. "We do an awful lot of hand-holding and consulting with our trading partners," Pfost says.
Intel's efforts aren't altruistic: The company wants to cut $500 million out of its annual supply-chain costs, and every trading partner that adopts RosettaNet brings Intel one step closer to that goal.
Bax Global Inc., which provides Intel with transportation and logistics services, is part of Intel's RosettaNet clique. Bax executives acknowledge that there are advantages to using RosettaNet, including the tight integration it allows with Intel's enterprise resource planning systems. But the biggest advantage is keeping big clients like Intel happy. "We use [RosettaNet] because our biggest customers like Intel require it," Bax CIO Doris Hall says.
Bax adopted RosettaNet in mid-2002 at the request of Intel, Cisco Systems, and a few other large technology companies. "They demand [such standards] rather vigorously," Hall says. Bax implemented RosettaNet with Intel's help, but it's still a significant—and additional—cost. "The investment is pretty high on our side," Hall says. And Bax still has to maintain the EDI and other XML technologies it uses to communicate with smaller companies. "It's only the very large, high-tech customers asking for RosettaNet."
Hall expects use of RosettaNet to increase, certainly among high-tech companies, so Bax's early adoption of the technology puts it in a good position if more of its customers begin to use the standards. High-tech companies account for about 25% of Bax's $2 billion annual revenue.
Arrow Electronics Inc., one of Intel's biggest customers, implemented RosettaNet simultaneously with Intel in February 2000. RosettaNet's ability to handle complex processes rather than just simple transactions aids Arrow's efforts to spur demand on Intel's behalf, says Paul Katz, VP of digital supply-chain solutions at the electronic-components distributor. Arrow has extended its RosettaNet links to 20 to 30 suppliers, almost all of them large companies, and it will have as many as 40 by year's end. But Katz acknowledges that RosettaNet is largely impractical for most of Arrow's tens of thousands of customers, the small companies that would have a hard time swallowing the high deployment costs. Katz believes RosettaNet will become prevalent throughout the electronics industry, but not until lower-cost deployment models emerge.
It's a common lament among suppliers and distributors: As new technologies get adopted by the influencers, their partners end up supporting multiple platforms. McKesson faces that challenge in its pharm- aceutical-distribution business, where it has to interact with large drugmakers on one side and smaller retailers and health-care organizations on the other. "Because we're in the middle, we have to maintain a lot of different standards," CIO Mallonee says.
One way large market influencers can be beneficial is in speeding the adoption cycle of particular technologies. But it doesn't always work. Three years ago, Cisco tried to use its own version of RosettaNet to manage its supply chain, but suppliers balked and forced Cisco to retreat, AMR Research analyst Bob Parker says.
That pushback isn't uncommon, and it means the suppliers to industry heavyweights can't always pass on demands they face to their suppliers. Top-tier automotive component maker Dana sometimes requires that its suppliers use the same CAD software the automakers require Dana to use. But Dana only does so on a project-by-project basis, recognizing that buying and maintaining expensive CAD systems can be a burden for second- and third-tier suppliers, says Brad Knauf, IT director for the Dana Automotive Systems Group.
EDI is another example. Automakers and their suppliers have relied on EDI ever since the 1970s when GM began using the standard. GM uses EDI and its derivatives such as Automotive Network Exchange, known as ANX, to communicate orders, invoices, and other material. That's percolated down the supply chain, and Dana uses EDI to send procurement forecasts and schedules to most of its suppliers, Knauf says. But get too far down the chain and companies rely more on fax machines rather than ERP systems to process orders.
GM is backing the ebXML standard for conducting E-business, and its suppliers are likely to follow. ArvinMeritor already uses ebXML in its commercial-vehicle business and for some internal applications. "GM sets the pattern, and we follow," says Perry Lipe, senior VP and CIO at ArvinMeritor. "They will dictate the methods of communication if you want to do business with them."
Technology vendors themselves are dependent on these market influencers to help them shape software products. As companies stop doing "technology for technology's sake," and the value of IT comes from its alignment with business processes, vendors need help from those who best understand those business processes. But market influencers increasingly ask to share in the intellectual-property value they create in that process. So when Procter & Gamble, which knows a bit about global product development, customized MatrixOne Inc.'s product-life-cycle-management software for specification management, it patented its contribution and licensed it back to MatrixOne. Yet revenue wasn't the main goal: If MatrixOne can help get this approach broadly adopted in the consumer packaged-goods industry, that would benefit P&G.
Another way companies influence technology vendors is through application consolidation. GM, for example, has consolidated its strategic business applications from 7,000 to 3,000, replacing a patchwork approach in which GM facilities around the world used many different apps for the same process. That gives GM leverage with IT vendors, and CTO Scott says the company wields that influence by demanding higher-quality software that provides better performance and is easier to upgrade. "We've had to raise the bar," Scott says.
That could be a boon for IT users everywhere. There's plenty of reason to grumble about the influence of major companies such as Wal-Mart, GM, and Intel. But in setting the pace for industries, heavyweight business-technology users can bring progress with the pain.
Illustration by Brian Stauffer