The Trust Imperative

When R.R. Donnelley & Sons Co. needed to accommodate growing business in its Graphic Management division, which creates books and games for the scholastic market, it developed a collaborative online system that lets the company integrate data from supply chains, customer inventories, design tools, and project-management software. The system, from Action Technologies Inc., lets Donnelley work closely with customers on products that increasingly include CD, DVD, and Internet-technology elements. It lets the publisher compare bids from a variety of suppliers and award contracts more efficiently. Contractors also have to post project status on the Web site, and the system retains historical data on performance.

Although the advantages of such a system were obvious to Donnelley, they weren't to its subcontractors. "They were concerned we were creating a system to beat them down on price," says David Oberst, director of Web application development at Donnelley, in Chicago. "The only way we got through that was by showing them that's not what we were going to do." Oberst says it took time before contractors became comfortable with the system. "The way we awarded jobs didn't change," he says. "We just made it more productive."

In other words, Donnelley's subcontractors had to learn to trust the world of online collaboration. The competitive advantages of collaboration are driving companies to share previously sacrosanct internal data such as daily sales reports, production schedules, product designs, and logistical details. Trusting that your supply-chain partners will behave responsibly with that information--and agreeing on what constitutes responsible behavior--is absolutely critical to the success of collaborative business.

"If it's collaborative, it means trust, period," says Frank Ioli, senior VP and CIO of The Great Atlantic and Pacific Tea Co. grocery chain in Montvale, N.J. "You can't do business without it."

But, as Donnelley knows, trust doesn't come easy. In many industries, the object of the game for decades has been to squeeze every dollar possible out of the other company--a company you're now being asked to collaborate with as a supply-chain partner. "Because you're crossing enterprise boundaries to conduct collaboration, there's a new, broader set of business ethics, one that takes into account the effect that your decisions have on other businesses," says Janet Suleski, a senior analyst who follows retail-industry collaboration for AMR Research.

Ethical behavior in collaboration boils down to business partners setting expectations up front about the relationship and data sharing--and then meeting them. "It's not a touchy-feely kind of trust," says Mark Crowder, a supply-chain manager at a large Midwestern equipment maker and a former member of the National Association of Purchasing Management's ethics committee. "It's simply doing what you say you're going to do and believing that your partners will do the same."

Collaborative business--reciprocal sharing of proprietary information among customers, suppliers, and partners--is growing in acceptance, according to data from a May survey by InformationWeek Research (Information Sharing And Collaboration: A Matter Of Trust). But not everyone is sold on the idea. "We still have the same issues around sharing data with supply-chain vendors," says Garrett Grainger, CIO of Dixon Ticonderoga Co., a Heathrow, Fla., manufacturer of pencils and crayons. Those issues involve vulnerabilities created by data floating around the supply chain, which "open us up to a lot of opportunities by competitors," he says.

For instance, Dixon Ticonderoga has a proprietary chemical mixture for manufacturing soybean-based crayons. Grainger says the company would never consider sharing that formula with the small number of suppliers with which it does business. "I don't think it's necessary," he says. "I'm old-fashioned."

While there's a considerable downside to losing control of a proprietary formula, the upside to sharing sales data with suppliers can be high. In the retail industry, apparently, it's often seen as not high enough. "Many retailers are still reticent about sharing sales information with their suppliers," says Brian Kilcourse, CIO of Longs Drug Stores Corp. in Walnut Creek, Calif. "It's their secret." That kind of proprietary self-interest doesn't build positive feelings along the supply chain. "I have people [at the company] who have literally despised our retailers for years," says Art Karrer, project manager of collaboration at Pharmavite Corp., a vitamin manufacturer in Northridge, Calif.

Historically, data sharing among retailers and manufacturers of consumer packaged goods could be downright deceptive, often as a direct result of conventional business practices and incentives. From consumer-product brand managers with meet-sales-quota-or-else directives to retail buyers who are rewarded based on low-cost purchase volumes, playing fast and loose with sales-forecast data and other shared information became widespread. "The mind-set of I-win-you-lose has characterized this industry," says Ralph Drayer, a recently retired supply-chain VP at Procter & Gamble Co. and founder and chairman of consulting firm Supply Chain Insights. "I'm trying to push product on you, you're trying to get a better deal from me. It was total mistrust."

One typical gambit is known as forward buying. Let's say a brewer offers retailers in Arizona a discount promotion before the Fourth of July. A retailer then buys considerably more beer at the discount than can be sold in that purchase cycle. The buyer's purchasing numbers look good because of the discount, but the company bears the extra cost of storing the beer until it's sold. The seller knows the promotion drove a lot of sales, but the increased volume strains the brewery to accommodate the spike in demand.

Because there's no collaborative sharing of sales data, the supplier doesn't see the discrepancy between what the retailer bought and what it actually sold to consumers until weeks later, if at all, from third-party research firms that aggregate point-of-sale data. In a related tactic known as diverting, the retailer might ship the extra beer to another region that wasn't part of the promotional discount.

"As an industry, we institutionalized lying and built business practices around it," says Chris Sellers, president of Syncra Systems Inc., which provides collaborative software and services to the retail business. "I don't think it was an intent to be unethical. It was just considered doing what you had to do in our business. And it increased costs for everyone."

Some observers say true collaborative business hasn't caught on quicker because the cultural shift necessary to take advantage of it is so wrenching. "A lot of companies don't really appreciate that collaboration means a significant change in the way they do business," says Drayer of Supply Chain Insights. "I know companies that started down the collaboration path and had to stop completely, because their culture simply resisted sharing information."

To create a more collaborative environment, Procter & Gamble in the mid-1990s overhauled its time-honored system of compensating brand managers. The company eliminated sales quotas and created business-development teams with customers, starting with its most important one, Wal-Mart Stores Inc. Product managers were asked to look at (and were compensated for) the success of the entire supply chain, not just how many boxes of a particular product they pushed into the retail channel. Today, P&G uses collaborative forecasting for 45% of its U.S. sales and a third of the products it sells internationally.

The changes P&G went through, and the work it did with Kmart, Wal-Mart, and other large retailers, resulted in a retail-industry initiative known as collaborative planning, forecasting, and replenishment. CPFR (dubbed "C-Far") is now practiced by about 700 pairs of trading partners worldwide, according to AMR Research.

Two of those partners are Kmart and Kimberly-Clark Corp. By exchanging timely and accurate data, Kmart and Kimberly-Clark are able to synchronize supply and demand more closely. For example, Kimberly-Clark was able to help Kmart adjust a promotion it runs every year on Kleenex tissues. Demand data indicated that Kleenex sold better at the end of the summer, around back-to-school time, than in the spring. That strategy has been further refined, based on forecasting data, to target the promotion in July, before other retailers begin their promotions but still taking advantage of shoppers looking for back-to-school sales. "Kmart tended to do that kind of promotion in August--getting to the market too late," says a source close to Kimberly-Clark's CPFR effort.

CPFR is probably the most structured collaborative-business framework in any industry and places a heavy emphasis on audits and verification of the accuracy of partners' forecast data. Setting up a CPFR relationship between two partners is a formalized, nine-step process that has been hashed out over several years by the Voluntary Industry Collaboration Standards group, a retail-standards consortium. The premise of CPFR is that if the retailer shares realistic sales-forecast data, the manufacturer can plan production better and offer lower prices overall, rather than artificial promotions limited by time and region.

Obvious in retrospect, and obviously successful, that kind of win-win strategic thinking is far from the norm. It grows out of first gaining an awareness of your supply-chain partners' business needs. "You have to understand what competitive advantage is to your partners," says AMR's Suleski. "What's the advantage to you if you put the squeeze on them, maybe put them out of business? What kind of environment does that create?"

A familiar one for many companies. One of the most common unethical practices in the logistics business is called back-selling, says Gene Tyndall, executive VP of global markets and E-commerce for Ryder System Inc. Logistics companies often work together because even the largest providers can't accommodate all of a customer's logistics needs; also, many companies don't want to be dependent on a single logistics provider. When a partner in a logistics project uses the data made available by collaboration to pitch business directly to the primary customer, that's back-selling. It's a practice so common, many in the logistics industry don't realize it's wrong, even when it's pointed out. "Their answer is, 'We didn't know we shouldn't do that. What's wrong with that?'" Tyndall says.

For that reason, Ryder has companies it won't partner with--and partner is the operative word. "It's a mind-set, understanding what partnerships are, understanding win-win propositions," says Tyndall, the former head of Ernst & Young's supply-chain management practice and author of Supercharging Supply Chains: New Ways To Increase Value Through Global Operational Excellence (John Wiley & Sons, 1998). "Trust comes before ethical behavior."

It's a trust that can be born out of necessity. As part of Ryder's multimillion contract last year as lead logistics manager for Lucent Technologies Inc., the company was asked to work with Lucent's longtime distributors, Anixter Inc. and Graybar Inc. "We're sharing data, we're reading each other's screens," Tyndall says. "But we're competitors. We wouldn't have gone to Graybar and partnered [with the company] if Lucent hadn't asked us to do it."

Trust comes first--that makes sense to Craig Watson, president and CEO of Payment Engineering LLC, which develops financial services businesses. Watson, formerly CIO of FMC Corp., says companies are driven toward collaboration by the intensity of competition in today's markets. "Collaboration is a response to the fact that it's a dog-eat-dog world," he says. "You collaborate with people you trust to go after market opportunities when you're able to share knowledge and deal with issues more quickly because you have such a tight relationship."

Vivendi Water N.A., a water-systems maker in Palm Desert, Calif., plans to open parts of its Pivotal Corp.-based customer-relationship management system to independent manufacturers' representatives and customers, but sees many hurdles ahead. "It's amazing how often people ignore the symbiotic relationships across the supply chain," executive VP Robert Joyce says. "It's always win-lose. How do you do business so that both parties get ahead? It's a hard nut to crack."

Before large-scale collaboration, Vivendi plans to put a fence down the middle of its database, separating what data it will and won't share. Certain information, such as a patented design process, will be off limits to outsiders--even those partners it trusts--because of the risks of information movement in the Internet Age. "We don't believe there's such a thing as limited access," Joyce says. "You never know who'll be walking through a customer's office and looking at a computer screen."

The parsing of sharable and nonsharable data is also a hot topic in the automotive industry, as new supply-chain dynamics create more and more collaboration. The Big Three automakers are outsourcing more responsibility for designing and building entire sections of a vehicle to their Tier 1 suppliers, which act as general contractors working with smaller suppliers to produce a vehicle-braking or safety system, for example.

"As you see more outsourcing of processes that used to be internal, you need more-formal agreements between the players," says Rick Radecki, director of E-business for Delphi Automotive Systems in Troy, Mich., the largest Tier 1 supplier. "You have to share dimensional data--form, fit, and function--but we won't share building materials or processes."

Delphi is a member of Covisint LLC, the industry's much-ballyhooed Web exchange. With archrivals sharing data that Covisint aggregates to give a picture of overall industry trends such as production costs, trust is critical. "There are audits to make sure that information can't be boiled down to a single company," Radecki says. "If there's any mistrust, Covisint will have a difficult time selling its value proposition."

Trust, or lack thereof, has been a key factor in the failure of third-party online exchanges to gain much favor as a way of doing business. Many companies fear that the exchanges launched by small startups don't have the resources to take legal responsibility if something happens to compromise the security of shared data.

"Who really has the ownership of the data and takes responsibility when something goes wrong?" says Jon Gibs, an associate analyst at market-research firm Jupiter Media Metrix. "You can trust your trading partners all you want, but if you don't trust the intermediary, that's an issue."

Gibs says companies fear finger-pointing and the legal quagmire of a technical glitch, such as the recent programming error at Eli Lilly & Co. that inadvertently exposed the E-mail addresses of 600 Prozac users. "We're still waiting for the first big incident in business-to-business E-commerce, like someone mistakenly switching off a confidentiality filter," Gibs says. "If it resulted in a lawsuit, it's unlikely that most of these [startup] exchanges would have the resources to survive that."

CPFR is perhaps more rigorous than the agreements that companies in other industries need for trustworthy collaboration, but one of its principles should be sacred for everyone: the need for clear, solid agreements up front (see story, "Mantra Of Collaboration: Trust, But Verify"). R.R. Donnelley uses a standard confidentiality agreement for any data sharing. "It's just like buying software, with a standard contract and specifics added," Oberst says. "Basically, both partners agree that the other's data is sensitive information and has to be treated as if it's within their own organization. When you put it that way, they get it."

One of the ethical risks of successful collaboration is that the relationship can get too cozy. Whenever competitors collaborate, there's always the policing mechanism of antitrust law and the Federal Trade Commission to draw the line against collusion. Except for laws against price discrimination, there are few legal boundaries in collaboration between supply-chain partners, so it's hard to know where to draw the line.

It's often a fine line between win-win and preserving your own company's profit margin and ability to compete in the market. AMR's Suleski tells of a case in which a retailer pushed a manufacturer to share production cost data. "The manufacturer felt it would put it under what we call an E-squeeze, where the retailer could determine the proper profit margin," she says. "That's inappropriate and counterintuitive to charging what the market will bear. It violates the spirit of collaboration and slows down progress, as well as adoption."

Ryder's Tyndall says there's been a slower rate of adoption of collaboration than early advocates had expected--and slower than it should be. "The technology is there, the success stories are there. In theory, everybody in the world ought to be collaborating," he says. Before that happens, it will take a change in business practices--and beliefs--more fundamental and far-reaching than those early advocates anticipated.