The Network Effect

When it comes to supply-chain integration, some companies are putting the "network effect" to work. They're turning to online service providers to link them to a network hub, through which they can integrate their trading partners.

Hewlett-Packard is using Viacore Inc.'s BusinessTone for its Key Chain supply-chain integration project. Over the last year, HP integrated 15 of its largest partners using the hub, and it now closes $15 million to $20 million in purchases online--as many as 5,000 purchase orders a month, says Raoul Schuhmacher, director of supply-chain interoperability. While HP considered building its own hub, Schuhmacher says, "We concluded our operations would be more scalable through an external hub. We selected a service provider so we wouldn't have to build out the internal infrastructure and take on the fixed costs." HP is ready to automate 150 more partners this year and 150 in 2004. Even so, it will take years before HP connects its 2,500 trading partners.

Purchasing integration services from a provider running a hub on the Internet is far from universally accepted. But turning to an online provider lowers a company's up-front costs; suppliers charge between $50 and $250 a month, compared with the $25,000 to $35,000 per application it can cost using packaged integration apps. Hub services represent a small percentage of the overall supply-chain integration market, says Andrew White, Gartner's director of supply-chain research, but they're growing.

Many companies don't want to send critical information to a hub, especially one its competitors might be using, says Jon Derome, a senior analyst at the Yankee Group. But online hubs typically ensure data separation and protection. Partitioning rules out intrusions by one party on another's data, says Andrew Dent, chief technology officer of Hubspan Inc. Customers also may request dedicated servers. The hub can accept messages from all standard Internet transports, including HTTP, FTP, and E-mail's SMTP. Once the message arrives, the hub's receiving system consults a directory of the destination company and hands off the message to subsystems with directions on how to reconfigure it and schedule it for delivery.

Companies can use EDI to send and receive documents, provided they are strictly formatted and handled by an EDI system at origin and destination. Businesses willing to invest in supply-chain integration in many cases have already invested in EDI. All 15 of HP's hub-enabled partners were already EDI users. Both HP and the partners continue to use EDI, but they plug its message flow into the hub, which offers greater flexibility in being able to reformat the messages for different systems, Schuhmacher says.

EDI isn't solving all Arrow Electronics Inc. supply-chain problems, either. "We have 1,300 trading partners on EDI," says Paul Katz, VP of digital supply-chain solutions for the electronics-parts distributor. But that still leaves 149,000 suppliers that Arrow would like to reach electronically.

To escape EDI dependence, Arrow became a strong backer of the electronics industry's XML consortium, RosettaNet, and has helped define 24 partner-interface processes that cover such things as the exchange of purchase orders and inventory information. Having set standards, it realized it needed to differentiate Arrow from other electronics-parts suppliers by making the XML standards readily available for business exchange. "The RosettaNet standards themselves are available to everybody. In order to use them, however, you've got to be connected," Katz says. That's why Arrow launched Arrow Connects, an online integration hub built around Viacore's BusinessTone. "As we add business partners, they play a role in getting the new partners connected," he says.

Viacore, Hubspan, and SPS Commerce try to find a large group of customers by selling a big manufacturer or distributor, like Arrow, on the idea of a hub service. They then encourage its trading partners to pay them a $2,000 fee to set up their system.

Will big companies want to risk their futures on 35-employee Hubspan or 100-employee SPS Commerce? Dent boasts of Hubspan's "multiple data centers in North America," all of which practice strict redundancies in their service offerings to reduce any chance of an outage. "We earn the right to send you a bill every month," Dent says.

And analysts and participants agree that the ability to connect many partners through a hub is a good way to capture the network effect. When an online service provider gets so plugged into a manufacturer's supply chain that it's eager to maintain its business relationships, says Yankee's Derome, "the network effect can be quite powerful."