Billions To Save

Businesses are working hard to reap more efficiencies from supply-chain processes
In a global market moving at lightning speed, the costly and laborious business of implementing standards to improve information flow along the supply chain often takes a backseat to quick workarounds that get the job done--for the moment. The quest for efficient supply chains led companies worldwide to spend more than $5 billion on supply-chain-management technology last year, according to ARC Advisory Group, a figure that's expected to grow to more than $7 billion by 2008. Yet the disparate ways nearly all U.S. businesses connect to their partners--from fax to E-mail to EDI and Internet links--still fritter away billions of dollars annually.

That's the conclusion of a report just issued by the Commerce Department's National Institute of Standards and Technology. The lack of widely accepted and implemented supply-chain standards costs the automotive and electronics industries a combined $9 billion a year, according to the report. That figure represents 1.25% of the total value of shipments in each industry. "One-and-one-quarter percent doesn't sound like a lot, but it can make all the difference to a business in a competitive world," says Edward Knab, director of customer satisfaction at chipmaker Skyworks Solutions Inc., who's responsible for supply-chain interconnectivity issues.

NIST says it studied the automotive and electronics sectors, in part, because they've invested more heavily in supply-chain technology than most industries. But the findings have applicability for other industries. While potential savings of 1.25% of the value of shipments may not seem huge, it's equivalent to the entire profit margin in a tight-margin business such as retail groceries, says NIST chief economist Gregory Tassey.

There's no quick fix to problems with supply-chain integration, though the automotive and electronics industries are making efforts. A movement in the auto industry to support the Electronic Business XML standard for data exchange counts among its adherents Compuware's Covisint online exchange, parts supplier Delphi, General Motors, and Volkswagen. The Automotive Industry Action Group's ebXML project for improving inventory views has entered into a strategic alliance with NIST to use its interoperability test bed for the proof-of-concept phase of the project, which started in the fall. NIST, which sees its role as being a third-party facilitator in driving standards, was authorized by Congress last year to work with industries on supply-chain integration.

In the electronics industry, the 500-member consortium RosettaNet has developed about 90 partner-interface processes, or PIPs, to facilitate the exchange of materials, financial transactions, and information among business partners.

Avnet and its partners can spend weeks creating a partner-interface process, Avnet Inc. CIO Ed Kamins says. -- Photo by Jon Gipe

Avnet and its partners can spend weeks creating a partner-interface process, Avnet Inc. CIO Ed Kamins says.

Photo by Jon Gipe
What's holding back progress? For one thing, creating a standards-based supply-chain architecture isn't simple. Electronic-components distributor Avnet Inc. uses RosettaNet standards to speed up order processing, shipping, and other transactions among some participants in its supply chain. But Avnet and its partners can spend weeks, even months, creating each partner interface in the supply chain. "It's not just throwing a switch," CIO Ed Kamins says. "RosettaNet is all about processes."

While the cost of implementing these partner interfaces has come down, it still can be an obstacle, especially for smaller companies. Creating a single interface runs anywhere between $5,000 and $10,000, according to RosettaNet. "The cost of deploying standardized technology across hundreds of partners is prohibitive," says Ram Chadrasekar, VP of high-tech solutions at supply-chain software vendor Manugistics Group Inc. and a member of the RosettaNet team while at Cisco Systems in the 1990s.

That's not holding Skyworks back, though. The company, with more than $600 million in revenue last year, believes using RosettaNet standards will be more efficient than its weekly mishmash of manual and EDI exchanges with hundreds of suppliers about product forecasts, Knab says. Skyworks plans to implement RosettaNet technology standards for forecast exchanges early next year.

Further resistance in adopting supply-chain standards comes from business executives who fear that doing so will result in the loss of unique business processes and competitive advantages. For many execs, says Avnet's Kamins, "the thinking goes, if you stay outside of the standard, you can be ahead of the curve."

Not true, says Kevin Mixer, research director for automotive and heavy equipment at AMR Research. "Standards don't decrease their competitive advantage, they reduce costs," Mixer says. NIST estimates an auto-parts maker with partially automated operations shipping $30 million in goods annually incurs $400,000 in supply-chain-related costs, while a supplier that has deployed an ideal integration strategy, in which data is entered once and then available to any system on the network that needs it, would spend only $150,000.

Todd Bennington, plant manager at BorgWarner's Emissions/Thermal Division's Cadillac Michigan Operation, which supplies emissions-control components and systems for vehicles, sees the logic. "Standardization drives down the price to implement technology because all companies work from the same framework," he says. Costs could have been much lower on a recent project to create a collaborative framework with its sole aftermarket distributor, Chicago Rawhide, if the automotive industry had a single standard for the exchange of data, he says.

The big payoff for companies, though, will come not merely from adopting standards, but from putting the information that's exchanged to work in ways that benefit all supply-chain partners. After all, says Skyworks' Knab, "we're only as good as our weakest link."

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