Collaboration: 5 Lessons in Supply Chain Management

by Russell Letson

Even before we received official notice that the economy was in recession, the collaborative supply chain management market was having problems. Despite the appeal of controlling manufacturing or distribution processes from end to end, the expense and difficulty of getting all the parts to work smoothly made adoption a slow process. The big e-marketplaces that emerged in the dot-com era stumbled, and some fell. Then the whole economy weakened, and everyone got very cautious.

The original "if you build it, they will come" idea of e-marketplaces just isn't working. Supply chain management (SCM) vendors are finding that customers are more conservative and detail-oriented today, with an eye on return on investment.

"Prospects are more tactically focused on solving specific business problems that they're experiencing today," observes Michael Schnoll, vice president of worldwide field operations at Softchain, a Burlingame, CA-based SCM vendor. "It's not quite as exciting and visionary as things were ... Now it's much more nuts and bolts, 'let's do something tangible.'"

Nevertheless, businesses are still working on ambitious, large-scale supply chain projects, and some of the most ambitious approaches are rooted in the belief that changes in business practices and relationships, especially in manufacturing, demand new ways of thinking about SCM.

An important catalyst in bringing about this new thinking has been collaboration. Collaborative technologies have offered new ways of linking partners while increasing end-to-end visibility. As collaboration has emerged, it has both fostered and demanded greater intimacy, trust, flexibility, synchronization and alignment across the entire supply chain.

Philips Builds on Flexibility and Trust

One pioneer in building a collaborative supply chain is Sunnyvale, CA-based Philips Components. The company's Connectivity business unit builds Bluetooth and 802.11 wireless LAN components, and the supply chain has collaborative links to customers such as Hewlett-Packard as well as component suppliers such as Flextronics.

From the start, Philips knew it wanted a more responsive, collaborative approach for this relatively young business unit. According to Ian Wakefield, Philips Connectivity's director of operations, the problem with traditional weekly or monthly approaches of master production scheduling and demand and supply balancing is that they can easily run afoul of bad information.

"If an event occurs in the marketplace, how quickly do sub-suppliers get to know what's going on, and how much spin is put on those changes as they work their way through the cycles?" Wakefield asks. "Often you find that there's so much spin and interpretation put on that data that the final information received by the supplier is so different from what actually happened in the marketplace that it's not recognizable."

1. Collaboration requires different technologies and different relationships among participants in the supply chain.

To preclude this "telephone" phenomenon, Philips decided to institute end-to-end supply chain collaboration with real-time processes instead of batch-based planning.

"If change has happened in the marketplace, we'll get a new forecast and a new order immediately visible throughout the whole supply chain so everybody can react to the latest information," says Wakefield. "It requires different technologies, different relationships among participants in the supply chain and different ways of working, moving toward a more collaborative model, as opposed to a competitive model."

To meet the need for different technologies, Philips employed Softchain's Collaborative Planner solution. Aimed at high-tech supply chain management, the software addresses several related challenges: the outsourcing and distributed manufacture of assemblies and entire products; the practice of collaborative design; and the goal of continuous fulfillment. Softchain says the technology is different in that it supports a different way of doing business.

2. It's not about producing the perfect plan so much as coordinating everyone so they execute optimally to the same plan.

"The old model, the one on which the transaction systems were built, assumes a relationship between a supplier and a buyer that has a length of one transaction," he says, "but we understand that supply relationships don't have a length of one transaction, they don't have a length of one program. They have an extended length across multiple products and programs."

The trend toward outsourcing has increased the need for intimacy with suppliers, says Schnoll, and he adds that businesses are looking to reduce the number of suppliers they do business with to gain better control over quality, predictability, delivery and costs.

"It's not about producing the perfect plan so much as coordinating everyone so they execute optimally to the same plan," Schnoll says.

In this collaborative manufacturing world, partners base their interactions on trust, commitment and flexibility agreements. "If I'm your supplier, I have an agreement to maintain 20 percent flexibility upside, and you agree not to drop your demand below 30 percent in the next two weeks," Schnoll explains. "When you get a demand shift, you're comfortable knowing that I can see it, adjust for it and give you feedback over a system that connects not just to me but also to a lot of other suppliers."

Wakefield of Philips points out that collaboration doesn't work if you're still operating in a commodity mode switching from supplier to supplier. "You don't have collaboration among competitors, not if you're lawful anyway, nor with [buyers and sellers] who are positioning ... purely on price," he says. "You collaborate among partners."

Pioneering a more flexible, collaborative approach to supply chain management did present challenges. For example, the choice between XML and EDI as the messaging tool among all the different systems at Philips, their customers and their suppliers "turned out to be much more difficult than we had anticipated," Wakefield admits.

Philips chose RosettaNet standards, but the problem was "they're not exactly standards; that was where we spent the majority of money," says Wakefield, although he adds that the company had "very high expectations" for tight integration and real-time information. "Just updating an entry on a Web site is easy enough, but that's not really what we were after."

Nevertheless, the problems got solved, and, "It's up and running, it's live and it works," says Wakefield. "We came up with some very good, novel ways of accomplishing collaboration, and we're going to roll those ideas out across the total organization over the next 12 months."

Hospitality Warehouse Extends The Enterprise, Quickly

Hospitality Warehouse is a hotel-goods procurement portal that has unified and cut the cost of doing business for some 300 chains and resorts in southern Africa. The site offers proof that fast implementation, integration with existing systems and applications and flexible, "componentized" applications can make the difference between success and failure.

Hospitality Warehouse is a joint venture between timeshare resort operator RCI Southern Africa of Rivonia, South Africa, and AXS-One, a supply chain management vendor based in Rutherford, NJ. The site is an end-to-end procurement service that acts as a conduit for hotel and resort properties to place orders from their preferred suppliers.

"We see ourselves as the purchasing department of the hotel or resort," explains Geoff Ronaldson, general manager. "[We provide] everything you need [in the] hospitality industry: consumables; replacements such as cutlery and crockery; capital items such as TVs, stoves and beds; [and] services and food and beverage supplies. [It's] one delivery vehicle for multiple vendors' goods, with one creditor and one payment via a procurement card."

While Hospitality Warehouse is a Web-based business, fewer than half of all orders currently come through the Web site. "Many of our clients are in remote areas," Ronaldson explains. "This is safari country, and Internet connectivity is not always optimum. Education levels are also low, with a resulting impact on computer literacy. Many users prefer to phone in or fax their orders to us." These orders enter the system via a call center and are passed on to suppliers electronically.

The Hospitality Warehouse site was built by AXS-One, an SCM vendor that uses toolkits and adaptable applications to manage procedures and especially data. "We realized that if we were going to put in self-service for customers and we don't want it to be a two-year project, we'd better take whatever data is in their legacy systems real fast."

The AXS-One toolkit consists of two major components and two sets of more specialized applications. The core components are the Process Manager workflow engine, with its associated templates for managing common business procedures, and the AXSPoint data transformation technology, which can make legacy data in various formats (such as print files, scanned documents and XML documents) available in Web and XML formats. Particular functions are addressed by a set of prebuilt financial applications capable of handling common enterprise operations. Prototype Web applications can be customized to match particular needs such as procurement or vendor self-service.

Despite its transformation technology, AXS-One has had a tough time integrating the purchasing sites' required data. Of the 300 suppliers Hospitality Warehouse works with, only about 50 are currently represented on the Web site. This, says Ronaldson, is "largely a result of the long process required to load the initial catalogs. There is no standard format, and attempts to get suppliers to submit electronic price lists have failed. We simply take the catalog in any format, convert it and load it. We currently do all catalog maintenance. We see this as an area that needs change."

What Hospitality Warehouse would like to see, says Ronaldson, is for the AXS-One software to accept standard barcode databases so that it can use standard industry descriptions. "Secondly," he adds, "we would like the supplier to be able to maintain its own catalog, once loaded, with our ability to approve changes before they go live. Right now, catalog maintenance is our biggest challenge."

3. Speed of implementation equals survival.

AXS-One took the toolkit and component approach to cope with the fact that business processes now change so fast that "there's a good chance, with global competition, that someone's going to come up with a new way of doing business that's going to require you to throw out the thing that you did a year ago," says AXS-One vice president Chris Mauldin. "We can get up and running so fast that there isn't time for the investment cost to get so large that we've dug a hole for ourselves." You might boil their approach down to this: Speed of implementation equals survival.

In Hospitality Warehouse's case, the project required about 1.4 full-time equivalents to develop, and it reached the demo stage within four months. Note, however, that the vendor had a powerful incentive to speed time to revenue; AXS-One built the site in exchange for an equity stake in the business, and it now runs the site with content and staff provided by RCI.

"Our whole startup cost, including hiring some people to run it, was probably $400,000," Mauldin says. "Our current projection is that we'll hit $10 million to $15 million in sales by the end of the year. It has to do with the speed of going live."

Hospitality Warehouse's best customer prospects are geographically dispersed companies that would otherwise have trouble controlling procurement. These users gain more than the convenience of one-stop procurement and simplified delivery logistics. Ronaldson says the initial research "showed a reduction in actual price paid for items of 11 percent. We think that administrative savings will be at least that again, but we have no figures yet."

4. The value proposition is in changing the way you do business with your trading partners.

Acknowledging the difficulty of pulling together disparate data sources, Mauldin says the best opportunities lie in bridging intercorporate business processes. "If the first 50 years of data processing was focused on what went on inside the walls of a company," he says. "The next 50 years should be spent on what goes on between companies, because very little has been done there. The value proposition is in changing the way you do business with your trading partners."

Ace Hardware Brings The 'Little Guys' Aboard

The problems encountered at Hospitality Warehouse sound familiar to executives at Ace Hardware. The well-known retail hardware chain based in Kensington, CT, also had trouble bringing smaller suppliers into its supply chain management system.

From the perspective of big corporations, one of the pesky facts of life in manufacturing and distribution is that not all partners are equally able to work in an online, collaborative mode. How can a corporation run an effective system without the participation of smaller partners?

5. You can't have a complete success if you can't connect to the balance of your supply chain.

Ace has turned to third-party outsourcers that provide some of the integration functions that smaller players would otherwise find too expensive to mount themselves. The hardware chain has around 2,000 "stocking" suppliers who fill the warehouses, and another 2,000 to 3,000 suppliers that deal with individual stores on a drop-ship basis. The larger suppliers use standard EDI, but more than 400 small-to-medium size vendors depend on data services from any of a half-dozen outsourcers. About half of these have gone with Advanced Data Exchange (ADX), Newark, CA, a document exchange network with services including EDI and XML translation.

"How do you get any return on a substantial investment in a supply chain system unless you can drive all of your suppliers to an electronic connection?" asks ADX marketing director George Scarvelis. "You may get some investment return and a partial success, but it won't be a complete success because you cannot connect to the balance of your supply chain. We're laying the pipe to companies that could not otherwise afford to connect."

ADX pays special attention to big-to-small relationships so that bigger players can extend their SCM systems to smaller partners that don't have EDI in place. The benefit to the large company is to smooth transactions that would otherwise come in by phone, paper or fax, and to get the data into the system more efficiently. Small partners can be integrated into the supply chain and dealt with on the same basis as a large supplier.

According to Ace Hardware's supply chain manager, Lynda Moriarty, the cost of outsourcing is "so minimal that there's almost no excuse to not do it. Before the ADXs of the world, you had to buy a translator and you had to have a dedicated EDI person to figure it all out. Now with email and the Web, that's all gone."

One Ace partner that now relies on ADX is Land 'N' Sea, a Pompano Beach, FL-based distributor of marine supplies and products. While Land 'N' Sea came to the outsourcing service through Ace, its other chain retail customers eventually switched over to ADX as well.

According to Betty Vaught, Land 'N' Sea's MIS manager, the distributor connects with its 11,000 customers in three ways. About 30 percent come through its in-house-developed business-to-business Web site, while most others arrive the old-fashioned way. A "very small percentage" of customers are handled via EDI and the ADX service, but these high-volume customers include Ace and several other chains.

Danny Berry, a programmer/analyst at Land 'N' Sea, says there are two scenarios for connecting to Ace and other chain retailers. The central purchasing groups for these EDI customers are processed by ADX and go directly into the Land 'N' Sea mainframe, while drop-ship orders from individual stores come in via phone, fax or the B2B site. In the last case, invoice information is sent back through ADX to customer post operations.

Vaught reports that the most difficult part of using ADX was setting up the document templates and mapping them to the Land 'N' Sea system. "It depends on how much automation you want to go through," she says. "In our case, we download it and don't touch it again."

There were also some teething problems on the operational end. Berry says, "We were used to sending off invoices and getting a check in 30 or 60 days," he explains. "In this case, [with] new software and new technology, there can be credit headaches when a customer is required to receive EDI data and we haven't perfected the transmission of the data. They don't pay on time or they reject the transmission, so we have some ups and downs. It's very positive when it works great; it's very time saving, [there's] very little user intervention and ultimately, you get paid on time."

Russell Letson (rletson@cloudnet.com) is a freelance writer based in St.Cloud, MN.