Recipe for success

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Imagine. In an effort to produce fresh breads and pastries for retailers, a group of entrepreneurs starts a bread company called Smart-and-Fresh Baking Co. However, Smart-and-Fresh isn’t the average baker. It’s a bread company that has a distinct edge over its competitors.

First, rather than doing everything itself, Smart-and-Fresh focuses on its core competency: developing brands for its breads and pastries, and marketing them to grocery stores. Everything else Smart-and-Fresh hands off to other businesses and the company forms a network for these businesses to work together closely. The network includes a French pastry chef specialising in croissants, an English pastry chef specialising in scones, an Italian pastry chef specialising in biscotti, and several other pastry and bread makers, all of whom specialise in a specific baked product to ensure that each product is top quality. The network also includes flour mills that supply the flour, dairy farms that supply the milk and eggs, and a range of other suppliers that produce ingredients such as yeast, sugar, chocolate, raisins, and nuts needed to make the breads and pastries. It also includes a packaging company that provides special bags to keep the bread fresh and a trucking company to transport the bread.

Linking together
Second, Smart-and-Fresh is linked together with its suppliers and the retail stores it serves via uniform business processes and top-speed technology. Linked together in this way, each retail store sends Smart-and-Fresh and all the relevant suppliers hourly updates regarding how much bread is selling, and which types of bread are selling fastest. So, for example, data regarding customer purchases of Smart-and-Fresh chocolate chip cookies is transmitted hourly to Smart-and-Fresh at the same time it is transmitted to the chocolate chip cookie manufacturer, the flour mill, the dairy company, and the chocolate chip supplier. Knowing exactly how many cookies customers are buying, all the suppliers in the network continuously adjust their production plans, minimising their need to store extra cookies or the ingredients that go in to them.

Then, because Smart-and-Fresh has formed a network, both it and its suppliers can quickly anticipate and react to market shifts. A study is released showing that oatmeal reduces cholesterol and suddenly customers start buying oatmeal cookies while sales of chocolate chip cookies decline. The information is passed within the hour from the retail store to all affected participants in the network, who adjust their production schedules and begin producing more oatmeal cookies within a few hours after receiving the information. Then there’s a truck strike in one area of England and the wheat producers notify Smart-and-Fresh which responds immediately and within 24 hours adds two French flour distributors to the network who deliver the wheat flour within the time frame required.

Finally, because Smart-and-Fresh works collaboratively with its network of suppliers, it can capitalise on their strengths to increase demand for both its products and other company products in the network. For example, a market analysis conducted for the networks shows that customers who buy biscotti also eat cheese and drink red wine. Upon receiving this data, the biscotti producer approaches Smart-and-Fresh and suggests packaging a new savoury biscotti with cheese and red wine, and selling it as a package in grocery stores. Smart-and-Fresh agrees to the idea, adds a wine producer and a cheese distributor to the network within 24 hours, and within days begins selling biscotti-cheese-wine packages to the grocery stores, creating more demand for its products.

Quick response
The network Smart-and-Fresh has created is an adaptive business network. What makes this network adaptive is that all companies have the mechanisms in place to co-operatively plan their activities, execute based on these plans, sense changes in customer demand as soon as they occur, and quickly respond to these changing conditions to adjust their plans.

The adaptive business network is a new business model that flexibly links companies into loose consortia that work together. Companies that join these networks will remain culturally and financially autonomous, but operationally integrated and dependent on the other participants. Yet, they will work together, share information, and make decisions more collaboratively than they do today – and will have more success than they could have had on their own.

The adaptive business network addresses the problems that many businesses struggle to solve: improving forecast accuracy; producing to match what customers actually buy; quickly meeting demand for new products; rapidly developing personalised products; maximising profits from commodity products; transforming commodity products into unique offerings by bundling them with other products and services; and automating mundane tasks. The adaptive business network solves these problems and creates new opportunities for companies along the way.

The adaptive business network is a group of organisations linked by standard business processes and common technology in order to capitalise on the strengths of each. This business network focuses on the need of the customer, using a set of aligned measurements. It enables participants to adapt to a changing business climate – and maximise profits.

Participants in an adaptive business network work together on everything from monitoring inventories to co-ordinating production schedules and sharing information about customer purchases. Each network has a lead company or ‘co-ordinating partner’ that is responsible for the relationship with the customer and that co-ordinates the establishment of the rules that govern how the network operates. In addition, each network will have dozens to hundreds of participating companies linked to it. Some of these participating companies may provide the parts that are combined into the final product. Others may provide services such as the transportation, the technology, or the financial services for the whole group, including the customer.

Instantaneous communications
Within the adaptive business network, information is communicated instantaneously and as frequently as required to make decisions. And the information received can be based on sales of a specific product, sales of a specific product through a specific sales channel, or sales of a product during a specific event, such as a promotion or a snowstorm. This information is communicated simultaneously – not to everyone, but only to those who need to receive it.

Through the network, many routine decisions made by the participants are automated. Automating daily decisions enables the network to respond with speed and precision to information received. It also allows companies to free up their employees to focus on more strategic goals rather than the mundane tasks that typically add little value.

Companies seeking to create an adaptive business network typically ask themselves many questions. How can we co-ordinate our business processes to work together faster? How can we eliminate the bottlenecks that prevent us from getting our products and services to the customer more quickly? What customer information should we share for mutual benefit?

What links companies in an adaptive business network are standardised business processes. By forming close procedural links, participants within a network put the mechanisms in place to respond to changing conditions. Rather than merely placing or filling orders from their next-in-line supplier or customer, participants work collaboratively to plan for, anticipate, and respond to changes in demand. This change from the traditional buyer-seller relationship requires a fundamental shift in how a company’s managers operate their business units and measure their success. It also requires a shift in the cultural thinking of the organisation.

For example, managers of a company must change how they negotiate with their partners. They also must change how the company purchases products, how it plans its production schedules, and how it allocates its capital resources. Managers of a company must change their perspective to focus on the customer who purchases the finished goods produced by the network. They must change how they measure customer satisfaction and establish new measurements of success.

Peer to peer operation
Finally, organisations must shift away from hierarchy towards a peer-to-peer way of operating, in which problems are resolved jointly with strategic partners. In addition, the role of human resources within companies must change to ensure employees, managers, and executives are evaluated by their contribution to the network’s measurements of success – not just those of a particular company division.

The vision of the adaptive business network is to connect companies within the network with pervasive technology that allows for distributed decision making. This technology can act autonomously, ‘perceive’ its surroundings, and interact with other technology elements to perform basic tasks. It enables information to be exchanged instantaneously and day-to-day decisions based on that information to be automated using a framework of controls or guidelines. This dramatically reduces the delays that occur when working in a complex business ecosystem.

Incorporating this technology into the network enables companies to quickly add new partners as customers, demand new products and services and acquire new technologies without building them from the ground up or going through the demanding and painful exercise of acquiring another company. The network can simply add partners that provide the products and services it needs, while eliminating those who provide substandard or outdated products.

Advanced technology will track information about customer purchases, unexpected changes in customer demand, delayed parts deliveries, shop floor machine failures, and other glitches that occur within the network. It will provide information to network participants and notify the appropriate parties when problems occur, so they can react immediately. Specific elements will analyse and distil information relevant to the network. Other elements will make decisions about how to best deploy local resources to solve a problem – from which facility to fulfil an order for a product, say. And still other elements will provide the controls required to prevent chaos – for example, they will decide which production line should take the lead when several lines are vying to produce the same product.

Even without advanced technology, companies can go a long way toward reducing the inefficiencies that exist when working within a network of partners. Businesses can create a common portal from which they manage and share network information. And with just a spreadsheet, companies can work together more collaboratively than they do today to share information about production schedules and demand for products. Even with minimal technology, companies within an adaptive business network can significantly reduce time delays by better co-ordinating business processes so that they can share information efficiently and make decisions quickly.

This article is based on an excerpt from the book, Adapt or Die: Transforming Your Supply Chain into an Adaptive Business Network, by Claus Heinrich with Bob Betts (Hardcover – John Wiley & Sons Inc – January 2003)

Claus Heinrich, PhD, is a Member of the executive board of SAP AG, serving as vice chairman of the product and technology board and is also responsible for human resources and labour relations at SAP AG.

Bob Betts has worked in the information technology field for more than 20 years. Since 1985, he has worked globally as a consultant on supply chain and related issues.

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