Over the past decade, the increasing emphasis on collaboration and partnership in business has added a ‘touchy-feely’ strand to the more macho business drivers of competition and market dominance. Of course, it has always been important in business to get along with suppliers and customers, but in the 21st Century collaboration has become much more than a matter of exchanging courteous e-mails and buying the occasional lunch.
In some industries, executives are hammering out new structures for joint decision-taking based on systems that share information. For example, distributors for drinks company Diageo have given up haggling over how much additional stock they will take when their supplier runs a special promotion. They let their computers do it for them, only getting involved if the difference between what the two systems want exceeds agreed limits.
‘Collaboration is extremely important,’ says Nigel Ford, senior industry and solutions marketing manager for software company SAP. ‘A lot of companies are looking at situations were they have to collaborate. In manufacturing, there is pressure to maintain revenues and reduce cost streams. They are outsourcing processes that we once regarded as mission critical.’
Through computer to computer communications, it is now possible to automate many of the decisions involved in everyday transactions. The ease with which these new partnerships can be established is being greatly increased by the development of technologies such as supply chain event management software, radio frequency identification (RFID) and Web Services, which provide closer connections between trading partners and more timely, accurate information on which to make decisions.
And these closer ties are more democratic too. ‘It doesn’t cost Diageo’s smaller distributors to take part in this process any more than the largest. They are not disadvantaged from a technology standpoint,’ explains Ron Kubera, senior vice president, northern Europe for Manugistics, whose software runs Diageo’s systems.
Previously confidential information about business plans, prices, sources of supply and stock levels, is now increasingly being swapped among business partners as they seek to improve their responsiveness to changing market demands. ‘Collaboration is not just about sharing information – exchanging documents and increasing transparency – it is also about shared decision-making,’ maintains Nigel Montgomery, European research director of AMR Research, a firm that specialises in research into manufacturing and supply chain systems.
Collaboration has become a critical part of the way many companies do business. This is most marked in the high technology industry. Phone company Nokia, for instance, responded to the shrinking shelf life of its products by seeking help from partners. The short time the company had to bring new products to market and the cost of doing it persuaded Nokia to collaborate in design and manufacturing to speed up the flow of new products and to share the costs involved.
Less cutting edge industries have also benefited from collaboration. In retail, there has been a big push towards collaborative planning, forecasting and replenishment (CPFR) intended to make supply chains more proactive. The big UK grocery groups such as Asda, Tesco, Sainsbury and Waitrose have invested heavily in internet-based CPFR to reduce inventories, cut the number of times products are out of stock and improve service levels through closer collaboration with suppliers.
Draw up a joint business plan
Before companies start any kind of collaboration, they need to draw up a joint business plan, says Pravin Rangachari, director of supply chain collaboration at i2. Front-end agreements are important in making forecasting and collaboration applications in the automotive, electronics and apparel industries work, he says.
There are two types of relationship. In the first the supplier is captive: for example, a SE Asian factory making trainers for Nike. In the second type of relationship, the agreement involves a non-captive supplier such as Texas Instruments which might be making chips for Nokia, but also other OEMs. The complex collaboration between TI and its suppliers involves long term capacity planning, shorter term planning and execution – not an easy mix to get right.
Effective information flows are critical to these exchanges. Communication can be web-based with a supplier bringing up data on a browser. Data may be manually downloaded from a partner’s system or it could be swapped computer to computer with a piece of software on the supplier side setting up schedules for when data will be pulled from a buyer’s system.
However, these connections are relatively low level in the collaborative process. Companies exchanging business information and conducting transactions need to be sure that they are speaking the same business language as their partners. At the most basic level, it is no good despatching a purchase order request expecting an immediate reply when the receiving company thinks it has several days to respond.
RosettaNet, a standards-setting body for high technology industry and the Uniform Code Council (UCC), which deals with standards for the retail industry, have developed protocols covering the format of exchanges like this. The standards these groups have drawn up define the form of purchase order requests, and a great many other transactions. They cover how requests will be dealt with; the number of retries that are to be attempted if they don’t go through the first time, how the requests should be acknowledged and so on. Both organisations have XML in which to write these protocols.
Last year, the two organisations merged. RosettaNet became a subsidiary of the UCC, while continuing to operate with its original members. The UCC currently works within 23 industries with an emphasis on retail and grocery. RosettaNet focuses on the high tech sector.
Jumping cultural hurdles
Although the decision by a company to collaborate with suppliers, customers and maybe even competitors usually involves jumping cultural hurdles first, technology tools are vital to making these new open partnerships work. In the supply chain, for example, systems that automatically track and trace inventory underpin many of the efforts to improve the degree of collaboration between partners.
Unfortunately, these efforts are handicapped by difficulties in integrating older systems. For example, many companies have invested in ERP systems that provide a single standard for internal company systems, but which are incompatible with one another. However, ERP suppliers such as SAP are making efforts to add collaborative features to their products.
SAP is piloting what it calls intelligent agents – pieces of software containing business rules that continuously monitor supply chains and make decisions about how they can be adjusted to work more effectively. The agents not only communicate with human operators but also with each other and they are able to adapt their behaviour to match changing circumstances. ‘What differentiates intelligent agents from other pieces of software is that they have the capability to learn and make informed decisions,’ explains Nigel Ford of SAP.
Ford believes that the decision-making process will be greatly enhanced when intelligent agents are combined with RFID, another emerging technology for real time tracking using low cost tags. ‘We are heavily involved in agent and RFID technology,’ explains Ford. ‘They make a powerful combination. Agents will enhance the decision making, while RFID will increase the amount of information available to make those decisions by 30 to 40 per cent. It will eliminate risk, provide better control and result in fewer items going missing in the supply chain.’
Although the technology is still under development, SAP is confident that it will have a big impact on supply chain operations and create a virtual supply chain in which groups of companies including suppliers, manufacturers, warehouse operators, third party logistics companies, retailers and consumers will participate on equal terms. ‘In the coming years, manufacturers will orchestrate their entire value chain through e-business solutions and concentrate on their core competencies,’ according to SAP.
Although Ford is quick to point out that there is no danger these automated systems will run out of control, there is no doubt that handling the vastly increased amount of data they generate will present a challenge to computer designers.
Kubera of Manugistics warns against using bad data: ‘It will only lead to bad decisions.’ And already there are problems in executing forecasts, notes Rangachari of i2. Often it is the case, he says, that when it comes to execution, orders do not match up with plans because forecasting is done by a different group from the one that does the ordering.
Management by exception
The amount of information that can now be generated in the supply chain is driving another trend – the move to management by exception. In supply chain execution systems, the emphasis is on the departure from an agreed norm rather than on monitoring every activity. ‘There has been a lot of work on supply chain event management,’ says Montgomery of AMR. ‘This year the industry is moving to exception management in which rules need to be comprehensive.’
There is still some way to go before concepts such as intelligent agents are widely adopted, companies are still grappling with earlier generations of technology. Many industries have spent years developing EDI formats to enable them to conduct business with each other. These are now proving more expensive, complex and inflexible than newer webbased alternatives.
Web-based exchanges are typical of the new breed of systems that rely on standard internet protocols to provide low cost, flexible networking. Mail order retailer, Littlewoods recently scrapped an older EDI-based system in favour of MTX-Trade, an internet- based supply chain execution and event management system from Kewill. The system will support Littlewoods’ £1.7bn direct trade business that relies on some 250 European suppliers
Reaping the benefits
Benefits that Littlewoods expects to gain from the system include greater transparency of information from the supplier community, a reduction in cancellations, returns and claims and a more efficient and cost effective method of transacting information than its existing EDI infrastructure.
However, it is unlikely that EDI technology is going to be junked any time soon. The technology works well for lower level exchanges of files. Cost-conscious companies are likely to stick with EDI, opting for new technology only when business demands it. ‘A lot of people take the view “if it ain’t broke, don’t fix it” and for that reason EDI networks are not going to be discarded,’ says Andrew Yuille, marketing director for software company Strategix: ‘The technology is proven: where they have set up a file exchange there is no point in dismissing that.’
Motorcycle manufacturer Harley-Davidson is typical of companies that are bypassing earlier technology altogether. The company recently revved up its European dealer networks by installing web-based business-to-business exchanges from Commerce One which give dealers access to pricing and availability checking for some 90,000 parts, accessories and other items, plus access to online service and technical information about motorcycles.
‘These early e-business innovations are only the beginning.’ asserts Jan Wilkinson director of information systems and business development at Harley-Davidson Europe ‘We’ve already seen improvements in our service – not the least of which being that our dealers no longer have to go through a tiresome manual process of phone and fax ping-pong. Particularly when they want to place an order or communicate with us about availability and so on.’
Proponents of Web Services, which are expected to supply the glue for many of these collaborative exercises, argue that the set of standards that go to make up the technology will enable users to achieve levels of integration with business partners’ systems similar to those already achieved with their internal systems.
Unlike EDI, in which standards have to be set for each industry, Web Services is a universal medium. The set of standards that go to make it up include interfaces that sit on top of existing applications and connect them with other applications.
There are also mechanisms in Web Services for discovering and communicating with systems owned by other companies. One of the advantages is that it is not necessary to make complicated arrangements with business partners in advance.
Computer company Dell is a good example of an organisation that has expanded its use of Web Services from co-ordinating business processes across the supply chain into its core activities. Initially, the company sent components specifications to suppliers in a Web Services format, so that suppliers’ inventory systems could read the information automatically. Dell reduced inventories of components at its many manufacturing plants from around 30 hours worth down to less than five hours.
A common format
Later, Dell set out to aggregate information across its many factory systems in order to better match production capacity to demand. Unfortunately, the company plants had installed different systems. Rather than replace these expensive databases Dell installed a Web Services application using XML as a common format. Data from each database is converted into XML so that information about production schedules can be combined and then used as the basis for automated communication with suppliers.
‘When managers plan their investments in Web Services they should follow three principles – leverage existing technology, implement investments in stages, and plug in new elements of the technology over time,’ says Silicon Valley consultant John Hager author of ‘Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow Through Web Services’.
Pressure on costs and falling prices, combined with over-supply in many industries, will ensure that systems to enhance collaboration of all types will remain a hot topic for supply chain managers. The pace of development is speeding up and with new ideas such as intelligent agents, Web Services and RFID coming on stream, companies will have their work cut out to make the right decisions.
One thing is certain, there is little that is touchyfeely about the commercial imperatives driving this particular game.