Waterstone Consulting News & Events

"Cautious Automation -- The Electronic Supply Chain Is Coming Of Age, But Many Companies Are Taking Their Time Linking Up"

Informationweek, October 19, 1998

By Edward Cone

Ed Toben, VP of global IT at Colgate-Palmolive Co., knows it makes sense for the consumer products giant to automate its supply chain. The company's SAP enterprise resource planning system allows accurate and flexible shared planning, true just-in-time production and delivery, and lower inventory costs.

Still, Colgate-Palmolive is moving cautiously as it ties key suppliers at plants around the world to its electronic supply chain. "Electronic, business-to-business integration is a logical extension of the way we work with our partners," Toben says. "How far and how fast it will go is open to debate."

What's the holdup? While the electronic supply chain presents its share of technical challenges, including the integration of supporting technologies such as ERP and electronic data interchange, the real problem is the impact automation will have on the business process. "Business change is the issue," Toben says. Colgate-Palmolive isn't ready to force such jarring changes on its suppliers.

An electric supply chain brings major changes in the way companies deal with each other, from planning to purchasing to paying. It also creates stress within each organization. For example, the sales force may complain that electronic ordering has cut them out of the loop, while manufacturing may have to adjust to getting one week's notice on order changes.

Also, smaller companies don't like being forced to join an electronic supply chain. Take, for example, the Pericom Semiconductor Corp., a San Jose, Calif., maker of electronic components for computer manufacturers. When big customers, such as Compaq and IBM, demanded the $49 million company automate or lose their business, there was plenty of grumbling at Pericom.

But Pericom had no choice. "Your channel master will tell you how to do business," says Mike Schmitt, a senior VP at J.D. Edwards & Co., which implemented an ERP system for Pericom. Automating the supply chain was the easy part. Pericom faced its biggest challenge when the company had to remake its business processes, down to the level of lot-sizing and bar-coding. The system, fed by a weekly EDI run from customers, generates new manufacturing work orders and manages inventory at third-party warehouses.

The mandate to automate is often passed along by a company's sales organization. It's then up to the IT managers to deal with the usual concerns of a major implementation-including return on investment, Internet security, and scalability-and the problems that are unique to automating a supply chain. IT managers must work out technical issues and make sure the business units understand what can and can't be done. "It's the CIO's job to lift the technical IQ of the entire upper management," says Andrew Zoldan, VP for strategic initiatives at SAP.

Zoldan says the key to implementing an automated supply chain, which involves big changes in the way companies do business, is education. That's why SAP developed training programs for business and technical managers, as well as its own employees. "I tell companies, yes, you should be afraid of this stuff," Zoldan says. "If I don't put that fear in you, and you buy it like a toaster oven, then I haven't done the right thing."

That Vulnerable Feeling

When a company considers starting or joining an electronic supply chain, one of its biggest concerns is that sharing information will adversely affect its business or its relationships with partners. For the most part, familiar security measures, such as encryption, can assure companies at both ends of the supply chain that people see only the information that's relevant to them.

Motts North America, the Stamford, Conn., subsidiary of British conglomerate Cadbury Schweppes plc, recently upgraded its SAP software to let third-party brokers of its products make inquiries electronically. Motts knew some of its smaller business partners had limited IT resources, so the company handled much of the IT work.

Chris Young, senior VP of logistics at Motts, says password protection works. "Brokers can't peer into each other's accounts." But Young also expects his customers to behave themselves while visiting his system. "We're not dealing with a bunch of hackers here. They want to keep doing business with us."

Some companies worry about sabotage perpetrated by strangers. "We're paranoid about that," says Thomas DiMarco, systems director for airline logistics support at Boeing Co.'s commercial airplane group. DiMarco waited to use Net-based EDI until he was sure adequate security was available. His group is responsible for getting spare parts to airlines, which can key into an EDI network to order and schedule replacements.

Beyond password security, Boeing monitors EDI traffic for transactions or volume that are out of the ordinary. "We call the customer if something unusual goes on," DiMarco says.

The question of who gets to see what information goes beyond security to business practice. It's less about outsiders hacking in than about how much information and control a company wants to share with customers and suppliers. Suppliers don't want their competitors to see their prices or order volumes. Companies fear that sharing too much information will harm their businesses. Companies have to make peace with the amount of information they're actually willing to divulge. "Am I willing to share proprietary information that we've previously held close?" says Joseph Cahill, the partner in charge of the supply chain solutions group at Waterstone Consulting in Des Plaines, Ill. "That's a question our customers have to deal with."

A contract manufacturer such as Pericom, for instance, doesn't want Company A to know how much capacity it has allocated to Company B, or what one company pays for components. Prices can change on volume, and a manufacturer doesn't want one customer to feel that another customer receives better treatment. "We swallowed hard on showing inventory," says Dan Wark, VP of operations at Pericom. "We haven't gotten burned on it yet."

Teknion Inc., a Downsview, Ontario, maker of office furniture that has eight suppliers connected to its Baan ERP system, won't put just anybody in its automated chain, where information about its production plans and costs can be found. "We don't provide full disclosure without a high level of comfort and long-term relationships," says Michael May, VP for IT at Teknion. "We observe the fundamental rule of confidentiality: Don't disclose what you don't want made public."

Some companies may have good reasons to avoid too much information sharing. Cahill has one client, a pharmaceutical distribution company, that ended up rejecting electronic links with its suppliers because it didn't want to share too much information about the way it does business. "Pharmaceutical distributors are almost financial companies," Cahill says. "They make money off investment buys, and margins are so thin that they measure profit margins in basis points. They don't want their suppliers to know too much about what drives their buying patterns."

Control Issues

Smaller companies pressured to automate by big customers face real issues of control. The decision to take on the costs and headaches of automation is not their own, and the benefits may accrue largely to their business partners. "A lot of fear stems from the fact the majority of companies are not in a power position," says Harry Tse, research director at the Yankee Group consulting firm. "They're giving up control for what they see to be a limited payback."

Andrew Douglas, general manager of Bartek Ingredients Inc., a privately held chemical company in Burlington, Ontario, that sells food additives to much larger processing companies, is in no hurry to yoke his operations to even trusted customers. He'll wait until they demand it. It's not that Douglas fears automation itself-he's installing a state-of-the-art intranet and has pushed automation in other phases of his operation. Although he does have some questions about the reliability of even dedicated Net connections, this is more of a control issue. "I'm happy with a fax order for now," he says. "Why should I let somebody else's computers run my factories?"

Even companies that participate in shared planning-coordinated scheduling of orders, manufacturing, and shipping- don't always trust it completely. May says Teknion's suppliers have been reluctant to alter production based on forecast volume. "They still don't trust our forecast, so they build to their own schedule," he says. "The supply chain is an attempt to create a larger integrated organization. It's difficult to control what you own, and a lot harder to control what you don't." May, who recognizes that these are the early days of supply chain automation, is being patient. He hasn't dropped any suppliers who aren't willing to sign up, but he continues to push the idea to them.

It's hard to play a team game without teammates, and the supply chain is definitely a coordinated activity. The whole chain suffers if one link is slow to provide information or access. "No customer at the moment is absolutely clamoring for a company of our size to give them access to our manufacturing process," says Motts' Young. That gives Motts the freedom to ease into automation on its own terms, which means carefully. "We've touched one or two suppliers and customers with experiments, but have not taken it very far yet," Young says. "There's an element of seeing how people adapt to the first changes." Another benefit of easing into an electronic supply chain is that it gives companies time to work out the kinks. "Supply-chain software today is still in its development cycle, and there are some technology risks," says Teknion's May. "We've had to build proprietary systems to meet some needs, because feature sets are not complete. If you're afraid of customization, you've got some problems."

At Colgate, Toben's IT staff had to react quickly when data from customers down the supply chain were introduced. "When we started getting point-of-sale data from customers, there was no function here to receive it. We had to create it."

Budget-Busters

Even relatively mature aspects of business interconnection, like EDI, are still evolving at a pace that threatens to bust future budgets if the wrong choice is made today. "It's like buying a PC, where you keep waiting for something cheaper and better, so you never buy at all," says Steven Scala, global marketing manager for EDI at GE Information Services, an electronic-commerce vendor in Rockville, Md. "People are waiting on a de facto standard."

The concerns both large and small companies have about implementing an electric supply chain are real. Even the sales and marketing people of ERP software acknowledge certain limitations. SAP's Zoldan, for one, questions how much business will become electronic and collaborative. "People talk in glowing terms about eliminating the distinction between public and private information, but I don't think it will turn out that way. You are not my buddy-I want to talk you down on price."

Still, the benefits of automated interaction are likely to win out. "At first, when they put a gun to our head and told us to use EDI, we'd print out information from our customers at our end and enter it into our systems ourselves," says Pericom's Wark. But now, he figures things will be scarier for companies that refuse to change with their industries than for those who find a way to overcome their fears.