Supply Chain

Should the FCC ban Async and Bisync?

legacy B2B protocols

Today is February 17th, which has become the equivalent of Y2K in the television broadcast industry. Today was also the original deadline set by the Federal Communications Commission (FCC) to discontinue analog broadcast television signals throughout the US. Congress recently passed the Digital TV Delay law which has extended the deadline to June 12th to allow consumers more time to complete the transition. While June 12th has become the new “drop dead” date, Congress specified that broadcasters are no longer obligated to continue analog transmissions during this extension period. However, 1100 of the nation’s 1800 TV networks will continue their legacy transmissions to maximize advertising distribution. The FCC’s ability to phase out older technology in favor of more modernized, cost effective protocols begs a question in my mind. If the FCC can apply such a policy to TV broadcasts, should we consider enacting similar legislation for outdated B2B communications protocols such as async, bisync and X.25? Y2K for the Television of the Industry The official motivation for the US switching to digital TV is to free up wireless broadcast spectrum which is in high demand by other user groups. Rather than using the spectrum for analog TV broadcasts, the frequencies could be allocated to municipal fire, police and emergency rescue departments to support public safety efforts. Of course, the upgrade to newer technology has numerous benefits for consumers and broadcasters as well such as improved picture quality and a wider variety of programming options. After the cutover, older televisions, which do not have a digital receiver and are not connected to a cable or satellite service provider, will not be able to receive the new transmissions. Consumers with older TVs will need to follow one of three courses of action to watch TV: Purchase a digital converter box, subsidized by the US government Upgrade to a newer model television Subscribe to a cable or satellite service The February deadline was extended to June due to a much higher than anticipated population of non-digital TV users. The US government originally estimated that only 15% of households received analog signals TV via free antennas. However, actual utilization of the analog broadcasts appears to be closer to 35% due to the fact that many homes have extra TVs not connected to cable or satellite TV networks. Legacy B2B Communications Protocols I think most government officials were surprised to learn of such a high population of legacy TV technology still in use in 2009. I suspect a similar level of disbelief would be experienced if a study of the use of legacy communications in the B2B integration sector were conducted. One would assume with all of the e-commerce technology businesses have today such as AS2, FTP and Web Forms that legacy technology such as async, bisync and X.25 have become virtually extinct. Unfortunately, this is not the case. For those of you not familiar with these legacy communications protocols, which is by no means something to be embarrassed about, here is a brief introduction. Async – is a communications protocol in which a start and stop signal are used to encapsulate individual characters and words. Async was originally developed for use with teletypwriters in the early 20th century.  Asynchronous signalling was very popular for dial-up modem access to time sharing computers and bulletin board systems during the 1970s, 80s and 90s.  Here is a link to the wikipedia page on async Bisync – is an acronym for the “Binary Synchronous Communication” protocol intorduced by IBM in the 1960s.  The bisync protocol was the most popular file transfer protocol during the 1970s and 1980s. EDI applications were a primary user of bisync as were ATM machines, cash registers and radar systems X.25 – is a Wide Area Network (WAN) protocolused with leased lines, ISDN connections and traditional telephone lines.  X.25 was especially popular in the 1980s within the financial services industry to connect ATMs to banking networks. Here is a link to the wikipedia page on X.25 I have never seen an official report on the use of legacy communications in B2B integration. However, I am confident there are over 10,000 companies are still using legacy dial-up connections such as async, bisync and X.25 throughout the US. What are the implications of the business world’s continued dependency on these ancient networking standards?  Can commercial entities effectively phase out these technologies on their own or will government regulation be required?

Read More

How can MMOG/LE Improve B2B Processes Across a Supply Chain?

So what does MMOG/LE stand for and how is it used? Well, the MMOG part stands for Materials Management Operations Guideline and was initially developed by the Automotive Industry Action Group in North America (AIAG). The LE part refers to Logistics Evaluation and was developed by the European Odette organisation. When combined, MMOG/LE provides a powerful continuous improvement tool which helps companies improve the efficiency and accuracy of their materials management processes whilst helping to reduce costs, errors and waste. By including logistics in the evaluation tool it allows companies to improve the efficiency of their transport and distribution network. MMOG/LE has now become a recognised global standard for improving materials and logistics processes. AIAG and Odette have developed a self assessment tool which allows companies to evaluate their own internal business processes and identify gaps. The tool has been successfully used by the major OEMs such as Ford, Chrysler, PSA and Renault as a way to evaluate both new suppliers and existing suppliers and make sure that their business processes comply with the high standards expected by the OEMs. In some cases suppliers must agree to take the MMOG/LE self assessment as part of their potential contract with an OEM. In particular, OEMs use the assessment with their suppliers to: Understand management commitment Look at capacity planning of the supplier Implement EDI Integration to ERP and automatic processing of data Measure the ability to interface with Tier 2 suppliers, especially those in emerging markets Develop an improvement plan and measure quality levels MMOG/LE has been in use since 2004 and many companies have seen significant improvements including an 85% reduction in premium freight, 80% reduction in obsolescence costs, 43% reduction in inventory carrying costs and a 20% reduction in data entry time. The self assessment looks at six different areas of a supply chain process and comprises of over 200 different questions. The six chapters of the assessment looks at strategy and improvement, work organisation, capacity and production planning, customer interface, production and product control and the supplier interface. Depending on responses, companies are then given one of three grades. The aim of the assessment is to identify gaps in any key business processes and this then allows the suppliers to take corrective action to improve and fill in the gaps. More importantly suppliers will uncover critical areas where automation and new IT systems can significantly increase plant efficiency and streamline processes. MMOG/LE essentially ensures that Information Flow follows Materials Flow. Now from an information flow point of view it is clear that B2B has a role to play here to help suppliers address some of the gaps within their MMOG/LE assessment. For example improving global connectivity and electronic document support, improving visibility of shipments and orders, providing integration between B2B and ERP, providing supplier enablement and improve availability of service. In fact, the MMOG/LE assessment helps to confirm what we have known for years that B2B solutions and services have a key role to play in improving an OEM’s supply chain. MMOG/LE has been so successful with helping improve business processes and information flow in the automotive industry that other industry sectors such as Healthcare and Retail have started to use the assessment tool as well. With the current downturn in the global economy I believe MMOG/LE will be used by many more companies in 2009 as a way of not only improving the efficiency of their supply chains but more importantly identify areas where manual processes can be replaced with automated processes. In addition, MMOG/LE helps to identify areas where costs can be reduced which in this tough economic climate is not a bad thing. B2B solutions and services can certainly help with automating a lot of manual business processes and for this reason I will be spending some time over the next few months taking a closer look at how B2B solutions can help resolve some of the issues and potential gaps highlighted by the MMOG/LE assessment process. I will report back on my findings very soon, so watch this space. In the meantime, if you would like further information on how your company can use the assessment tool then please visit the AIAG or ODETTE websites.

Read More

Managing Cash–Visibility is Key

With Thanksgiving and Black Friday now behind us, the Holiday Season has officially kicked off in the States. For consumers, corporations and even for banks the next few weeks will focus not just on what you can buy but also on how much you have to spend, save and loan at the end of each day. Now I have a fairly extensive gift list big family=big holiday budget.  But like most people, I am thinking before I buy and more often than not I’m paying with cash and not credit. Because come January, I want some money in my pocket. So all through the holiday season, probably every day because again I have a lot of gifts to buy, I will be checking my online banking statement to make sure that I haven’t spent more than I can see. And according to a recent survey of U.S. Treasurers, I’m not the only one thinking that seeing is definitely believing. Despite all the noise about banks not lending, the fact is that more and more of the bank’s corporate clients are trying not to borrow. They are instead looking, both internally to their own processes and externally to their banks for help to increase visibility into the cash they already have. The one size fits all cash forecasting methodology that may have been good enough last year, is insufficient today due to the sheer volatility of the marketplace. So just like me and my near obsessive checking of my account balances, corporate treasurers are looking at their cash statements, positions and forecasts more often and expecting to see a lot more. So what does this trend toward increased visibility mean for banks? Well, it seems obvious but maybe not banks have to adapt. In a time where corporate clients are consolidating banking relationships, banks will have to offer solutions that can help their corporate clients to see and more importantly act on the information they see faster and more efficiently. True real-time visibility, which is now more essential than ever to the cash management value proposition, is going to rely on automation which means it will rely on technology. And the facts show that while spending on technology that helps to improve visibility to cash has been on the upswing for several years, far too many banks still lag behind in automating the processes that support forecasting such as payables, receivables, cash management, and account reconciliation. Which begs the question: what good is visibility if it is not accurate at the time an action is needed?  Or to use a real world example; what good does it do me to see that I can’t afford the Eiffel Tower Lego set if I already purchased it because my online statement said I had the cash available? In the coming months, the importance of real-time or near real-time visibility will most likely increase. As bargain hunting corporate treasurers with cash look to acquire smaller less liquid players they will be counting on their banks to show them the money. I think the four big questions that banks will get asked again and again in 2009 by their corporate clients will be: Where is the money, who has the money, how much money do they have and what are they using their money for?   Did I miss any big ones? What are the questions you expect to get in 2009?

Read More

OAGi and CIDX – The Long Tail Gets a Little Shorter

B2B standards

Earlier this month CIDX, the Chemical Industry Data Exchange, organization voted to transition its’ operational and governance roles to the Open Applications Group (OAGi) and the American Chemistry Council (ACC). CIDX will transfer its intellectual property to OAGi, which will create a new Chemical Industry Council to manage the standards going forward. I view this as a positive development for the B2B e-commerce sector. There are far too many e-business standards in the marketplace today. While these standards can create significant efficiencies and competitive advantages within vertical industries, they complicate matters for trading partners who need to collaborate across industry sectors. Rationalizing the standards efforts under a common governance and organizational model will promote more interoperability and ultimately wider adoption of standards. More about CIDX I do not have a background in the chemical industry so I cannot comment extensively on the use of CIDX within the sector. The CIDX web site offers very little information about its practice to non-members, despite advertising the standards as “free.” However, I did find information on the history, membership, financials and business processes supported by CIDX. History – CIDX was founded in 1985, but the most interesting work to me began in 2000 when the Chem eStandards were developed for XML-based buying, selling and delivery of chemical products Membership – includes industry leaders such as BASF, Bayer, Celanese, Dupont, Eastman Chemical, Shell Chemical and Rohm & Haas Business Processes – are very similar to other industries – RFQ, Catalog, Purchase Order, Credit upon Proof of Sale, Financials, Logistics and Forecasting Financials – CIDX generated $860K with a net income of approximately $40K in 2006 according to their annual report. OAG – The Long Term Winner in the XML Standards Race I read a Forrester report recently which stated that “industry initiatives like OAGi have failed to deliver consensus on any one set of standards…”  I would have to respectfully disagree with this opinion. If anyone is having success linking the efforts of XML-based standards across industries it is OAGi. The CIDX announcement is an excellent example. In my opinion, OAGi is a clear contender for the short head segment of the B2B standards curve I refer to as the Long Tail. OAGi has been active in the automotive sector for many years now and has recently taken on a more prominent role in the high tech and electronics sector as well. Industry insiders tell me that OAGi could potentially replace 1SYNC’s RosettaNet division as the primary standards organization for high tech. OAGi is even active in the financial services sector, collaborating with SWIFT and others on the new ISO 20022 XML standard for payments, securities and cards transactions. Another reason I think OAGi is poised to be the long term winner in the XML space is the reputation it enjoys in the marketplace. Some standards organizations have a reputation for being highly political and bureaucratic. However, I hear nothing but good things about OAG from its participants. Promoting Cross Industry Standards CIDX is a good match for OAGi, as it shares a similar vision of cross-industry standards. CIDX has always promoted the idea of cross-industry standards. Even before the recent announcements with OAGi, CIDX worked closely with other industry associations such as papiNet in the forestry sector; GUSI in the consumer products industry and RAPID in the agriculture community. Under the OAGi leadership the opportunity for collaboration with other industry sectors should be accelerated enabling even faster growth of XML.

Read More

It’s Not Easy—Green Banking Continues to Grow

green banking

“It’s not easy being green.”  When this tune started floating around my head for this post, I thought Kermit the Frog had first sung these words about twenty years ago. Imagine my surprise when I checked Wikipedia and found out the song is over forty years old. And what was once a frog’s simple lament about growing comfortable in his own somewhat hunter green skin, has over the years been co-opted by the green movement as a reminder of the difficulties of living green with Kermit’s blessing of course.   So for the purposes of this post, I’m going to focus on the environmental Kermit, my earliest exposure to and hero of the green movement. Kermit the Frog and the Ad Council anti-pollution ad that featured the Crying Native American guy made a big impression on me and I’m not the only one. For many people of my generation, these impressions spurred us to action both then and now. I’ve been an avid recycler for more than a decade but I remember organizing a neighborhood clean-up when I was still watching the Frog on a daily basis. Somehow I think some of the banking decision makers who are helping to implement green initiatives have these same cultural references working in their subconscious too. This fact might help to explain why, despite the economic upheaval, so many financial institutions and banks are moving forward with their green initiatives. Citi announced the opening of a 305,000-square-foot facility to house its computer systems and components in Georgetown, Texas. This facility will employ about 50 people and is only the first step that Citi is taking toward more environmentally friendly data centers. Other organizations are taking similar steps to help eliminate paper waste and reduce their carbon footprint. While it would be great to think that the focus on eco-friendly is only driven by altruism, the truth is that it makes good business sense as well. Let’s take a look at my own employer, which recently formed an alliance with Verizon Business targeting transactions among vendors, partners and customers, and the companies said that by automating annual business-to-business transactions worldwide, estimated at about 40 billion transactions, companies would cut 2.3 billion pounds of CO2, or the equivalent of removing about 200,000 cars of the road for a year. According to the Aberdeen Group, a company that processes 500,000 invoices per year can cut manual process costs by 60 percent or more if automation is implemented. For financial institutions that support wholesale clients, this green trend toward cost savings and streamlined operations can translate into additional capital to fund new growth. Good business return and good press are compelling reasons for any company to go green. More and more banks are “Finding New Opportunity in Green Banking.” And I’d like to think that the little green frog is playing a part in these decisions. What about you? Did Kermit influence you to take some green action? If not Kermit, then who and what type of action are you taking?

Read More

Green Coffee XML and the Long Tail

XML vs EDI

The Green Coffee Association’s XML standard offers an excellent example of the Long Tail of B2B Standards. The standard automates a highly specialized set of business processes within a niche industry subsector. Tremendous benefits can be derived from market participants as a result of the flexibility offered from the wide variety of tendering, payment, pricing and performance management terms that can be modeled in the XML.  Such benefits would not be practically achievable with a more generalized standard such as EDI.  Benefits of Green Coffee XML Lower Days Sales Outstanding (DSOs) for sellers of coffee bean products are achieved by creating an electronic audit trail of commercial transactions that reduces the likelihood of post-shipment quality and invoicing disputes Improved Order Fulfillment rates are accomplished by routing contracts directly from buyer procurement applications to seller order management systems thereby obviating the need for error-prone, human interactions Reduced Total Landed Costs for transportation are realized by standardizing and digitizing the import and export processes that often delay shipments at international borders and result in unexpected penalties or fines Challenges of Green Coffee XML Specialized e-commerce standards such as Green Coffee XML offer unparalleled levels of automation and efficiency within a particular market sub-segment. However, such niche XML standards create challenges for market participants whose core business utilizes a different e-commerce framework. Green Coffee XML offers an all-inclusive solution for the agricultural businesses that grow the coffee beans and the specialized brokers who act as middlemen in sales transactions. However, the standards complicate e-commerce scenarios for other market participants such as consumer products manufacturers, food service retailers, government trade ministries, transportation providers, commercial insurer and banking institutions. Consumer Products Manufacturers Brand owners such as Kraft and P&G who purchase large quantities of green coffee beans can benefit from the GCA standards during procurement processes. However, Green Coffee XML is not the only standard utilized by consumer products manufacturers. Other non-coffee suppliers of ingredients, raw materials or packaging materials are adopting the GUSI XML standards. Retail customers expect their suppliers to exchange information in the EDI document standard via AS2 Internet transmission protocols. Furthermore, retailers expect product branding, pricing, packaging, promotion, taxation and regulatory data to be transmitted using the Global Data Synchronization (GDS) standards. A wealth of information about coffee bean quality can be exchanged using GCA XML, but the data must be transformed into GDS XML formats for distribution to downstream retailers. Banking Institutions Financial institutions provide risk mitigation and working capital solutions to coffee buyers and sellers. Examples include letters of credit and post-export supply chain finance. Cost effective and timely processing of such services requires electronic communication with the buyer and seller. Consequently, banks engaged in coffee-related transactions must either embrace the GCA XML standards or develop a process for mapping data to and from their own preferred standards. Financial institutions utilize the SWIFT FIN MT standards for international trade processing. Additionally, a new set of Trade Services Utility (TSU) standards are being developed for supply chain finance. Transportation Vendors Ocean, rail and ground freight carriers as well as third party logistics providers offer a variety of transportation, warehousing, freight forwarding and customs clearing services to buyers and sellers of coffee products. The cost-effective and timely processing of coffee-related shipments necessitates electronic communications between buyers, sellers and government trade ministries. Consequently, transportation vendors engaged in coffee-related shipments must either embrace the GCA XML standards or develop a process for mapping data to and from their own preferred standards.  Transportation providers utilize higher volumes of EDI than any other e-commerce standard. However, due to the broad range of industries serviced by logistics providers, a myriad of standards including AS2, RosettaNet, Odette, STAR and OAG are being embraced by transportation vendors.  The emerging multi-standard model in the transportation industry is customer-friendly, but costly and complex for the carriers who must manage highly customized e-commerce infrastructures.  Similar challenges exist for other trading partners involved in coffee-related transactions: Government Trade Ministries They are charged with monitoring the import and export of coffee products across their borders. Imports and exports must be properly classified to ensure the appropriate taxation of goods. Incomplete or inaccurate documentation will result in delayed processing and financial penalties to either the buyer or supplier. To expedite trade processing, governments support electronic interfaces with importers and exporters of goods. However, government ministries focus e-commerce capabilities on broader, industry-neutral standards such as EDI or ebXML. Such an approach creates challenges for long tail standards adopters such as Green Coffee bean buyers and sellers. Commercial Insurers They offer policies that compensate the buyer or seller of a coffee-related transaction for losses, damages or theft that occurs during the transportation of goods from origin to destination. Such losses might occur from inclement weather, collisions, stranding, pirates or acts of war. Damages might be caused by seawater, fire, smoke or chemical contact with the coffee goods. Insurers require documentation of the shipment contents and value in order to underwrite a marine coverage policy.  To expedite the processing of the policy, insurers offer electronic interfaces to submit documents such as shipment advices, bills of lading and packing lists. Similarly, insurers can distribute insurance certificates electronically to a buyer, seller, shipper or banker facilitating the trade. Insurers utilize specialized standards to support underwriting, policy rating, claims processing and customer billing processes. For example, the ACORD standards offer a highly specialized set of transactions designed to orchestrate insurance transactions. Both ANSI X12 EDI and EDIFACT offer insurance document sets as well. Varying standards between insurers and their customers creates challenges for all parties. Green Coffee XML offers tremendous return on investment and unparalleled levels of efficiency for producers and brokers of coffee. However, the value proposition becomes substantially diluted for other market participants with core businesses that utilize alternative e-commerce frameworks. Consequently, there are tradeoffs to be considered when evaluating whether to adopt specialized, industry sub-sector level e-commerce standards or to rely on less robust, but more highly adopted standards such as EDI.  As cross-industry trade continues to grow, there will be an increasing level of tension between competing e-commerce frameworks.

Read More

What can Dominos Pizza Teach us About Supply Chain Visibility?

supply chain visibility

Last weekend we had some friends over to visit our house and rather than cooking we decided to place an order for pizza delivery from Dominos. Ordering a pizza today is amazingly convenient. We didn’t even have to pick up the phone. Instead we placed the pizza delivery order online using the Dominos web site and a credit card. The fact that you can order a pizza online should probably come as little surprise in today’s increasingly Internet-centric world. What did surprise me, however, was the new Domino’s Pizza Tracker site that provides you a step-by-step update on the status of your order. Using the phone number that you used to place the order you can login to a graphical interface that monitors the progress of your delivery. The web site also displays the street address of your delivery, the complete contents of your purchase and the exact time of your order. The tracker shows five different steps throughout the food preparation and delivery process: Order placement Food preparation Baking Boxing and packaging Delivery en route My tracker even told me the name of the driver who was coming to our house! All that was missing was a link to the driver’s MySpace page so you could learn more about he or she before they arrived…. Dominos launched this new tracker service on January 30th. I am not sure exactly how it works, but the system somehow ties the local operations systems in each store to the B2C web site on a real time basis. One thing I will bet on is that it doesn’t use RFID. The tracker site is one of the more customer friendly web experiences that I have seen in recent years. In fact, there is even a survey that consumers can fill out after the delivery to comment on their experience. So as I ate my pizza I started thinking about the idea of providing customers real time visibility into the status of their orders. And I began to relate this to some of the customer visits I have conducted recently with multi-national corporations in the automotive, high tech and retail industries. One thing that I am consistently surprised by is how little visibility many of the largest companies have to inventory moving through their supply chains. Most of the order management portals large manufacturers provide their customers don’t come anywhere close to the supply chain visibility that Dominos offers its consumers. So I ask you – if the average Dominos franchise with an employee base of 10 and annual revenues of $580K can notify me of the exact time that a pizza is boxed and taken out the door for delivery, why can’t a multi-billion dollar manufacturer of airplane parts be able to tell their customers when a $50M shipment of goods has arrived at a port and cleared US customs? The good news is that many manufacturing leaders seem to be recognizing the challenges associated with lack of supply chain visibility. We have seen a recent surge in interest amongst large manufacturers seeking to provide their key distributors and customers with better visibility to outbound shipments. The highest concentration of demand seems to be with industrial goods manufacturers who are seeking better quality data on ocean freight traversing long distance trans-Pacific routes. Consumer products companies are slightly ahead of their peers in the automotive, high tech, aerospace and industrial machinery sectors when it comes to supply chain visibility. In the industrial sector, it is not uncommon to find that neither buyer nor supplier has visibility to the location and status of shipments of goods once they leave the manufacturing plant. Interestingly, this situation applies even to high value goods including consumer electronics such as high definition plasma televisions, kitchen appliances such as refrigerators and computing equipment such as robotic tape backup libraries. Not only are these expensive goods targets for theft and counterfeiting, but many of them can be easily damaged without proper handling. Due to the value of the goods, suppliers often purchase cargo insurance to protect against these types of threats. Also due to the value of the goods, many suppliers seek out third party financing for their inventory in transit. The financing frees up working capital that would otherwise be tied up in long distance supply chains. So the point here is that we have multi-million dollar shipments of industrial goods insured and financed by third parties and no one other than the transportation provider holding the actual inventory seems to know the location at any point in time. Should industrial manufacturers hire pizza delivery persons to help them?  That is probably unnecessary. But they should consider investing further in transportation management applications, particularly in logistics visibility suites that offer customers insights into the status of inbound freight.

Read More

Battle of the Supply Chains

supply chain

One of the industry associations we have been working with recently is the Global Supply Chain Forum sponsored by Stanford University. The forum is comprised of representatives from many of the world’s largest manufacturing companies as well as some of Stanford’s leading faculty such as supply chain thought leader Dr. Hau Lee. Dr. Lee has introduced a number of revolutionary ideas over the past few years, but there is one particular insight that stands out in my mind: “Instead of company-to-company competition, we are now in an era of supply chain-to-supply chain competition.” This is a concept that I think becomes more and more critical every day that goes by. To illustrate my point, let us examine the high tech industry as an example. More specifically, consider the sub-sector of high tech that manufactures computers and related peripherals. This is a relatively young sector that was first started back in the 1960s and 1970s. However, during its short history the supply chain model has undergone a radical transformation. Mainframe Value Chain When the first mainframes were introduced a single vendor often functioned as the sole source for all computing needs. OEMs such as IBM and Honeywell manufactured not only the finished mainframe product, but most of the components as well including the memory, storage (DASD) and processors. The operating system, database and even some applications were developed by the same vendor who manufactured the hardware. If the mainframe broke or needed an upgrade, the hardware OEM provided the repair and service. 2008 PC Value Chain Contrast the mainframe model to the complex, multi-tiered value chain in today’s computer industry. I work on an “IBM Thinkpad.” However, while the logo on my laptop says IBM, the manufacturer of the machine is actually a Chinese company – Lenovo. Although Lenovo is the OEM, it only contributes a small fraction of the content of the laptop. The components inside the laptop are sourced from third party suppliers (Kingston for memory; Seagate for storage; Intel for microprocessors). Also noteworthy is the fact that Lenovo does not typically sell the machine directly to end users. My laptop was purchased through our company’s preferred distributor – CDW. The software on the machine is made by another group of specialized companies. Microsoft publishes the Windows operating system and Office application suite. Other software vendors such as Adobe, Symantec and Apple provide other applications such as document viewing, desktop security and digital music. And when my laptop breaks, who do I call? Not Lenovo, but a third party such as a high tech distributor, third party logistics provider or a contract manufacturer for warranty support and epair. The point here is that the computer industry has migrated from a vertically integrated model to a highly specialized, heavily outsourced model. This type of highly outsourced model in which OEMs outsource much of the manufacturing and supply chain management to suppliers is growing more common in all discrete manufacturing sectors. Examples can be found not only in high tech, but also aerospace, automotive, consumer products and industrial equipment. Supply Chain versus Supply Chain The key take-away from the discussion above is that OEM manufacturers are increasingly dependent upon a community of outsourcing partners to achieve success. Factors that can go wrong (and do go wrong) are, in many cases, completely out of the control of the OEM. In these new value chain models, companies are actually not competing with other companies, but instead their supply chains are competing with other supply chains. This crucial concept, first introduced by Dr. Lee, is critical for channel masters in today’s supply chain to understand. However, while it may seem obvious, the majority of today’s leading retailers and manufacturers continue to structure models that prioritize the near-term financial performance of their own company above the overall long-term competitiveness of their supply chains. The term “partner” continues to be utilized ever more frequently to describe suppliers in a value chain. However, the approach of most channel masters remains more adversarial than collaborative. The largest exception is, of course, the Japanese manufacturing community which has structured itself around kereitsu relationships between OEMs and key suppliers. Consider the following “company centric” paradigms that are becoming more commonplace in today’s supply chains. Performance Scorecards and Penalties – Retailers and manufacturing OEMs have instituted elaborate chargeback mechanisms that penalize suppliers for problems arising during routine order fulfillment. Not only are these penalties designed with the goal of optimizing the buyer’s business processes, but each retailer and manufacturer has different measurement criteria. As a result, suppliers are forced to comply with terms such as delivering during tightly monitored 2-hour receiving windows and labeling of pallets with customer-specific serialized barcodes and text. While these processes simplify receiving for the buyer, they add cost and complexity for the supplier and friction to the overall relationship. Open Account – Large buyers are moving from their traditional letter of credit processes with overseas suppliers towards open account models. The goal of the migration is to reduce banking fees for the buyer, but in many cases the side-effects to suppliers are significant. Without a bank-guaranteed letter of credit to use as collateral for short term financing, suppliers struggle to fund raw materials purchases, manufacturing plant payrolls and other operating expenses. Extended Payment Terms – In an effort to hold on to cash longer, buyers are extending payment terms with suppliers to periods of 60 or 90 days. Extended terms create a cash flow issue for suppliers who must now seek out short term loans to fund their operations. For smaller suppliers with lower credit ratings, these expensive short term loans compromise profit margins and increase the overall cost of goods sold. Vendor Managed Inventory – More and more customers are looking for their suppliers (or a third party) to hold title for inventory until the point of consumption or sale to the end-customer. Buyers prefer these types of models as they shift the inventory carrying costs to the supplier’s balance sheet along with the risk of product obsolescence and retail shrinkage. For high volume channels, large suppliers can benefit from the added demand visibility and end-customer insights available through a VMI program. However, for many buyer-supplier relationships the risks and costs are heavily unbalanced in favor of the customer. What do suppliers as valued partners in the relationship receive in exchange for these terms? Buyers will offer appealing terms to suppliers willing to engage in customer centric business processes: Greater share of a customer’s wallet as the supplier becomes the preferred vendor for a particular product line Broader scope of services that may include many value added services that increase the average revenue per unit sold Suppliers must weigh the pros and cons of such arrangements to determine their best strategy.  Often the tradeoff is a choice between revenues and profitability. What are the EDInomics of supply chain to supply chain competition? B2B integration technology can be the key to unlocking the potential of collaborative relationships in a value chain.  B2B can be used to enable a variety of strategies such as multi-echelon demand visibility, collaborative product development and third party supply chain finance. But the technology is rendered ineffective unless the channel master in a relationship has a long-term, supply-chain wide perspective on their activities. Unhealthy suppliers introduce performance drag, cost overhead and higher risks to the overall supply chain.  While these factors may not be visible in the buyer’s next quarterly income statement, they will most certainly define the long term success of the buyer. After all, as Dr. Lee states “The weakest link in the supply chain defines the supply chain.”

Read More