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Collaborative commerce revitalizes supply chain

This article appears in the issue July/August 2005 [Volume 14, Issue 7]


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Collaborative commerce software coordinates interactions among suppliers, manufacturers, distributors and retailers to improve acquisition, delivery and payment for goods and services. At the height of the dot.com bubble, it seemed that Internet-based B2B commerce would take over, and that brick-and-mortar facilities would be obsolete.

The hype dropped off abruptly, however, as the dot.com bubble burst in the late 1990s. Investors and companies alike realized that not everything Internet was charmed, and that some e-commerce initiatives were actually accomplishing very little. In order to survive, companies had to make a profit and create value for users; many were doing neither. Another distraction was Y2K, which preoccupied IT departments in the late 1990s, diverting attention from other areas.

Over the past few years, however, Internet-based collaborative commerce has seen renewed interest. Gartner recently published its first Magic Quadrant report on B2B Gateway Providers, which identified 15 standalone products in this area. The predicted growth rate of 5 percent to 8 percent per year for the B2B gateway market, estimated at $200 million to $250 million, is modest but respectable.

"The B2B market really didn't go away," says Frank Kenney, principal analyst with Gartner, "but the hype did, which may have allowed the vendors to accomplish more."

Behind the scenes, IT infrastructures have become more robust, and progress has been made toward developing standards for Electronic Data Exchange (EDI) carried out over the Internet (see sidebar). CEOs have also become more interested in collaborative commerce, because most of the inefficiencies have been squeezed out of internal systems. Any further improvements must come from outside the four walls of the enterprise. In addition, collaboration software lets organizations do more than they could before.

"While companies do still purchase technology to increase efficiency," says Kenney, "increasingly, they are purchasing it to extend the value that they can offer their trading partners."

The improved infrastructures have enabled companies to deploy B2B commerce in a broader context of business integration.

"Getting an order electronically does not mean a lot in the grand scheme if it can't be submitted electronically to the back office," says Gary So, VP of strategic marketing at webMethods. "B2B should be part of an end-to-end business process."

Going back to basics also meant cleaning up the data. "One of the top 10 U.S. retailers found that in 30 percent of the shipments they received, at least one item was present that their inventory management system did not recognize," says John Stelzer, director of industry development at Sterling Commerce. In those situations, the delay for checking the inbound shipment into inventory increases from one day to eight days. "Another example—one of the largest wholesalers in the United States receives 2.5 million invoices per year, 37 percent of which kick out of its accounting system with bad item numbers or bad prices," Stelzer adds.

Those numbers may sound bad, but they are consistent with studies across a wide range of industries. And the costs of correcting such errors are staggering. Per-error correction costs have been calculated at $40 to $400. Some studies estimate an hourly cost of $60 to $80, and others a percent of total sales (1 percent or higher). The costs of reconciling errors for a $1 billion company can be as high as $32 million per year, according to one study, when the impact of delayed payments is also considered.

On a more encouraging note, recent news indicates that companies are giving a high priority to data cleansing. According to a study published in January 2005 by the Yankee Group, 75 percent of companies that supply retailers view product information management (PIM) as an important strategic investment, and 52 percent have developed a business case for it. PIM is a step along the way to external synchronization, ensuring that internal data is consistent. Processes for synchronization can be set up fairly quickly--within a few months--and benefits accrue rapidly.

Retailers now understand that if they want manufacturers to do a better job in terms of responding, more information will have to be shared, and not just summary data from weeks ago. The data needs to be real-time at the store level and product level.

"An awareness of the consumer experience has become something of an obsession with retailers," claims Darryl Eicher, general manager of industry solutions at Cyclone Commerce. "A retailer's worst nightmare is an out-of-stock situation that sends the consumer to another store."

A large food retailing business in Europe with 750 outlets, having built a strong reputation on providing top-quality products, wanted to turn its attention to monitoring and improving supply chain performance. The company began implementing Cyclone Commerce's (cyclonecommerce.com) collaborative commerce tools.

The first step was to connect company headquarters with the retail stores. Cyclone Interchange serves as the communications hub, and Cyclone Activator establishes the end points of the linkages. The company reported that it has completed the connection process with selected outlets, and once the decision is made for a full rollout, the remainder can be connected within a matter of days.

The next step was to establish visibility into the data that was flowing between the company's headquarters and the retail outlets that had already been connected. The company accomplished that with Cyclone's Director. Having one methodology in place for communication and monitoring improved the visibility into the supply chain. The final step, for which the company is in the planning stages, will be to decide on an approach for analytics. That capability will allow the company to identify bottlenecks and improve the supply chain performance

The critical importance of maintaining stock has led to a new level of formal agreements. Those agreements are now embedded in the operational business model. Says Eicher, "They are part of how you get paid and how you succeed."

Fortunately, the robust communication, management capability and analytics required to measure performance have now advanced to the point of being able to support those models.

"The supply chain does not end at the warehouse or even at the store," agrees Stelzer. "The consumer is now the driver for supply chain analysis."

The incentive to keep the supply chain running smoothly is strong. When stock is out, the retailer loses hard dollars about 60 percent of the time, and the manufacturer, about half the time, according to the "2002 GAME Worldwide Retail Out of Stocks Study."

Collaborative commerce software provides alerts about potential problems ahead of time, too, allowing an alternate plan to be put into place.

"One supplier who found out that a critical shipment was not passing key milestones (such as import and export customs) in time to meet the scheduled delivery time was able to expedite a partial shipment by air," recalls Stelzer. That allowed the company to meet a service-level agreement and keep an important customer happy.

The retailer could also take similar actions if it became evident that expected supplies were not going to arrive. An alternate source could be found to make up the difference. Although little or no automation of this step is taking place now, when the e-business portion is built out further, it will become possible.

A successful monitoring system for the supply chain can provide major returns in a short time. At one large consumer electronics company, the goal for timely fulfillment of orders submitted electronically was only 75 percent, and the company wanted a 95 percent rate. The company, which was already using webMethods as part of its infrastructure, began using it in 2004 to provide connectivity between order receipt and processing. A CRM system from Siebel and Oracle's ERP system were integrated, and webMethods' business activity monitoring (BAM) solution was set up to find bottlenecks. For example, incorrect product codes, addresses and quantities could be spotted and corrected earlier in the order cycle, reducing the time for resolving exceptions.

A dramatic increase in on-time fulfillment and reduction in exceptions (75 percent in both cases) is expected to produce annual savings of $1 million. Coordination is an important capability for those processes.

"When multiple systems are in place for different functions," points out So, "making sure the visibility is there through all the handoffs is very important."

Secure and reliable standards

The Applicability Statement 2 (AS2) is a specification for Electronic Data Interchange (EDI) over the Internet using the Hypertext Transfer Protocol (HTTP). Like its predecessor AS1, AS2 was developed by a working group of the Internet Engineering Task Force (IETF), which develops business communication standards. The standard includes such features as encryption, digital signatures and nonrepudiation, to ensure secure and reliable communication. Use of industry standards helps reduce mistakes that result in accounting errors and running out of products ("stock-outs").

The Uniform Code Council (UCC) plays an important role in global trade by developing standards such as the Universal Product Code (UPC). It also sponsors tests for interoperability to ensure that business software products can interact with each other.

UCCnet, a subsidiary of the Uniform Code Council, is a global repository that has established XML schema for standard item-related descriptors and metadata. By aggregating product information, repositories help ensure consistency in format and content. Data from a supplier goes through a cleansing process prior to being placed in the repository. Customers of the repository can then download the data knowing it is in standard form.


Judith Lamont is a research analyst with Zentek Corp., e-mail jlamont@sprintmail.com.