Monthly Archives: August 2008

Supply Chain IT Can Make A Competitive Difference

Since the mid-1990s, a new competitive dynamic has emerged — greater gaps between the leaders and laggards in an industry, more concentrated and winner-take-all markets, and more churn among rivals in a sector. Strikingly, this pattern closely matches the turbulent “creative destruction” mode of capitalism that was first predicted over 60 years ago by economist Joseph Schumpeter. This accelerated competition has coincided with a sharp increase in the quantity and quality of IT investments, as more organizations have moved to bolster (or altogether replace) their existing operating models using the internet and enterprise software.

In addition, the internet andenterprise IT are now accelerating competition within traditional industries in the broader U.S. economy. Why? Not because more products arebecoming digital but because more processes are: Just as a digital photo or a web-search algorithm can be endlessly replicated quickly and accuratelyby copying the underlying bits, a company’s unique business processes can now be propagated with much higher fidelity across the organization byembedding it in enterprise information technology. As a result, an innovator with a better way of doing things can scale up with unprecedented speed to dominate an industry. In response, a rival can roll out further process innovations throughout its product lines and geographic markets to recapture market share. Winners can win big and fast, but not necessarily for very long. Thus conclude Andrew McAfee and Erik Brynjolfsson in their feature article in the Harvard Business Review on how Investing in IT That Makes a Competitive Difference can intensify competitiveness.

The article described a number of findings from research conducted by the authors along with Michael Sorell and Feng Zhu on the link between IT and competitiveness, and some of the findings were surprising. Not surprising was the fact that the average turbulence has been sharply increasing across numerous industries since the mid-1990’s or that industry concentration began increasing again around the same time. What was surprising was that the researchers also considered the role of M&A activity, globalization, and R&D spending in their analysis of the competitive landscape and, although they found some minor correlations, none came close to the impact of IT.

So, why the correlation between increased IT investment and competitiveness? The researchers posit that it was not the breadth of IT innovation that led to the improvement but because some of these newtechnologies enabled improvements to companies’ operating models and then made it possible to replicate those improvements much more widely. How does this happen? Consider the example given by the authors:

Imagine that a drugstore chain … has a number of rivals, most of which also have multiple stores. Before the advent of enterprise IT, a successful innovation by a manager at one store could lead to dominance in that manager’s local market. But because no firm had a monopoly on good managers, other firms might win the competitive battle in other local markets, reflecting the relative talent at these other locations. Sharing and replication of innovations (via analog technologies like corporate memos, procedures manuals, and training sessions) would be relatively slow and imperfect, and overall market share would change little from year to year.

With the advent of enterprise IT, however, not just [one drugstore chain], but its competitors [also] have the option to deploy technology to improve their processes. Some may not exercise this option because they don’t believe in the power of IT. Others will try and fail. Some will succeed, and effective innovations will spread rapidly. The firm with the best processes will win in most or all markets. At the same time, competitors will be able to strike back much more quickly: Instead of simply copying the first mover, they will introduce further IT-based innovations, perhaps instituting digitally mediated outsourcing or CRM software that identifies cross- and up-selling opportunities. These innovations will also propagate widely, rapidly, and accurately because they are embedded in the IT system. Success will prompt these companies to make bolder and more frequent competitive moves, and customers will switch from one company to another in response to them.

As a result, performance spread will rise, as the most successful IT exploiters pull away from the pack. Concentration will increase, as the losers fall by the wayside. And yet turbulence will actually intensify, as the remaining rivals use successive IT-enabled operating-model changes to leapfrog one another over time. Thus, despite the shakeout, rivalry in the industry will continue to become more fast-paced, intense, and dynamic than it was prior to the advent of enterprise technology.

In other words, technology innovation leads to business innovation, and business innovation gets results. So invest in modern supply chain systems — like sourcing, procurement, and global trade — and watch your competitiveness rise.

Introducing B2B 3.0 and Simplicity for All

Sourcing Innovation is proud to announce the release of the first white paper in a 5-part series about B2B 3.0 — the next generation of technology for the enterprise and the first generation of technology that actually puts business users on the same footing as consumers, who have had “3.0” technologies at their fingertips for years.

This very special Illumination series is going to describe the B2B 3.0 revolution and the benefits it delivers to today’s enterprise. Considering that B2B 3.0 is the first technology to enable true commerce in the global marketplace, the doctor‘s goal with this series is to open your mind as to what B2B 3.0 is all about (hint: it’s not “Web 2.0” and all the useless hullabaloo that accompanies it) and how B2B 3.0 technologies can help you save time, save money, and increase productivity and innovation in your enterprise.

But first, it’s going to tell the tale of how we got to where we are today, which starts with B2C 1.0 in the early nineties, following the introduction of the Netscape Web Browser soon after Tim Berners-Lee released his new standard for open document sharing on the internet – HTML (Hyper Text Markup Language) 1.0. Once Netscape made the web accessible to all, enterprising entrepreneurs saw the potential of the Internet to grow new and existing businesses, and B2C e-Commerce 1.0 was born. This led to the introduction of B2B 1.0 which allowed business to use the public Internet to conduct e-Commerce, instead of EDI (Electronic Data Interchange) over private networks which were extremely costly to maintain and limited to only the largest suppliers in a buyer’s supply base.

Technology improved, online security tightened, and online storefronts moved from the static order forms of B2C 1.0 to the dynamic order forms of B2C 2.0. Online e-Commerce thrived and online retail became a trillion dollar industry. And businesses saw the potential to move beyond the transaction and take advantage of basic services such as catalog management, request for bid, reverse auctions, and supplier directories. This was significantly better than B2B 1.0, but it had its drawbacks, since the space was dominated by marketplaces and private supplier networks that restricted a buyer to those suppliers who could afford to be part of the community (as there were significant membership fees, and no supplier could afford to be part of all the marketplaces). Furthermore, content staled quickly as suppliers had to maintain different versions of their catalog for each network they belonged to, and each buyer they did business with.

A revolution was needed. So thought leaders again looked to the consumer space and B2C 3.0 which was taking advantage of integrated search across sites and document formats, mash-ups, web services, networks, and other services that significantly enhanced e-Commerce for the average consumer. As a result, visionary software and service providers in the B2B space started building their own web-services, intelligent agents, forums, knowledge-networks, mash-ups, and meta-search technologies. Now, business buyers can search across “catalogues” and “punch-outs” just as easily as a consumer can use Google Product Search (formerly Froogle), normalize data from hundreds of file-formats into a single common meta format to allow for intra-and-inter-enteprise collaboration in design-for-sourcing, and access third party services during the negotiation of a transaction.

And it’s just the beginning. So check out the Illumination that is Introducing B2B 3.0 And Simplicity for All and find out not only what B2B 3.0 is all about, but how we got here, and why we need it. Simply put, it is the first technology to enable true B2B e-Commerce — consisting of simple, fast, low-cost transactions at true market prices — and the technology that will run tomorrow’s businesses.

The Return of U.S. Manufacturing?

In my recent piece on Is Your Supply Chain Reversible, I noted that the US is now a low cost country source for (Western) Europe and that those manufacturers ready to take advantage of the situation are going to lead the turnaround in US manufacturing. Shortly after, I found an article in Industry Week that wanted to welcome back US manufacturing on the basis that high fuel and energy prices along with rising labor costs in traditionally low-wage markets have some manufacturers rethinking how far they are willing to extend their supply chains. This article caught my attention as it pointed out that some mid-size companies are already bringing manufacturing back home, as they are unable to control shipping costs that are spiraling out of control.

The article mentions Desa LLC, a manufacturer of residential heaters based in Bowling Green, KY, as a case in point. Despite the low production costs in China, the high shipping costs, combined with the recent VAT reductions in China, give local manufacturing a lower TCO. Then there’s the relative price increases in some raw materials in China compared to the US, the falling dollar, and across-the-board energy costs. When everything is put together, the perceived advantages of China-based manufacturing for many (large, bulky) products disappear.

Of course, as the article notes, not all manufacturers are going to return to the US, since labor costs are higher than in other countries, but, as the article notes, many are likely to return to the continent and “near-shore” to Mexico (and, if the dollar rebounds, to Canada for complex products and services). But many are considering the US. A recent AMR survey of manufacturing executives found that 21% are planning to increase US-based manufacturing over the next year and Caterpillar Inc., for example, is investing 1 Billion in a multi-year capacity expansion plan for five Illinois plants.

But when you consider that the smart US manufacturers, like CEI who recently invested in an robotic palletizing system that automated a formerly manual stacking procedure, are investing in better technology that makes production more cost efficient, it’s going to make more and more sense for many manufacturers to return home. After all, it’s all about competitiveness, and those companies who invest money into new equipment, processes, and innovation are always going to have an edge. And considering that the US has been the center-point for innovation over the last few decades, there’s no reason that US manufacturers can’t bring jobs back if they put a bit of effort and investment into it.

A State Gets Smart

Today’s guest post is from Mark Usher of Treya Partners and originally appeared on the 1 Procurement Place blog on July 31, 2008. It is reprinted with kind permission.

Those of you who follow the public sector space may know that the State of Georgia recently selected SciQuest’s e-procurement tool. State agency employees in Georgia who need to buy anything from pens to asphalt will shop in SciQuest’s web-hosted electronic catalogs which will be populated with pre-priced goods and services from the State’s existing supplier agreements. This decision by the State of Georgia is notable for two reasons – (i) it is another example of an organization electing to carry out its purchasing transactions in a best-of-breed e-procurement tool as opposed to the purchasing module its existing ERP system (numerous Fortune 500 companies have gone the EP route following sunk ERP investments and the State of Georgia already has PeopleSoft) and (ii) it is also an example of another state government that is moving ahead strongly with a strategic procurement initiative (other states moving to transform their procurement function include Virginia and Indiana to name just two).

The shunning of ERP’s historically much-maligned inbuilt purchasing functionality in favor of e-procurement is a trend that I would expect to continue both in the private and public sectors. Not so much due to application functionality (a gap that that I would say doesn’t really exist anymore since the ERP vendors have refined the workflow in their own e-procurement modules) but due to the fundamentally different way that the best-in-breed providers and ERP vendors handle catalog content. All of the e-procurement providers utilize web-hosted catalogs pre-populated with many of the vendors and products that most buying organization will need (and with the capability to have the organization’s specific contract pricing built in). And if a customer has vendors that are not already in the pre-populated catalog it is a simple task for the e-procurement provider to request product and pricing from those vendors and load them into their web catalog. With an ERP provider’s e-procurement solution, however, you are most likely going to have to build your catalogs behind your firewall, involving considerably much more time and expense. And now that the best-in-breed e-procurement providers all integrate so perfectly with ERP (e.g. with accounts payable to enable payment reconciliation), why would you ever go the ERP purchasing route? I wouldn’t.

As regards Georgia’s general procurement transformation initiative, expect to see a lot more of this from state governments in the next 2-5 years. State governments have long presented a massive challenge for creating value from procurement due to their extreme decentralization. Often hundreds of state agencies within a state making their own procurement decisions and developing their own price agreements with suppliers. To complicate matters even more, agencies usually have their own financial and purchasing systems meaning there is no centralized store of data from which to build a consolidated picture of total state spend by category, supplier and agency – key information for identifying and developing aggressively discounted price agreements with suppliers. Rounding out the challenges for states in the this area are a lack of a strong mission/vision/strategy for a center-led approach to procurement and a shortage of strategic sourcing skills among current state procurement staff.

As regards my state procurement crystal ball I would expect to see (or would HOPE to see) state governments address the following five areas:

  • Develop and broadly communicate a center-led strategy for procurement in the state with the centerpiece being a strategically focused, “center of excellence”-based central procurement group
  • Conducting a best practice spend analysis to develop a consolidated cross-state picture of spend by agency, supplier and agency
  • Based on the spend analysis, develop and implement a sourcing roadmap with the objective of maximizing the amount of state spend under cross-agency (“state-wide”) leveraged price agreements
  • Upskill the central procurement group with the required training in best practice strategic sourcing methods (or hire where needed)
  • Implement a state e-procurement system with web-hosted electronic catalogs to drive maximum spend through the new price agreements

Thanks Mark!

MFGX.com – Exploding onto the Scene

MFGX.com, the first open global community for manufacturers, which came out of beta three short months ago, is poised to take the manufacturing world by storm. It already has 12 active communities with over 80 discussions, 40 documents, and 30 blog posts — which is quite a lot considering how traditionally silent the manufacturing and procurement communities are with respect to the on-line world.

MFGX.com, which was originally conceived as a companion site to MFG.com, is important because it’s the first offering in the space that’s open to all manufacturers, regardless of the marketplaces they belong to or the products they offer. This allows producers, distributors, and retailers to find the best manufacturer to fill their needs and manufacturers to find the producers, distributors, and retailers that they can have the best relationships with – creating a win-win for everyone.

Furthermore, it’s simple — composed primarily of plain old forums (discussions), wikis (documents), and blogs, it eschews all of the new social networking nonsense that plagues many other sites. Considering that most social networking sites are, at least in the doctor‘s view, a big waste of time, I believe that this is a good thing. The internet is one of the best tools for knowledge sharing that we have, and the best sites are those that promote the sharing of knowledge, not your latest anti-ephiphany. (After all, does it really matter that you think Britney should be boycotting her current fashion line because of sweat-shop utilization? And do you really want the world to know you read BritneyZone daily? [Hat Tip: Google Search] So next time you use Twitter, remember the definition of the word.)

However, the real beauty of the concept, is the fact that it serves as the foundation for Open Source Manufacturing, which, as Jason Busch also points out over on Spend Matters, is quite cool and forward looking. After all, some of the best innovations in IT have come from open source, and some of the best successes in R&D have come from open innovation networks like NineSigma, InnoCentive, and YourEncore, and crowd-sourcing has been used to successfully streamline process. Just think what open source could do for manufacturing. It could improve processes and products. Even more importantly, it could open manufacturing design up so that, if you’re an engineer, inventor, or just a tinkerer, you could build your own products and not have to worry about a manufacturer going out of business if there’s a product you really want to keep using. For example, imagine an open source car that anyone could build parts for and that anyone could maintain. You wouldn’t have to worry about manufacturer bankruptcies, or, better yet, unnecessarily high prices or poor quality. And this could be just the beginning.