[From iSource Business, October 2001] The cover story of iSource Business this month examines the future of the supply chain and proposes a series of steps that companies can take to advance toward their own next-generation supply chain. In this month's The Net Best Thing, we offer profiles from companies on three continents that already have begun adopting enabling technologies to improve the efficiency and value-add of their supply chains. In each case, the company found a personal Net Best solution, a unique combination of software and process that best addressed that enterprise's supply chain challenges.
Let's start our voyage of international discovery in the North Central United States, near Detroit, where The Budd Co. sees its supply chain future in electronic sourcing.
First Stop: MotorCity e-Sourcing
Chris Flum is certain that The Budd Co. will never do 100 percent of its purchasing online. Flum should know, since he is corporate manager of strategic sourcing, as well as e-business team leader for procurement and supply chain, at the Troy, Mich.-based Budd, a tier-one automotive supplier that is a unit of $6 billion German industrial group ThyssenKrupp Automotive. The utopia where everything is bought online won't happen because we won't be buying everything, he explains. Automatic replenishment will cover some items through electronic data interchange (EDI) notifications to Budd's suppliers under vendor-managed inventory (VMI) programs, for example.
EDI notwithstanding, Budd, which manufactures parts found on approximately 100 different vehicle models, has undertaken to define and execute an e-business strategy for its supply chain. In mid-2000, Budd worked with a consulting firm to develop seven broad goals for the company's strategy (see The Budd Company's Seven e-Business Strategy Goals on this page), as well as five high-level strategies that include e-procurement, participation in B2B exchanges and supplier-facing B2B initiatives. By July 2001, Flum says Budd had touched 80 percent of the 24 subinitiatives the company defined to support its strategy, piloting projects addressing such areas as the procurement of indirect maintenance, repair and operation (MRO) goods through an e-marketplace, the use of online competitive bids to buy direct materials, and communications with smaller suppliers through Web-EDI connections.
Among the initiatives, Flum likes to focus on e-sourcing, which he views as the key to achieving the reduced costs and cycle-times required to remain competitive in the auto industry. For Budd, e-sourcing has meant using FreeMarkets to hold Web-based competitive bids for various materials and services. While Flum declined to quantify the cost savings that have been achieved using FreeMarkets, he noted that the efficiencies of the online sourcing processes allowed Budd's sourcing team to accomplish in four months what previously would have taken two years. Consequently, Budd has moved from a pilot program to a long-term engagement with FreeMarkets.
Flum hastens to add that e-sourcing means more than just online auctions. That online bid is just one part of the process, Flum says. You've still got to manage the supplier. You've still got to work with him to remove costs from the supply chain to give back to the customer. And while much of the hype surrounding online auction events has focused on lower costs, Flum notes that the lowest bidder has not won in about 50 percent of the events Budd has run, and incumbents have been retained 50 percent of the time.
Second Stop: Optimization Without Disintermediation
Half a world away from Michigan, in Johannesburg, South Africa, Paul Deppe is using supply chain optimization as a weapon in a battle for market share.
Deppe is joint managing director of Barloworld Energy, part of Barloworld Group, a $2.7 billion company with about 22,000 employees and operations in more than 90 countries, distributing, among other things, agricultural and construction equipment, materials handling machines and vehicle motors. Barloworld Energy is the exclusive distributor in South Africa for industrial-class engines from UK-based Perkins Engine Co., recently acquired by Caterpillar.
Barloworld Energy got into the Perkins engine parts business three years ago when it bought out another distributor, along with its entire stock. Shortly thereafter, Barloworld formed a joint venture with Boeresake (the local Massey Ferguson distributor) to sell and support Perkins engines at locations throughout the country. Within three months of getting into the partnership, Deppe found that his company's $1.5 million inventory of engine parts essentially had a turnover rate of once a year and its service levels were erratic because of the limited capabilities of the joint venture's inventory system.
To address this problem, in 1999 Barloworld Energy implemented inventory optimization software from Atlanta, Ga.-based Ability. The software allows Barloworld to capture daily sales, stock, order and surplus data from customers, as well as demand histories. Using this software, Deppe's company can determine stock forecast levels at the component level and make better purchasing decisions. As a result, Deppe says Barloworld has reduced its inventory levels by almost half and stabilized service levels at between 94 and 96 percent. Because the inventory system interfaces directly with Boeresake's transactional system, Barloworld Energy has eliminated manual errors and reduced order-processing times from two weeks to one day.
Having ameliorated the inventory situation, Barloworld turned its attention to increasing its market share for Perkins engine parts in South Africa from the current 25 percent level to a target of 50 percent. At a corporate brainstorming session in January 2000, the company set the goal of offering lower prices and better accessibility to its customers. Once again, inventory was key, only this time the solution was distributor-managed inventory (DMI).
Barloworld Energy opted to extend its use of the Ability software to encompass its network of about 50 dealers throughout the country. Rather than the dealers purchasing stock, Barloworld Energy would maintain ownership of the inventory and manage it at the dealers' locations, leaving the dealers to focus on selling and supporting Perkins engines and engine parts. Deppe says Barloworld Energy's modeling indicates this DMI system should reduce costs but increase profits for the dealers, who will now work on commissions. Since Barloworld Energy will manage the inventory throughout the country, the company should be able to shift stock that isn't moving well in one area to another area where it might move better. The company is also working on a system to allow the end customers to order parts from dealers over the Internet.
Looking upstream in Barloworld Energy's supply chain, Deppe says his company may try to move toward a system in which Barloworld Energy would receive parts directly from Perkins' own suppliers. After an order is placed through Perkins, the order and the money would flow through Perkins to the supplier. The part, however, would be shipped directly from the supplier to Barloworld Energy, cutting out inventory and logistics costs. But that idea remains on the drawing board. Everyone agrees it's where we want to go, but there are many steps to take before we get there, Deppe says.
Barloworld Energy's approach to supply chain optimization is notable for its emphasis on avoiding disintermediation, an oft-cited barrier to greater adoption of B2B technologies. We felt that all along the chain, there was some value to be added, Deppe says. Barloworld Energy's value-add was its ability to manage the inventory, while the dealers were best at sales and support in the field.
Last Stop: e-Payments Without Borders
Some 5,400 miles northeast of Johannesburg, in Singapore, Michael Mahon has discovered that, sometimes, if you want your Net Best solution to work just right, you have to build it yourself.
Mahon is general manager for procurement at Caltex Corp., a $20 billion petroleum refining and distribution company headquartered in Singapore. Caltex, a 65-year-old joint venture between Chevron and Texaco, has interests in 11 refineries and 7,800 retail outlets, and it operates about 700 Star Mart convenience store outlets throughout the Asia Pacific region and Africa. The company's area of operations also includes the Middle East, New Zealand and Australia.
Caltex implemented the Ariba Buyer e-procurement platform two years ago to streamline its purchasing, outsourcing hosting and support for the solution to Chicago-based Technology Solutions Co. (TSC). TSC also helped integrate the Ariba system with the regional centers for Caltex's SAP e-business financial backbone in South Africa and Singapore.
But Caltex, which deals with more than 8,000 suppliers in 60 countries, quickly found e-procurement does not begin when the platform implementation ends. It was pretty clear to us from the beginning that in Asia electronic procurement wasn't enough, Mahon says. We've got currency problems and tax problems. We needed a way to make international sourcing easier.
Recognizing that the complexities of coordinating payments among multiple business units and trading partners across international boundaries were holding up the integration of suppliers into the procurement platform and, therefore, the expected return on investment Caltex began to look for an e-payments system to augment its purchasing system. The company surveyed the available solutions but ultimately decided to build its own system.
Caltex organized conferences around Asia to get supplier input on its future e-payments system. The first thing they said was, don't make it [purchasing] card-based, Mahon recalls, explaining that the suppliers, many of whom were small enterprises, didn't want to pay fees on p-card transactions. Supplier feedback in hand, the company assembled a cross-functional team from five of its biggest Asian operations. The team designed the requirements for the e-payments system, and Caltex, after request for information (RFI) and request for proposal (RFP) processes, partnered with JP Morgan Chase to develop the system. Caltex began implementing the system in August, integrating it with its existing Ariba and SAP systems and again outsourcing hosting to TSC.
Using the system, Caltex can initiate payment to those of its suppliers that are enrolled on the Ariba e-procurement platform. The system handles cross-border currency and tax issues, including value-added tax, goods and services tax, withholding tax, and remittance.
Besides these expected results, Mahon cites several additional benefits. For example, because the e-payments system ties into the company's SAP system, detailed transactions flow directly into the financial system. What we found was that we had completely outsourced our payables, Mahon explains.
Another benefit: intercompany billing between different business units. If Caltex in the Philippines wants to make a purchase from a supplier in Malaysia, the supplier may agree to do business with Caltex Philippines, but it may want to get paid by the local Caltex Malaysia company. We do that for some suppliers, but it takes a lot of accountants in the background to handle all the intercompany billing and get the books straight in both [units], Mahon says. With the e-payments system in place, that problem goes away.
Finally, the new system has allowed Caltex, for the first time, to establish different payment terms for each supplier. Before e-payments, Caltex stuck to a net 30 days after goods receipt policy for all suppliers. Some long-time suppliers had much higher cost of capital than the petroleum firm, with much greater working capital exposure, and those suppliers were discounting their receivables for onerous interest rates. With the e-payments system in place, both sides can benefit from early payments: Caltex, because it gets early payment discounts, and the suppliers, because they no longer have to discount those receivables.
Caltex started a five-country pilot in August, and by mid- to late autumn the company expected to open the e-payments system up to its entire supply base, with the goal of bringing the majority of its 8,000 suppliers onboard the e-procurement and e-payments systems within a year. Reaction from suppliers thus far has been so positive that Caltex is examining the possibility of commercializing the e-payments system, perhaps marketing the solution to its suppliers' other customers or more broadly.
What's Your Net Best Thing?
Each company described in this article has taken a different path toward building a next-generation supply chain, illustrating that no cookie- cutter solutions yet exist for making a supply chain more efficient, and that strategic planning remains critical when contemplating any e-business solution. As Barloworld's Deppe says: It's important that people don't create e-business companies for the sake of creating them. If the Internet can provide an expansion to your business process, then look at it. Otherwise, keep looking for your own Net Best Thing.
The Budd Company's Seven e-Business Strategy Goals:
1. Develop a cohesive solution across the company.
2. Lead where it adds advantage.
3. Follow where it saves resources.
4. Look for quick wins.
5. Reduce transaction costs.
6. Increase supply chain efficiency.
7. Complement any ThyssenKrupp Automotive initiative.