[From iSource Business, November 2001] How's this for a nightmare: One company with products designed in nearly 20 engineering centers and manufactured in about 81 plants on six continents tries to introduce new, standard supply chain management technology throughout the organization and its key suppliers. That nightmare is an everyday reality for Ed Williams, vice president of supply chain management for $8.4 billion Carrier Corp, the world's largest manufacturer of air conditioning, heating and refrigeration equipment. Four years ago, Williams launched an ambitious effort to install everything from reverse auctions to Web-based office supplies purchasing in the Farmington, Conn., subsidiary of United Technologies Corp. Because that initial implementation has been so successful, the company is looking for new ways to harness enabled technology to weather today's economic downturn.
It's far from being a walk in the park, and Williams sat down with iSource to give a supply chain manager's point of view on how enabled technology is creating some incredible opportunities - and how it is creating some incredible headaches, as well.
iSource: What do you see as the imperative driving enabled technology?
Williams: Every company will tell you that it has difficulty raising prices. In order to maintain profitability, the only other alternative is to reduce cost. In the environment of today, especially, that's the name of the game. And in most companies today, 70 to 80 percent of the cost of production can be found in purchases. As a result, if you don't optimize that area, your costs will creep up and hurt your margins. Enabled technology can help companies remove waste, reduce cost and increase margins.
iSource: What does that mean for suppliers?
Williams: Suppliers have to transform themselves so they can work in this Internet age and communicate appropriately with buyers. For example, they have to have online catalogs. All the suppliers we do business with are in transformation mode.
But what's super critical is that enabled technology has to take cost and waste out of the process; that's true for both indirect and direct buys. The Internet will drive the industry to the most cost-effective suppliers, particularly those selling commodities. The ones that aren't moving quick enough to lower costs will be out of business.
iSource: What about buyers?
Williams: Buyers have to become more like supply managers. The ability to be cross-functional, flexible and lead change are going to be the new things to look for in buyers, as opposed to their negotiation skills.
The whole value chain is affected because expectations throughout the value chain are constantly changing. You think you're moving forward, but everyone's expectations of time and cost are constantly fluctuating. Consumers expect things to be faster and they expect costs to be lower, so companies have to stay on track to keep up with customer expectations.
iSource: So, you find the fast pace of technological change to be particularly challenging?
Williams: The technology is changing - and will always change. And that means making sure you have a good handle on the latest online tools, whether you're talking about everything from reverse auctions to collaborating with suppliers. There's always a different mousetrap out there, and if you get yourself locked into something, you're in trouble. That means developing benchmarks, so you know whether to improve your current processes or look for something new.
iSource: Can you tell us more about those new metrics?
Williams: If you don't measure something, you will have a harder time improving your current processes. For that reason, we have a set of new, key metrics in our company that we've set up over a three-year window. In year one, we might see 20 percent of what we're looking for; year two, 50 to 70 percent; year three, 90 to 100 percent. We're in the 50 to 60 percent-range, as we speak. The beauty of the metrics is that, in a downturn, we can rapidly push the information to suppliers within minutes, as opposed to days.
But the fundamental reason for the metrics is that we're trying to drive change and transformation. The metrics we use would not have been effective two years ago.
iSource: What are some specific measurements?
Williams: Things like how many online sourcing events we are conducting, the amount and percent of savings, and where we are in Web-enabling the supply base. We also look at how much spend is going through a particular supplier. Other measurements include how we're doing with suppliers in terms of new product development, how many suppliers we are collaborating with, and how much spend and savings are coming from low-cost sourcing regions.
iSource: What about the data gathering and studying opportunities?
Williams: The opportunity is huge. What we're doing is linking up with factories' ERP [enterprise resource planning] systems so we can collect information on all the purchases we have. The critical issues are seeing what your spend is with your suppliers and what that looks like year after year. That means knowing - by supplier, by part number how much is purchased. Ultimately, that data can tell you which suppliers are the most cost-effective.
But the more decentralized you are, the more complex it is. In our case, we don't have one Oracle or SAP system to connect to - we have 88 sites. So it's a big job.
iSource: What about the difficulties in getting everyone in the company to accept enabled technology. How should companies handle that problem?
Williams: They have to be much more collaborative in terms of how they get the stake holders involved in this process. When you start telling people, Here's the computer, you have to start doing your ordering over the Internet or purchase your tickets for travel,' it means a transformation of the organization. You can't just turn a light switch on and figure it will happen. The organization has to be prepared for that.
Getting the support of all the people affected by the change requires training, and you have to provide training for a large number of people. That requires thinking about how to package the message, representing the business case and showcasing what's in it for them. Take business travel, for example. We showed people the extra benefits of buying online, such as how many more cost-effective options they could find.
But you also need results. With some early successes, you can show people that a new system works and the quicker everyone gets on the boat, the better off we'll all be.
iSource: Tell us more about how enabled technology has affected your company?
Williams: The Web has had a major impact on our business, changing how we work inside our supply chain management and in the value we get from what we do. One example is how we work in indirect spend, how we buy things like office supplies. We now have a system where we essentially send a requisition from our desktop directly to suppliers on 60 percent of our purchases. It's all enabled by a Web browser that connects to the supplier and it is where all order fulfillment is done. And at the end of the day, we know what all of our people have bought.
We introduced that three years ago. Since then, we've re-engineered many jobs, as a result. People who were placing orders are now doing strategic sourcing. And individuals are empowered to purchase their own stuff in a controlled environment.
iSource: What about direct goods?
Williams: On the direct side, we've done a lot with reverse auctions. We've run maybe 1,000 online auctions here with nearly a billion dollars of spend through that process. We're buying from suppliers in China, Central Europe and Mexico.
It's a much cleaner process. We get much better pricing now than via traditional negotiations, and we can make the award quicker and get savings quicker. It's really enabled us to continue on the path of year-round cost reduction.
iSource: You're also a supplier. What's happened in that part of the business?
Williams: Our customers want to place orders with us and have a quicker delivery time. We're looking at how to drive the technology so we can have the order filled when customers want to have it filled. So the whole fulfillment process now focuses on how to optimize the distribution process and how to manage our logistics providers so we can have real-time data that tells us two things: when an order is filled and when the customer wants it.
iSource: How has the state of the economy affected the supply chain?
Williams: A year ago we were chasing shortages in various components. It was a seller's market. Now it's a buyer's market, and we have to capitalize on that by going back to suppliers and asking them to be more efficient, helping us further reduce cost. We have an initiative now, Supplier Day, during which we're bringing in 10 to 15 suppliers, showing them the current state of Carrier, and asking them to share how they're going to help us through this economic downturn.
iSource: How are suppliers reacting to all these changes?
Williams: A lot of suppliers aren't thrilled. We aren't thrilled to be placed in an auction either, because these reverse auctions are deadly for the incumbent suppliers. We've seen prices tumble 20 percent and we know that's because the incumbent has dropped its prices. Of course, that means the prices had a tremendous amount of waste before.
The challenge for suppliers is to rethink the services they provide and their core competencies. The ones that can come up with a compelling case are the ones that will survive.
iSource: Aren't there risks to supplier collaboration?
Williams: In the HVAC industry there are a handful of providers. It's a tight-knit industry. The risk is that our competitors will get benefits from the work we're doing. Our hope is that the flip side - some of our competitors, hopefully, - are doing this and we're getting benefits from their efforts.
The question is, how do we get our competitive advantage and keep it to ourselves? As we take costs out of our supply chain and leverage the best tactics, initiatives like low-cost sourcing and reverse auctions have a way of migrating through the firewall to competitors via suppliers. The challenge is to keep the ball moving fast enough so the competition can't keep up.
iSource: How do you see enabled technology in the supply chain evolving?
Williams: I think the role of the supply chain will evolve to the point where people throughout the organization have the data they need to make intelligent choices for sourcing, to truly optimize the value chain so they can find the lowest cost service or product. Everything in the process will be transparent to everyone in the company and the supply base. The work force will also evolve to the point where they're comfortable with the technology, and they are able to apply and accept it.
iSource: But companies still have a lot of work to get to that point?
Williams: The plate is definitely full. You have to stay ahead of the technology and the competition. And you have to figure out a faster way to drive cost reduction and productivity across the business and inside the corporation. If you don't, then margins will shrink.
Ultimately, it's all about information. How we manage that information, how we get our competitive advantage from it, and how we communicate that over the Internet - those will be the keys to success. Companies will need to integrate all this stuff both inside the company and with critical suppliers. That's where the home run will lay.