THE McKI NSEY QUARTERLY 2001 NUMBER 2: ON- LI NE TACTI CS 22
Getting smart about supply
chain management B2B exchanges cant improve the efficiency of every element of the supply chain. An improved information ow is what they really have to offer. Mani K. Agrawal and Minsok H. Pak Some investors continue to believe that on-line business-to-business (B2B) exchanges could improve supply chain management dramatically despite the punishment they took in nancial markets last year. Many com- panies are still eager to jump in: during the year 2000, the total investment in B2B infrastructure exceeded $200 billionan estimated $10 billion of it for public consortia-backed e-marketplaces alone. Still, the nancial markets appear to have caught on to something that experienced supply- chain-management practitioners have suspected for a while. Although B2B exchanges (otherwise known as e-marketplaces) can help companies realize certain purchasing and transaction-processing benets in the short term, broader improvementsparticularly reductions in inventory, improved ser- vice levels, faster time to marketare harder to achieve. The promise of real benets rests on the potential for seamlessly integrating data ows and work processes across entire enterprises and even industries. To realize this opportunity, the power of B2B exchanges would have to be combined with the enterprise-resource-planning and decision support sys- tems that many companies have adopted in recent years. But this kind of integration is hard to pull off, and for industries with complex, segmented supply chains, it is simply inappropriate. True improvement will emerge only from the understanding that exchanges cant affect every element of the supply chain equally. The primary benets will come from their ability to speed up the ow of information and to make it available more widelywhich alone can produce gains large enough to justify the big investments that unshaken believers in the future of B2B exchanges continue to make. Elusive benets Products reach customers through a chain of retailers, distributors, whole- salers, manufacturers, and component suppliers. Supply chain management is intended to accelerate the ow of goods, information, and capital in both (022-025)EcomB2B_supply chain 4/12/01 11:00 AM Page 22 directions, along the chains entire length, and to help companies monitor that ow. Because the costs of managing the supply chaininventory, the warehouse and distribution center, and freightcan represent 10 to 15 per- cent of sales in most industries, the savings that B2B exchanges promise could have a genuine impact. Indeed, programs to improve supply chains might raise margins by 1 to 2 percent of sales and improve customer service dramatically. Yet most exchanges havent delivered these benets. First, an exchange cant wring huge efficiencies out of all elements of the supply chain; in fact, it can have no impact at all on some of them, such as the physical ow of goods. An electronics manufacturer in California, for example, must maintain sur- plus inventory because otherwise the company wouldnt be able to fulll unanticipated orders until the components for them arrived; those from Taiwan, for instance, may take several weeks to cross the Pacic and clear customs. At best, the improved information ow or collaboration that an exchange offers may eliminate the three to ve days ordinarily spent plan- ning, negotiating, and documenting transactions. The second reason for the failure of B2B exchanges to function as promised is that they themselves have perpetuated certain inefficiencies by failing to recognize that the same supply chain segment in different industries, and different supply chains (or segments thereof) in the same industry, may require different improvement levers. In mens apparel, for instance, a retailer could have a number of supply chains. One might replenish perennials such as undershirts, white dress shirts, and size-40 regular navy blazers, while a second might stock fashion items, for which demand varies according to the season, the effectiveness of efforts to promote them, and their inherent appeal. A grocery retailer, meanwhile, must manage the ow of perishable produce (such as lettuce and apples), for which demand tends to be fairly predictable, and of nonperishable products (such as soft drinks), for which it can be inuenced by heavy promotion. Instead of developing services based on different segments of the supply chain, retail B2B exchanges have so far tried to serve all of these needs at once. Third, many companies that own information think it gives them a crucial competitive advantage and therefore fear sharing it freely, though companies up and down the supply chain would benet if they did. Companies know that their business processes and decision support systems have a direct impact on their costs and revenue. The level of mutual cooperation and trust that participants in a B2B exchange must have before aggregating their pur- chases of, say, copy paper is trivial compared with what would be needed to get them to share informationfor example, about forecasts, product life cycles, and bills of material. The idea of conding nancial data to an 23 I S T HE T HI RD T I ME T HE CHA RM F OR B2 B? (022-025)EcomB2B_supply chain 4/12/01 11:00 AM Page 23 exchange generates even greater skepticism. Precisely because Dell Computer and Wal-Mart, for example, derive a competitive advantage from their exclu- sive collaborations and from the proprietary sharing of information with their suppliers, they have avoided public B2B marketplaces and exchanges. Moreover, the tools and techniques needed to optimize and integrate nan- cial ows are just coming into broad use. Even if it were possible to allay basic fears about the sharing of information, thorny challenges for B2B exchanges would remain: providing security, imposing formats for conveying information, and ensuring that members share information fairly. Dening the real opportunity To date, e-marketplaces have focused mainly on procurementand dealt with it reasonably well. But they have encountered problems in seeking to streamline tasks (such as production planning, inventory control, and scheduling) that lie closer to the heart of supply chain management. To devise solutions, it will be neces- sary to analyze what exchanges can and cant do. They will never reduce the time it takes to deliver goods physically, for example. But since the infor- mation ow in supply chains is typically linear, fragmented, and inaccurate, they can make a vast difference in this area. Retailers, distributors, wholesalers, manufacturers, and suppliers all partici- pate in a typical supply chain. But only two adjacent playersthe buyer and the sellerusually share information at each stage, and the nature and amount of what they share depends on the quality of their relationship. After all, this kind of information mostly concerns the actual transaction between them; they rarely communicate their general understanding of market trends or changes within the industry. As a result, the information that each participant uses to make its decisions doesnt reect conditions in the industry as a whole, and perspectives diverge. When forecasts of demand, for instance, arent reliable, companies must act defensively by accumulating excessive inventory, and they must also pay overtime and incur the expense of expedited service when an unexpected order arrives. If they cant make last-minute adjustments, they lose sales. The successful B2B exchanges of the future will replace this linear, bilateral structure with one organized as a hub and spokethe exchange at the center of the information ow and the individual trading partners arrayed THE McKI NSEY QUARTERLY 2001 NUMBER 2: ON- LI NE TACTI CS 24 Usually, information is shared only by two players, buyer and seller, at each stage of the supply chain (022-025)EcomB2B_supply chain 4/12/01 11:00 AM Page 24 along the circumference. Successful exchanges will also be tailored to coher- ent segments of the supply chain. When exchanges have established transac- tion standards and common platforms, the hubs will be able to gather information spanning all levels of the chain. The dispersal of this informa- tion by hubs will increase the speed with which it is shared, its accuracy and quantity, and the transparency of the whole chain. As the lead times and search costs of early adopters shrink and forecasts become more dependable, companies will be increasingly prepared to surrender their closely guarded secrets to the exchanges. If an improved information ow is what B2B exchanges really have to offer companies that want to sharpen their management of the supply chain, two questions should determine where they put their greatest effort and invest- ment. First, what are the characteristics of the different supply chains in which companies participate? Second, what parts of the chain are most affected by better information in the short and long term, and what parts are most relevant for long-term improvement? Before a company allows its fear of being left behind to push it into investing in and joining a public exchange, it should determine if the supply chain ser- vices offered by the exchange comport well with its supply chain segments. It is understandable that companies want to cut their inventories by improv- ing forecasts, for example, but no statistical model can predict the day-to-day demand for a product with a three-month life cycle and thus what levels of safety stock to maintain. In industries such as fashion apparel or personal computers, shorter lead times and response cycles are therefore more likely to generate real improvements in the supply chain. Companies should decide which elements of the chain could produce the greatest efficiencies and then choose the exchange most likely to promote them. Identifying ways to capture true supply chain benets from exchanges thus comes down to basic supply chain management. Companies shouldnt let the hype and excitement of the exchange phenomenon make them neglect their off-line supply chain operationsfrom demand-planning algorithms to logistics management. If they focus their attention on these basics, the bene- ts will surely follow. Mani Agrawal is a consultant in McKinseys Chicago office, and Minsok Pak is a principal in the Dallas office. 25 I S T HE T HI RD T I ME T HE CHA RM F OR B2 B? (022-025)EcomB2B_supply chain 4/12/01 11:00 AM Page 25