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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
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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
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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
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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.
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