The news that Prudential’s much heralded direct banking service, Egg, is to stop taking any new customers unless they apply through the Internet is an object lesson in the value of low transaction costs. Having promised to offer savers 0.5% above base rates, the Pru has realised that it has a huge problem with around £5bn-worth of loss-making deposits. But the Internet has two attractions – it means fewer people can apply; and the cost of processing their account transactions is much, much lower. This principle is already fairly well understood in the business-to-business market, where companies aren’t necessarily forced to offer one-size-fits-all pricing and can load up the costs of distribution, complex manufacturing, or inconvenient inventory holding for individual customers. That way margins can be controlled, unlike in consumer-facing situations where an increase in the transaction costs of individual sales has to be swallowed by the retailer. But now that technology – and in particular, the Internet and enterprise resource planning – is offering the chance to reduce transaction and logistics costs throughout the supply chain, the question is whether companies will be willing to trade with businesses that, through their slow adoption of streamlined planning, manufacturing and distribution systems, are keeping costs throughout the chain artificially high. As usual with this type of technology-enabled process change, the computer industry has been the first to realise the big benefits. In part this is because so many elements within the supply chain of the sector are highly computerised. But continual downward pressure on prices, fast-changing product lines and the fact that the IT industry is relatively new have all hastened adoption. Andrew Berger, partner at Andersen Consulting, calls this the eSynchronised supply chain. All the elements within the chain are electronically linked together so that any change – an increase in raw material costs, a customer placing an order, low parts levels on a factory floor – will ripple through the entire process, allowing all the participants to alter their behaviour accordingly. Cisco is frequently cited as the best role model for the eSynchronised supply chain. For a start, its tech-savvy customer base enables it to make a majority of its sales over the Internet. But within the supply chain, Cisco has also managed to find huge cost savings by applying Internet technologies. For example, although the company is classed as a manufacturer of networking products, it doesn’t even touch 40% of the units it sells, preferring to arrange, electronically, for the goods to go direct from the OEM to the end-user. So a partner wanting to manufacture for Cisco has to consider its ability to fit in with this cost model. If it does not have the capability to cope with this streamlined supply chain, the cost to Cisco of handling distribution, inventory, repackaging, orders and invoices would directly hit its margins. And that would make the supplier deeply unattractive to the company. This process also works the other way. Following the Cisco example, supplier companies can get into the Cisco system and see what orders are coming through. From this data they can then plan their manufacturing and inventory levels appropriately, which also helps them to drive cost out of the supply chain. Allowing partner companies to see your sales forecasts – indeed, developing systems to make these forecasts in the first place – becomes not just sensible, but compelling. And many software companies – like i2 Technologies – now provide planning and forecasting tools to make this information fresher and more available. For a more radical case, Berger cites Dell Computers, where inventory turns were shifted up, in one year, from 28 to 56 – allowing the company to carry almost no finished stock at all. Allied with the success of its e-commerce activities, this also means that when a customer orders a PC, it is made to order straight away (the order effectively appears on the factory’s system at the moment the “send” button on the Web site is clicked by the customer), increasing satisfaction and perceived value at the user’s end. “Dell spotted that rivals had no interest in developing new channel models,” notes Berger. But now Compaq, in particular, has had to reassess its model in light of Dell’s startling success at driving cost out of its processes. “Developing supply chain synchronisation is urgent because of first-mover advantages, where key players will establish positions that will be hard to attack,” he stresses. “And as most ventures in this area will be collaborative, slower companies will find that the best players will already be tied up. “In recent years we have seen increasing evidence of the ‘best’ companies in individual industries breaking away from the rest,” continues Berger. “Now we are starting to see a new phase of ‘the best working with the best’ to synchronise their demand and supply chains and to build value chain networks of companies that offer unbeatable value propositions to their most valuable customers.” From a technological standpoint, this means companies should be looking at the way they structure their data to enable partners within their supply chain to see what is happening. “You need everyone speaking the same language. That means data integrity – you want everything as clean as possible,” explains Berger. Clean, visible and properly-structured data and systems will also allow companies to take small, low risks steps towards eSynchronisation. “If you have the backbone in place, if you have data integrity, then you can afford to do a little experimentation. It may be that you want to roll these sort of developments out piecemeal anyway. If you can keep that experimentation within the Web protocols and standards, a lot of it is plug-and-play in any case.” Thanks to the common standards that it uses, the Internet has an important role to play in all this. “The reason that the Web-based world is unique in terms of the sharing of information and processes, is because the people who were the culture behind it – the academic community – put way more value on the ability to share information than the traditional IT companies, which put more emphasis on closing out the competition,” explains Berger. So while proprietary systems may still be on offer from these IT companies, there is now increasing pressure to make them have “open” data sets to encourage this level of interoperability. For a while, there will be huge competitive advantages in being part of such eSynchronised chains. But as time passes, and the best companies develop supply chains that neither want nor can sustain relationships with un-synchronised partners, the real opportunity will lie in not being left behind. As Berger says, “The big challenge for less well prepared multinationals will be to drive up levels of awareness and act fast enough to be credible value chain partners in a world of eSynchronised supply chains.” The first companies that need to adopt capacity for this higher level of integration are those that are already in a position to exploit global economies and partnerships. “The level of threat will vary by industry and size of company, but big companies will probably have about six to nine months to get involved,” Berger reckons. The benefits of synchronised supply chains are certainly already evident, and the markets and customers have been quick to ascribe value to companies performing in the “best” category. “What we’re seeing is the beginning of an extraordinary phase in business,” says Berger. “It’s easy to be cynical about this and say it’ll never happen. But when an $8bn-sales company like Cisco is valued in the market at double the size of General Motors, despite the fact that it has only a small proportion of its sales, you have to say that this evolution is already happening.” As the adoption of the technology to enable these streamlined supply chains grows, the ways companies can alter their processes will also change. “It all depends on getting your supply chain configured so it makes sense for the products and services you’re offering, but also to secure the customer relationship,” Berger points out. “If you’re stuck in a model of the world where what you make is what you sell, that is going to make it very difficult to operate in a world where increasingly what you sell is what your customer wants.” From this point of view, for example, it’s obvious that Dell, which is able to react to customer demand more quickly than Compaq, will end up retaining more customers. Obviously FDs have an enormous interest in driving out cost, consolidating the strategic position of businesses and minimising risks. But there are other, even more direct, impacts of eSynchronisation on the operation of the finance function. “The FD becomes locked into complex decision making and must understand the financial implications of partnerships, the faster execution of deals and the concept of ‘lights out’ financial accounting,” says Berger. “That means getting everyone in the organisation to think about financial data in the same way a bank thinks about money transactions – as a closed loop system where all errors are evil, and there’s a real transparency of information.” This is essential because with the speed and efficiency of eSynchronised companies, mistakes and delays have a huge knock-on effect. “You must cut out a lot of the checks and error handling that finance spends a lot of its time doing,” urges Berger. “If people are to operate in a lean way, they must ask how many processes they can take out in terms of audits and checks. Do you end up in a world where electronic audits are more the norm?” As we have seen, experimentation is important. And in order to gain the experience of operating using Web-based supplier relationships, companies need to be seeking out initial low-cost projects. Berger is convinced that even if true eSynchronisation across industries doesn’t happen straight away, it is only a matter of time before it does. “Sure, you can hang on to the past. And it took a long time for the UK car industry to kill itself off. But that doesn’t mean it was doing the right thing,” he says. “So you can either think about the future as being one of the ‘best’ companies, and being linked in with this kind of world and spending the next few years learning how to operate and experimenting and getting better. Or you can ignore it, and the death may be rapid or lingering. But it will still signal the end for businesses that are behind the times.” The seven pillars of eSynchronisation Andersen Consulting’s Andrew Berger has identified seven business trends driving companies towards an eSynchronised future for supply chains: – Globalisation – Your supply chain is no longer bound by geography. Indeed, technology can make the location of suppliers and markets immaterial, and the need to find economies of scale and cheaper products will drive further development in the electronic supply chain across regions and industries. – Industry and product convergence – Mega-mergers and the use by companies of customer relationships to move into fresh sectors (like retailers into banking) is changing the way businesses view competition and the need for co-operation. This will further drive the hunt for higher value chain initiatives. – Increasing sophistication in the supply chain – Companies realise that shareholder value can be derived from greater integration in their supply chains, driving out cost and improving customer satisfaction. And as national and industry boundaries are blurred, the minimum level for effective scales in the supply chain is growing. – Greater information integration – As more companies adopt increasingly standardised ERP solutions and specific supply-chain software, they become able to plug in new elements of the supply chain (including e-commerce enabled consumers) with minimum fuss and maximum speed. – Rise of business-to-business e-commerce – The Internet already carries $20bn-worth of business-to-business transactions. Some estimates place the value of this market at $1trillion by 2002. Companies prepared for an eSynchronised supply chain will be best placed to handle further explosive growth in this activity and integrate it with their own systems to generate greater savings. – Rise in value chain networks – More and more companies – even those that compete with each other – are entering partnerships to maximise their total returns and exploit new markets more quickly. eSynchronised companies offer a more attractive partner opportunity than those where relationships require greater manpower and development of bespoke technologies to run effectively. – New types of employee incentives – Cutting edge companies encourage employees to satisfy their customer’s needs through collaboration, both internally and externally. By rewarding employees for focusing the best resources available around the customer opportunity, companies quick to adopt flexible systems will keep the best people and the best customers.
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