THE SUPPLY CHAIN: LEAPFROGGING A FEW LINKS

The Net is rewriting supplier-manufacturer contracts, blurring roles and empowering small fry

BUSINESS AT NET SPEED Click for June 22, 1998 issue




Wander the PC aisles at CompUSA (CPU) and you'll discover something odd. Right next to the latest offerings from IBM (IBM), Compaq (CPQ), and Hewlett-Packard (HP) stands a PC that just says ''CompUSA.'' It wasn't simply purchased from some third-tier manufacturer and relabeled. Carefully aping Compaq and HP, CompUSA oversees parts procurement, assembly, warehousing, and shipping. You don't buy the PC on display. You configure your own at a kiosk in the store--or later, on the Net--and it gets built to order.

Once an ordinary retail outfit, CompUSA has broken out of the box--changing the definition of electronics retailing. And it is in good company. J.C. Penney Co. (JCP) designs and manages a brand of jeans called Arizona. These compete with Levis and other big brands and bring in about $1 billion a year. Federal Express Corp. (FDX), the shipping titan, doesn't just transport products for its large corporate customers. It takes over whole chunks of their distribution--sometimes bumping old-style wholesalers out of the picture. Wal-Mart Stores Inc. (WMT), the ultimate retail channel-master, pushes its suppliers to take over costly warehousing and shipping. To sell at Wal-Mart, SC Johnson Wax must study the giant's weekly sales figures, forecast demand for its shaving gels and air-fresheners, and place them on the shelves. It even manages rival brands in return for special treatment at Wal-Mart.

Topsy-turvy role reversals like these are cropping up all across the America's retail, shipping, and manufacturing supply chains. And the Internet will hasten the changes. ''Who is a materials supplier, a final-product manufacturer, a distributor, a transportation vendor, or a retailer?'' asks James C. Sheperd, vice-president of research at Advanced Manufacturing Research Inc. (AMR) in Boston. ''The roles are getting very blurry.''

Whichever way the big players choose to shake the supply chain, the goals are the same: speed, efficiency, and cost control. To hit their targets, the fleetest companies are relying on powerful software tools that speed up and automate the flow of information. The market for such supply-chain programs, sold by i2 Technologies (ITWO), Manugistics, IMI, and others, was just $2 billion last year. But AMR expects the number to hit nearly $14 billion in 2002.

These software programs sharpen a company's view of parts and products moving through the supply chain so it can better grasp what stocks are available and how demand may be shifting. Texas Instruments Inc. (TXN) pioneered many such programs and uses them to fulfill 60,000 orders a month for 45,000 different types of devices, says Chief Information Officer Pallab Chatterjee. And it pulls that off with 95% on-time delivery.

In a fast-changing market, profits often hang on accurate predictions. A chip company, for example, may prematurely assign all its capacity to the first customer who walks in the door--agreeing to make a high-volume, low-profit chip when there are other customers who would pay a premium for different chips the company makes. ''It's capacity you could have charged more for because it's in short supply,'' says Sanjiv Sidhu, a former TI researcher who founded high-flier i2 Technologies Inc. of Irving, Tex.

ON THE FLY. The Internet didn't trigger the rising velocity and unpredictability in the supply chain. Major retailers and manufacturers have been ordering goods electronically and sharing sales data with product and parts suppliers for decades. But using older techniques such as Electronic Data Interchange (EDI) the dialogue specifying orders and inventory is both limited and slow. For example, a car manufacturer tells a supplier that it needs 60 tires. It gets an answer, which may be yes, no, or some counterproposal. The manufacturer decides, and electronic forms are exchanged. The technology is not ideal for a fast build-to-order production model.

The Internet loosens up the conversation and opens it to more players. Compared to EDI, says Sidhu, ''human collaboration over the Web is extremely rich.'' The manufacturer can broadcast its ever-shifting requirements on a Web page and employ automated programs to interpret the responses from suppliers. This way, it can accurately assess what parts or materials are available across a spectrum of suppliers and at what price. In addition, the Internet makes it easier to enlist new partners, scrutinize their credentials, and pass work along to others.

Rollerblade Inc. can't wait to move its contract manufacturers onto the Net. Today, it routinely labels and prices its cartons of in-line skates for its large customers. And using EDI, it electronically notifies them about what's coming and when. This is a burden the Eden Prairie (Minn.) skatemaker could live without. ''I see us pushing all that responsibility up the supply chain, making our subcontractors do it,'' says Alan L. Sussman, vice-president for information technology. Sussman can't force Rollerblade's partners to join a costly EDI network--and he doesn't have to. ''The Internet will make this absolutely painless.''

HARD DECISIONS. Supply-chain tools also spell massive efficiency gains. Thomson Consumer Electronics--maker of RCA brand TVs and VCRs--is customizing Web pages for retailers so they can feed Thomson demand data in a flash. ''We'll do this across every product line,'' says Monte Chamberlin, Thomson's general manager for supply-chain strategy. He anticipates an accumulated savings of $25 million to $50 million over the next 18 months.

Carried to its logical extreme, however, software that forecasts and mediates supply and demand could wreak havoc on traditional supply- chain relationships. FastParts Inc. already lets electronics companies buy and sell large lots of excess inventory in online auctions, eliminating the need for traditional parts brokers. Expect more of that, says Robert Hutchinson, top supply-chain maven at KPMG Consulting. Some retailers, he says, are now pitting shipping companies against each other in auction-style bids. ''They'll describe how many loads they have going out, along with the weight, the volume, and the destination,'' he says. ''Carriers are monitoring that and bidding in real time.''

As the supply-chain revolution rages, companies will be confronted with some nail-biting choices. Where in the supply chain do you really belong? If you move too abruptly in some new direction, what becomes of your partners? Making such decisions without the latest tools will be tough. ''Good manufacturers are trying to take time out of the chain,'' says Donald F. Scaccia, J.C. Penney's vice-president in charge of corporate brands like Arizona Jeans. ''The best are set up with all the right electronics.'' Wal-Mart is also pushing its suppliers onto the Net.

Soon, the very supply-chain metaphor may give way to a supply web. ''Our role is to follow the customers wherever they go,'' says Executive Vice-President and CFO James E. Skinner of CompUSA. One day, they may be individual shoppers. The next, they could be purchasing agents for large corporations. They can't be bothered with who is defined as the retailer or who handles the manufacturing. ''Customers don't want to think about channels, and neither do we,'' says Skinner. In a time of upheaval, others companies are bound to come to this same conclusion.

By Neil Gross in New York



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