Why the Productivity Revolution Will Spread
The Net's revamping of old-line industry may save trillions
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For much of the last century, it was hard not to refer to Ford Motor Co. and the Industrial Age in the same breath. The company that practically invented mass production sported such 20th-century features as assembly lines, labor unions, sprawling supplier networks, and a vast dealer universe. The 97-year-old auto maker wasn't exactly an icon of the New Economy.
Until now. In November, 1999, the company unveiled plans to set up a massive online bazaar, called AutoXchange, for all the goods and services it buys, whether paper clips, stamping presses, or finished components. Over the next three to five years, Ford hopes to vastly improve productivity--and save billions in the process--by replacing an elaborate network of personal contracts and
triplicate forms with a global electronic forum where deals can be done almost instantly. In just the first few years, it claims it could save as much as $8 billion from lower prices and boost supplier productivity by up to 10%.
Forget about Amazon.com Inc. and eBay Inc. Ford, along with a host of much maligned metal-benders and other old-timers, istransforming e-commerce from a blip on the economic radar into the engine of industry. And although it may not offer a dot.com market cap or a hipper-than-thou ad campaign, Ford has something else: real e-productivity potential, in the form of an $83 billion-a-year purchasing budget and 30,000 suppliers. Just as Henry Ford's assembly line created a revolution, says Ford Chief Executive
Jacques A. Nasser, the Internet is once again transforming
manufacturing. "This is going to change how we think about the business and the way we conduct business," says Nasser. "This is going to reinvent the way the automobile business works."
Why stop with automobiles? Sure, by dragging its vast network of suppliers online--General Motors Corp. and DaimlerChrysler have similar plans--the auto industry will be linking up a big chunk of the world's economy, with a goal of cutting spending on parts alone by 10%. But other old-line companies, from Royal Dutch/Shell Group to Honeywell International to General Electric, are pushing just as hard to move the Net-driven productivity revolution from the fab land to the heartland. "If this is going on in the auto industry, think about the implications across all industries," says Gary Hamel, founder of Menlo Park (Calif.) consultancy Strategos. "We're talking trillions of dollars in productivity gains when all is said and done."
E-ENGINEERING ENTHUSIASM.
The refrain is one we've heard before--but this time, it's con molto brio. Technology spending in the late 1980s and early 1990s triggered dreams of a productivity miracle, but it wasn't until companies redesigned their businesses that the investments bore fruit. During the reengineering craze, the resulting increase in productivity showed up first in high-tech sectors such as chips and computers and is still coursing through the economy. The Net is inspiring new enthusiasm for information technology investments, which the Gartner Group estimates will rise to an average 5.8% of
revenues for global companies in 2005, from 3.5% now. And with what they have learned from reengineering, the latest improvements-- dubbed e-engineering--have the potential to keep the fast-growth, low-inflation miracle alive. Management expert Adrian J. Slywotsky of Mercer Management Consulting Inc. thinks that the Net will lead to tenfold efficiency improvements in such areas as delivery and purchasing alone. With a budget as enormous as Ford's, that's not small change.
Yet as it did with reengineering, adapting to the Net-based model requires some wrenching changes. The biggest investments won't be in technology but in reshaping companies to move at Net speed, says Erik Brynjolfsson, co-director of Massachusetts Institute of Technology's Center for eBusiness. Companies that can't foster a new culture may not survive. Vast numbers of jobs in such fields as
purchasing will be eliminated, while skill shortages may keep many companies from cashing in on the payoffs. The hardest part of all may be creating collaboration between a company and its new partners. "This revolution will proceed in a lumpy fashion," says Slywotsky. "There will be slowpokes. But this shift is too fundamental to fail catching everyone in the ride."
Signs of change are popping up all over. "Everyone in every sector, whether they are extracting minerals from Mother Earth or working with the consumer, is facing a marketplace that is just relentless on costs," says Phillip L. Carter, the Harold E. Fearon Chair of Purchasing at Arizona State University. Corning Inc., for example, says that by using a Web-based catalog in its science products unit, it will be able to drop its average procurement cost to $10 per product from $140. At NCR, ordering such products as rolls of automated teller machine paper or toner cartridges online has cut the time from order to delivery to a few hours from three days. Business-to-business auction site FreeMarkets Inc. says that purchasers are saving anywhere from 2% to 25% by letting suppliers bid for business online. Enron Corp., the nation's largest wholesale electricity trader, is using the Net from its Houston
trading floor to add or draw power from a grid in 20 seconds flat when demand--or price--changes suddenly. Enron President Jeffrey Skilling says the company's wired power plants are 50% more efficient than the old ones.
General Electric Co. provides a fascinating glimpse of how the Net changes things. At GE Power Systems, customers and designers use project collaboration technology to help construct a power plant from the ground up on the Web, says Jose A. Lopez, the subsidiary's general manager of e-business. They can hold virtual meetings in which blueprints can be exchanged and manipulated in real time.
Then customers can use the Web to watch from anywhere in the world as a turbine is built and moves down the production line, ordering last-minute changes as needed. Since the turbines cost an average of $35 million each and contain about 13,000 parts, catching changes--and errors--early is priceless. And after the turbine is delivered, a new Net-powered system called the Turbine Optimizer
lets both customers and GE compare the performance of the turbines with other GE turbines around the world. While GE's new systems should give the company a 20% to 30% reduction in the time it takes to build a turbine and could improve the annual output of each by 1% to 2%, that's just the beginning. "Sure there are productivity gains for us, but this is mainly a competitive advantage," says Lopez. "If customers find this helps them, they'll come back." So far, so good: Sales at GE Power Systems are expected to rise to $13 billion this year, up 30% from 1999.
INSTANT ANALYSIS.
The collaboration the Net fosters can work just as well for farmers as it does for manufacturers. Before Ocean Spray Cranberries Inc. turned to the Internet, growers didn't always sell cranberries to their own cooperative because they could get better prices elsewhere. So the cooperative set up an extranet that quickly distributes helpful information to growers and lets them talk back instantly. Growers can drop off a load of berries and within two
hours log on to the extranet for an analysis of their crop, the prices they earned, and how their berries compare with the quality and prices of others. The information helps them make better decisions about harvesting the rest of their fruit--data that last season let South Carver (Mass.) grower Gary Garretson earn 10% higher profits on berries sold to Ocean Spray. The co-op also got more for its money: Ocean Spray executives say quality has improved
and waste has been cut by more than 25%.
The Net's productivity gains are trickling down to even the
smallest companies. In May, Miracle Transport in Midland, Mich., joined an online network, the National Transportation Exchange Inc. The Downers Grove (Ill.) exchange helps truckers and dispatchers find cargo within range of their trucks. Trucker Bill Frizzell now logs on to NTE before making his regular runs to see if he can pick
up any extra cargo. In the last six months, NTE delivered about $60,000 in extra revenue--half his overall business. "I thank the Lord first, and I thank NTE second," says Frizzell.
One of the Net's most powerful applications is collecting
information on customers, then using it to fine-tune marketing or design more profitable products. At Sanwa Bank Corp., execs use data mining to direct the best customer service to the most profitable clients. The company thinks it can boost the productivity of its support operations by up to 20% this year. At Weyerhaeuser Co.'s Marshfield (Wis.) door factory, executives weed out customers who don't provide enough business. Last year, Weyerhaeuser cut its customer roster in half but doubled order volumes. "In the past, relationships counted more," says Weyerhaeuser Vice-President Lee Kirchman. "But now, the machine knows more than we do." Since 1993, the factory's return on net
assets has grown from -2% to 27%.
Many other companies are using the Internet to stimulate
innovation. At Royal Dutch/Shell, for example, six teams of six employees each meet every week at the Exploration & Production Divisions in Houston and in Rijswijk, Netherlands, to mull over ideas e-mailed by other employees. Last year, the "GameChanger" teams collected 320 ideas on everything from ways to cut paperwork to new ways to discover oil. Of Shell's five top business initiatives in 1999, four came from the GameChangers, including Shell's "Light Touch" oil discovery method, which senses
hydrocarbon emissions released naturally into the air from
underground reserves. The laser technology, refined by teams using a global network, helped locate some 30 million barrels of oil reserves in Gabon last year.
The best Net news, then, may be that it can lead to faster growth as well as cost savings. "There have been boatloads written about how much you save, but not much about how much revenue you can gain," says Gerry Angeli, vice-president, global manufacturing and e-commerce at NCR. At GE Plastics, its gepolymerland.com site started selling resins in January, 1998, and should be selling nearly half of the division's $750 million in total resins online
within a few months. And where Enron used to take nine months to assemble a $100 million natural gas deal for a factory or other customer, it can do the job in 20 minutes now. Skilling says technology efficiencies helped boost Enron's operating income by 47% in 1999, to $1.3 billion.
BUREAUCRACY BLOCKS.
Yet for all the glamour and sizzle of e-business, companies must make far-reaching changes to benefit from the Net revolution. It's an echo of the productivity gains of the 1990s, and plenty of other "revolutions" before those: You can't just set up a hot new system and expect the money and ideas to roll in. "The bureaucracy is a bigger block than the technology," says Edward W. Davis, a professor at the University of Virginia's Darden Graduate School of Business Administration. Andrew B. Zimmerman, global leader of e-
business consulting for PricewaterhouseCoopers, says cultural issues can take up as much as one-fourth of the time on an info- tech consulting job. One time-eater is the issue of sharing once proprietary information with others inside and outside the company. After a career spent defending your turf, it's not easy developing collaboration based on trust. "It has to be earned," says Robb A.
D'Amore, e-commerce marketing manager at Corning Inc. "What level of info do we share? How much do we push out to the public? How much do we hold?"
Speed, too, is more critical than ever in a Net-centric world. Enron's Skilling literally knocked down walls at the Houston headquarters to install stairways and avoid wasted time waiting for elevators. R. David Nelson, the vice-president for worldwide supply management at Deere & Co., tells the story about two lawn mower blade suppliers that were invited to become more efficient to keep up with Deere. One quickly got up to speed, the other dragged its
feet. Guess which supplier doesn't do business with Deere anymore-- or anyone else?
The unlucky Deere supplier won't be the last cautionary tale of the new model. "There will be a lot of dead bodies," says technology consultant and author Don Tapscott. Because the Net can connect customers directly to products, the raison d'etre of suppliers, in particular, is at risk. Emerson Electric Co.'s Liebert Corp., for example, plans to launch a direct-sales Web site for backup power
systems in April, targeting a competitor--and putting pressure on the rival's distributors. "I can't wait to see the look on my competitor's face," says Robert P. Bauer, president of Liebert Americas. "I believe that distribution channels that are commodity resellers are definitely threatened."
Look for opportunities cloaked in those risks, though. Lear Corp., which provides auto seats and other parts to Ford, might use Ford's virtual marketplace to get a better price on fabric by piggybacking on the auto maker's vast purchasing power, says Ford's e-purchasing chief Alice Miles. Or a supplier could sell excess capacity in a
plant it wasn't going to need for a few weeks. "Information about assembly speed and requirements now will be immediate," says John Crary, president of Lear. "That's going to make it cheaper for us to do business in the end and help us boost revenues."
The transition is sure to be rocky. But take a look inside just one traditional company--Honeywell International Inc.--and the Net's possibilities appear endless. Despite the complications of a merger with AlliedSignal, Honeywell has launched a companywide Net strategy that is already paying off. The company has introduced a series of portals such as MyPlant.com, aimed at helping plant managers solve manufacturing problems online, and a site called Avionics-Zone.com, which resells used equipment. This year,
AvionicsZone.com should hit $24 million in sales, and Honeywell expects MyPlant.com to have $500 million in sales by 2003.
The company is also using the Web for everything from the
collaborative design of an airplane cockpit to examining materials in Phoenix through an electron microscope located in Morristown, N.J. By linking all its labs, Honeywell will generate $45 million in productivity gains this year. And when BP Amoco, which uses a Honeywell control system in its refineries, found that a reactor in the Grangemouth (Scotland) refinery wasn't working at full throttle, there was no need to spend days flying in experts. Honeywell e-mailed a product called LoopScout, which BP engineers
used to transmit data over the Net. Honeywell engineers analyzed the results and sent back a report, and the refinery was running at top speed the next day. "There are all kinds of capabilities that we're just beginning to fully grasp," says Raymond C. Stark, corporate vice-president for (quality movement) Six Sigma and productivity at Honeywell. Suddenly, the Net has gone from a threat
to established Industrial Age companies to a tool with nearly unlimited potential. If used wisely, it could keep this economic engine humming for some time to come.
--Jennifer Reingold and Marcia Stepanek, Business Week
(http://www.businessweek.com/2000/00_07/b3668015.htm)
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