Why is B-to-B getting such a bad rap?
By Stefan Heck and Jeff Arvin
Special to ZDNet
December 7, 2001 9:22 AM PT
COMMENTARY--In a series of articles published last year on ZDNet, McKinsey & Co. described some of the myths and pitfalls surrounding two initial "waves" of Business-to-Business (B-to-B) e-commerce, specifically, the net market makers and consortia. We predicted that the biggest challenges ahead were in "developing the new business processes, standards, and organizational capabilities to execute a good B2B strategy, regardless of the technology used."
Since then, many ventures have stumbled and their fall has ensnared enabling software companies in the form of missed earnings and declining revenues. However, a slower, quieter wave of B-to-B models is showing good early results-particularly in supply chain process excellence-suggesting that rumors of B-to-B's demise are myths. Rather, a gradual but challenging transformation of supply chains is underway.
B-to-B is creating real economic value. Across industries, a new wave of successful enterprises are leveraging and enhancing exceptional offline processes through e-business technology. They are not throwing everything out and starting over. Nor are they are starting with technology. Instead, they are extracting significant B-to-B benefit by applying e-tools to proven offline processes and selectively reshaping them with careful focus on value creation. They are using technology as a means to overcome operational challenges with the understanding that implementing a new e-business software application or participating in a public marketplace does not automatically result in increased efficiencies and process improvements. B-to-B technologies alone offer no such "silver bullet" if the process itself is flawed to begin with.
To best demonstrate where process excellence is evident, we share five case studies representing different types of industries and supply chain challenges. While the steps taken in each example are not generic formulas for what every company should do, they illustrate how to optimize competitive process advantage by selectively integrating B-to-B tools focused on supply chain elements to create a competitive industry advantage.
High-value/Fast moving/Trend: Companies in this category produce high-value, short-life products, such as fashion apparel, PCs, and toys. Their typical supply chain concerns include short sales windows, rapidly declining price points, proliferating SKUs, and high obsolescence costs.
Zara, a Spanish fashion apparel retailer with 450 stores worldwide, automated segments of its supply chain to optimize demand visibility and inventory management levers. The company developed supply chain cycles of 10-15 days-compared to the typical industry cycle of 9 months-from design concept to store delivery. One way that Zara decreases this cycle time is by equipping all store managers with handheld devices to instantly send feedback to designers on what customers are buying. With up-to-the-minute data, the company responds quickly to changing consumer demand, designs fashions that are aligned with evolving trends, and simultaneously discontinues stale merchandise. By efficiently managing inventory, Zara has significantly reduced obsolescence costs.
Over the last five years, the chain has doubled in size with no increase in net debt and no decrease in profit margin, which remains at a sector-leading 27%. Of course, Zara had to get other critical pieces right, like marketing and pricing, but their ability to respond swiftly to a fast-changing market provides a critical advantage. Before the Internet and wireless technologies, coordinating multiple functions in the space of two weeks was simply not possible.
Complex Replenishment: This category includes auto and furniture manufacturers that build well-established, moderately complex products. Here, managing multi-step manufacturing processes and distribution logistics are key success factors, and inventory visibility and transportation exchange are critical supply chain levers.
Herman Miller is an international manufacturer of office furniture with $2 billion in sales. The company was plagued by costly, extended lead times. A cumbersome order entry process and poorly aligned order fulfillment process were causing growing work-in-progress inventory. Customers had to endure a four-week lead time even for relatively straightforward orders.
To eliminate inefficiencies, the company needed to increase coordination among its supply chain participants. So, they instituted a system that provides a single point of order entry for all products. This system feeds into newly implemented supply chain software that generates corresponding requirements for its plants and vendors on an hourly basis. The orders are then synchronized to meet customer delivery requirements and eliminate inventory costs.
Herman Miller has since decreased inventory costs by 30%, lowered manufacturing lead time by 50%, and increased inventory turns by 30%. They now serve small companies and home offices efficiently and have expanded their annual small- and mid-market volume by 30%.
Customized/Engineered: These are highly complex products-aircraft, power plant turbines, cellular base stations-requiring substantial value-added engineering or customization and extensive design collaboration between suppliers, the final manufacturer, and customers.
Boeing, in an effort to streamline their highly complex aviation design and manufacturing processes, addressed two key supply chain levers: collaborative design and Web-based configuration. By utilizing techniques such as 3-D modeling, virtual reality, and digital simulation of assembly processes, the company creates significant value through improved coordination. For example, during the design of a concept demonstrator fighter jet, Boeing engaged in collaborative R&D with suppliers.
According to the company's own public statements, the improved coordination reduced staffing requirements on the project by nearly 50%, compared to legacy aircraft, and cut tooling costs in half with 80% fewer defects. The jet was completed one and a half months ahead of schedule and assembly costs were reduced by 75%.
Commodity/High density: Organizations operating in these markets manufacture process-intensive, low-margin commodities, such as chemicals and minerals.
The Mexican firm Cemex built itself into one of the world's three largest producers of cement, largely on a technology-focused strategy. Cemex brought core procurement, supply chain, plant management, and customer relationship management functions online with its Dynamic Synchronization of Operations (SDO) system. They installed a computer terminal and global positioning tracker aboard delivery trucks and linked the system to plant production output and pending customer orders to allow centralized dispatchers to select optimal routing combinations.
As a result, Cemex can maximize plant output, respond quickly to customer orders, and even re-direct trucks in transit. This logistical improvement creates significant value, considering cement needs to be poured within 90 minutes of mixing. With a more efficient supply chain, Cemex has reduced their average delivery time from three hours to twenty minutes, increasing per-truck productivity by 35%.
Promoted Goods: These products include relatively low complexity, often consumer-oriented goods that compete on price and brand, such as packaged goods and groceries.
Wal-Mart, well known for leveraging cutting edge technologies to optimize its processes, uses a proprietary point-of-sale system called RetailLink to allow it to connect electronically to its 7,600 suppliers. By providing on-the-shelf inventory, invoice status, promotion, and sales information by store and SKU, Wal-Mart helps suppliers manage their supply chains more tightly. The system gives vendors Internet access to the previous day's sales, by store, where they can view shrinkage information by item, and forecast demand by region, store, and product.
RetailLink has delivered dramatic results, including a 47% increase in sales, with only a 7% increase in inventory over three years, and a 45% decrease in shrinkage over five years. Despite Wal-Mart's aggressive adoption of technology, they have not strayed from their core business of retailing. The primary purpose of their technology-related initiatives is to help management stock the right product at the right time and in the right place.
Clearly, B-to-B technologies have helped many companies reap significant cost savings and revenue growth. Remember, they did not rely only on technology as a solution. Rather, they first had to identify specific problem areas within their existing value chains and then figure out how technology could help solve those issues. In doing so, these companies now enjoy the various benefits that come with leveraging a well-developed process with e-enabling tools.
Stefan Heck is a Principal in McKinsey & Company's Silicon Valley office and co-leads the Firm's B-to-B practice. He is also a core member of the McKinsey's High Tech practice. Jeff Arvin is a Practice Knowledge Specialist who focuses on eBusiness technologies. |
