Online supply-chain management yields significant cost savings

Mark Johnson

Mike Malicky

Navigant Consultants (formerly Metzler & Associates)

More than 70 percent of current e-commerce transpires in business-to-business applications, services and products. Yet e-commerce also holds tremendous capabilities for use within companies-particularly in the area of shared services.

Companies with large employee populations, geographically dispersed operations, and thousands of external suppliers can reap substantial benefits from online supply-chain management. A carefully crafted online shared-services e-commerce strategy, coupled with proper processes and the best technologies, can help businesses get the best return from the promise of e-commerce.

Evolving inventory control systems have dramatically affected the flow of raw materials and simple supplies. In the last two decades, business has moved from “just-in-case” to just-in-time (JIT) inventory control, cutting manufacturing costs and improving efficiency throughout the manufacturing and distribution process.

The utility sector is now applying the knowledge gleaned from these changes to new, sophisticated e-commerce tools. It is now possible to integrate suppliers and their goods-from pencils to poles-with end users over an electronic-economic platform that supports inquiries, purchase orders, shipment, tracking and delivery. All this is done without large stacks of inventory taking up warehouse space.

The benefits of conducting supply-chain management online include lower costs, immediate access to supplier content and transparent transaction routing. Simply stated, cheaper, faster, and more accurate logistics information leads to true productivity and profitability.

As in any transaction, online supply-chain management features two primary interested parties-buyers and sellers. Both benefit from the ability to provide and receive knowledge. (see Figure 1).

GE and ConEd

From the standpoint of both buyers and sellers, several examples can be found in multiple industries that highlight the true cost savings and increased speed of using e-commerce to manage inventory on both sides.

In Rockville, Md., General Electric Information Services Inc. (GEIS) uses the trading process network (TPN), which may be viewed at http://www.tpn.geis.com. TPN allows customers to place customized product catalogs on their Web sites, then manages bids from suppliers around the world via the Web.

GE Lighting, in Cleveland, Ohio, has been using TPN for 18 months. In that time, the division has reduced the time it takes to process quotes from machine part suppliers from between 18 and 23 days to nine days. Another division, GE Capital in Stamford, Conn., has been using TPN for more than a year, in this case to place bids on computers. The group went from processing three requests for quotes (RFQs) per day to handling 24. Both divisions have saved 30 percent in fax, mail, and labor costs, said GE officials.

Consolidated Edison Co. of New York Inc. (ConEd) also signed up for the TPN service. Requisitions from ConEd employees are electronically transmitted to the purchasing department via the company`s mainframe. Those requisitions are then assigned to buyers who place RFQs on GEIS` TPN site, using Netscape Navigator on the Web. Once qualified suppliers are found over TPN, ConEd cuts its purchasing deals.

ConEd expects using TPN will cut purchasing cycle times and drive down costs. It will also give ConEd buyers a chance to more fully analyze the company`s purchase activities, since TPN supports downloading of historical information into a Microsoft Excel-based bid analysis tool.

Streamlining at PG&E

Pacific Gas and Electric Co. (PG&E) is using Web technology and the company`s intranet to revamp the way PG&E buys everything necessary to support its $15 billion operation.

Today, PG&E employees fill out a form in the company`s SAP AG financial application. The form is routed to managers, who must sign off on the request, and then to purchasers who go out looking for the best deal. Soon these three distinct steps will be compressed into a direct, more efficient link from ultimate buyer to supplier. Moving an order through such a procurement process at most companies can easily exceed the cost of the items being purchased.

PG&E is moving toward giving employees direct access to an online catalog of products supplied by vendors that have been pre-approved by PG&E purchasing agents. Ultimately, employees will be able to go to the Web site, select an item, order it and track its delivery status.

Chrysler and IBM

Chrysler Corp. faces a monumental task in communicating standards and sharing critical software applications with its almost 20,000 suppliers of parts, packaging and technology. Even though the company provides vendors with dial-in access to its mainframe systems servers so they can download information and applications, many vendors still depend on mail, fax and phone. Others have reported frustration with the dozens of diskettes required to install necessary applications.

IBM and Chrysler developed and implemented the Chrysler Corp. Supply Partner Information Network (SPIN), an intranet-based supply-chain management and support environment for distributing files over the Internet. In its first year of operation, SPIN increased productivity by 20 percent for Chrysler`s entire “Extended Enterprise” family of suppliers, while significantly reducing operating costs.

From this experience, Chrysler learned that the Internet presents an excellent medium for transferring time-sensitive information, applications and other large files to a multi-platform universe. Seeing the success of SPIN, the company put as much information as possible online.

Chrysler can distribute applications and communications packages about policy, procurement and inventory methods over the Internet. From developing products to delivering parts and sending payments, SPIN works for all of Chrysler`s suppliers: production suppliers, parts suppliers and the suppliers that package parts.

More than 3,500 supplier locations have registered to access the Chrysler SPIN Web site, while more than 12,000 users were issued the IDs necessary to access information such as Chrysler`s EDI Guide or QS9000 certification policies and procedures. Users can also access dynamic database applications such as real-time data feeds, procurement analyses and strategy applications.

Getting critical production information to external suppliers as soon as it becomes available internally provides a competitive advantage. Chrysler`s Part Quality Supply System tracks parts throughout the process-from engineering to purchasing to the supplier. If any part is deficient or a parts change is announced, the information is immediately available online, saving both supplier and Chrysler time and money.

Building the application

The keys to success in building a shared-services e-commerce application include careful and detailed strategy, process analyses and technology study (Figure 2). Ideally, one should bring in an objective, independent outside consultant to assist with this project. A thorough evaluation should: articulate the desired future state; identify challenges, opportunities and contingencies; develop a transition plan; and develop a self-supporting and ongoing shared-services e-commerce application that suits the company`s needs.

To ensure an objective application evaluation, the focus should be on seven important functional attributes. The application should:

– enable the buyer to interact with multiple authorized suppliers;

– individually record each requisition by activity and buyer; aggregate billing and shipping by company and ship- to location;

– administer approvals and authorizations on the buying site based on the individual making the requisition care for organizational structure and approval limits in the configurable workflow process;

– permit buyers to determine the range of inventory and approve product pricing;

– allow buyers access to real-time order status and material-availability data; and

– integrate seamlessly with the user`s existing purchasing and accounts payable applications

A carefully crafted shared-services e-commerce application for supply-chain management yields great quantitative dividends and valuable qualitative benefits to the organization. Approaching the task with a firm grip on strategy, process analysis and technology will ensure success.

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