getting smart about scm

8/10/2019 Getting Smart About SCM

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T H E M c K I N S E Y Q U A RT E R LY 2 0 0 1 N U M B E R 2 : O N - L I N E TA C T I C S22

Getting smart about supply chain management

B2B exchanges cant improve the efficiencyof every element of the supply chain. An

improved information ow is what they reallyhave to offer.

Mani K. Agrawal and Minsok H. Pak

Some investors continue to believe that on-line business-to-business(B2B) exchanges could improve supply chain management dramaticallydespite the punishment they took in nancial markets last year. Many com-panies are still eager to jump in: during the year 2000, the total investmentin B2B infrastructure exceeded $200 billionan estimated $10 billion ofit for public consortia-backed e-marketplaces alone. Still, the nancial

markets appear to have caught on to something that experienced supply-chain-management practitioners have suspected for a while. Although B2Bexchanges (otherwise known as e-marketplaces) can help companies realizecertain purchasing and transaction-processing benets in the short term,broader improvementsparticularly reductions in inventory, improved ser-vice levels, faster time to marketare harder to achieve.

The promise of real benets rests on the potential for seamlessly integratingdata ows and work processes across entire enterprises and even industries.To realize this opportunity, the power of B2B exchanges would have to becombined with the enterprise-resource-planning and decision support sys-tems that many companies have adopted in recent years. But this kind of integration is hard to pull off, and for industries with complex, segmentedsupply chains, it is simply inappropriate.

True improvement will emerge only from the understanding that exchangescant affect every element of the supply chain equally. The primary benetswill come from their ability to speed up the ow of information and to makeit available more widelywhich alone can produce gains large enough tojustify the big investments that unshaken believers in the future of B2Bexchanges continue to make.

Elusive benets

Products reach customers through a chain of retailers, distributors, whole-

salers, manufacturers, and component suppliers. Supply chain managementis intended to accelerate the ow of goods, information, and capital in both


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directions, along the chains entire length, and to help companies monitorthat ow. Because the costs of managing the supply chaininventory, thewarehouse and distribution center, and freightcan represent 10 to 15 per-cent of sales in most industries, the savings that B2B exchanges promisecould have a genuine impact. Indeed, programs to improve supply chainsmight raise margins by 1 to 2 percent of sales and improve customer servicedramatically.

Yet most exchanges havent delivered these benets. First, an exchange cantwring huge efficiencies out of all elements of the supply chain; in fact, it canhave no impact at all on some of them, such as the physical ow of goods.An electronics manufacturer in California, for example, must maintain sur-plus inventory because otherwise the company wouldnt be able to fulllunanticipated orders until the components for them arrived; those fromTaiwan, for instance, may take several weeks to cross the Pacic and clearcustoms. At best, the improved information ow or collaboration that anexchange offers may eliminate the three to ve days ordinarily spent plan-

ning, negotiating, and documenting transactions.

The second reason for the failure of B2B exchanges to function as promisedis that they themselves have perpetuated certain inefficiencies by failing torecognize that the same supply chain segment in different industries, anddifferent supply chains (or segments thereof) in the same industry, mayrequire different improvement levers. In mens apparel, for instance, a retailercould have a number of supply chains. One might replenish perennials suchas undershirts, white dress shirts, and size-40 regular navy blazers, while asecond might stock fashion items, for which demand varies according tothe season, the effectiveness of efforts to promote them, and their inherentappeal. A grocery retailer, meanwhile, must manage the ow of perishableproduce (such as lettuce and apples), for which demand tends to be fairlypredictable, and of nonperishable products (such as soft drinks), for which itcan be inuenced by heavy promotion. Instead of developing services basedon different segments of the supply chain, retail B2B exchanges have so fartried to serve all of these needs at once.

Third, many companies that own information think it gives them a crucialcompetitive advantage and therefore fear sharing it freely, though companiesup and down the supply chain would benet if they did. Companies knowthat their business processes and decision support systems have a directimpact on their costs and revenue. The level of mutual cooperation and trustthat participants in a B2B exchange must have before aggregating their pur-chases of, say, copy paper is trivial compared with what would be needed

to get them to share informationfor example, about forecasts, productlife cycles, and bills of material. The idea of conding nancial data to an

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exchange generates even greater skepticism. Precisely because Dell Computerand Wal-Mart, for example, derive a competitive advantage from their exclu-sive collaborations and from the proprietary sharing of information withtheir suppliers, they have avoided public B2B marketplaces and exchanges.Moreover, the tools and techniques needed to optimize and integrate nan-cial ows are just coming into broad use.

Even if it were possible to allay basic fears about the sharing of information,thorny challenges for B2B exchanges would remain: providing security,imposing formats for conveying information, and ensuring that membersshare information fairly.

Dening the real opportunity

To date, e-marketplaces have focused mainly on procurementand dealtwith it reasonably well. But they have encountered problems in seeking to

streamline tasks (such as production

planning, inventory control, andscheduling) that lie closer to theheart of supply chain management.To devise solutions, it will be neces-sary to analyze what exchanges canand cant do. They will never reduce

the time it takes to deliver goods physically, for example. But since the infor-mation ow in supply chains is typically linear, fragmented, and inaccurate,they can make a vast difference in this area.

Retailers, distributors, wholesalers, manufacturers, and suppliers all partici-pate in a typical supply chain. But only two adjacent playersthe buyerand the sellerusually share information at each stage, and the nature andamount of what they share depends on the quality of their relationship.After all, this kind of information mostly concerns the actual transactionbetween them; they rarely communicate their general understanding of market trends or changes within the industry. As a result, the informationthat each participant uses to make its decisions doesnt reect conditionsin the industry as a whole, and perspectives diverge. When forecasts of demand, for instance, arent reliable, companies must act defensively byaccumulating excessive inventory, and they must also pay overtime and incurthe expense of expedited service when an unexpected order arrives. If theycant make last-minute adjustments, they lose sales.

The successful B2B exchanges of the future will replace this linear, bilateral

structure with one organized as a hub and spokethe exchange at thecenter of the information ow and the individual trading partners arrayed

T H E M c K I N S E Y Q U A RT E R LY 2 0 0 1 N U M B E R 2 : O N - L I N E TA C T I C S24

Usually, information is shared only by two players, buyer and seller,at each stage of the supply chain


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along the circumference. Successful exchanges will also be tailored to coher-ent segments of the supply chain. When exchanges have established transac-tion standards and common platforms, the hubs will be able to gatherinformation spanning all levels of the chain. The dispersal of this informa-tion by hubs will increase the speed with which it is shared, its accuracy andquantity, and the transparency of the whole chain. As the lead times andsearch costs of early adopters shrink and forecasts become more dependable,companies will be increasingly prepared to surrender their closely guardedsecrets to the exchanges.

If an improved information ow is what B2B exchanges really have to offercompanies that want to sharpen their management of the supply chain, twoquestions should determine where they put their greatest effort and invest-ment. First, what are the characteristics of the different supply chains inwhich companies participate? Second, what parts of the chain are most

affected by better information in the short and long term, and what partsare most relevant for long-term improvement?

Before a company allows its fear of being left behind to push it into investingin and joining a public exchange, it should determine if the supply chain ser-vices offered by the exchange comport well with its supply chain segments.It is understandable that companies want to cut their inventories by improv-ing forecasts, for example, but no statistical model can predict the day-to-daydemand for a product with a three-month life cycle and thus what levels of safety stock to maintain. In industries such as fashion apparel or personalcomputers, shorter lead times and response cycles are therefore more likelyto generate real improvements in the supply chain.

Companies should decide which elements of the chain could produce thegreatest efficiencies and then choose the exchange most likely to promotethem. Identifying ways to capture true supply chain benets from exchangesthus comes down to basic supply chain management. Companies shouldntlet the hype and excitement of the exchange phenomenon make them neglecttheir off-line supply chain operationsfrom demand-planning algorithms tologistics management. If they focus their attention on these basics, the bene-ts will surely follow.

Mani Agrawal is a consultant in McKinseys Chicago office, and Minsok Pak is a principal in theDallas office.

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