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CHANGE MANAGEMENT

Purchasing and Supply Chain Management in Business Networking

a report by

H u b e r t Ö s t e r l e , E l g a r F l e i s c h and D r R a i n e r A l t Institute for Information Management, University of St. Gallen

Introduction

During the past 10 to 20 years, business process redesign has created integrated processes within companies, made possible by database systems. During the next 10 to 20 years, the networking among companies (business networking) will link company boundaries: information technology, such as the Internet, will provide the means. This interorganisational co-ordination will change business more fundamentally than intra-organisational integration. There will be a worldwide network of specialists, each of which will play its part in value creation with its core competence. The path will be led via the disassembly of existing enterprises into independent processes and via reassembly of enterprises and supply chains.1 Business is at the start of a dramatic transformation and business networking is a main driver.2 There are many reorganisations occurring in the financial sector, in the pharmaceuticals industry, in the steel industry and in tourism, etc. With Micro Compact Car (MCC)3, DaimlerChrysler realised an enterprise that largely performs the co-ordination of processes which it has outsourced to specialists. Ford is currently in the process of handing over parts of its final assembly to specialists and transforming itself into an enterprise for consumer goods and services.4 Both companies redesign the collaboration processes with suppliers and leverage the potentials of information technology (IT), such as electronic data interchange and procurement and supply chain software from vendors such as CommerceOne, i2 or SAP. Recently, DaimlerChrysler, Ford and General Motors teamed up to create an Internet marketplace for the joint procurement of supplies with a purchasing volume of US$240 billion.

Purchasing and Supply Chain Management

Purchasing and supply chain management (SCM) are two main areas of business networking. Both show a dynamic development and the emergence of electronic marketplaces. Buy-side e-Commerce (e-Procurement)

Currently, many companies are pursuing projects that aim at optimising the procurement of indirect goods. These e-commerce systems start from the customer’s procurement process and link various electronic catalogues from suppliers into a personalised catalogue that is made available to buyers within the organisation. Well-known vendors for these systems are Ariba, CommerceOne and SAP.

Dr Hubert Österle is Professor of Information Management and Managing Director of the Institute for Information Management at the University of St. Gallen. He is also a partner of the Information Management Group. Dr Elgar Fleisch is Project Manager of Business Networking at the Institute for Information Management, University of St. Gallen. Dr Rainer Alt is Project Manager of the Competence Center Business Networking at the Institute for Information Management, University of St. Gallen.

United Bank of Switzerland (UBS) has set up an e-procurement system with 10,000 articles for the procurement of maintenance, repair and operations (MRO) products (office stationery, furniture, IT, etc.).5 External suppliers maintain a warehouse and supply materials for 3,000 authorised purchasers within UBS. Six months after introducing the system, 2,500 different articles are processed on a daily basis. The benefit lies in a drastic simplification of the ordering process, plus volume discounts and reduced inventory. For example, British Telecom reports reduced procurement costs from US$113 to US$8 per transaction by using the CommerceOne tool.6 However, implementing these systems, establishing bilateral links to partners and maintaining the catalogue are seldom regarded as core activities.

1. R T Wigand, A Picot and R Reichwald (1997), Information, Organization and Management, Wiley & Sons, Chichester. 2. E Fleisch and H Österle (2000) “A Process-oriented Approach to Business Networking”, Electronic Journal of Organizational Virtualness 2, 2, pp. 1–21. 3. R van Hoel and H Weken, “How Modular Production Can Contribute to Integration in Inbound and Outbound Logistics”, Proceedings of the Logistics Research Network Conference, University of Huddersfield, 16–17 September 1997. 4. T Burt, “Ford to Farm Out Key Final Assembly Jobs to Contractors, Outsourcing Move in Brazil Could Signal Change in Carmaker’s Core Activities”, Financial Times, 4 August 1999, p. 1. 5. R Dolmetsch (2000), eProcurement – Mehr Effizienz in der Beschaffung, Addison-Wesley, Munich.

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Outsourcing these processes is a logical step. This led to multi-partner marketplaces that are emerging for general (horizontal MRO markets for office supplies, travel services, etc.) and industry-specific MRO markets (e.g., laboratory supplies in the pharmaceutical industry).

Marketplace initiatives are currently aiming to establish improved collaboration among several partners in the supply chain. Examples are Tradematrix of i2 Technologies and Bnetworks from Manugistics. e-Commerce and SCM are complementary concepts. Information from the supply chain, such as ATP, is an important element when purchasing or selling products and a close link to the supply chain (for order entry, transaction processing, transportation and payment) significantly increases the business benefit of e-commerce systems.

Supply Chain Management

Another area of business networking focuses on the optimisation of purchasing, production, inventory management and transport across all the elements in the supply chain network.7 Information on sales forecasts, effected sales, inventory levels, delivery dates, customs documents, payments, etc., are exchanged across all business partners.

Model of Business Networking

These areas of business networking have presented a glimpse of the new business options. We offer a model that supports companies in managing the transformation to networked enterprises (see Figure 1).

For example, Riverwood, a packaging material manufacturer, has implemented a vendor-managed inventory solution that closely links Riverwood’s production and distribution planning processes with that of its customers, such as Miller Breweries. This has enabled Riverwood to increase drastically delivery speed and accuracy and to increase customer service.8

Intermediary Supports Customer Process

An intermediary that focuses on the customer process is the first element. As shown in Figure 1, a customer planning to purchase a new car performs the subprocesses of gathering information, configuring the information, followed by payment, etc. These processes are ‘mirrored’ by the car dealer’s processes of publishing, configuring and dealing with finance, etc. The degree of customer orientation and the

Various tools have emerged for SCM. These advanced planning systems complement enterprise resource planning (ERP) systems with functionalities, such as demand forecasting, supply network planning and ‘available to promise’ (ATP). The relationships with partners have largely been on a bilateral basis. Figure 1: Model of Business Networking

...

...

Rent-a-Car

Insurance Accessories

Garage

Producer e.g., car manufacturer

... Police Driver

Integrator e.g., dealer

Customer e.g., car owner

Product Documentation

Publish

Information

Production Planning

Configure

Configure

Finance

Finance

Payment

...

...

...

Business Business Bus Bus e-Service e.g., Bill Presentation

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e-Service e.g., Credit Rating

e-Service e.g., Directory Service

e-Service ...

6. C Philipps, M Meeker (April 2000), The B2B Internet Report – Collaborative Commerce, Morgan Stanley Dean Witter. 7. R Handfield and E L Nichols (1998), Introduction to Supply Chain Management, Prentice Hall, Upper Saddle River, NJ. 8. H Österle, E Fleisch and R Alt (2000), Business Networking – Shaping Enterprise Relationships on the Internet, Springer, Berlin etc.

integration of these processes will determine the value created by an intermediary. Customers will only place a large proportion of their purchases via the Internet if an intermediary packages a large number of suppliers, products and services to conveniently cover the customer’s needs in a particular process. Any company can act as an intermediary without having to invest much effort. Only few intermediaries will survive worldwide in each business area (customer segment, customer process and range of articles) and a number of the 700 (industry) marketplaces currently available is expected to diminish rapidly.9 Purchasing and SCM will lead to integrators and marketplaces that provide liquidity and set the necessary standards. Standard software for intermediaries, which is currently being developed under the heading of customer relationship management (e.g., Siebel), will further increase the dynamics in this area.

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Electronic Services Link Business Partners

In our example, the car dealer uses a variety of supplementary services from the Internet. For instance, he or she retrieves the customer’s address data from an electronic directory service and the credit information from an electronic service for credit rating and settles payment through a payment service. Business networking will give rise to a new business sector for electronic services: Internet access, directories, payment, logistics etc. Electronic services either perform co-ordination tasks (e.g., payment transactions) or they are subprocesses that many companies require in a similar form and, therefore, purchase in electronic form. Payment transactions, credit ratings, multi-vendor product catalogues, trust, etc., are services that are needed repeatedly in many forms of business networking. The more this is available and accepted by a large number of market participants, the easier it will be to set up an electronic business relationship. Business Bus Enables n:m Connectivity

The business bus is the third element of our model. It recognises standardisation as a vital enabler for creating efficient business networking among many suppliers and customers (n:m). We use the term ‘business bus’ to describe the totality of technical applications and business standards on which software solutions and electronic services, etc., are based. These include electronic data interchange for administration commerce and transport, commercial XML (cXML), RosettaNet, open application group 9. R D Hof, “E-Marketplaces: A Bloodbath”, Business Week, v. 3, 4, 2000, p. EB 72.

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integration specification and open applications group middleware application program interface (API) specification, de facto standards for business objects, such as SAP’s business application programming interfaces or Microsoft’s BizTalk, process standards such as collaborative planning, forecasting and replenishment and, finally, ‘laws’ for business networking, e.g., generally valid rules for dealing with delays in delivery, as now agreed in some cases between the participants in a supply chain. The business bus produces the m:n capability of business networking. Virtually all business networks are either 1:n (e.g., Amazon) or 1:1 relationships (e.g., Riverwood). As a result, the effort for setting up and operating every additional business relationship is

Which networks will establish themselves on the market? Which positions can the company hope to occupy in these networks? Which alliances should be forged? Can the company organise a supply chain or does it act as a supplier and customer? • Which non-core processes can be outsourced? In view of reduced transaction costs, companies can gain striking power by concentrating on strategic processes and buying in all the others from outside. A pharmaceutical corporation may understand the management of its complex research and development process, plus marketing and distribution as core processes, and outsource all the others, such as the performance of research, the testing of substances and production, to specialists.

Business is at the start of a dramatic transformation and business networking is the main device.

high. The availability of standards that improve the m:n capability will determine more than anything else the speed with which business becomes networked. Consequences for Management

In many cases, the question is not whether investments in business networking will pay off in the short term, but whether the customer will be prepared to accept a supplier who does not offer its product catalogue and associated services electronically. For the transformation towards networked enterprises, several answers are critical for management: • Which new products and services will be feasible? Which internal services can the company also offer in the marketplace? Does the company perform internal services that it could offer as an electronic service without too much effort? One example would be the soil database of an agrochemical manufacturer that documents the quality of the soil according to region, which the manufacturer has used so far to sell its fertilizer, but could possibly be sold more profitably as a service via the Internet. • What are the relevant customer segments and what is the relationship towards existing distribution channels? Business networking creates an additional channel to existing customers but also access to other customer segments. Customer segments have to be carefully identified and channel conflicts with existing partners have to be addressed. 118

• In which supply chain is the company involved?

• What is the path towards critical mass? Customers will purchase from the online bookshop with the biggest selection of books. Suppliers are likely to supply to the bookshop that has the largest number of customers. The investments for setting up an electronic bookshop are high, the marginal costs low. Being able to allocate the investment costs to as many transactions as possible will decide profitability. What is true for the bookshop applies by analogy for the investment service of a bank, for training or for the marketing of construction materials. Many networking solutions, while useful in themselves, disappear from the market if the path to reaching the critical mass is too long or uncertain. • What is the company’s networkability? Networkability is a core competence that sums up a company’s ability to offer new services quickly via the Internet and to integrate new customers and suppliers with minimum effort. The business implications of business networking will be more profound than ERP systems and many are talking of a new industrial revolution. However, the transformation to networked enterprises will not come about unless all the necessary participants stand to benefit, standards are available and critical mass is achieved within a foreseeable timespan. ■ Additional Reference R Kalakota and A B Whinston (1997), Electronic Commerce: a Manager’s Guide, Addison Wesley Longman, Mexico City.