The Big Payoff

CIOs play a critical role in reducing a company’s procurement costs.

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and inventories in their computers and the ways they exchanged that information with headquarters. All of which makes VF ready and able to approach its suppliers and customers with standard, repeatable ways to access its different businesses' inventory and ordering systems.

Lambeth's experience suggests that companies that aren't ready to bring their supply chain to the Web will be forced into it by customers. "I'd rather have customers come to me and say, 'Here's what you need to do to keep our business,' instead of 'Here's why we won't be doing business with you anymore.'" "The most important thing is to get your own systems in order first," he adds.

Who do you trust? Most of the stress in the new internet-based supply chain will occur between humans, not computers. Communication is the sine quo non of good supply chain management. And the key to good communication is trust.

Staples Vice President of Supply Chain Programs Kevin Holian

But you can't trust your supply chain partners if you don't know them.

Kevin Holian knows all about that. Two years ago, Holian, vice president of supply chain programs for Staples, began sitting down with the Framingham, Mass.-based office supply giant's major supply chain partners to discuss ways to improve performance. Holian wanted to know, for example, why Hewlett-Packard demanded a 21-day lead time for orders.

"The guy from HP looked at me and was dumbfounded," recalls Holian. "Finally he said, 'We thought you wanted the 21-day lead time.'"

Turned out, neither Staples nor HP needed the 21-day lead time; it was a process zombie, the unholy spawn of some over-the-beers deal that didn't know enough to die. Just by identifying the walking dead, Hewlett-Packard and Staples cut the lead time for computer orders to seven days. The ripples of this reduction include fewer stock-outs for Staples and less need to hold extra safety stock. The Palo Alto, Calif.-based HP, of course, reduced its order-to-cash cycle.

Transactions that require little trust between a company and its suppliers are already on the Web. Web procurement vendors like CommerceOne and Ariba have built fortunes on the fact that their clients don't really care where they get their pens and pencils, they just want the best price. Companies hook into Ariba or CommerceOne's indirect procurement catalogs on the Web, and

Communication is the sine quo non of good supply chain management, and the key to good communication is trust.

suddenly all the different business units that used to buy three dozen pens from three different office supply stores are buying them from one vendor at a reduced price. That's called supply chain leverage.

But transactions that affect the products that a company makes and delivers to customers will take longer to move to the Web.

Up to now, collaborative supply chain partnerships just haven't taken hold outside of Asia. It shows in the predominantly American B2B exchanges that have flooded the Internet over the past year. "They seem to be mostly focused on cost reduction and pitting suppliers against one another," says Cisco's Solvik. Collaboration and relationship building seem to be taking a back seatat least for now. Which is why companies like Cisco, which long ago adopted the supplier-manufacturer partnership model that has held sway in Japan for decades, are staying out of exchanges.

Cisco does what companies like Honda and Toyota have been doing for years—building capacity and reducing costs by scratching suppliers' backs rather than whipping them. "We have goals, and [the suppliers] have goals," says Solvik. "If we help them reach some of their goals then we can count on them to give us priority when we have problems." Specifically, Solvik says Cisco may help out by becoming an "anchor tenant" in a new factory that the supplier wants to build, for example, or become an early buyer for a new product offering. Meanwhile Cisco may ask for help in making an emergency assembly line switchover to supply a new Cisco product that is selling far better than expected—or shutting down a line sooner than expected for a

"If we can help the suppliers reach their goals then we can count on them to give us priority when we have problems."


poor selling one. The Internet adds a new dimension to this give-and-take manufacturing model. It puts the relationship, which has traditionally focused on a lot of personal hand-holding and meetings, online. For example, Cisco puts prototype specs for products that are still under development on its extranet. By knowing in advance the components that will most likely be part of the final Cisco product, suppliers can plan their own manufacturing earlier and more accurately, while Cisco can get an early heads up if a few of those components are going to be too dear when it comes time to begin making the new product. "We're taking the engineering process and linking it as early as possible to the manufacturing cycle," says Solvik. "We want to impact the design of products before they're set in stone to make sure the product that's being designed is going to be of high quality, efficient in terms of cost and able to ramp up quickly in terms of supply chain." But sharing information about products in the development pipeline? That takes a lot of faith.

"Supplier-vendor relationships have always been about showing what information you needed to show to get the best deal. Now you'll be playing more with your cards face up," says Lambeth, who's in the process of showing his hand to Cone Mills in Greensboro, N.C., a 30-plus-year supplier of denim to VF's jeans coalition, which includes VF-owned companies like Lee and Wrangler. Despite all those years together, Lambeth, a 32-year VF veteran, doesn't know how Cone responds to incoming orders. It's time, he realizes, to find out.

"Together, we're sitting down to go through how we generate an order for them and how they handle that order. We don't want both of us to do anything twice," Lambeth says. If the companies can begin sharing real-time inventory and order information, the savings "will be huge—in the millions of dollars to us and to them," he says, relying on studies by VF's supply chain software vendor, Dallas-based i2 Technologies. Real-time is the operative phrase here, because demand forecasts go dead faster than a beer left sitting on a windowsill. "We're getting POS [point of sale] information continually from our retailers and we have dynamic sales forecasting in the company," says Lambeth. "We share this information with our vendors periodically, but it's haphazard, and it's always a little dated by the time they get it." It is planning based on history rather than reality.

Eventually, Lambeth wants to post VF's real-time demand forecasts on a secure website where suppliers can access them anytime they want. "They can come in and say based on VF's plan right now they will need 100,000 yards of fabric. And looking three months out, they can have a slightly better idea of what VF needs rather than just putting their thumbs in the air," he says.

Staples' corollary to the thumb-in-the-air approach is called safety stock, the extra computing and office supply products it holds in its warehouses to fill in for unexpected lapses in deliveries from its suppliers, or for unexpected demand surges. Staples' suppliers' situation isn't much better. Without access to Staples' customer demand data, the suppliers must base their own forecasts on Staples' past orders and build in their own levels of safety stock to be able to respond to Staples' demands, as well as all of the other major office supply retailers they deal with. The problem, known as the bullwhip effect, costs Staples and its suppliers millions in extra inventory holding costs and lost sales.

Staples dipped a toe into the trust pool two years ago, when it began flying its biggest suppliers to its Framingham

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headquarters each quarter and showed them their supplier metrics report cards. The effort wasn't really technology driven, because Staples already did 99 percent of its ordering to suppliers through EDI. It was more to see what real supplier discussions could yield in savings. "It's strange," recalls Holian, "but we treated the metrics information almost as if it was a secret." Once the suppliers got a look at the metrics (see "Benchmarks"), they wanted to see their report cards more often, especially after Staples announced it would push them harder on each of the metrics.

"We created a website where they can access the metrics anytime they want," Holian says. "Each supplier gets a password so that it can't access other suppliers metrics. Though the Web communication is mostly one-way for now, it creates a basis for deeper discussions and connections with suppliers."

CIOs have a special opportunity to lead these deep discussions about sharing, trust and supply chain processes. If the trials of ERP have taught CIOs anything, it's that the changes in people and the ways they work are more important to business and even project success than software installation. CIOs now have a deep knowledge of ways to mix technology implementations and process redesign so that the two work together. ERP, now so out of favor with the media and the pundits, brought a type of ROI that no one sees outside the companies that have done it: readiness.

Readiness to begin the difficult work of ripping apart decades-old supply chain practices and remapping them for e-commerce. Unlike ERP, the ROI of that effort won't be difficult to find or to prove. Supply chain is the big payoff.

Copyright © 2007 IDG Communications, Inc.

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