by Michael Schrage

IT Challenge: Collaborating Without Compromising Security

Mar 15, 20046 mins

Techno-enthusiasts insist that radio frequency identification is the Next Great Killer App and will transform the future of the global supply chain. But I’ve seen the future of supply chain management, and it’s called China. If I were advising a CIO charged with a global supply chain mandate, I’d suggest they’d get a better return on their time looking at supply chain behavior in China than at prospective RFID implementations by Wal-Mart.

A story in the China Daily English-language paper describes local law enforcement officials confiscating tens of thousands of cartons of counterfeit cigarettes that had genuine Universal Product Code labels. Step outside a luxury hotel in the heart of Beijing’s embassy district in January and you’ll find street vendors approaching you with shrink-wrapped DVDs of The Return of the King and The Last Samurai. They’re pirated, of course.

Not to worry: This isn’t a column about counterfeiting or intellectual property theft in China. That would be too easy. More important, it would miss the point. Sure, there are “bad actors” in China who use their vital link in the supply chain to steal, cheat and copy from their clients, but that masks the deeper dynamics of tomorrow’s interactions. Talk to the CIOs of Chinese companies supplying U.S. and European multinationals with IT systems and components, and you’ll hear that they’re happy to comply with whatever technical standards their customer desires.

ERP? A-OK. Interconnected CAD? Of course. They’re very eager to learn. Yes, they want to be the low-cost supplier. But, if you don’t mind, they fully expect to evolve into strategic partners. The IT systems they’re building to provide just-in-time componentry worldwide are supposed to become platforms for value-added subassemblies by decade’s end. Today, it’s chips; tomorrow, it’s motherboards; next year, it’s an effort that makes Apple’s iPod or Sony’s CliŽ look like yesterday’s PC. In other words, Chinese companies have ambitions that go beyond the first few links of your supply chain.

In this respect, RFID represents the least interesting innovation in the supply chain future. After all, none of Wal-Mart’s suppliers, for example, will ever go into direct competition with the world’s largest store. To the contrary, Wal-Mart seems far likelier to go into direct competition with some of its largest suppliers via its own house or private label brands. Managing the competition between global supply chains may prove much less of a leadership challenge to CIOs than managing the competition within global supply chains.

To what extent might RFID be a virtual window into the cost structures and innovation processes of a company’s supplier? More provocatively, to what extent might suppliers mask, distort or minimize RFID tag elements to minimize the risk of giving their customers information that might come back to bite them in future negotiations?

Answers to those questions will define the CIO’s supply chain design and implementation agenda for the next decade. The “cost-effective” supply chain is a seductive trap. CIOs who invest as if the goal of their supply chain infrastructures is to ensure least-cost design and delivery of just-in-time ingredients are either shortsighted fools or long-term incompetents. China’s rise as a global sourcing superpower requires CIOs to fundamentally rethink what kind of transparency, visibility and accountability they want to build into their supply chain.

Why? Because it’s far too easy to design supply chains that get the immediate job done at the price of irreparably altering the balance of power between the multinational customer and Chinese vendor. George Bernard Shaw once defined success as the ability to take the path of maximum advantage rather than the path of least resistance. By that measure, too many global supply chains are miserable failures.

How so? Listen and learn from the Chinese. Companies will increasingly have to decide what information they wish to conceal or reveal to their links on their supply chains.

Determining the appropriate conceal/reveal ratio is a calculation that, frankly, is more difficult than most organizations are willing to admit. Legal, manufacturing, sales and finance may each have different notions of what data is appropriate?or necessary?to share. If your supplier asks for financial information, sales projections or manufacturing batch schedules as part of its efforts to be a faster, cheaper source for you, just how accommodating are you prepared to be? Does IT provide the necessary data in an integrated ERP fashion? On an as-needed data retrieval basis via the Net? Or through souped-up XML process drivers?

What complicates these questions even further is the inarguable reality that there are “gray markets” in supply chains. The Chinese understand a lot about gray markets. One Chinese manufacturing head who works closely with his IT chief tells me that his company builds a dynamic database for each of its major accounts and uses it to make a business case for tighter links to its customers’ networks. The executive’s goal is to become a design partner?not just a supplier?to his key customers. He believes the best way to do that is to go deeper into the client company. He’s not alone.

If you’re the CIO of the client company, how does this info-intimacy play? Do you want to encourage informal interactions? Or does the prospect of having your supply chain management support half a dozen data-sharing “gray markets” increase your level of risk? Do you just say, “That’s not my responsibility. I just make sure the infrastructure works?”

Your answers around the conceal/reveal ratio would no doubt be influenced by the question of whether your company wants to collaborate with your customer?or supplier. Or whether your customer wants to commoditize your company’s product. Collaboration likely means more revealing; commoditization means more concealing. After all, you don’t want to give your customer the ingredients that turn you into just another supplier. But if you’re trying to commoditize a key supplier’s offering, then you’re looking for more information that would make it easier for your company to switch suppliers.

In other words, what role should IT play in helping reduce dependence on your suppliers while increasing the dependence of your customers? I don’t know the answer to that question. But I do know that every single manufacturer I’ve met in Beijing thinks along those dimensions. RFID tags are a technical means to a business end. The conceal/reveal ratio and the collaborate/commoditize axis, on the other hand, are key business criteria to determine technical investments.

Observing the evolution of this debate in China?and learning how this supply chain superpower implements answers to those questions?represents the best way for you to discuss the future of the supply chain in your own company.