Professional Documents
Culture Documents
International Journal of Physical Distribution & Logistics Management, Vol. 27 No. 2, 1997, pp. 77-96.
© MCB University Press, 0960-0035
Driving future
Driving future trends trends
In recent years many companies worldwide have been focusing on their core
business, downsizing and outsourcing, in order to weather adverse economic
conditions. In effect, their approach to improving performance has been
essentially inward-looking. 79
However, there is a developing consensus that this tactic may have run its
course. Companies, in particular those within the supply chain, must now turn
to more outward-looking approaches, such as providing higher added value to
customers and developing better working relationships and ultimately
partnerships, if they are really to improve their performance and that of
industry in general.
Nowhere is this thinking more evident than in the automotive industry.
Where this industry – which holds a key position in the manufacturing
economies of many countries – leads in terms of international trends, other
industrial sectors follow.
Few can have failed to notice the dramatic changes which have occurred
within some of the automotive industry’s major organizations. However, the
component supply chain companies are of equal importance to economic
interests, and these companies are now being forced to cope with a much
greater range of competitive pressures than ever before.
Compounding the difficulties caused by successive worldwide recessions,
other factors include:
• increasing pressures from discerning customers and developing
competitors – in western Europe in particular, this competition (from
Eastern Europe and the Far East) is expected to grow;
• a range of IT (information technology), from CAD to EDI, has been
rapidly developing to support the complete range of business activities
and help revolutionize ways of working;
• the immense environmental and legislative pressures being imposed on
the industry in many areas.
Overall, the demands being placed on the supply chain have made its
management a major issue of the 1990s, with the subsequent breaking of new
ground in terms of performance requirements, working relationships and
partnerships a crucial factor.
To examine what is happening in the automotive component supply chain,
what today’s critical success factors are perceived to be and how the industry
must develop over the next five years, an international survey has been
conducted by Ingersoll Engineers in co-operation with Financial Times
Conferences.
Having sought predominantly the opinions of senior executives working in
the automotive component supply chain, the survey results, which have been
published in the report entitled Partnership or Conflict, focus on three key
IJPDLM points for future development. These are critical factors, specific differences
27,2 and strength of partnerships.
Specific differences
How well companies can respond to these developing requirements will provide
differentiation and order-winning capability in future. However, it is also vital
that suppliers appreciate the potentially conflicting demands of the various
vehicle manufacturers – which have significantly different needs, cultures and
ways of doing business. Awareness of these differing priorities, and the ability
to respond specifically, will give competitive advantage all the way down the
supply chain.
According to the report, global presence is the success factor demonstrating
the greatest variation between vehicle manufacturers. The range is from Ford
and GM in Europe, where global sourcing is currently very much an issue, to
Jaguar and Rover – UK companies with no overseas operations.
Similarly, whereas development risk sharing seems to be a requirement of
major European companies, it is much less a feature in Australia and the USA,
and the Japanese companies Toyota and Honda in the UK are perceived to be
strongly against the trend. Also, in the UK there is a sharp contrast in culture
and working practices between the new Japanese companies and those of the
more traditional US companies.
Strength of partnerships Driving future
For the future, finds the report, the suppliers recognize that a key business trends
advantage will most likely be the ability to work well with the customer, as will
excellent working relationships both up and down the supply chain. The
accepted way forward, therefore, is through more efficient collaboration – closer
partnerships, including more technical collaboration.
As well as practicalities such as EDI links, CAD links and direct delivery to 81
the line side, to help achieve this development of closer relationships many
suppliers intend to deploy more people regularly or permanently in one
another’s plants up and down the supply chain. The purposes are both “hard”
issues of quality, delivery and cost improvements, and a soft agenda to improve
understanding of processes and business strategy, and establish better
communications.
Also evident in this partnership and deployment theme is the issue of
working together on product design. Suppliers not only wish to become
involved in the process, but also to take on more value-adding work by
introducing new technology as part of the price/cost battle.
Unfortunately, although the issue of partnerships may have been on the
agenda for some time and the theory well understood, progress has been slow.
The report reveals that there is still much to do in this area: there are still many
frustrations, and the links in the supply chain are often under strain.
Across all the regions there may be almost uniform agreement that
partnerships are better than “OK”, but only 2 per cent of the respondents
described their relationship with either customer or supplier as a full
partnership. The views on communication reflect the views on partnerships,
with one general manager of a Tier 1 supplier in France declaring that there is
“still a cultural gap between speeches and realities”.
Specifically, customers still frequently report poor communications, a lack of
understanding on the part of their suppliers and a failure to focus on their
needs. Suppliers’ grumbles are predominantly about price and the wish to see
more fairness, understanding and mutual benefit – the need is for “true
partnership without greed for one another’s profit margins”, stated one
respondent.
Conclusion
There is little doubt that partnership is a thorny issue, as many adversarial
attitudes remain. In tomorrow’s business environment, however, closer
communications and better relationships will be at the heart of supply-chain
management.
Essentially, the process revolves around trust, particularly given that
customers are looking to their suppliers for more product innovation, faster
prototype development times, preassembly and other investment-intensive
technical support in the future. Developing partnerships and building this
trust, will involve a great deal of painstaking work and long-term commitment
from both sides.
IJPDLM
27,2 Looking to the future
The misplaced assumption that UK manufacturing’s long-term success could
lie in becoming Europe’s lowest cost producer is, apparently, being laid to rest.
Instead companies are now recognizing that the future lies in competing on a
82 basis of a higher skill level and providing greater added value. And within this
marketplace, IT – an area where in terms of investment UK industry is ahead of
the competition – is regarded as having the potential to provide a significant
competitive edge.
The prediction that the majority of UK manufacturers intend to move closer
to world class through customer focus, is based on the main findings of the
fourth annual Manufacturing Attitudes Survey, conducted by Benchmark
Research and published by Computervision Ltd. “Sweatshop Britain”, suggests
the survey report, “is no longer seen by the country’s manufacturers as a
desirable or even achievable way forward”.
However, obstructing this vision of future competitiveness are two key
problems. UK industry is facing a skills shortage which, if anything, is
deepening. Also, there is a continuing love affair with cost cutting, which is, in
part, contributing to the skills dilemma, and could potentially severely hamper
any long-term plans to move to competing on added value and tailoring
products to customer needs.
Changing of attitudes?
With the peaking of export growth occuring in the latter half of 1995, and a
continuing coolness apparent within the UK domestic market, the
manufacturing-led recovery is rapidly slowing down. In this period of little
growth, competing has got tougher and winning orders, by definition, has
become harder. Moreover, even with the possible market upturn predicted for
later in 1996, most companies surveyed expect competition – especially in the
UK and Europe – to get increasingly hotter.
In such a climate, the competitiveness debate becomes more intense, with
many companies reexamining the way forward – where they are going, how do
they intend to get there, and have they got the approach and resources needed?
The collective outcome of this situation, as illustrated by the manufacturing
attitudes survey, is that in answering the above questions the majority of
companies say they realize that:
• They need to learn to compete on equal terms with their main
competitors, who are already moving into “mass customization”. A
demand for heavy customization in their orders is reported by 42 per
cent of survey respondents.
• Rather than aiming to compete as a low cost producer, the main
competitive thrust for the future must lie in providing value-added
products tailored to customer requirements (58 per cent), or
technological leadership (26 per cent).
• If customer-focused manufacturing is to be successfully established Looking to the
there has to be further development in a number of critical areas – skills, future
cost, product development and IT integration.
Building on IT strengths
Fortunately, there are positive factors in UK industry’s favour. As well as
customer service and flexibility, many manufacturers also regard investment in
IT as perhaps their most significant weapon. This investment advantage may
IJPDLM help to plug part of the skills gap – with IT providing a capacity to release some
27,2 skilled people for higher value-added activity.
Developing enterprise-wide IT
Although, the UK seems to be ahead of its main competitors in exploiting IT,
with manufacturers acknowledging significant IT payback at department level,
many companies are now recognizing the need to wring greater returns from
their investment. To achieve the real breakthrough in competitiveness senior
managers are now looking to IT to deliver transformational change on an
enterprise-wide level, and in this area the survey found that the majority of
companies are still frustrated. This is particularly true of companies with
turnovers of more than £100 million, with 80 per cent of respondents claiming
that IT payback does not yet meet expectations.
However, as some leading UK organizations have already delivered business
transformation in part through the successful deployment of IT, the expectation
of emulating such change in more UK manufacturers is not totally unrealistic.
And for many companies, the answer is twofold.
First, there needs to be a move away from the traditional cost accounting
payback method for justifying IT investment. This approach, which is still the
most popular and used by 35 per cent of survey respondents, in effect forces
companies to take a more departmental and short-term view when procuring
and implementing IT.
Second, a new approach to implementation needs to be recognized and
accepted as the best way forward – both by manufacturers and IT suppliers. As
the survey report highlights, those companies which achieved transformational
change have done so in close partnership with their IT suppliers. Working
together, the manufacturers’ business processes are fully understood and
reengineered where necessary, and then, and only then, IT is overlaid to
automate these optimized processes.
“Customerize”:
“Customerize”: how it worked Unisys
for Unisys Corporation Corporation
China’s market for mass consumer goods has exploded over the past decade and
will continue to grow with breathtaking speed. By 2000, some 260 million 91
people will be able to afford packaged consumer goods, making China the
world’s largest market in many categories. Success in China has therefore
become a top priority for multinational corporations, many of which see it as a
once-in-a-lifetime opportunity. But winning will not be easy say Jim Ayala,
principal in McKinsey’s Hong Kong office, and Richard Lai, a former consultant
with the firm.
Conclusion
One final point. Rapid expansion inevitably strains resources, but some
companies have learned to form creative alliances. Colgate-Palmolive and
Johnson & Johnson are banding together to share warehousing and distribution
facilities. Kraft Foods has avoided building new capacity by producing its
Maxwell House ice coffee at a Pepsi plant. The rewards in China will be
immense, but winning requires playing for high stakes and playing now. Given
the escalating competition, companies can no longer expect to earn easy profits
by just skimming the surface of new markets. Multinationals must take an
integrated approach, one that enables them to dominate priority markets, then
replicate success elsewhere. Only those in dominant positions, with deep sales
and distribution capabilities, are likely to emerge unscathed from the battles
that lie ahead.
IJPDLM
27,2 Supply partnerships –
building strategic
advantage
94
Competitive firms across industries succeed by developing knowledge and
speeding it to market in a stream of rapidly and continually improved products
or services. However, as performance standards rise, the scope of what a firm
can do alone shrinks. By entering collaborative relationships, firms can attain
goals that they could not achieve independently. The experiences of ABB and
the Ford Motor Company during the design and construction of a $300 million
facility provides a good example of how co-operation can create value. Instead
of forming a relationship centred on price negotiation, the companies developed
a longer-term relationship based on co-operative engineering to facilitate the
exchange of knowledge and experience between Ford, ABB and other
subcontractors. The relationship resulted in cross-fertilization of ideas, the
compression of total project time and exceptionally tight schedules.
Managerial implications
So what are the implications of all this? How firms choose to compete will
dictate which capabilities managers emphasize. Thus, firms may elect to co-
operate with suppliers to reap benefits that are used to serve the firm’s
customers better. This means that suppliers must broaden their focus beyond
the terms of the specific relationship and consider how a supply partnership
may provide value to their customer’s customers. Likewise, buyers need to
consider the ability of a potential supply partner to help the firm execute its
marketing strategies further downstream.
IJPDLM Conclusion
27,2 For many buying firms today, a major challenge is how to position
manufacturing capabilities to combine in-house skills with the strengths of
suppliers. Since well-established business practices no longer provide the
framework by which to optimize the allocation of resources within ever-shorter
timeframes, purchasing assumes increasing importance as a spanning process.
96 Yet in many firms, marketing and purchasing functions operate autonomously,
and purchasing managers are unable to assess properly the risks and potential
benefits of supply partnerships. Armed with a clearer understanding of the
firm’s marketing strategy, however, purchasing managers can evaluate the
strategic benefits of co-operation with suppliers more accurately.
SECTION 2
The information
challenge
International Journal of Physical Distribution & Logistics Management, Vol. 27 No. 2, 1997, pp. 97-112.
© MCB University Press, 0960-0035
Business on the
Doing business on the information
information superhighway superhighway
Disruptive technologies
Many highly skilled managers are caught in a paradox which inexorably leads
them to ignore or reject the information superhighway. This is the paradox of
disruptive technologies. At first they appear as an insignificant niche market of
little interest to a company’s mainstream customers. However, successful
disruptive technologies follow such a rapid price/performance improvement
trajectory that they can meet or beat established technology very quickly and
attract mainstream customers in the process. The vendors which previously
dominated the market now find themselves lagging far behind and few can
recover completely. For example: Xerox falling behind in the desktop copier
market or IBM missing the minicomputer market.
Ernst & Young believes that it is possible for managers to assess and predict
the impact of the information superhighway and position the company for
maximum advantage. Managers must evaluate how the improvements in
communication in general, and the interactive infrastructures in particular, will
have an impact on both demand (the customer) and supply (the industry)
through changed communications patterns. On the demand side, better
communications technology will alter the dynamics of purchase decisions. On
the supply side, better communications will alter the supply chain, streamline
production economics and change relationships between players. Technology
will reduce the need to conduct simple transactions like renting a film on a face-
to-face basis, and complex transactions, such as contractual negotiations, will
be increasingly simulated.
This is a précis from an article, “National semiconductor on the Web”, in Product Development
Best Practice Report, February 1996, published by Management Roundtable Inc.
system, they had to be provided with the information they need in their design Virtual partners
environment.
to all
105
Electronic data interchange (EDI) systems are essential for transmitting
information, buying instructions, prices, stock availability and other transaction
exchanges. So why are they so expensive, exclusive and exceptionally
complicated? The traditional reason has been that there have been very few
providers of the service, and to join the electronic retail trading community was
the prerogative of the largest suppliers and retailers who did not shy at the high
prices the small band of providers were charging. However, as with all the other
things it has changed, the Internet may be bringing EDI to the masses.
Electronic data interchange is used primarily between large retailers and their
larger suppliers. Information gleaned from sales information from cashiers’ tills
automatically triggers reordering when stocks of a particular good fall below a
certain point. The key to EDI networks is automation – because the supplier and
the retailer are connected through a dedicated network, information and
instructions can be sent and executed without human intervention. Stocks never
run out as replenishments arrive just in time.
The current architecture for EDI and electronic trading communities is the
largely proprietary wide area and value added networks run by a handful of
telecommunications and computer giants. Because of the high cost, in terms of
time, resources and money, needed to trade effectively using EDI technology, only
5 per cent of the entire total of trade in the western hemisphere is undertaken
through EDI. Trading through EDI has been likened to an exclusive gentlemen’s
club: a company has to have the right qualifications, the tenacity to get in, and the
resources to stay a member once admitted.
Like gentlemen’s clubs the world over, those without the right connections
(money and resources) do not get a look in. Smaller suppliers have to rely on
constant human contact with the retailer to monitor stock levels, to order new
production runs and to organize shipments. All of this takes considerable time,
effort and expense. However, the common man now has a champion. The
opportunity to join the EDI club – and all the attendant electronic commerce,
groupware and e-mail benefits that membership brings – at a fraction of the costs
and set-up times of traditional EDI networks has been made available to all
companies since the advent of the Internet.
Value-added EDI networks incur a large amount of unnecessary expense for
members; by using the Internet to conduct electronic commerce, companies can
save up to 88 per cent of costs of EDI trading. Furthermore, studies have shown
that the percentage of purchases being made by EDI is set to rise from 35 per cent
to 75 per cent in five years – and this rise is predicted across all sectors of
commerce, from food purchases to such diverse areas as music stores, jewellers
and opticians. In other words, the users of EDI technology will become more
IJPDLM consumer-oriented than the current business-to-business practitioners currently
27,2 monopolizing the expensive and exclusive EDI networks.
Several companies have already introduced Internet-based EDI products.
However, these same companies are the main drivers of the proprietary wide area
networks that service the current EDI systems, so the technology inherent in the
products is hedged at best. Sterling Software, an EDI value-added network
106 provider, has introduced a package that gives smaller suppliers limited access to
an EDI system through their PC. Unlike a full EDI service, however, all the
electronic data are transmitted to the supplier/retailer in fax form, forcing the
recipient/user to input the data manually into their own system.
IBM is also currently developing an Internet-based EDI service which will run
over its own Internet service. No extra software packages are needed, and users
pay for the service based on the number of transactions they make over the
system. Some of the proprietary providers are attempting to pour cold water on
the blossoming Internet-based EDI systems by saying that transactions made on
the Internet are not secure. Speed, certainty and security are still the watchwords
of wide area network-based EDI systems. Proprietary networks also provide
excellent user-identification facilities.
However, the Internet is making great strides to close these gaps. The new
Internet-based providers are building-in data protection measures and tracking
procedures. All information can be tracked and verified across the networks
according to the Internet electronic commerce software provider Premenos.
Premenos and other EDI providers use firewalls at both the sender and receiver
ends of the commercial link to maximize security. The Internet EDI providers
assure that security tracking is not a problem. Data know where they are going –
after a fashion. The first time a packet of information is sent, it does not
inherently know the route, but it finds the quickest route nonetheless. On the
second and subsequent journeys, the EDI packet picks the same route, making
tracking easier.
The rise of Internet-based electronic data interchange is slowly changing the
way retailers deal with their suppliers – both large and small. The larger suppliers
who are already connected by proprietary wide area networks will continue to use
the existing links – and will continue to accept the relatively huge costs that bring
a higher degree of security and larger transaction capacity with it. Retailers will
increasingly be happy to deal with smaller suppliers, whose smaller volume and
resources preclude use of traditional EDI networks, over the Internet.
Electronic data interchange is crucial for both supplier and retailer – the
retailer needs to ensure constant stock levels and a constant supply of goods, and
the supplier needs to maintain up-to-date manufacturing, production and delivery
schedules in order to meet the needs of the supplier. Traditional EDI networks
have favoured the big suppliers and the big retailers; the rise of the Internet and
the electronic trading capacity inherent in it means that the smaller suppliers can
compete with the big guns on an even footing, while smaller retailers can manage
their purchasing and supply regimes more efficiently. Larger retailers benefit as
they now have access to a wide range of suppliers, all working to similar
information and deadlines. EDI has ceased to be the province of the élite and has
become the real engine for egalitarian commerce.
IT in UK
IT in UK industry industry
The UK manufacturing sector is set to invest £3.14 billion on IT in 1996/97.
This figure, which represents a continuation of the recovery in spending from
the recessionary low point of 1992/3, highlights the importance most managers
place on IT as a competitive weapon; and one that can be deployed throughout 107
the organization. However, although the potential of IT for improving efficiency
and customer service, and reducing costs, may now be almost universally
recognized, the question still remains, is UK industry investing enough and
getting value for its money?
The 1996 Computers in UK Manufacturing Survey, conducted by
Benchmark Research Ltd, provides a clear indication of the actual growth in
usage of IT throughout UK manufacturing, and its increasing impact on
different organizational processes. For instance, according to the survey:
• PC usage has grown significantly over the last year, highlighting the
drive to provide people with greater access to information. With over
200,000 machines purchased in the last year alone, the survey estimates
that there are now over 800,000 PCs in use in UK manufacturing, one for
every six people employed in the industry. There is a clear drive to
migrate processing power at the end user level, but with control exerted
through the use of LANs and WANs.
• Networking is an area of IT investment that has seen significant growth
over the last couple of years, as PCs have been installed and users look to
get greater return out of their investment. As information has become
easier to store and retrieve, so networks have begun to become a key part
in any investment strategy. As managers and directors look to use
information as a key decision-making weapon, then the use of the
network will increase, as it allows high quality react time information to
be easily passed from one person to another and used effectively.
• The Internet is now being used by a significant number of companies in
the manufacturing sector. Of all sites with over 200 employees, 50 per
cent now have direct access. Even smaller sites (50-199 employees) are
able to access the Internet in 33 per cent of all cases. While many people
are simply using the Internet for brief e-mail communications, general
administration and information searches, there are a significant number
of users who are beginning to explore more sophisticated applications.
Of the Internet users, 33 per cent are now using the medium to exchange
technical information with customers, suppliers and other offices within
their own organization. In addition, some companies (under 10 per cent)
are now using the Internet for purchasing, indicating the beginnings of
electronic trading over the Internet.
• Database technology is now widely used in UK manufacturing. Three out
of every four manufacturing sites with over 200 employees possess what
IJPDLM may be termed a highly functional database technology and even in
27,2 smaller sites usage is now as high as 25 per cent.
• MRP is now widely used in all manufacturing sites (over 75 per cent for
sites with over 200 employees). However, satisfaction ratings vary
greatly by product and user, and the functional fit of the product is not
108 always fully explored until too late in the buying cycle.
• Shopfloor IT is widespread, but this includes a mixed variety of
equipment and systems, with PCs being the most commonly deployed.
However, the awareness and use of more sophisticated solutions, such as
barcoding, SCADA and MES, is on the increase, with good reason. As
manufacturing businesses strive to become more flexible and
responsive, the effective use of automation systems becomes necessary
to track material movements and respond in real time to emerging
situations in the factory.
• CAD is very widely used with over 85 per cent of all manufacturing sites
which undertake mechanical or electronic design work now possessing a
CAD system of some kind. However, true 3D solid modelling is still only
used by a minority, being deployed by 28 per cent of all CAD sites.
• EDM/PDM technology growth has been tracked over the last few years
to a current level of approximately 10 per cent of sites using some form
of data/document control solution. This includes basic products
performing document management as well as the true enterprise
solutions. It is predicted that this will be one of the major growth areas
over the next year.
However, the survey also highlights that the UK spending represents only 12
per cent of the total investment in IT made by manufacturing across western
Europe. Germany contributes the largest share (20 per cent), with France
second (16 per cent) and Italy third (13 per cent). Therefore, although the
importance of IT may be well established, there is still room for greater
investment by UK industry. Perhaps, more important, is the survey conclusion
that considerable opportunity is missed because companies still fail to align the
IT strategy to the business and manufacturing strategy. Instead of IT being
seen as a core part of the overall business strategy, manufacturing companies
still like to compartmentalize, and this prevents IT taking on its true strategic
role.
In fact, although apparently more prevalent within manufacturing
organizations, the cultural gap that exists between business and technology,
and which often leads to the failure to develop productive working relationships
between senior business managers and the technologists, tends to exist
throughout business. This “disconnect” has been highlighted by research
conducted by MORI among senior managers of Times Top 1000 companies for
Computer Associates.
Although most top managers state a commitment to IT, and recognize the IT in UK
contribution that it can make to their business, there seems to be general industry
agreement that many of these same managers are not yet fully comfortable with
IT concepts and practices. In particular, IT managers tend to feel that their
board directors are not comfortable with the terminology and talking with IT
technologists, or even using IT in their everyday working lives. Many believe
that their bosses could do with more IT training. However, although the overall 109
impression is that the greater need is to bring business managers up to speed
about IT, the lack of understanding of the others’ perspective does similarly
apply to IT managers, and their staff.
Therefore, if companies wish to avoid the missed opportunities and
overcome the poor performance that has characterized the introduction of a
large percentage of IT – as recognized by the growing band of younger
managers who are less convinced than their elders that they have got value
from IT – the challenge is to break the cultural barrier.
According to Charles Wang, CEO of Computer Associates, speaking at the
1996 Top Management Forum, the first step towards change is to ensure that all
IT departments keep reminding themselves of the fact that IT has no other
legitimate role than to support the business. With this message firmly in place,
it is then easier to maintain the crucial requirement that all IT initiatives must
be strictly in line with the company objectives. Moreover, the message also helps
establish the reasoning behind the need for all projects to be actually owned by
the customer groups whose requirements the IT system will address.
However, for this business-oriented approach to happen in practice, IT must
be realigned as an organizational team player. At individual project level, the IT
staff must be part of a system development team. Just as importantly, at senior
levels, technology executives must become an integral part of the strategic
business-planning process. Otherwise, how can IT staff and managers really
understand what the business objectives of the company are, if their executives
are not part of the management team that decides on those objectives?
Similarly, if IT is to be recognized throughout the business as what it really
is – just another business tool – the mystique surrounding computer systems
must be dispelled. The answer to this issue, and perhaps the key to sorting the
whole disconnect, is the need for business executives and technical managers to
think more alike and to learn to speak the same language. In effect, all business
executives – including CEOs – must overcome their techno-illiteracy and
become comfortable with technical terms and concepts. There should no longer
be any room for managers who boast that they cannot use a PC and employ
others for that sort of thing! Just as crucially, IT managers in turn must become
familiar with elementary business concepts.
IJPDLM
27,2 The marketing information
revolution
Information has always been one of the cornerstones of marketing, and is used
110 to design products, brand, price, communicate to customers and as a channel
service output. However, a discontinuous change is now taking place in the type
and availability of marketing data and information, and the cause of this
“revolution” is information technology.
In his address to the 1996 Top Management Forum, which was organized by
Management Centre Europe, Robert Blattberg stated that this “revolution” will
now enable firms to return to the invaluable “one-to-one” marketing techniques
used at the turn of the twentieth century. During that era marketing was
characterized by highly personal contact which led to detailed knowledge of
customers and a clear individual customer focus.
Unfortunately, explained Blattberg – the Polk Bros distinguished professor
of retailing and director for the Centre for Retail Management in the Kellogg
Graduate School of Management at Northwestern University – the problem
was that this approach was costly and labour intensive. Therefore, as mass
marketing evolved through media such as magazines, trade publications and
radio, personal marketing declined. The result is that typically, marketing
information is now only analysed at the market and segment level.
However, with the advent of low-cost computing (data management),
expanded and low-cost telecommunications (information transmission) and the
ubiquity of computers (information receipt), there is now the capability to use
information technology rather than individual effort to reapply 1900 marketing
in the year 2000. These drivers of the marketing information revolution, and in
particular the Internet – which Blattberg stressed is something that is going to
“explode” – will now enable companies to go full circle, and revert to individual
marketing using highly detailed customer information.
Major implications
During his presentation Blattberg focused on the managerial implications
of this marketing information revolution, and outlined a number of
propositions.
Customer information firms will become the retailers in the twenty-first century
The proposition is that the channels of distribution will change so that the
“retailer” will be the firm with customer information and other channel
members will provide efficient movement of products and services to this
“retailer”. (That is the retailer will be defined based on information
management not product flows to the customer.)
Crucially, Blattberg stressed that this situation would raise the question of
who controls the customer, and this would need to be understood. For example,
who will control banking customers – the bank or the software companies with
access to the retail customer?
International Journal of Physical Distribution & Logistics Management, Vol. 27 No. 2, 1997, pp. 113-130.
© MCB University Press, 0960-0035
The future of
The future of manufacturing manufacturing
Many companies cannot think about how their manufacturing environment will
look in ten months, let alone ten years’ time. However, a colloquium of
manufacturing leaders thought about the “long game” and came up with a few
critical insights into the world of manufacturing in 2005. Contrary to what 115
many people believe, the factory of the future will not be a “lights out”
monument to the triumph of technology over human beings. Instead, it will be
a system which thrives on a vital and highly complementary relationship
between technology and human beings. The assembled executives also
highlighted four major elements as essential to successful manufacturing and
technology management in the year 2005.
The first element is ensuring a steady increase in process knowledge
throughout the enterprise. Process knowledge was mentioned many times as an
essential support to the coming generation of manufacturing firms. The term
means the organization’s understanding of core manufacturing processes,
ranging from the highly practical to the theoretical. Process knowledge of core
manufacturing processes – be they surface-mount assembly or blast furnace
operation – is a critical strategic asset that must be recognized, managed,
nourished and renewed.
The second working definition of process knowledge expanded the
conventional definition of processes as technical or purely physical activities to
include the social activities of production. Leadership and personal
effectiveness were deemed critical elements of process knowledge in several of
the companies involved in the symposium. One of these companies’ belief in a
social dimension to process knowledge was backed up with cash: the company
has dedicated itself to providing training on social processes to 10,000
employees. Without the confidence to express their views on how to improve the
manufacturing process, production workers’ process knowledge would forever
remain a hidden and underutilized asset.
The next element was learning as a core competence. Most manufacturing
companies have abandoned a blind faith in technology as the only key to
competitive survival. They have not abandoned technology, but they are
seeking to find more effective ways to balance investments in people and
technology. For example, virtually everyone in the symposium agreed that
technology confers agility and speed. But that agility and speed, in turn,
requires a workforce with greater latitude to act and therefore more skills and a
greater understanding of the company’s overall direction. This struggle to
leverage value out of investments in people and technology has led to a focus on
learning. The organizations which learn the fastest are going to be the most
successful in years to come. Being able to change continuously is the key. And
this can only be achieved through a learning organization.
The next element to a successful manufacturing and technological
organization in the year 2005 is a having a committed workforce. In order to
achieve and sustain breakthroughs in performance, it is now widely recognized
that organizations need to engage employees’ minds and hearts, not just their
IJPDLM hands. However, commitment is a two-way street. Management has to let go of
27,2 responsibilities, and the workforce has to be willing to pick them up. Trust and
respect have to travel in both directions.
The last element the symposium agreed on as critical for future success is
the ability to use change as a stimulus to growth. Virtually all the companies
represented were weary of exercises in re-engineering which focused solely on
116 cost reduction and downsizing. Keying in on the desire for growth through
change, several participants hypothesized that an organization’s “capacity to
change” ought to be considered a critical feature in its ability to prosper in an
era of high-velocity change.
The “capacity to change” in an individual or an organization is all about
gaining mastery over change. This means becoming comfortable with flux and
transformation, rather than fearful of it. In sum, mastery over change becomes
a stimulus to growth because the entire workforce is dedicated to expanding
and applying its process knowledge.
The symposium finished with a roundtable on what the successful
manufacturing company will be like in the year 2005. Ten years from now, great
manufacturing companies will:
• Understand their processes deeply and manufacture with virtually no
disruptions.
• Employ a multiskilled, continuously trained and highly committed
workforce.
• Integrate seamlessly with suppliers and customers.
• Design and manufacture with a full understanding of the cost savings
and environmental benefits of eliminating waste and pollution.
• Move information and production quickly around the globe, leveraging
technology and capacity.
• Grow and compete on learning and knowledge as well as speed, quality
and price.
In the year 2005, the pace-setting manufacturing firms will have become
masters of change – in large measure because they will be driving change at all
levels. They will define the state-of-the-art in process technology and
manufacturing management because they will have found – or more likely
invented – the most effective means for harnessing the creative energies of all
employees. More emphatically, they will have established a positive-sum
relationship between people and technology: a relationship in which each
stimulates the other – and from which greater value is the consistent outcome.
What is happening – and will continue to happen at a greater rate – is the
reversal of traditional manufacturing philosophy. According to the assembled
best-of-the-best manufacturing companies at the symposium, the emphasis in
manufacturing is swinging from process and machine to the worker. The
gathered executives – many of them trained as engineers – unanimously turned
to human issues as the greatest challenge for manufacturers going into the next
century.
Supplier alliances
Supplier alliances – Chrysler
and MAGNA International
An alliance with MAGNA International, along with other alliances and internal
changes, has made a major contribution to the re-birth of Chrysler. It now has 117
47 per cent of the North American mini-van market and is claimed to be the
lowest cost, highest profit per-vehicle car producer in North America. Here
Thomas Stailkamp, vice-president of procurement and supply, and general
manager of large-vehicle operations at Chrysler Corporation, and Donald
Walker, president and CEO, MAGNA International, examine and evaluate the
relationship between the two firms. Both were speaking at the 1996
International Strategic Leadership Conference in Atlanta, organized by The
Strategic Leadership Forum.
MAGNA International
Stailkamp believes that Chrysler could not have developed any of these
products if it had not expanded its internal re-engineering to the supply base; its
suppliers have a crucial role to perform in Chrysler’s improvement strategy.
One of those suppliers is MAGNA International. MAGNA has 25,000 employees
around the world and manufactures in ten countries with 100 different
manufacturing plants. The company is very decentralized, with each of its
IJPDLM plant managers having total control of his operation. MAGNA also spends a lot
27,2 of time with its employees, has a system of profit sharing and is non-union. As
a result, it can react very quickly, changing and growing as its customers
change. Its products include complete metal body structures, interiors (seats,
panels, carpeting), all the exterior trims, transmission engine components,
airbags, steering wheels, etc. It manufactures all the seating for Chrysler’s mini-
118 vans, delivering just-in-time; as Chrysler builds a line of green mini-vans, the
green seats come in, and as it builds a line of red ones, the red seats come in.
MAGNA has had to focus on full capability in all these areas, because
although it has what it believes is a partnership, it still has to be world-class or
else lose business. It, too, has had its share of problems. At one time it just made
tools, then it moved on to parts and assemblies and finally to full systems. It had
to spend a great deal of money on product engineering and R&D and suffered
all the associated development costs too. By 1989 it had debts of over a billion
dollars. Interest rates went up, car sales went down, and with its large
overheads, MAGNA almost went bankrupt. Like Chrysler, MAGNA also had to
restructure and sell off many of its operations. Today, the Canada-based firm is
Chrysler’s largest single supplier and was recently voted supplier of the year by
General Motors.
Conclusion
No culture change is easy and a successful one requires time before it can
produce results, but Chrysler believes that it is making progress. The
improvements are producing higher quality components, lower costs, lower 119
warranty costs and less variation in the manufacturing process. Inventories
have been reduced and the firm is getting to market faster. MAGNA has
benefited too: sales growth, a changed company culture, reduced overheads,
more value added, improved communication and less bureaucracy. Now that
Chrysler considers its suppliers true partners, it is not bashful about telling
them about its expectations in quality, costs and delivery. And it wants
suppliers to initiate similar programmes with their suppliers to encourage best
practice throughout the industry.
IJPDLM
27,2 The logical step forward
Industry is witnessing a significant change in attitudes, as many companies
finally begin to recognize that working together as customer and supplier is
more profitable for both, than is maintaining an adversarial relationship, where
120 the ultimate winner is the competition.
One aspect of this advance in the way business is being conducted has been
the development of the JIT II concept, pioneered by the BOSE Corporation – the
international manufacturer of consumer and professional audio equipment. As
the next logical step in two of today’s leading-edge practices – partnership
sourcing and concurrent engineering – as well as enhancing aspects of JIT
itself, the business concept JIT II (a registered service mark of BOSE
Corporation) is now being reviewed and is in the initial phases of
implementation in various US corporations.
Speaking at the First International Conference on Integrating Product
Development Throughout the Supply Chain, organized by The Management
Roundtable, Lance Dixon, director of purchasing, BOSE Corp., and creator of
the JIT II concept, provided an overview of this developing business practice.
Based on the basic JIT premiss of bringing supplier and customer closer
together to eliminate inventory, the JIT II concept further develops the
partnering relationship by establishing:
• the supplier partner in the customer’s plant full time, to provide supplier-
managed inventory, automatic material replenishment and engineering
input;
• the provision of supplier access and linkage to customer computers and
full, free access to customer data, people and processes;
• an evergreen contract and no bidding rituals.
In practice, states Dixon, a supplier employee sits in the customer’s purchasing
office. However, the key element is not only having this person physically
located inside, but for him or her to be empowered within the customer
purchasing function as the link between the customer’s planning department
and the supplier’s production plant, and thus enabled to place customer
purchase orders on his or her own company. With all parts having standard
costs negotiated and frozen, control is provided through this in-plant
representative operating at buyer level, under the normal conditions that the
typical purchasing systems and management place on a buyer.
The result is that the “in-plant” supplier employee effectively replaces the
buyer and the salesman, and the old system (of customer planner to buyer to
supplier salesman to supplier order intake) becomes customer planner to
supplier in-plant. In the process, JIT is advanced – as from inside, the in-plant
vendor can interface heavily with planners, obtaining and critiquing
information with more timeliness and insight than is today’s normal practice –
with efficiency in order placement and material delivery fine-tuned to customer The logical step
needs greatly enhanced. forward
The supplier in-plant person is also empowered to practise concurrent
engineering, attending any and all new product design meetings involving his
or her company’s product area. This places concurrent engineering in-plant, at
the customer location on a full-time basis, rather than today’s normal practice of
visits. 121
As a benchmark, the process has been in operation for well over five years
within BOSE, and now encompasses nine suppliers, with 11 in-plant supplier
personnel addressing 25 per cent of the purchased dollar volume of material.
The purchased commodities include plastic tooling and parts, metal parts,
corrugated packaging, import functions and domestic and international
transportation.
Although BOSE only implements one JIT II supplier in a given commodity,
having this one “most favoured nation” supplier relationship, carrying on a
professional and fair relationship with other competing vendors in the same
commodity has not proved to be a problem, claims Dixon.
As with all partnerships, the aim is mutual benefit. The benefits for the
customer, states Dixon, include:
• A headcount reduction or staff reallocation to address other purchasing
needs, dramatically improved communications and purchase order
placement, and immediate material cost reduction.
• An ongoing material cost reduction as the supplier employee is also
empowered and motivated to pursue concurrent engineering in-plant.
Costs are lowered on new and existing products with savings shared.
Also, effective “design in” of suppliers helps in developing better
products.
• a natural foundation for EDI and other short cuts, leading to paperwork
and administrative savings. Computer terminals and software from the
supplier tie customer and supplier together. Both work from real-time
supplier data and have free total data access to each other’s company
data.
For suppliers, benefits typically cited include;
• an evergreen contract, with no end date and no rebiddding, the
elimination of the salesman effort and cost, an increased volume of
business at the start of a programme and an increased critical mass of
business, all of which more than offset the on-site vendor person costs;
• efficient invoicing and payment administration as paperwork is reduced
and invoices are paid in a timely manner;
• the ability to sell their process and skills directly into engineering – this
opportunity, being “designed in” early, provides for increased new
business and subsequent process efficiency, to the benefit of both
companies.
IJPDLM As Dixon observed, these in-plant representatives are not necessarily restricted
27,2 to any one plant or office. A typical day, for example, for one of the two
representatives from G&F Industries – which supplies plastic injection molding
tooling and plastic and metal parts, shipping to various BOSE plants
worldwide – could see the representative start his or her day at his or her own
plant checking various production schedules. He or she may then visit the
122 BOSE manufacturing plant where the other in-plant representative is heavily
involved in the daily planning and ordering of G&F materials for this particular
plant, using BOSE purchase orders.
The representative would then go to an office in the BOSE corporate
purchasing department, where he or she would take material requisitions from
the planners at another BOSE plant. After any requisitions which exceed his or
her monetary authorization have been signed off – as with any other BOSE
buyer – the G&F representative would call the orders into his or her own
factory.
Later in the day this representative may attend a new product project review
at the BOSE headquarters, to gather any information on parts G&F will be
supplying. He or she may also speak to BOSE design engineers about existing
parts and processes, and address a quality control issue with corporate and
plant quality personnel. The representative is also required to visit other BOSE
facilities, in Mexico, etc. when new product start-ups take place with various
G&F parts.
In practising what it preaches, BOSE plans to implement more JIT II
vendors. Moreover, claims Dixon, existing vendors are using this practice as a
sales tool and have implemented it with other customers; it is also being
implemented by a number of major US corporations and is the subject of
leading university case studies and MIT seminars.
Overall, concludes Dixon, JIT II can be the facilitator and catalyst for change
and considerable improvement. The key to achieving this is the relationship and
structure which allows full-time, in-plant supplier personnel to place customer
purchase orders on themselves and free access to customer plant and
engineering programmes. Once this basic and rather substantial act of faith is
accomplished, a wide range of daily business activity in purchasing, planning,
engineering, importing and transportation, can be improved beyond today’s
norms.
Channel vision
Channel vision
Car manufacturers have a problem because consumers hate visiting car dealers.
They hate negotiating over price and they often come away feeling cheated. If
they hate visiting dealers, that means they probably buy fewer cars and this is
not good news for the manufacturers. Improving this distribution network 123
would obviously improve manufacturers’ sales figures, but problems such as
these are often overlooked while internal operations are busily being re-
engineered.
At McKinsey & Company the issue of channel management has been
scrutinized by Christine Bucklin, Stephen DeFalco, John DeVincentis and Trip
Levis and they believe investing time and effort in a company’s distribution
channels could boost profits and competitiveness. Research has shown that
distribution channels account for around 15 per cent of the cost of a car, 28 per
cent of gasoline costs and 41 per cent of packaged foods costs.
Two factors seem to inhibit the efficient exploitation of channel
opportunities:
(1) Opportunities are hard to spot. It is relatively easy to spot opportunities
when they burgeon overnight, but consumer habits traditionally change
slowly. It has taken 20 years for warehouse clubs to attain their current
popularity and spotting this opening two years ago must have taken a
leap of faith.
Similarly, when companies use distributors they can lose contact with
their end-users, relying instead on the distributor to provide them with
information, and second-hand information lacks the accuracy that could
help companies see fresh openings.
(2) Decisions are driven more by emotion than by cool assessment.
Companies are sometimes reluctant to lose control of certain distribution
processes and therefore make decisions based more on a gut feeling than
data. In the same fashion, entrenched relationships with distributors can
affect the decision-making process and mean that unprofitable channels
or underperforming distributors remain in place merely because they are
already there.
For those keen to seek out fresh avenues, the McKinsey researchers provide six
clues as to where new opportunities may lie and how to make the most of them.
Unhappy end-users
The first clue is provided by unhappy end-users. The reputation car dealers
have acquired means that opportunities for doing things differently abound, as
General Motors’ Saturn division found out. Their dealers try to provide a
buying experience normally only associated with the luxury end of the market
and eliminated haggling so that car prices are universal. Customer satisfaction
ratings rose and car sales went up fourfold between 1991 and 1994.
IJPDLM Before being able to turn unhappy customers into happy customers, you
27,2 need information on what makes customers happy. It is all too easy to spend
heavily on features that are not at the top of the list of customer requirements,
when lower cost alternatives that really satisfy customers are available to those
who really find out what customers want.
One fast-food franchiser found that although their customers valued
124 cleanliness, their outlets did not need to be absolutely spotless. On the other
hand, customers really wanted hot, fast food. Concentrating more on the food
and less on polishing counters paid dividends.
Complacent intermediaries
The fifth clue is provided by complacent intermediaries, who are often
unwilling to make the same efforts that are being made by the company to
improve their competitive position. They may well be satisfied with their own Channel vision
performance, but the company or the end-users are not. This provides an
opportunity for renegotiating arrangements with the intermediary or going
elsewhere.
Sometimes the fault lies in the way that incentives have been laid down by
the company itself. For example, if customer satisfaction ratings are important
then incentives have to reflect this. One auto manufacturer restructured its 125
reimbursement system to its dealers to strengthen their warranty service, after
customers complained about the servicing of their new automobiles. On close
inspection it was found that dealers made very little on warranty repairs. Once
the warranty reimbursements were restructured more favourably towards the
dealers service performance and customer satisfaction improved dramatically.
Master or mastered, lords or servants. The coming years will see companies
either controlling technology or being controlled by it – i.e. being controlled by 129
companies which have controlled technology. Control does not mean huge
budgets and intricate manufacturing processes. Simple manufacturing
excellence will be, as quality has become, the ticket to the corporate big leagues
in the next 15 years. How can companies ensure that they are in these big
leagues 15 years from now … just read on.
The biggest areas of opportunity in the next decade and half – in terms of
manufacturing excellence – is not manufacturing itself, but after care. These
include customer fulfilment, logistics and all the other places where time gets
used up with no payback, at least not yet. The whole company has to embrace
excellence, not just the manufacturing side of things. Companies need to extend
the definition of excellence to encompass the whole enterprise. They need to
concentrate on the front end of the system – design, procurement, packaging
and customer service.
These are the areas where innovative manufacturers take huge chunks of
time and money out of the system, where they make the biggest impact on
product design and introduction, and where they get closer to real customer
involvement in product design fulfilment. According to some experts, in the
year 2010 there will be two types of enterprises: the Island of Excellence, and all
the rest.
The Island of Excellence organization will do many things extremely well –
manufacturing, real-time customer design of product and simultaneous
production, and customer fulfilment. The workforce will be very special –
specially selected, trained and motivated, aware of their position as an élite
corps. Each employee of an Island company will have been immersed in the
culture and the mission of the business before they were let loose on the actual
operation – people in a strong and simple culture need time to adapt to such a
culture and they need to learn that they will be trusted and are expected to
behave accordingly.
All the rest, on the other hand, make only simple, ordinary things – flashlight
switches, pans and dog collars. The company has a lurching, erratic corporate
attention span that makes attention deficit order look like the company’s single
unifying theme. Whether a company wants to be an Island of Excellence or an
other depends on whether the company accepts the challenge of forming an
extended enterprise. That reaches beyond manufacturing excellence into three
key areas – value chain excellence, organizational excellence and the knowledge
worker.
By 2010, the Island of Excellence enterprise will have achieved excellence in
customer fulfilment. Through value chain excellence they will have created a
perfectly balanced entity that translates customer ideas or wishes
instantaneously into perfect products. The value chain vision will be driven by
IJPDLM simplicity. The vision will be stretched and extended to include the “last
27,2 frontier” opportunity areas, the spots where customer fulfilment happens –
design, logistics and procurement. Simple systems will ensure integrated data
channels and rigorous information channels throughout the chain. Supplier
development will become a corporate dictum.
Organizational excellence means that everybody within the company works
130 for the customer. The US-led era of rugged individualism will give way to an
ethic that protects the common good, the organization – as well as the
individual. The winning organization will be smaller, more like an élite group of
soldiers who can swoop into a problem, work as team and solve the problem.
The workforce will be empowered and self-managed – hierarchical
organizations will not be able to mobilize quickly enough to capture, defend or
move markets. Essential to this organizational excellence is having a
knowledgeable and trusted workforce.
There are three building block for creating an Island. These are boundary-
less jobs, people development and compensation and rewards. In the year 2010,
in Island of Excellence companies, there will be a balance between technical
specialists and customer fulfilment specialists. The way to create this ideal is to
build as many opportunities for cross-functional integration into the
organization’s hiring, training, development and reward systems as possible.
People development in companies of excellence means customized training
and education, delivered on site, modified quickly as needed. It will mean just-
in-time training, with no bricks or mortar – no underlying “philosophy”. An
Island company will also audit its workforce to uncover areas of weakness and
subsequently alter hiring policies to capture people to fill these areas of
weakness.
Companies which build reward schemes based on monetary rewards will
find severe limitations to workforce flexibility and growth. Island companies
will reward workers for patient and deliberate skills acquisition in a number of
complex and challenging areas, such as languages, product design, database
use, simulation, partnering skills and changeable technology-driven
knowledge. Reward packages will include a mix of rotations, internal
recognition, base monetary compensation as well as lifestyle benefits. When
needed, specific – and temporary – group or team profit-sharing plans will be
used to encourage entrepreneurial businesses.
The third area for an Island company to achieve manufacturing excellence is
to create knowledge workers. Knowledge workers have strong technical bases
and experience, and are comfortable at using IT and other technical
applications. Second, they have tremendous skills in communication, and are
extremely adept at creative thinking. Finally, knowledge workers are ethical
and committed to the company. Building knowledge workers will in turn fulfil
the key factors for manufacturing excellence.
The year 2010 will see manufacturing companies split into two camps – the
Islands of Excellence and the others. Which camp your company will belong to
depends on how well you can follow and implement the recipe above of value
chain excellence, organizational excellence and knowledge workers.
SECTION 4
21st century
service industries
International Journal of Physical Distribution & Logistics Management, Vol. 27 No. 2, 1997, pp. 131-142.
© MCB University Press, 0960-0035
Overcoming the
Overcoming the hurdles in hurdles in global
global retailing retailing
Trends in retailing reverberate far beyond the confines of the industry and
many commentators look at retail sector performance as an indicator of general 133
economic wellbeing. The issues that retailers face and what they do about them
trickle down in almost every facet of any business that ultimately sells its
products to consumers. One of the most problematic trends, say McKinsey’s
Karen Barth, Nancy Karch, Kathleen McLaughlin and Christiana Smith Shi,
writing in The McKinsey Quarterly, 1996, No. 1, is globalization. Given the
substantial productivity advantages enjoyed by the world’s best retailers,
opportunities to move successful formats abroad would appear to be boundless.
But the reality is that it is more difficult for retailing to operate across
distinctive national markets in comparison with other industries.
Retail performance in local markets is highly sensitive to consumer behavior.
Entrants in places such as Thailand and Indonesia will find pronounced
differences in consumer tastes, buying habits and spending patterns from one
country to another. Accommodating these differences means tailoring the
merchandise: food, clothes, toys, leisure goods, and so on. Yet the very changes
that are needed to satisfy consumer preferences may hamper an entrant’s efforts
to leverage its global sourcing scale and stay competitive with local retailers.
Other problems include: shortages of resources such as land and labour,
unfavourable tariff structures, restrictions on trading hours and foreign
ownership, impenetrable established supplier relationships.
Nonetheless, many participants have ventured overseas in the past 20 years.
Their experiences fall into two distinct “waves” of expansion. The first wave
during the 1970s and 1980s included speciality retailers with proprietary
brands such as Benetton and Laura Ashley, luxury brands like Hermès and
Gucci, well-funded grocers and hypermarkets (Tengelmann and Makro), and
general merchandise retailers such as Marks & Spencer and Sears. Many
encountered difficulties and some were forced to pull out. The second wave,
which began in the late 1980s and is still under way, followed a different
pattern, with movement beyond a retailer’s established trading bloc (i.e. from
Europe to Asia) as well as greenfield expansion and joint ventures rather than
acquisitions. Leading this global charge are firms such as Wal-Mart, Carrefour,
IKEA, Toys ‘R’ Us, The Disney Store, Gap and Body Shop.
However, global retailing is still in its infancy – but the momentum is
growing. Proof can be seen in some of the indicators of market opportunity:
currency convertibility, exchange control, stock exchange access, majority
ownership rules and repatriation of capital and earnings. In the last three years
or so, barriers have crumbled around the world, freeing up access to more
countries and allowing entrants to establish viable market positions. Many
parts of the world are sustaining much higher rates of growth than the mature
IJPDLM economies, and although this is no guarantee of market attractiveness, where it
27,2 exists, opportunity often follows. Many of these fast-growing markets still offer
substantial “unstaked” market share; in other words, only a relatively small
proportion of demand is currently captured by organized retailers, leaving
ample room for new entrants.
Difficulties arise when retailers try to export – wholesale and unchanged – a
134 retail formula that is successful at home. For example, Galeries Lafayette
attempted to export a high-end Parisian fashion concept to the USA. Perceived
as French, but not exclusive enough for the highly competitive Manhattan
market, the concept failed to find a sufficiently large customer base. Similarly,
when Marks & Spencer introduced a new retail concept to Canada – apparel
plus food – it attempted to operate with its successful UK formula largely intact.
As in Britain, it neither provided fitting rooms nor advertised heavily. In food, it
offered such items as Scotch eggs, which few Canadians recognized or liked. In
apparel, it maintained a traditional private-label stance against more
fashionable competitors. Although it has since moved to address many of these
cultural differences, M&S may have missed the chance to build something big
in Canada.
To win in international retailing, companies need to assess their competitive
strengths and position themselves so that they can re-invent advantage in each
new market. This means that the success factors they have always relied on –
brand, skills, productivity – must be re-examined as they expand. They will
also need to:
• restructure their business systems, both locally and globally,
• create new relationships with vendors,
• manage alliances and partnerships,
• outsource non-critical activities,
• build truly international management teams,
• adjust their concepts and profit formulas in every market to achieve
sustainable levels of return.
The Web might be good way of idly passing a few hours of leisure time, but is
it a worthwhile business tool? There have been relatively few case studies of a 141
Web application actually making a positive impact on business operations –
and profitability. However, Southwest Airlines – the American domestic
passenger carrier – provides an excellent lesson on how to make the Internet
work.
Southwest Airlines has always been different. From its low cost flights, to its
casual corporate environment, to its 23 consecutive years of profitability,
Southwest continually differentiates itself from the rest of the airline industry,
and its foray into the Internet is no exception.
The airline is the first to enable customers to make reservations and purchase
tickets on-line via the World Wide Web. Reserving and purchasing tickets for a
flight is as easy as pushing a few buttons on the interactive “Home Gate”.
Customers simply click on the departing location, their destination, travel date
and approximate departure time. The Home Gate looks up the fare and
schedule information and returns the appropriate information. The customer
can then make a reservation, select a form of payment and purchase the ticket
on-line. Transaction security is assured through the use of encryption
technology.
The company uses an object database management system (ODBMS) as its
core application. ODBMS facilitate and enable the development of new Internet
and Web applications by providing unique capabilities to manage, store, query
and retrieve the extended data types and relationships required by the
applications. Objects can be any data type, including text, image, video and
sound. Objects relate other objects by direct pointers instead of joins on keys, as
in a relational database. This allows relationships, such as “a document
contains several images, pieces of text, and an audio clip” to be easily
represented, stored and quickly retrieved from the database without computing
joins. Southwest’s Home Gate could not operate as efficiently, effectively or as
quickly without being based on object applications.
Although airlines typically sell 80 per cent of their tickets through travel
agencies, Southwest sells nearly half its tickets directly to passengers. In the
first few weeks of the Home Gate system, Southwest exceeded its initial
expectations with over 100,000 hits daily. There were a number of reasons why
the airline decided to create a presence on the World Wide Web. The first was
market presence. The Internet is becoming the marketplace. Failure to be
present on the Internet can cost a company business. Second, the Home Gate
enables Southwest to provide additional services and convenience to customers.
Third, it saves the company money. Airline revenues are based on the number
of people in seats per flight, and empty seats mean lost revenues. Filling a seat,
IJPDLM even at a discount, adds revenue, and the Home Gate allows Southwest to react
27,2 quickly to shortfalls in seat demand on any particular flight. Rate changes can
be posted and seats can be sold directly to customers at deep discounts. The
logistics and expense of traditional marketing prohibited this kind of reaction.
Finally, the Internet allows Southwest to collect data and tailor messages and
interactions for specific customers.
142 As noted above, choosing the right technology was key to building the site.
Fare, schedule and availability information changes frequently. The site has to
be able to handle and present dynamically updated information. Also, because
reservation information comprises a combination of cities, departure times,
arrival times, fares and availability data, it must also be able easily to manage
and quickly traverse a highly complex data model. Speed is a top consideration.
To meet these requirements, Southwest used ObjectStore, an object-oriented
application from Object Design. When a customer chooses the variable
information on the Home Gate pages, the resulting HTML request is translated
into an ObjectStore database query. ObjectStore executes the query using
pointers between objects, instead of joins as in a relational database, rapidly to
search and navigate the Web of reservation information and return information
on all inbound and outbound flights that fit the specified criteria. ObjectStore
returns the flight and fare information to the Web server via formated HTML
pages. Once a customer makes a reservation, the information is stored in
ObjectStore, and Southwest’s central reservation system is immediately
updated.
The usefulness of the Southwest Home Gate, and the business benefits the
company has enjoyed, underlines the growing realization of the power of the
Internet for business purposes. Hand in hand with this growing awareness is
the growing use of object databases for Internet and Web applications.
According to recent market research, the total market for object databases –
which was $115 million in 1995 – will reach $1.6 billion by the year 2000, fueled
by the growth of Internet application development and the need to manage
multimedia information.
The study of Southwest Airlines has two important lessons. The first is that
the Internet can make a difference financially, and the second is that, to create
an effective and efficient presence, companies have to utilize the best application
platform for their needs – and for most applications, an object database
management system is probably just the ticket.