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IJPDLM
27,2 Editorial
Strategic logistics management – the challenges ahead
It has been a real pleasure to have this opportunity to scan the literature,
conference presentations and reports covering logistics and to pick out strategic
74 briefings which seem to point to the way ahead.
This special issue has been put together in association with MCB Business
Strategy Publications which publishes briefings for executives on a host of
topical strategic issues. The editorial teams cover new thinking and practice as
it emerges. The joy in putting this special issue together has been in the need to
reflect on what has been recently published, to pick out emerging themes, and
look for trends.
I have grouped the material under the following headings:
• Logistical future;
• The information challenge;
• 21st century manufacturing; and
• 21st century service industries.
The material included is concise and to the point. The briefings have been
designed in order that a range of issues and ideas can be quickly taken on board
by the reader. The aim is not to explore each issue in depth, such learned papers
will be published in this journal throughout the year. It is to look at the plethora
of challenges facing logistics practitioners and researchers in the interesting
times which lie ahead.
To quote from Dick Morley’s excellent Viewpoint (page 75), “In all of history,
pundits have said: ‘Even if it happens elsewhere, it can never happen here. We
are special.’ Nothing is older than the future unheeded…”
Not by this readership!
Eric Sandelands
Guest Editor

International Journal of Physical


Distribution & Logistics
Management, Vol. 27 No. 2, 1997,
p. 74. © MCB University Press,
0960-0035
Viewpoint
Viewpoint
Technology strategies for manufacturing – the next decade
Manufacturing is a passion of mine. It has been in my blood since I was a union
machinist in the early 1950s. The money helped pay for my college education. 75
Since that time, I have tried to combine physics, computer science and
capitalism into a paying profession. You see, investors require the ability to look
into the future. Manufacturing is an investment process. Let us peer into our
manufacturing future…

Infinite product life


Infinite product life? Indeed. We only need to think about white kitchen
products and clothing. Replacement of products is based on fashion, not
wearout. Computers are replaced because the user wants the “latest”. How fast
can we type? Infinite life implies infinite quality.
Modern products have a complexity exceeded only in the biological world.
These products must be of high quality – where quality is defined by the
perception of the user. Quality is a trouble-free lifetime, and satisfactory
utilization of the product. Enjoyment becomes more important than the old
formal definition of quality. Sports cars need to convey the illusion of the 007
rake.
Products are unfixable. Complexity and molecular engineering have zero
replication costs, but infinite repair costs. How does one repair a Pentium
computer chip? Since products are not repairable, these same products cannot
be prototyped. The first units must be made in the production facilities. Surface
mount technology and multilayer boards utilizing complex semiconductors
need to be modelled in a virtual system and directly coupled to the factory. Cost
of manufacture will disappear from pricing considerations, and return of
capital will be the overriding consideration. This is now happening in jet
aircraft and software manufacture.

The definition of product life takes on a new meaning


Recycled products used to be called “throwaway”. People are making money on
the concept of the recyclable camera. Electronics are recycled more than ten
times and the plastic, after reduction, is used about five times. A famous
automobile manufacturer is considering the remanufacturing of engines. With
the new, agile concepts available, we can envisage the automatic dismembering
of the old and remanufacturing into the new. Some of the boutique makers are
advertising a high recyclable material content in the new cars.
We can envision in the future, 200,000 miles service-free automobiles with a
International Journal of Physical
high recyclable content – including consumables. The idea of throwaway Distribution & Logistics
products has led society to consider the value of the old, discarded product, Management, Vol. 27 No. 2, 1997,
pp. 75-76. © MCB University Press,
which is an unexpected event. 0960-0035
IJPDLM Desktop manufacturing (DTM)
27,2 What is DTM? A close analogy is desktop publishing. Desktop publishing
allows the computer user to self-publish. Printers of high resolution and colour
are available for several hundred to several thousand dollars. Software permits
the process. Finished goods inventory and instant changes are available at the
stroke of a key.
76 Philosophical considerations abound. We must now think in terms of the
human, rather than the equipment, utilization. The printer is used for DTP, but
for only a small percentage of the time, and for the convenience of the user.
DTM must be considered in the same vein. Historically, machine tools were high
priced devices to be used optimally – as were printers. Now we must think about
the under-utilization of machine tools and the inventory in software, not
hardware. In addition to the “print” button, we will have a “make” button on the
menu.
Utilizing the Internet (or its cousins), we can place the replication process at
the consumption point, not the resource point. Now, manufacturing facilities are
located for cheap labour or materials. We can expect that Internet-connected
manufacturing capability will be as close to the customer as possible. Spare
parts and small physical products (toys) will be made on demand in the store.
Innovative replication and manufacturing at point of use will be strong trends.

The dark side


Any innovative, turbulent change brings problems. We can expect the usual
Luddite reaction to these changes. Environmentalists, union members and
politicians will all try to resist, or use technology narrowly for self-
aggrandizement. The conventional small job shop (as in the printer world) will
change or die. Machine tools will be lower in price and fully compatible with
Windows 95. Industrial products will be designed for a trouble- and service-free
five-year life, as opposed to a high maintenance, 20-year life. Magazine sales of
products, large and small, will skyrocket. Look to the communications and
computer industries for future direction. In all of history, pundits have said:
“Even if it happens elsewhere, it can never happen here. We are special”.
Nothing is older than the future unheeded…
Dick Morley
Mason, NH
SECTION 1
Logistical
future

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.

Critical success factors


Internationally, component suppliers broadly agreed that quality and delivery
are, and will remain, the most important critical success factors in the market.
80 Both now and in the future these are order qualifiers which supply chain
companies know they must offer to win business.
Although ongoing, regular price reduction is today one of the most important
factors worldwide, the general consensus is that it will become less important
in five years’ time. However, while component suppliers feel that there are more
important factors to focus on in the future, the whole issue of price will remain
a major pressure which needs to be resolved.
The notable factors, which are commonly seen as most rapidly gaining in
importance, are those influencing the development of closer relationships and
recycleability:
• Some of the greatest changes in the success factors over the next five
years show a predominant theme of working more closely with
customers and suppliers. This includes greater adoption of CAD and
EDI links.
• The fact that recycling ability is one of the fastest-growing factors for
everyone reflects the increasing environmental pressures being imposed
on the industry. Although this issue remains a low priority overall for
suppliers, this view is in stark contrast to that of manufacturers which
see this as becoming one of the top success factors within five years.

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.

Critical success factors


Overcome skills shortage
The value-added route to enhanced competitiveness demands that skilled 83
workers are in place at all levels. Yet, the survey identifies that many companies
are facing skill shortages in engineering and other manufacturing disciplines.
Although initiatives are now in place at school level to attract more young
people into engineering, historical neglect in this area means that the main
route at present to tackling the shortfall is through training on the job.

Move on from preoccupation with cost reduction


Unfortunately, actions may speak louder than words, and the intended
marriage with customers, forged on producing quality customized goods, is
endangered by industry still showing a reluctance to wean itself off its hitherto
favoured competitive weapon – short-term cost cutting (not the same as low
cost strategy). This “unhealthy” preoccupation manifests itself in numerous
ways, as the survey discovered:
• Although customer service is naturally cited (by 57 per cent) as the main
weapon to be deployed to achieve the new competitive thrust, when
asked about actual strategic actions, cost reduction still comes top, being
the main focus for 23 per cent of respondents.
• When asked about the UK’s biggest competitive weakness, high product
cost is cited by more manufacturers (24 per cent) than any other factor.
Yet, the UK has one of the lowest cost bases among European countries,
and experiences have proved that the customer is often willing to pay a
higher price for the right product.
• Many manufacturers still do not seem to recognize that buying cheap is
not the same as buying value. In accepting that “supplier partnerships”
do deliver significant benefits – a view apparently widely held, with 57
per cent of survey respondents intending to have closer relations with
fewer suppliers – logic suggests that suppliers should be chosen on value
provided. Yet, only a meagre 42 per cent of respondents judge a supplier
mainly on the value added, as opposed to 69 per cent who see cost of
products as key. It is this retained emphasis on cost that is undoubtedly
a major factor why many UK suppliers are reluctant to invest in
developing design and engineering skills.

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.

Controlling new product information


New product development is an increasingly important process, especially if
companies expect to provide more customized offerings, and is one area where
84 IT can prove its worth. As manufacturers recognize the importance of having to
share and control information across teams and with suppliers and customers,
many (25 per cent claims the survey) have already turned to IT to help improve
communications and manage the process.

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

Unisys Corporation is a leading information systems company with 60,000


customers in 100 countries worldwide, and a major supplier of information 85
services and technology to financial service, government, telecommunications,
airlines and other markets.
In early 1993, Unisys, searching for a novel and effective way to provide high
quality service at all client levels, began to implement its transition from a
hardware-oriented manufacturer to an organization committed to providing a
full range of information services for its customers. Included in this was the
concept called Customerize.
This initiative was researched, tested and implemented as a corporate-wide
programme affecting all disciplines from manufacturing to marketing, to sales
and services. It was seen as an effective way to market the US$9 billion
company’s services and products worldwide. For recognition and positioning,
Customerize has been a huge success, but where did it start?
Customerize evolved from the company’s experience in working with clients,
and from discussions and evaluations with research organizations, internal
groups and advertising agencies. This helped to identify a key differentiator: a
focus on the clients’ customer.
Unisys’ global market position and market opportunities were scrutinized.
Its core strengths, coupled with increased demand, created a unique
opportunity for Unisys to help its clients attract and retain their customers, and
to communicate this capability to a widespread and diverse client base.
The idea had merit because it was so simple: furthermore, it was better than
many other forms of customer-orientation because it crossed all the usual
borders. No one was left out, and it applied to all levels of the business and
public sector community. There is an endless chain in any business that goes
from the suppliers of raw materials, to the manufacturer or service provider, to
the user or buyer, to other users or buyers, and back to the initial providers.
Enter the chain anywhere and you find that the next organization in the chain
is dependent on the earlier ones.
Customerize was never intended to be merely an advertising theme or point-
of-sale technology: neither an umbrella for all products and services, nor a
short-term gimmick. Customerize was a philosophy based on the premiss that
service to the customer was the prime directive for any of Unisys’ clients. In this
commodity-dominated society (the company reasoned), service is often the only
differentiator among companies. So, this need for Unisys – and its clients – to
offer superior service means that it is no longer sufficient just to take care of
your clients’ service needs – that benefit must be carried through to their
customers as well. The company must look carefully at aligning its customers’
information strategy with their customer service goals.
IJPDLM Thousands of Unisys employees were trained so they were tuned into
27,2 Customerize. Customers also were trained. The company appointed a sort of
“Czar” – a champion – for the programme, to help reach and educate all
employees and management. The fact that a manager was dedicated to the
concept provided evidence of management’s strong commitment.
The company implemented Customerize by, first, listening to hear exactly
86 what customers needed. Then, most important, it worked with them to
understand what their customers expected. Competitors’ best practices were
analysed to shorten the time frame in responding to customer needs. Then a
process of evaluating and determining the current position of clients – how
“Customerized” their operation was already – by answering questions
including:
• Do they know what their customers really value?
• How do they monitor changes in customer needs?
• Do all their employees – not just those involved in customer service –
understand how they ultimately impact the delivery of service?
• How do they segment and service different classes of customers, and
how successful are they?
Then, based on the answers, the Customerize process might begin with (for
example) research on market trends, segmenting the client’s markets and
customers and understanding buyer values.
The next stage could be to assist the client in prioritizing the actions to
improve existing services, or offer new services based on customer feedback.
The quickest way to modify or create a service is to leverage best practice from
other companies; but if competitors focus only on this, the best they can achieve
is parity: you will not get ahead.
Customerize leads to a quality standard that is not yet fully established. It
helped Unisys develop a new attitude that will take the company into the next
decade. Customerize epitomizes the philosophy and practice that will make –
and always has made – businesses successful. Unisys believes the model is
correct, but expects it to evolve as clients’ business opportunities and
challenges change.
One simple measure of success is to count responses. The company looks at
results from focus groups. It pays for research. One advertisement asked
readers: “Are you Customerized?” and asks ten questions to help readers
analyse their business and determine how their company measures up. The
greatest measure of all is from clients, and from the increase in contracting
engagements for Unisys in assisting clients to Customerize their operations.
Of course, there were obstacles. On first exposure, some people could not
relate to what it meant to them. The company had to overcome the usual
resistance to a new word, and getting people on board. Some methods of
implementation, like posters and advertisements, when tested in focus groups,
did not do well. People got confused and thought Customerize was some sort of
process. Some thought it was silly. Unisys did a lot of selling up front, and got “Customerize”:
management support early on and took it from there. Unisys
The strategy is pretty hard to argue with, once you understand it. One Corporation
advertisement read: “When you Customerize, you put the customer at the heart
of your world instead of at the periphery. By embedding customer service
objectives within your information strategy, Unisys will help you extend the
full capabilities of your enterprise to points of customer contact – the points 87
where business is won or lost.” Where doesn’t that fit?
So what was the pay-off? It stimulated new business and discussions with
organizations Unisys did not know before the programme. There were also
several other benefits, many of them among the objectives set at the start.
Increased awareness, for example. The concept sets the company’s advertising
apart. It also helped Unisys gain a unique positioning as a service-led,
technology-based corporation that had recognized the growing need to take
care of clients, and their customers.
It discovered a growing rallying cry for employees, clients and third parties.
When times were tough for the company some years ago, people had given up
hope. Now it is back and doing better than its peers, it can point to this and
other new ideas as being part of the new Unisys.
In addition, it has been a tremendous help in putting the company well ahead
of its two different types of competitor, those technology companies that are
now doing less well, and those that are purely consultants recommending to
clients what they should do to streamline and grow. In both cases, Customerize
is proving to be an effective weapon that brings in new customers, and helps
Unisys keep the old ones. The company believes that Customerize is a “dig in”
concept. Stay with your customers, and their customers will stay with them.
IJPDLM
27,2 The missing links
With the huge increase in the use of computers that has taken place within most
manufacturing organizations over the last decade, it would be easy to assume
that the early promise of “the right information at the right time”, was now
88 being met. Yet, although most companies are awash with electronic data, they
still rarely seem to be accessible by the people who need them, when they need
them.
In fact, the lack of control over engineering data has been recognized over the
last few years, with the resultant growth in prominence of Product Data
Management systems. However, perhaps more surprising is that, for most
companies, manufacturing and shopfloor data are also similarly unmanaged.
According to Pat McCarthy, Managing Director of Information Engineering
Group (IEG), although most companies now use some form of planning system,
such as MRPII/ERP, these “office”-based systems tend to be driven more by
financial considerations, as opposed to providing actual support to run the
factory floor.
Speaking at the CIM Show Conference, McCarthy explained that MRPII
systems are good at managing everything up to the factory door, and some do
provide facilities for finite scheduling and some shopfloor data capture. But,
this coverage is only a small proportion of the data management needed.
Moreover, it is tied to the typical MRP cycle of days or weeks. Whereas, with the
general industry trend towards short-run and reduced lead time production, the
factory cycle is now typically measured in hours and days.
Similarly, when other solutions have been sought, the tendency in the past
has been for throwing in discrete systems targeted at meeting specific local
needs. These have included introducing some shopfloor data capture terminals,
machine-monitoring equipment and SPC, scheduling software, or enhancing
the limited data capture and analysis capabilities of machine and process
controllers through adding SCADA systems. But, by not tying these systems
together, or providing integration with the management systems, which could
then make the data available to all those who need them, these have also failed
to provide the missing shopfloor control.
The greater level of decision making on the shopfloor, and the limited time
for referring to higher management, means that companies not only need to
capture data more quickly and accurately, but also manage these data and make
them available to the people on the shopfloor. To do this means companies must
install effective controls in the area between business-planning and
management systems and the individual machine/process control systems.
Importantly, this lack of manufacturing data management is not really a
technical problem. System integration has been theoretically possible for some
time, and has become more practical than having to comply with the CIM
standards of the 1980s, such as MAP, which is far too complex and
sophisticated for the majority of applications. Manufacturers of both control
systems and management systems now claim that they supply open systems The missing
and that connectivity of the diverse systems is possible through standard links
interfaces and protocols. Also the standardization on Windows operating
system is making it increasingly easier to provide networked links between the
plant floor and office systems.
There is also now an increasing number of potential software/hardware
solutions, ranging from completely integrated systems that offer everything 89
from an ERP right down to PLCs to “Networked” PC-based factory systems and
modular software packages that extend the capability of, and link, existing
fragmented shopfloor technology. Included within these options are
Manufacturing Execution Systems (MES). This is one of the better-known
generic terms, adopted by a number of IT suppliers, for systems that provide
the “ability to link business planning and control systems to deliver to
manufacturing an achievable and realistic plan”.
However, stated McCarthy, when it comes to actually implementing a system
to bridge the gap in factory control, there are some key issues that companies
need to recognize.
Operations complexity. Many activities within industry, such as sales order
processing, managing inventory, financial information or procurement, do not
differ dramatically from one kind of manufacturing organization to another.
Therefore, developing relatively standard IT solutions has been possible.
However, the factory environment and its control requirements can differ
substantially, depending on whether the company has a bulk process operation,
specializes in design-to-order products or manufactures a range of standard
and customized products. Because of wide variation in manufacturing
characteristics, in terms of product complexity, incidence of design change,
process style and priorities, there can be no “off the shelf” solutions. Therefore,
although there are now sets of tools available, how they are used needs to be
tailored to individual needs, and this adds significantly to the complexity of the
task.
Problem perception. A typical mistake is the belief that there are only two
basic dimensions to shopfloor data control; getting demand information down
to the shopfloor from a higher level MRPII and feeding back information so that
management can make decisions. Although these aspects are important, this
view completely misses a major part of what is really required. As decisions are
made every day within the factory, factory control must also be about what type
of IT tools are provided on the shopfloor to enable people to manage the way
they do things more effectively, by enabling them to make operational decisions
using the latest and most accurate information.
People/process issues. Probably the main problem, but also ultimately the key
to the effective use of information within a factory, is the need first of all to
change substantially the way the factory operates. Unless the processes have
been re-engineered and simplified, around integrated teams, work cells, local
empowerment and decision making, then IT support tools will have little
benefit.
IJPDLM In reality, observes McCarthy, there is little point putting these IT systems
27,2 into traditionally structured factories. They will not be very effective within this
environment, and they will not drive change.
However, within re-engineered operations, working to simplified processes,
IT can provide significant support – in areas such as better factory planning,
area/cell scheduling, worklist management, job tracking, traceability, quality
90 control and process monitoring. Moreover, by improving the process flow and
so bringing together all of the previously disparate elements, this tends to
reduce the overall amount of IT needed, and the systems are often less
complicated.
According to McCarthy, a typical factory system is based around “Windows”
Networked PCs, with a flexible database architecture, and supporting Open
System communication tools. In this way integration is not complicated.
Providing overall factory control is the main Factory PC. This is interfaced with
the MRP system, and from the downloaded master schedules can undertake the
reconciliation against resources and actual demand pull to produce an actual
worklist. It also maintains a factory database for control purposes, which holds
BOM data, and plans and routes that the factory needs but which can be
detailed to hold within the MRP system. At the next level within the network,
production areas have their own cell control PCs, for providing schedule and
product data, measuring performance and which may often maintain cell
databases. At a lower level the network includes individual work centre PCs,
and interfaces to process and machine control systems.
Because of the simplicity, and general greater familiarity of PCs, line
managers and operators are in a better position to manage their own systems,
and many of the applications, run on a line or within a cell, can be developed by
the users themselves, with a minimum of specialist support. This approach
tends to generate a level of ownership and commitment to the system, which is
often hard to achieve with solutions imposed from above.
Overall, concludes McCarthy, there is still plenty of scope for major
improvements in shopfloor control in most companies, and if done well the
benefits from implementing changed worked practices and supporting IT can
be enormous, and unrivalled anywhere else in IT.
Business 2000 –
Business 2000 – China’s China’s consumer
consumer markets markets

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.

Market share a necessity


China’s sheer size, its weak distribution infrastructure and increasingly intense
competition will make market leadership an elusive prize. Many companies are
already having to reconsider their approaches; in all too many cases, early gains
have turned into a serious drain on resources. By 2000, leaders will need to have
category market shares of at least 20 per cent to 25 per cent nationwide,
probably more to be considered clear winners. For mass market categories such
as food and beverages this implies achieving annual sales in excess of $1 billion.
Yet in a survey of 13 leading multinationals, McKinsey found that most had
sales in 1995 of less than $100 million. Leaders will also need far wider
geographic coverage. Surveyed companies typically had salespeople in only
about 15 cities. But with millions more consumers set to cross the $800 annual
income threshold – the level at which consumerism takes off – winning
companies will need sales offices and established supply lines in well over 100
cities by 2000.
While a number of consumer goods companies are increasing their presence
– Procter & Gamble, Coca-Cola, Unilever and Nestlé look set to reach $1 billion
in annual sales by 2000 – many are struggling. They face five formidable
obstacles:
(1) Rapidly escalating competition. Practically all leading consumer
multinationals have established operations in China. In addition, many
mid-sized Asian manufacturers have used their superior understanding
of China to make significant inroads. Market share is therefore volatile.
Overcapacity is already apparent. The world’s top beer companies and
many smaller ones have rushed to buy or build capacity. If all their
capacity announcements materialize, production of premium beer could
exceed demand by 80 per cent by the end of the decade. Sales, marketing
and advertising costs are rising too.
(2) Poor transportation infrastructure. Delivering products reliably and cost-
effectively will be an enormous challenge given China’s poor
transportation. It generally takes four times longer to transport a
IJPDLM container from Beijing to Guangzhou than it does to cover a similar
27,2 distance in the USA. Moreover, the contents are up to 20 times more
likely to arrive damaged.
(3) Underdeveloped and fragmented distribution channels. The proliferation
of small-scale stores means that less than 10 per cent of grocery sales go
through large-format stores, even in major cities. For real market impact,
92 multinationals will have to supply these local groceries, penetrating
more than 250,000 outlets. While using local distributors to reach these
stores offers a cost-effective answer, most companies feel their
distributors are inadequate with respect to delivery, sales,
merchandising, promotion and collection.
(4) Scarcity of talent. The dearth of good managers is one of the biggest
brakes on growth. Most multinationals soon discover that their local
partners lack the necessary product and market knowledge, distribution
reach and financial resources.
(5) Unwieldy joint ventures. As Chinese business expands, manufacturing,
logistics, sales and marketing all need to be carefully co-ordinated. That
is no easy task in the best of worlds, and all the more difficult in China,
where it usually means orchestrating a growing number of complex joint
ventures.
Choosing the right strategy
McKinsey has seen three common business approaches to China. Companies
following the first two – “Wait for payback before investing further” and “Bet
on a few strong brands” – often get off to a good start but then sputter and stall
because they do not have the power to win long term, especially once strong
competitors enter the race. The third approach – “Build volume fast” – rightly
aims for aggressive growth, but often fails because market expansion gets too
far ahead of the organization’s ability to support broad sales and distribution
efforts; pricing and positioning control is frequently lost. Some firms
underestimate the cost of operating on multiple fronts and run into cash-flow
problems too.
The winning companies are bold. From the outset they play to dominate key
markets, then replicate their strength elsewhere. They do so by building
beachheads in cities they can win outright. By generating positive momentum
with both consumers and the trade they pull ahead of competitors, then go on to
secure their positions by controlling sales and distribution and quickly building
deep organizational capabilities. Once in a dominant position, they can weather
onslaughts from new entrants. Profits from these early wins can be used to fund
expansion into new markets and help maintain corporate commitment.
Companies should heed the three principles outlined below.

First mover advantage


(1) Take charge of sales and distribution. Companies which enter the market
early have a distinct advantage. They have their choice of distributors,
open access to shelf space and find it easier to build their brands in Business 2000 –
uncrowded markets. In the cola wars, the first company to establish a China’s consumer
bottling plant in a given city has since maintained leadership there. markets
However, to build real depth in the market, multinationals must meet the
needs of trade channels and consumers consistently, providing
distributors and retailers with dependable turnover and margins, and
customers with uniform product positioning and availability. This is 93
enormously difficult in China, where the basic distribution infrastructure
and distribution skills are so inadequate. As a result, multinationals
must play an active role in sales and distribution; concentrating on
marketing and brand management will not suffice.
(2) Over-invest in building organizational capabilities. Companies need the
necessary resources and organizational structures to build local
capabilities. However, do not localize too quickly. Experienced
expatriates may be expensive, but you need them. Ambitious
multinationals are also attempting to centralize their key activities (sales,
marketing, distribution, etc.) under umbrella holding companies.
(3) Pace yourself for a marathon, not a sprint. To succeed in China requires
deep financial pockets and commitment from corporate headquarters.
China management needs to be explicit about market development
priorities, investment needs and likely returns. For its part, the parent
company must clarify its appetite for investment and willingness to
endure negative cash flows because of development expenses. The better
a company’s understanding of what it takes to succeed in China, the
easier it will be to set realistic targets.

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.

The role of supply partnerships


While there is widespread agreement that business partnerships can be an
effective means for firms to leverage their skills and resources in increasingly
competitive and turbulent environments, few studies have examined the
partnerships that develop between firms and their suppliers. This article
summarizes research undertaken by Alexandra Campbell, assistant professor
of marketing at York University, into 114 firms in the European flexible
packaging industry, and investigates the role of supply partnerships in
building strategic advantage. The results from the research include the
following:
• When the buying firm has a strategy of fast innovation, buyer
commitment to a supplier increases.
• A strategy of fast delivery does not increase buyer commitment to a
supplier.
• When the buyer perceives mutual trust in the supply relationship, buyer
commitment to a supplier increases.
• Firms do commit to suppliers to shorten new product development
cycles.
• Buyer commitment leads to joint problem solving to increase the
efficiency of the supply relationship.
• Joint problem solving with suppliers increases the buying firm’s belief
that it is difficult for competitors to match its market responsiveness
advantages.
• Joint problem solving with suppliers improves a firm’s efficiency or Supply
effectiveness through the interlinking of activities. partnerships
• Joint problem solving with suppliers improves a firm’s position in other
connected relationships.
• Supply partnerships can contribute to maintaining or improving a firm’s
competitiveness. 95
Creating customer value
Campbell’s findings make two significant contributions to the study of buyer-
supplier relationships. The first is the recognition that supply governance
decisions are influenced not only by factors stemming from the supply
relationship itself, but also by a firm’s strategies in its customer relationships.
The second lies in the evidence of a buying firm’s perception of the market
responsiveness advantages that can arise from co-operation. The research has
focused on one type of firm strategy aimed at consistently offering superior
value to the customer: fast market responsiveness. However, there are other
possible approaches. Recent studies of market leaders revealed three such
strategies:
(1) operational excellence;
(2) customer responsiveness; and
(3) performance superiority.
All of these differ in their core value proposition and in the capabilities required
to execute them.
Fast market responsiveness is influenced by linking activities that occur in
a firm’s supply relationships with activities that occur in its customer
relationships. This implies that the extent to which a firm’s strategy choices
become distinctive depends on the quality of its supplier relationships. The
ability to transfer knowledge derived in one set of relationships to other
relationships can be used to execute a number of different firm strategies. Joint
problem solving with suppliers may represent a distinctive capability for
firms, one that both improves their competitiveness and protects them from
imitation.

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

You cannot pick up a magazine or newspaper or turn on the TV without


hearing something about the information superhighway, telecommunications 99
companies or cable TV. Intriguing pilot projects and apparent success stories
capture the attention of executives in all manner of industries. Success is not
necessarily assured, however. The average annual revenue earned by Internet
vendors has been less than $25,000. Other projects such as Mecklermedia’s
shared corporate World Wide Web server and several interactive television
trials appear to have fizzled out. Nonetheless, the information superhighway
does have the ability to create and destroy business value on a scale that could
rock the world’s largest and most successful companies.

The opportunities on offer


The predicted growth in connected infrastructure is staggering. Research
predicts a 16-fold increase in the installed visual telephony base worldwide
between 1994 and 2000. Once the Internet, or some other interactive
infrastructure becomes robust and widely adopted, the potential for business
change is colossal. There will be opportunities to improve current business
processes, create and exploit new markets, bypass non-value-adding
intermediaries and radically revise workplace practices. While doubters remain
(viewing the rise of the information superhighway as an over-hyped fad
offering only cosmetic changes) some managers recognize the potential and
have decided that the opportunities outweigh the risks. This is apparent with
the ongoing announcements concerning various alliances, cable TV trials,
mergers and other projects. Businesses outside the media and
telecommunications industry are also beginning to set up World Web pages. It
is now possible to try out banking services offered by Bank of America or take
a preview of a Hyatt Resort hotel in the Caribbean.
One reason for the relative lack of commercial success may be the confusion
which surrounds the information superhighway. Executives are bombarded
with conflicting viewpoints, differing opinions, contradictory research and a
diverse set of future scenarios and timetables. Compounding the confusion is
the lack of tools, methods and models for analysing the impact of the
information superhighway. This has led Ernst & Young to develop a way of
identifying business opportunities to assess the ongoing potential. A recent
issue of its publication CenterPoint provides a starting point for a thorough
appraisal of the benefits and associated risks.

The electronic marketspace


To assess the impact of the information superhighway, managers must
understand several concepts. The first is the distinction between the traditional
IJPDLM marketplace transaction and the electronic marketspace transaction. The
27,2 traditional marketplace is based on the familiar notions of interactions between
a physical seller and buyer in an actual location. Along the superhighway,
transactions occur electronically, location is irrelevant and a physical seller may
not be present at the time of transaction. The second is the application of three
components of the business value proposition – content, context and
100 infrastructure – to the electronic marketspace and how it alters business value.
A key challenge to executives is to review their current value propositions in
terms of these components:
• Content – the product or service to be purchased. Since it cannot be
physically present, new notions of content description are needed.
• Context – the electronic environment in which content is offered.
• Infrastructure – the delivery method (i.e. the major telecommunications
carriers). This is comparable to the physical network of warehouses,
vehicles and roads which enable traditional market participation.

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.

The action to take


While mainstream customers may have little interest in conducting business
over the information superhighway, this may change quickly in the future.
Managers need to anticipate such changes. Here are a number of steps that they Business on the
can take to ensure their organizations are not caught off-guard: information
• Confirm your interest. Investment and commitment to new ways of superhighway
working is essential. Managers will need to overcome the paradox of
disruptive technologies while continuing to conduct business as usual.
But until clearer patterns emerge, a modest portfolio approach towards
investments would be safer. 101
• Innovate your value proposition. Brainstorm clever ways to offer new
services and to deliver these services electronically: create an expanded
online context, consider developing an online context which offers
products and services from your competitors (as the airlines have done
with reservation systems), develop an online context which addresses a
niche that has no single physical context, create an electronic community
around your business through which people can share information. At
the very least, extend your existing context to include the electronic
community. Avoid thinking of the information superhighway as a simple
expansion of your current marketing and delivery systems.
• Leverage your existing infrastructure. Recognize that the information
which you already collect about products and customer activity has
value itself. Such information can serve as a significant source of revenue
or as a competitive differentiator, while the information superhighway
provides an excellent means to deliver that information. Overnight
delivery companies now let customers dial-in to get information on the
status of packages in transit. Exploit your existing infrastructure to
develop new lines of business or promote existing businesses.
• Look beyond customers and suppliers. Identify ways you can bypass
existing intermediaries and ways you can become a valued intermediary
for those in the value chain. Develop offensive and defensive strategies
for either possibility. Determine whether your products or services will
be required when customers conduct business over the information
superhighway. (What will be the role of travel agents when travellers can
easily find and compare availability and rates for airlines, rental cars and
hotels online?)
• Look for innovative partnerships. Partnerships allow organizations to
move into new areas while leveraging current core competences. A
utility firm considering a move into the telecommunications service
market would benefit from a partnership with an appropriate high-
technology company. Few companies will have the variety of skills in the
areas of content, context and infrastructure to single-handedly dominate
a segment of the information superhighway, but in partnership a
company could quickly bring together the right mix of skills.
IJPDLM
27,2 Virtual partners
Following the explosion in general interest in the Internet, the growing debate
within the industrial community is how companies and engineers can best
utilize the information superhighway. One obvious role is the speeding up of
102 information gathering, an essential but time-consuming part of a designer’s
role. And, with time to market increasingly important for most companies,
finding the shortest route to establishing firm information about the
components needed to turn a concept into a design, can prove vital.
Now, National Semiconductor Corp. (National) has taken a significant step
towards realizing this potential, by mounting its 30,000 parts catalogue on the
World Wide Web. California-based National sees this approach creating a
dramatic teaming of product development and marketing possibilities, cutting
as much as eight weeks from its customers’ time to market, and developing a
new forum for active dialogue between its semiconductor engineers and its
customers.

Improving information delivery


Traditional product information vehicles, such as printed catalogues, and sales
and advertising literature, suffer from a number of problems:
• They typically reach only a relatively small percentage of the “right”
customers (National estimate 30 per cent).
• With shrinking development cycles, paper delivered information can
often become obsolete by the time it reaches the designer. Even if the
information is not out of date, there is always the suspicion that it might
be.
• The time between product information being created and printed
documents getting into the customers’ hands can be relatively lengthy.
For semiconductor products this can be anywhere from eight to 16
weeks; time which can add delay to a designer’s cycle time.
To improve its product information delivery, and reduce the time lag, National
first studied its customer base. From the information gathered it was able to
define its real customer as the million or so engineers who design workstations,
PCs, or central switches for the telecommunications industry. It also realized
that these engineers do not buy the products per se, they really buy the function
that they are told it will do.
Once this customer focus was established, National decided to solve its
information delivery challenge by building individual relationships with the
designers themselves. If engineers were to design National’s products into their

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.

Developing the solution


To achieve the desired solution the company has turned to the Web as the
optimal vehicle for getting information to the right customers in a way that best
serves their needs. According to National, the Web is able to meet its customers’ 103
demand for comprehensive, complete and accurate information – and the most
up-to-date data become available in minutes, thus providing potentially
significant time savings.
To develop the necessary Web site, National linked up with CADIS Inc., and
it has also partnered with a publishing company, which maintains the Web site.
The actual initial process of making the information available comprised two
basic steps. First, National’s full product library of basic technology
information (its data sheets) was put on the Web, with access to this database
established late in 1995. The next step was finding efficient ways for designers
to get the information they need.
At the simplest level, customers identified that they wanted to be able to
search by part number and by the industry standards which define a product.
At the next level, the need was for the ability to do a text search, say, for
Ethernet controllers. These requirements were fairly easy to satisfy. The real
challenge lay in enabling deeper enquiries, where designers want to search by
performance attribute. For example, if a designer wants a system to operate on
a battery at 250MHz, he/she needs to be able to find out quickly, without
searching by specific part number, what semiconductor components there are
which will satisfy these performance criteria.
For a 30,000 part database with parameters running at least eight levels
deep, meeting these search requirements presented a formidable obstacle. As
National explain, the then existing technology for creating Web pages, Hyper
Text Mark-up Language, looked awkward and impractical for the necessary
kind of guided search, where designers are able to intuitively get through to the
right information with complex enquiries. The solution proved to be Sun
Microsystems’ new Java technology. By developing the client application in
Java, CADIS paved the way for instant updating of the parts’ database and all
of its associated screens as the customer moves through a query.

More than just access


As National has recognized, adopting this new approach marks a dramatic shift
from the traditional method of storing information in paper documents. Web
accessibility requires moving to a knowledge-based environment which allows
customers to search and organize information in ways that fit their needs.
Also, more than access is at stake here. The paper format, which served its
purpose when semiconductor technology was simpler, has grown cumbersome
and unworkable for parts that may now contain more than a million gates.
Designers are looking for something far richer than today’s data sheets can
IJPDLM convey, especially when data sheets can run up to 300 pages long. National
27,2 predict that enhancement of its Web access will enable it to eliminate the
constriction on information currently delivered on paper and allow for inclusion
of data about a product’s performance, such as complex curves, not currently
embodied in a few discrete numbers.

104 Further possibilities


Furthermore, a wealth of helpful information is already emerging from blind
focus groups the company commissioned to survey response to the Web project.
Hands-on experience has spurred new ideas and insights. As an example of
emerging possibilities, National is talking about using an attribute search to
come up with a request for a part that does not yet exist. It can also make use of
failed queries to guess at ideas for new products, again steepening the cycle
curve and bringing the company closer to its customers’ design process.
With this focus on getting the right information quickly into customer’s
hands, National expects to enhance not only its customers’ product
development capabilities, but its own. And, through continuous enhancement of
its Web site information gateway, the company sees the system designer
responsible for the end product becoming able to raise new ideas with National
directly and effectively – and even the future possibility of facilitating online
dialog between an external systems designer and one of National’s own
semiconductor designers. This will in effect make National and its customers
virtual partners in the design and development process.
Electronic data
Making electronic data interchange
interchange facilities available available to all

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.

Firms will become truly customer driven


The great illusion of modern marketing, claimed Blattberg, is that it is customer
driven. But, how many companies really know their customers face to face? The
reality is that the information used today is sampled and survey based,
and tends to be about segments and markets, not about individual customer
needs.
However, IT – low-cost computing and integrated databases coupled with
data capture techniques – will now allow companies to gather and manage
individual customer information cost effectively. This will enable marketing to The marketing
work directly with individualized customer data, such as customer profiles, information
product/service usage and preferences, individual price and promotional revolution
responses, and use this to design individual products and services. Another
important implication of this one-on-one marketing is that companies will be
able to manage customer relationships better. For example, by knowing who
individual customers are, they will be able determine when custom is lost, and 111
act accordingly. Importantly, the rapidly increasing flexibility in manufacturing
is starting to complement this marketing approach.

Rapid information flows and telecommunications will allow the creation of


virtual firms which serve customers
Within this new business environment, all of the activities typically associated
with satisfying customer demand – i.e. promotion, order response, production
and delivery – are undertaken by different specialist companies. In essence,
explained Blattberg, the customer information firm will control the customers
and will simply manage the product and service providers who serve the
customers. An existing example of the virtual firm is the Sears catalog.
Although Sears maintains the customer lists, the marketing, purchasing,
manufacturing, distribution and product servicing are all undertaken by other
companies.

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?

Marketing will become intercorporational


To provide products and services, marketing will become the “link” of the
relationship with the customer. Therefore, all customer interactions will need to
be managed by marketing, including production, operations, customer service
and logistics.

Marketing organization will be restructured


Firms will reorganize the marketing organization, with the emphasis on
different types of customer rather than products or markets. Similarly, different
stages of the customer life cycle will require separate marketing teams. The
teams will be focused on acquisition and retention, with customers categorized
as best, new, occasional, etc.
IJPDLM Action steps
27,2 To convert the theory into practice, and gain from the marketing information
revolution, Blattberg recommended a number of action steps that companies
should be currently pursuing. These are:
• Design and create integrated customer databases – this will enable
companies actually to name individual customers and also identify their
112 actions and needs.
• Capture all customer interactions – every relationship must be recorded,
especially those which are negative.
• Learn how to use database marketing.
• Structure the marketing function around “customer equity” – i.e. what
customers are worth over the long term, rather than just the present sale.
• Create a learning marketing function – one which evolves and adapts to
its customers as it captures and analyses more and more information.
Blattberg concluded that companies must learn to use IT to listen to customers
and communicate. Systems must be developed to capture what is going on with
customers, feed this information to the right part of the organization, and –
most importantly – respond accordingly.
SECTION 3
21st century
manufacturing

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.

A break with tradition


Chrysler admits that it has made more than its fair share of near fatal mistakes
over the past few years. Like many other traditional manufacturing companies,
it was organized in vertically oriented, functional departments. Designers
worked separately in their own building, and each design would be thrown
“over the wall” from design to engineering, engineering to purchasing,
purchasing to manufacturing, and so on. Eventually, after about five years,
sales would have something to offer the market. The system worked well
enough for many years, but it became evident that Chrysler could no longer
produce with sufficient speed the cost-effective, quality products it needed to
remain competitive.
In response, the firm introduced cross-functional platform teams, with all the
functions working together to develop the best possible product at the best
possible price. The system fosters innovative thinking and problem solving as
well as faster and cheaper new product development. During the past five years,
this blend of teamwork and innovation has transformed the company and its
product line. The first experiment in platform engineering – the 400 hp V10
Dodge Viper sports car – proved to be a great success. Other successful
products include: the Grand Cherokee jeep (which attracts so many buyers
Chrysler is building them around the clock on three shifts, six days a week), the
Dodge Ram and the Town and Country mini-van.

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.

The bad old days


Historically, the customer-supplier relationship has not always been a rosy one.
In the late 1970s and early 1980s the little trust that existed between suppliers
and manufacturers turned into outright hostility. Contracts were being
auctioned off to the lowest bid and car makers invariably became upset with the
cost that crept in after these low cost bids had been accepted. Inevitably,
suppliers complained that they did not have any profit margin by the end.
Chrysler began to see that change was necessary, that the old command and
control style of management needed to be replaced with innovative managerial
concepts that would be mutually beneficial to both customer and supplier.
According to Stailkamp, Chrysler had to swallow its pride, admit its mistakes
and take note of what suppliers were saying. It scrapped purchase order
auctioning and replaced it with target costing, and instead of demanding price
cuts from suppliers, it asked its suppliers what it could do to reduce costs
internally.
The result was a programme called SCORE, which has a certain irony as the
acronym began as a supplier cost reduction effort. It gave Chrysler a whole new
way of reducing costs and waste without reducing suppliers’ profit margins. It
also proved to be an invaluable communications programme. It has worked
well. According to Stailkamp the company has “booked a billion and a half
dollars in SCORE cost reduction savings”. The system convinced Chrysler that
a communication link with suppliers was crucial, and it decided to expand the
whole programme into what it calls an “extension enterprise” – a horizontal,
seamless, value-added chain that leads from the raw material to the retail
customer. Its basic tenet is that the leader of the chain is really the retail Supplier alliances
customer, not the manufacturer.

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.

Unexplored new channels


The second clue is to look at unexplored new channels. The UK’s direct auto
insurer, Direct Line, has found unprecedented success using information
technology to provide a cost-effective and fast service to its customers. It also
has the best retention rate and expense ratio in the industry because it tried to
provide a cheap service in a new way.
New channels still need to be evaluated and compared to current channel
distribution networks. Can the new channel meet customer needs effectively
and efficiently? Large customers with complex needs and generating high levels
of profits may justify the expense of a direct salesforce and may not be
adequately served by a cheaper alternative.

Gaps in market coverage


The third clue can be found by looking to see if there are any gaps in market
coverage. Xerox found, for instance, that it was dominating the corporate copier
market in the 1980s, but that Japanese companies were having success at the
lower end of the market. Xerox fought back by hiring independent sales agents
to go after the personal copier segment and saw its market share rise from
nothing in 1987 to 27 per cent in 1994.
Filling in gaps in market coverage can be highly satisfying and profitable,
but caution needs to be exercised and transitions need to be carefully managed.
In the worst scenario, intermediaries can end up competing for the same
customers. Establishing the segments served by each channel, the products it
offers and the functions it performs at the outset will ensure that these conflicts
will be avoided.

Deteriorating total system economics


The fourth opportunity lies in taking benchmarking and other improvement
tools out of the company and into the distribution channels themselves. One oil
company did just that in the 1980s, restructuring its entire retailing network
and thus achieving the highest volumes and lowest costs in the market.

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.

Dated systems at interfaces


The last clue is found at the point where the company and its distributors meet
and where information is exchanged. Electronic data interchange and efficient
consumer response have helped in the more efficient management of
inventories, leading to cost savings. Investing in interface systems also benefits
the company as it often makes it a preferred supplier and increases switching
costs for the channel distributor.
Channel management has a poor track record, and succeeding requires
taking a rigorous, systematic and continuously innovative approach, according
to the team at McKinsey. As always, easier said than done. The good news is
that technological developments are likely to provide fresh opportunities for
those capable of making the most of them. But seeing where the opportunities
lie would appear to be the critical factor in successful channel management.
IJPDLM
27,2 The high-performance factory
Many technology-based companies have historically placed far more value on
developing and selling their products than making and delivering them. This
emphasis has typically resulted in high manufacturing costs, product
126 shortages, inventory bulges, back orders, delayed new product introductions,
and reduced customer satisfaction. However, as companies struggle to improve
their product development, many are discovering that they cannot afford to
ignore the essential processes that get their products through the production
line and into the customer’s hands.
According to international consultants Pittiglio Rabin Todd & McGrath
(PRTM), it now seems that high technology industry leaders are successfully
transforming their product supply operations from a necessary evil to a source
of sustainable competitive advantage. Their research reveals that those
companies striving to improve their product supply capabilities, irrespective of
their volumes, are becoming increasingly successful in overcoming past
problems, and hence beating their competitors two- to three-fold.
These findings have been established as part PRTM’s 1995 High
Performance Factory Benchmarking Study, which provides a best practice
model of “source and make” manufacturing processes on a global basis, against
which companies can position themselves to evaluate their own performance.
The study, which was co-sponsored by 11 leaders of manufacturing industry
and included over 150 participating plants, examined high-technology factories
source and make capabilities in five different industry segments; personal
computers, server and mainframe-class computers, telecommunications
equipment, medical electronics, and other electronic equipment. The
summarized findings of the study are presented under four main headings.
In the high-tech arena, where getting to market quickly means the difference
between market leadership and a warehouse of obsolete inventory, the time
required to ramp up a product from first prototype to full-volume production is
critical. But the study found that many companies are left far behind their best
in class rivals, who can reach production in one-third of the time – top European
companies beat average manufacturing launch time by 75 per cent.
A major factor in a product’s manufacturing launch time is the number of
engineering change orders, which are typically brought about by product
design quality issues and difficulties with component sourcing. Best-in-class
(BIC) companies (BIC is the average of the top 20 per cent) accelerate their
development cycle times, and save significant revenue, by reducing the number
of mistakes made in the design process. Close linkages between development,
suppliers, manufacturing and regulatory authorities, along with a gated
product introduction process that is well understood by all parties, drives
outstanding performance in this area.
And best performance can be quite outstanding – within 12 months after the
launch of a major new development project, BIC computer companies in the
server and mainframe market report only three ECOs, as compared to the The high-
median figure of 19 ECOs. performance
Supply-line management – formerly known as purchasing – has become an factory
important new tool for gaining competitive advantage. PRTM’s new study
reveals that supply-line practices are changing dramatically, providing
companies with new ways to speed production, save money and improve
quality. Supply bases are shrinking rapidly, and the old practices of inspecting 127
every piece part received is being replaced with vendor certification
programmes.
As an example, in 1995 the average computer company obtained 80 per cent
of its materials from 22 suppliers, as opposed to 31 suppliers in 1992. These
companies are also phasing out cumbersome paper-based ordering
mechanisms; 27 per cent of transactions are now completed by electronic data
interchange (EDI), compared with 12 per cent in 1992. In terms of inspection
effort, in 1995 82 per cent of incoming material lots were received without
inspection, an increase from 65 per cent in 1992. For Europe alone the picture is
slightly different. The average European computer company obtained 80 per
cent of it material from 43 suppliers, down from 55 suppliers in 1992. Currently,
33 per cent of transactions are completed via EDI, up from 18 per cent two years
ago.
Although changes in supply-line practice are industry-wide, some
companies are far ahead of the pack on the issue of supply line flexibility – an
increasingly crucial issue as product life cycles decrease and sales volumes
become harder to predict. In the computer sector, BIC companies needed only 20
days to achieve an unplanned 20 per cent increase in production, while median
companies needed 56 days. The same BIC companies can also more easily
adjust to a downturn, sustaining an average of 94 per cent order reduction
within 45 days of scheduled product delivery with no inventory or cost penalty.
The average company can only sustain a 20 per cent reduction for the same
amount of time. Companies that cannot respond quickly to changes in the
marketplace run the risk of out-of-control inventory and lost revenue.
According to the study, there is a measurable difference between delivering
what a company promises and meeting actual customer needs. While many
factories perform reasonably well in meeting the committed delivery date, they
do not come close to meeting the date initially requested by the customer. This
performance is leaving a major opportunity for competitive advantage that is
being taken by those companies that recognize the importance of fulfilling
customer needs. Across all industries, best-in-class companies meet 86 per cent
of customer request dates, while average companies only meet 50 per cent of
those requests.
Proper management of inventory is also critical for cost, flexibility and cycle-
time performance. For example, across all industries, sourcing time (the time to
specify and acquire materials and components) comprises nearly 75 per cent of
the entire source-make cycle-time; but companies that find ways to reduce
sourcing time take a dramatic lead time advantage. The personal computing
IJPDLM industry has proven itself a leader in this area, with fewer inventory days of
27,2 supply than every other study segment. In fact PC factories have reduced work-
in-progress and finished goods inventories to less than one week of supply each.
Finally, PRTM’s examination of manufacturing processes revealed the
continuing significant impact of high volume on factory costs in 1995. For
example, median cost per placement for printed circuit board assembly was 32
128 cents for factories with a volume of 25 million placements, 15 cents for those
with 200 million, and only ten cents for those with 800 million.
The study indicated that the high-tech industry has recognized the
importance of volume: volumes have risen throughout the industry and reduced
overall product assembly costs. For example, median cost per placement for
printed circuit board assembly declined by 20 per cent since 1992, from 35 cents
to 28 cents. This is attributed to a decreasing number of low-volume producers,
various factory improvements, and an increasing reliance on outsourced
production.
Though median assembly costs have dropped, typical companies are still
lagging behind the BIC competitors whose costs are 7 cents per placement.
Figures show, however, that these best-in-class companies saw no cost
improvement during the last few years, suggesting that the influence of volume
may have peaked for the leading companies. While volume is still key, some of
the other cost-related areas companies can address include plant location,
unique part numbers manufactured, printed circuit board assembly density,
and the ratio of indirect to direct employees, observes the study.
Volume is also a major factor in low material acquisition costs, and the
material acquisition rate – the cost of acquiring the material as a percentage of
material expenditures – was found to vary from 1 per cent to more than 20 per
cent. Obviously, concludes the study summary, companies buying the most
material are going to have the lowest rates, but companies can still find ways to
remain competitive. They can improve the efficiency of their acquisition
function by examining the number of suppliers, the number of parts procured,
percentage of material procured from international sources, and the percentage
of material received without inspection.
Ensuring
Ensuring manufacturing manufacturing
excellence excellence

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.

IKEA leads the way


IKEA is beginning to change the retail game as it creates and maintains a
superior global business. It has transformed its relationships with consumers,
and by “teaching” them to assemble furniture, it has cut its manufacturing and
distribution costs. It has built up a following across widely different markets for
a relatively consistent line of Scandinavian-inspired furniture, thus boosting
volume, which again reduces manufacturing costs. It has also transformed its
relationships with suppliers. Its buying offices scan the globe for potential
suppliers, and its engineering and business services groups coach these
suppliers to raise productivity, source raw materials and achieve quality
standards. It has invested in global information systems to manage logistics
across more than 120 stores, a dozen distribution centres and 2,300 suppliers in
nearly 70 countries. Among others, Wal-Mart, Makro and Carrefour show signs Overcoming the
that they are starting to recognize and adopt this approach. hurdles in global
Once a retailer starts to approach globalization in this way, a broad range of retailing
strategic options emerge that go beyond the traditional business exporter
approach. Three less familiar models are now being adopted by retailers
expanding abroad:
(1) Superior operator – companies expand internationally on the strength of 135
their operating capability (Tengelmann’s acquisition and turnaround of
A&P in the USA).
(2) Concept exporter – Benetton’s strategy to export a distinctive concept,
but let someone else run it. A vital ingredient of such an approach is
effective control of franchise execution, something Benetton continues to
struggle with.
(3) Skills exporter – companies export unique skills rather than entire
business systems.
Retail formats which have had trouble globalizing in the past may find that this
variegated approach allows them to participate selectively in attractive
international opportunities. Marks & Spencer has achieved greater success in
Asia than it did in Canada, for instance, because it has done a better job of
reconfiguring its approach to suit individual markets. While many experts
consider global retailing to be problematic and unprofitable, maintaining that
few companies have managed to establish genuinely global businesses, it is
clear that the prospects of long-term growth and tangible financial gains are too
real to be ignored.
IJPDLM
27,2 Radical Internet stirs up
retailing
One wonders what will happen to Britain – “the nation of shopkeepers” – if the
136 much-touted revolution in retailing occurs. The revolutionary forces are being
led by that all-purpose radical of the 1990s – the Internet. Many industry
analysts see interactive marketing – buying and selling through the Internet –
completely revolutionizing the marketing process, and some go as far as to say
that shops will no longer exist as all transactions will take place online. What
interactive marketing actually is and how it may – sensibly – develop is
outlined.
Interactive marketing is a broad term which takes in any kind of marketing
via interactive media, from video games and TV home shopping through CD-
ROMs, online computer services and interactive kiosks all the way to shopping
by computer. Marketing is considered to be interactive wherever there is a
continuing dialogue with customers that is not subject to the typical promotion
lag.
The growth of interactive media and interactive marketing is largely driven
by the technological development in computers, and the acceptance of new
forms of communications. This latter point is brought home after looking at the
global reach of online services. Over ten million Americans are now connected
to the Internet, and the figures are rising daily. The same trends are in place
across Europe, the Far East and the developing world. The total figure of people
with access to the Internet across the world is projected to be 250 million by the
end of the century.
Interactive marketing is ideally suited to perform three key marketing roles:
informing customers about a company’s products or services; creating brand
awareness, differentiation and preference among customers and convincing
customers in order to obtain orders and sell. Interactivity usually requires the
customer to take some form of initiative – to enquire about a product or service,
and to follow through. It does not achieve its full potential when customers have
no incentive to search. Much interactive marketing activity has focused on
providing information about products, services or other subjects and what
attracts the user is the speed of getting this information and its completeness.
The advantage to the marketer is a much lower cost of providing the
information compared with traditional, labour-intensive methods.
The advantage of providing information interactively is its low cost per
contact compared with traditional methods of sending mail pieces or manning
the telephones. However, interactive marketing’s penetration in this area is
limited to fields where customers have a high degree of interest and voluntarily
engage in information seeking, locating the particular sources themselves.
The opportunities actually to purchase through interactive media are far
rarer. Although customers in many parts of the world routinely purchase by
telephone, fax or mail, the move to provide interactive electronic purchasing has Radical Internet
lagged behind the rush to deliver information. The main barriers are data stirs up retailing
security and privacy. Customers are often reluctant to transmit credit card
numbers electronically or other sensitive information which will stay in the
selling company’s database.
However, technological developments that will offer full security are not far
away. These developments will have a sweeping impact as companies which 137
use interactive purchasing intelligently will be able to penetrate previously
unreachable markets. This will be particularly true for categories in which a
vast selection of products is important, and where the ratio of transport cost to
value favours regional, or even international shipment. The electronic
superstore has the potential to create an entirely new industry, allowing
geographically far-flung customers to purchase quickly and easily from
companies from even more far-flung suppliers.
The degree to which interactivity will affect marketing depends to a great
extent on the kind of product involved. Interactivity is likely to become a
powerful tool in those markets where the customer has a strong incentive to
search for information, or actively seeks to purchase the products because of
high interest value. In these markets, electronic interactivity may drive out more
traditional forms of marketing, such as those based on high fixed assets like
retail stores, or those which rely on scarce, experienced manpower.
On the other hand, interactivity is unlikely to have a great impact in
marketing products or services which do not trigger customers to seek
information or which rely on constant reminders to purchase. These
“unsought” products include low-interest items such as simple business
supplies or standard household consumables.
In another category, customers are relatively well informed and do not have
a large information need but they actively look for the products. Here, purchase-
based, interactive marketing systems may come to dominate because of their
low transaction costs. Many such products are sold today via mail order, with
consumers and businesses passing their orders via the post, fax or telephone.
Eventually, these product areas will be ready to move to electronic interactivity.
With marketing operations under attack in many firms, and the constant
need to improve marketing effectiveness in a highly competitive environment,
marketing professionals cannot afford to ignore this new technology.
Companies which harness the potential will be able to improve the efficiency of
their information and sales processes and concentrate more on brand building
or other means of enhancing their competitiveness. The potential for cost
saving in routine marketing operations and concentrating resources where they
count most makes interactive marketing a key area of interest.
To make the transition to interactive marketing, companies must do the
following: establish an Internet connection by obtaining an Internet address;
open a World Wide Web page on the Internet allowing customers to self-select
information, thus generating a flow of queries about the company; and devise
procedures to move from information interactivity to transaction interactivity.
IJPDLM This will challenge the company to allow customers actually to perform part of
27,2 the business electronically.
Interactive marketing will never take the place of interacting the old
fashioned way – with a retail salesperson or shop assistant. However, in many
aspects of purchasing life, buying electronically will inevitably replace face-to-
face transactions. Therefore companies need to be looking at all forms of
138 interactive marketing now – not when the method becomes an accepted norm.
How fast the new approach is adopted and mastered by businesses may well
make the difference between tomorrow’s winners and losers.
Banking on the
Banking on the Internet Internet
For many years commentators have said that the traditional bank has about as
much future as the dinosaur. Granted, many of these commentators secretly
hate their bank because of punitive charges, inconvenient opening hours and
unhelpful branch staff. Finally, they might be right. The rise of the usage and 139
popularity of the Internet and telephone banking systems may very well have
sounded the death knell for the “bank as we know it”. Telephone banking has
been fairly popular – nowhere more so than in nonservice-oriented Great
Britain – but it is the Internet which sends the most shivers up the spine of the
traditional bank branch manager.
The electronic ground was well and truly broken in the USA in 1995. In May
of that year Huntington Bancshares and Wachovia Corporation each invested
$1.2 million in the development of a completely Internet-based bank. The bank
was originally created and designed by a relatively small financial services
player – the Kentucky based, $580 million-asset Cardinal Bancshares
organization. Cardinal launched, with the other partners’ assistance, the
Security First Network Bank in October 1995. The Security First offered
checking and savings accounts to anyone with a computer and a modem.
Why should two large banks invest in a community bank’s product on such
a grand scale? Because Cardinal has developed the most advanced security
architecture – a massive pre-requisite for Internet banking. For once the small
fry has had a leading edge on its larger competitors! The launching of Security
First Network Bank marks a new beginning in banking – the advent of a secure
online financial transaction environment. Despite repeated attempts by
computer security experts, the security of the software has never been
breached. The lesson of Cardinal and Security First is that, in the age of
electronic banking, both large and small banks are now on equal footing. Both
can gain access to the Internet for approximately the same cost, and both can
compete in the same environment for customers around the world. Any bank,
from the smallest community bank to the largest commercial bank, will be able
to create its own online bank – cheaply and effectively.
But why is electronic banking finally catching on now? After all, the
technology has been available for over 20 years. Telephone banking was
introduced in 1977, but it has only been the last three years in which there has
been any significant use of the services. Now, with the Internet, it appears that
consumers, on the whole, may skip right over telephone banking and go
straight to PC banking. Industry reports show that, in the USA alone, in 1994
the sale of PCs exceeded the sale of color televisions for the first time. Over 30
million PCs are in homes across the USA already. What is more, the computer
industry anticipates shipping 12 million PCs in 1996 alone.
With this as the background, it is not surprising that the Huntington/
Wachovia/Cardinal joint venture was – although first – only one of several
major partnerships agreements between banks in the month of May 1995 alone.
IJPDLM Chief among the many deals was the purchase of software service providers. In
27,2 the same month, NationsBank Corporation and BankAmerica Corporation
announced their purchase of Meca Software Inc. the makers of the “Managing
your money” software package.
By purchasing this homebanking software, the banks hoped to maintain
their one-to-one relationship with their customers. In addition, NationsBank and
140 BankAmerica planned to allow a limited number of banks to join them as
owners of the software. It seems clear that partnerships between banks, and
between banks and service providers, will become more common as different
parties seek to develop cutting-edge abilities and services.
In addition to meeting consumer demand by offering electronic alternatives
to financial services, banks also stand to save significant amounts of money by
converting customers to self-service online banking. A recent study shows that
an average transaction performed by a teller in a branch costs $1.10, while an
equivalent electronic transaction costs about one-fourth that amount. Banks
will also save a great deal of expense by reducing the number of employees in
the bank and in closing some (most?) of the branches. Electronic banking makes
good economic sense, no matter how one looks at it.
There are countless opportunities for banks of all sizes to explore electronic
banking. Some banks are starting programmes gradually, exploring telephone
banking and screen phone options first. Others have commissioned proprietary
software that they will provide to their customers for PC banking. Financial
institutions of all sizes – at least 75 in the USA alone – have taken the plunge
and created home pages on the Internet.
The message is clear. Banks – and non-bank competitors such as insurance
companies – are developing online services as fast as they can. Whether banks
choose to address electronic banking through telephone banking, PC banking or
through the Internet is a decision each bank will have to make. Banker
colleagues and experts alike are urging banks not to fall behind in this rapidly
developing environment. This is a critical opportunity to lead the industry as
consumer demand for financial products continues to grow. No longer will the
winner of the financial services game be the one with the most branches; the
winner will be the one with the easiest customer access, through the telephone,
the Internet or any other electronic method that may be developed in the future.
Southwest
Southwest Airlines’ Home Airlines’ Home
Gate Gate

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.

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