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Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks


The authors Thomas H. Davenport is Director and Partner of the Accenture Institute for Strategic Change, Cambridge, MA, and the President's Distinguished Professor of Information Technology and Management at Babson College, USA. Jeffrey D. Brooks is a Research Fellow at the Accenture Institute for Strategic Change, Cambridge, MA, USA. Keywords Manufacturing resource planning, Supply chain management Abstract Early enterprise resource planning (ERP) systems or, more simply, enterprise systems (ES), were not primarily focused on the supply chain. Their initial focus was to execute and integrate such internally-oriented applications that support finance, accounting, manufacturing, order entry, and human resources. Having got their internal operations somewhat integrated, many organizations have moved on to address the supply chain with their ES. The Internet has also brought about a revolution in supply chain thinking. Progress toward complete inter-enterprise integration is measured in years and even decades. In this article, we discuss both the visions firms have for using enterprise systems for supply chain management, and the actual reality of current implementation. We conclude with projections of how enterprise systems will be used for supply chains in the future. Electronic access The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1741-0398.htm

Introduction
Early enterprise resource planning (ERP) systems or, more simply, enterprise systems (ES), were not primarily focused on the supply chain. Their initial focus was to execute and integrate such internally-oriented applications that support finance, accounting, manufacturing, order entry, and human resources. Even in the early days, however, a link to supply chain management (SCM) was present in the form of inventory management. Having got their internal operations somewhat integrated (Davenport, 2000), many organizations have moved on to address the supply chain with their ES. As more and more businesses complete their initial, multi-year implementations of core ESs and reflect on the large amounts of money and years it has taken to reach this point, too many are still unclear on how they will leverage all this integrated information into real competitive advantage. The supply chain, with all its transaction and information-intensity, offers substantial opportunity for inventory and working capital reductions. It also offers the possibility of closer relationships with suppliers and customers. In difficult economic times, both of these benefits are highly sought after. In a recent study of how 30 large firms were managing their ES environments (Davenport et al., 2002), more mentioned work on supply chains than any other application domain. The Internet has also brought about a revolution in supply chain thinking. Electronic data interchange (EDI), of course, has existed for a couple of decades to link industrial vendors with their customers. EDI, however, was heavily concentrated among large firms, was restricted to prosaic forms of information like order quantities and bills of lading, and relied on complex relationships with third-party ``value-added network'' providers. The connections between firms that it made possible could hardly be called seamless. The low cost and ease of use of the Internet has greatly spurred attempts to connect supply-and-demand chains across organizations. It is clear that organizations particularly large, global corporations are slowly approaching the visions laid out by strategists of 8

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . pp. 8-19 # Emerald Group Publishing Limited . ISSN 1741-0398 DOI 10.1108/09576050410510917

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

the ``extended enterprise'' and the ``real-time economy''. But the emphasis is on slow. Connecting complex information and business process environments across companies has proven to be much more difficult than the visionaries anticipated. Progress toward complete inter-enterprise integration is measured in years and even decades. In this article, we discuss both the visions firms have for using enterprise systems for SCM, and the actual reality of current implementation. We conclude with projections of how enterprise systems will be used for supply chains in the future.

The role of integrated information in SCM


SCM has always been a challenge of information integration. The idea is to allow everyone involved in the flow of goods to make decisions based on the latest and best information from everyone else, both upstream and downstream. The company that manages its supply chain best gets its product from points of origin to points of consumption in the least amount of time at the lowest cost. Earlier supply chain software helped firms manage and analyze their logistical and inventory management processes, but they were not well-integrated with other applications. ``Bolt-on'' SCM module vendors like Manugistics and i2 were focused on building cross-enterprise supply chain applications at the same time that firms like SAP and PeopleSoft were primarily focused on financial and human resource systems. Today, more powerful and integrated packaged solutions, in many cases employing the Internet, are suddenly putting supply chain excellence within the reach of virtually every company, and making it a competitive imperative for businesses of all sizes. Cost-cutting in internal operations At the most fundamental level, enterprise systems offer ways to squeeze costs out of internal supply chain operations. They accomplish this mainly by cutting across and linking together the traditional functional ``silos'' of the business, in the same way that good business process management does. In 9

fact, it is fair to say that cross-functional process management is not even possible on a large scale without enterprise systems to provide a shared foundation of information. It is easy for top management to declare that manufacturing should only make what sales has discovered it can sell, and that procurement should buy the right quantity of raw materials for what manufacturing is about to make. But in most firms, these functions are supported by completely separate systems, designed to handle only their own piece of the business and incapable of talking to each other. Manufacturing has no idea what sales is seeing in the marketplace. Procurement has no visibility into what marketing plans to promote. Lack of information integration among supply chain functions, of course, means that hand-offs from one part of the business to the next are far from smooth. To avoid lots of dropped balls, managers build ample redundancy and slack into the system which, in a product business, typically takes the form of inventory. And inventory is not cheap. For many companies, reducing inventory is the easiest and most direct means of getting value from their ES investments. The theme sounded often is to replace inventory with information. This is what Dreyer's Grand Ice Cream had in mind, for example, when it undertook to build its SCM system. Dreyer's, a $970 million California-based company recently acquired by Nestle, has all the typical supply chain problems of a food manufacturer, and then some. Its raw materials and finished goods are highly temperature sensitive (i.e. it melts) and perishable and its product line experiences seasonal sales peaks that would give most planners vertigo. Dreyer's used an enterprise system to link its forecasts to production scheduling and, ultimately, to procurement. As a result, it dramatically cut inventory levels a key cost driver. It used to be that Dreyer's entire finished goods inventory turned over 12 times per year. That number is now up to 15. Faster turns translate to higher warehouse capacity, and no immediate need as the business grows to spend capital on a new warehouse. Improving the efficiency of internal operations was also the goal at Eastman Chemical when it linked its SAP software into a new supply chain planning and forecasting

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

application. The application, made by Logility, pulls sales data from the enterprise system to generate forecasts based on special algorithms and past experience. Those forecasts are then published on the ES's database for the use of managers throughout the organization including salespeople in the field, who can input revised information via an intranet to reflect what they're learning in customer calls. For Eastman, a business-to-business supplier of plastics, fibers, and chemicals, better SCM keeps its resources working in concert to meet customer demand with maximum efficiency. As we will discuss later, an Eastman strategic venture is outsourcing its SCM capabilities to other firms. Efficiency across the extended supply chain For most companies, streamlining operations within their own walls presents enough of an immediate challenge. But the firms that are known for SCM have understood for a long time that the really big game is external. The inefficiencies in the hand-offs between different functions in a firm usually pale in comparison to those between the different firms that make up the broader supply chain. The classic example is that old case study from the 1980s: the Procter & Gamble/Wal-Mart relationship forged around the sale of disposable diapers. By sharing forecast and sales data, the two firms took a huge amount of inventory out of the total system, while at the same time improving in-stock performance and they shared the financial benefit. Today, this kind of cooperation across the supply chain is being made easier by the availability of enterprise systems. This is true in part simply because firms are getting their own acts together internally. Once integration has been achieved across the enterprise, it begins to seem possible to attack the larger issues of the extended supply chain. Once you have good information on your own sales, inventory, or production figures, it is much easier to share that with other companies. In keeping with the interests of their customers, major ES vendors are also making it an explicit part of their strategy to support cross-enterprise communications in their package offerings. 10

Reebok International is an excellent case in point. In its main businesses footwear, apparel, and sports equipment the company operates mainly as a marketer, producing and selling goods on a global basis. But with some 150 outlet stores of its own, Reebok is also a retailer in its own right. Reebok has focused particularly on supply chain capabilities, both internally and externally. To cut inventories across its entire system, it simultaneously implemented two SAP enterprise systems in the marketing and retailing parts of the business, and linked them through electronic commerce and EDI connections. The combination allows Reebok to integrate everything from new product development to analyzing profits in individual stores. But the connections do not end with Reebok's own retail operations. It is also integrating its manufacturing partners and customers around the globe through Internet EDI links and, ultimately, plans to tie its systems directly to theirs. Eventually, Reebok also expects to have direct linkages with the retailers it does not own through its ES. The situation is similar at Boeing, which relies on hundreds of internal and external suppliers for the five million to six million components needed to build a large twin-aisle airplane. Using Baan enterprise systems in combination with forecasting software from i2 Technologies, Boeing is finally getting a firm grasp on the complexity of getting the right parts to arrive just as they are needed. As at Reebok, the communications connections among internal parties are direct, from database to database but the connection to external suppliers is almost as seamless through EDI links to the ES. At the same time, Boeing is giving customers access to enterprise information through its part analysis and requirements tracking (PART) page, a secure Internet site that its customers can use to order spare parts or just check on availability and pricing. The Web site is especially popular with the 600 or so airlines that have never adopted EDI for parts ordering from Boeing. Both the Reebok and the Boeing examples offer a glimmer of the emerging revolution in SCM with the main instrument of change being the Internet. In fact, it is safe to say that the Internet's promise of instant, platform-independent communication among

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

systems is the biggest thing spurring today's development boom in SCM systems. It offers considerable improvement over EDI in terms of the types of information that can be transmitted, the number of firms that can access information over it, and the widespread availability and ease of use of software (i.e. Web browsers) to access the information. Enhanced customer service and network relationships Usually, the first impetus for SCM is the opportunity it offers for cost reduction. Along the way, though, companies generally discover it is also key to growing their businesses. This is true, first, because excellence in SCM can make a profound difference to customer service quality. Some studies have suggested that the typical manufacturer stands to cut the time between a customer's order and the arrival of the shipment by 15-40 per cent with well-implemented SCM software. And total lead-time, they find, could be reduced by as much as 75 per cent. Better customer service, naturally, leads to increased sales. One firm that has proved the studies true is Colgate-Palmolive, which undertook to install ESs, largely to achieve supply chain efficiencies. As part of a major turnaround effort, it reworked every link in its global supply chain, and used SAP software to link everything from purchasing to inventory management to manufacturing to delivery. As a result, Colgate reports it has cut delivery times to customers by 25 per cent. And the results are clear on the bottom line. For the first time in its history, Colgate surpassed Procter & Gamble's US market share in its largest product line, oral care products. Adding icing to the cake, Colgate also put the systems in place in model fashion; it is frequently benchmarked by other companies embarking on enterprise systems implementations (Grant, 1998). The service advantage goes further still when having a strong enterprise system in place allows a company to offer ``self-serve'' capabilities to customers and other supply chain partners. FedEx is famous for creating a package tracking system that allows shippers to see exactly where their package is in the system en route on schedule, delayed by bad weather, or already signed for by the recipient. 11

Companies of all kinds are following suit by creating extranets secure Internet sites accessible to selected partners that provide a view into their operations. Heineken, for instance, launched a system that gives its distributors access, via the Internet, to information about product availability and sales patterns housed in its ESs. Again, the fact of the ESs already being in place for internal purposes was the key. Once the brewer's own house was in order, it was not such a huge step to open the doors to others. Sara Lee Bakeries, previously known as Earthgrains, is still another company that saw customer service improvement as a key goal of its enterprise solution. Sara Lee Bakeries has used ES data to manage its entire business better, but it began its ES work focusing on supply chain improvements. In the past, this wholesale baker too often made deliveries to large grocery chain customers that were not on time or in accurate quantities, or were invoiced incorrectly. Earthgrains decided to clean up its act with enterprise software that would link together its accounting, reporting, order management, and distribution. When it saw from ES data that many customer orders were unprofitable, it forced customers to either change their orders or be ``fired''. The investment is paying off: Sara Lee Bakeries turned itself around in the late 1990s from a loss-making to a profitable company a key factor in its being acquired by Sara Lee in 2001. The rise of packaged supply chain software As well as being the right thing to do, SCM is getting easier to do right, thanks to the fact that software vendors have made it a development priority. For the most part, this development has been spearheaded not by the major enterprise systems vendors the SAPs, PeopleSofts, and Oracles of the world but by smaller, more focused software solution providers such as i2 and Manugistics. While the major ES vendors worked on providing the backbone systems to support SCM the operational transaction processing systems it was left to others, usually vendors with deep familiarity and expertise in specific industries, to create the analytical tools that would leverage all that good data into strategic analyses and tactical decisions. Their tools were the first to

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

help managers do good supply planning, demand planning, plant scheduling, transportation and warehouse management, and so on, drawing on information pulled from an ES's manufacturing applications and other sources. Later, of course, mainstream ES vendors added these capabilities to their own products. Smaller SCM vendors generally have the edge in state-of-the-art functionality, while mainstream ES vendors offer better integration with the other modules in their packages. As a result, there are dozens of good packaged applications on the market to choose from, virtually all of which interface to greater or lesser degrees of difficulty with the major enterprise systems vendors' applications. Some of these are highly-specialized point solutions, which address particular bottlenecks or leverage points in the supply chain. Others are suites of applications in themselves. The Dallas-based vendor i2, for example, offers a whole range of software, including tools for vendor-managed inventory, point-of-sale driven demand planning, and collaborative planning, forecasting, and replenishment. Strung together, its products enable companies to analyze and manage the flow of products from demand, distribution, and manufacturing through to purchasing, transportation and logistics, not only across an enterprise but throughout the supply chain. Speaking generally, the packaged software currently available for SCM falls into four basic categories (Gormley et al., 1997): (1) supply planning tools, which help to align all the resources and activities required to get goods to market cost-effectively; (2) demand planning tools, which help companies anticipate market demand for their products with more precision, thanks to sophisticated modeling and statistical analysis; (3) plant scheduling tools, which translate overall supply requirements into day-to-day production plans; and (4) logistics systems for supporting warehouse management, inventory transportation, and order management. Note that the first three categories of software involve planning-related activities, while the fourth largely includes transaction processing. 12

Planning software requires a high level of interaction between the system and sophisticated users, whereas transaction software interfaces primarily with other software programs. It is important for organizations adopting supply chain software to be aware of these differences, and to build their organizations' capabilities accordingly. Relatively new functionality from vendors is available that addresses the most important trend in SCM the collaborative planning, forecasting, and replenishment (CPFR), originally implemented by a consortium of consumer goods manufacturers and retailers. This term refers to software and business processes in which supply chain partners exchange not only orders and shipment notices, but sales plans and production forecasts with each other, so that they can synchronize their respective processes more fully. Colgate-Palmolive, for example, has implemented CPFR with several of its retailers. Many other industries have long-term plans to collaborate with their customers and suppliers, but only consumer products and retail have made significant strides toward this goal. Whether firms adopt SCM functionality from a major ES vendor like SAP or PeopleSoft, or employ ``bolt-on'' supply chain software developed by multiple other vendors, their operations managers are confronted with an embarrassment of riches. What was once the exclusive capability of only the best in an industry is now available off-the-shelf. In SCM, as in so many areas touched by enterprise systems, it makes less and less sense to put the effort into homegrown systems. With vendors taking over the hard work in system development, user companies can shift their efforts to address redesigning supply chain processes to work well with the software, training employees and managers on advanced supply chain techniques, and interfacing supply chain applications and processes to their ES packages. These challenges are plenty for most organizations to handle. Infrastructural vs strategic capabilities The major choice in supply chain software for most organizations is whether to implement infrastructural capabilities first, strategic capabilities first, or both simultaneously.

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

Infrastructural capabilities are all those back office functions that are essentially the foundation that needs to be laid for internal and cross-enterprise integration. These capabilities are offered by the core functionality of ES, but they can take millions of dollars and many years to fully implement. In themselves, infrastructural capabilities provide very little in the way of real business value. They are critical to long-term internal and external integration, but do not offer short-term cost savings or other competitive advantages. Some supply chain solutions are another matter; they count as strategic, competitively-oriented capabilities. Even standalone SCM applications can reduce inventory and improve customer service. Some Japanese companies, such as Sony and Ricoh, have decided that in the poor economy they face, they need to put infrastructural implementations on hold, and focus for the moment on applications with short-term financial benefits. But getting maximum benefit from them relies on their being able to draw on a core of integrated information systems. The catch is that most companies will not get value from infrastructural systems without strategic applications, and they will not get enough payback on competitive applications without infrastructural systems. The ideal answer, of course, is to bring foundational systems and SCM tools on line in tandem. Too many firms have focused exclusively on the technical systems at the outset of their enterprise systems initiatives, intending to build on the competitive tools down the road. As costs and time pressures mount, they find they have not the resources left for applications that will turn all that data into information and, more importantly, into business results. If anything, the thinking should be reversed. Technical capabilities should be prioritized with an eye to the supply chain and other competitive tools they will support. If, for instance, demand forecasting is the area above all others that stands to make an impact on your profitability, then that should be the first done and most well-executed component of the overall SCM solution. If your warehouses are at capacity, perhaps the highest impact area is production scheduling, which, 13

done well, would lead to faster inventory turns and avoid the need for capital to be spent on new facilities. If electronic commerce capabilities are what you need, and no best-of-breed solution has yet emerged that fits the bill, do not accept the delay and move ahead in other areas. Put all your energy into getting that requirement served. The most aggressive SCM firms do not even mind trying out software that is not fully marketed. They figure that as a beta site, you can influence the direction of vendors' software development. This was the thinking of the 15 pilot customers who signed up to test and refine SAP's advanced planner and optimizer (APO) software in the late 1990s. For all the pain of operating on the bleeding edge of technology, they were able to have real influence on a package that was important to their future operations. SAP had devoted some 180 full-time developers to the creation of the software, and was listening intently to what these pilot customers thought. None of them, presumably, would have considered it more worthwhile to have opted for in-house development on such a scale. Finally, even if vendors have no plans to create the packages on their wish lists, impatient customers can lobby them, create development consortia, and generally agitate for the applications important to them. Take a lesson from Reebok and VF, which formed the apparel development consortium with SAP. Managers at both companies loved the idea of wholly integrated enterprise systems, but found existing packages woefully inadequate to deal with the peculiarities of apparel and footwear supply chains. Reebok's chief technology officer, Peter Burrows, and VF's vice president of re-engineering, Leroy Allen, created a consortium with SAP that jointly paid for and managed the development of an R/3 add-on appropriate for their companies which SAP was then free to market to others in the industry. Burrows says it was not easy to get SAP to go along, because its management ``looked at our industry and thought it was a mess''. But in the end, his persistence paid off the new systems are now up and running basically as Reebok and VF envisioned them (Stedman, 1998).

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

The future of ES supply chain solutions


Amidst all the uncertainty of a rapidly shifting landscape, one thing seems clear about the future of supply chain solutions in ESs. They will continue to enjoy increased functionality and sales growth. New technologies will be accommodated. It also seems likely we will see a few major trends in the functionality vendors add to the systems, in the use of the Internet to achieve ``extended enterprise'' integration, and in a growing range of outsourcing options. New planning functionality Much of what is on the immediate horizon falls into the category of decision-support tools to help senior executives manage and increase profits. These will include sophisticated applications for activity-based costing, to give management an accurate understanding of exactly what cost is being incurred relative to the value added by specific supply chain activities. Other tools will include ``supply chain dashboards'' that provide up-to-the-minute readings on operational performance, fueled by data in ESs. Some of these will be designed as ``balanced scorecard'' applications, presenting a limited set of key process and outcome metrics based on the business model of a particular company. Early implementations of supply chain dashboards already exist: HewlettPackard's Imaging and Printing Systems division uses a dashboard application to give suppliers, purchasing managers, plant managers and customers access to supply chain information across the firewall. The consistent and consolidated information sharing provided by the dashboard supports improved supplier agreements and re-engineered business processes that are credited with cutting the group's monthly sourcing costs by several million dollars (Informatica, 2002). One of the most likely improvements in functionality will come in the linkage between demand-and-supply planning. Today, any such linkages are highly iterative and involve a high degree of human interaction. A planner envisions demand changes resulting, for example, from changes in pricing and then plans the likely impact on inventory and suppliers. This is appealing in theory, but to make these iterative adjustments for any real 14

supply chain is enormously complex. New analytic solutions, based on complexity theory and agent-based modeling, are able to work their way through these problems that vex both human beings and standard linear-programming techniques to find truly optimized solutions. Procter & Gamble, for example, recently used complexity-based supply chain modeling to squeeze out delays and inventory from its distribution chain. After using current state-of-the-art supply chain management techniques to identify ways to reduce cycle times and inventory by 50 per cent, it used a complexity-based tool from the Bios Group to model its distribution chain. Using actual customer and promotion profiles to determine daily sales, the model tested various potential ordering, allocation, and shipping policies, and identified an additional 50 per cent reduction in both cycle times and inventory (Bios Group, 2002). In the future, demand-and-supply planning applications will be more closely linked through ESs and will begin to interact in real time, with the human interactions involved becoming less frequent. Agent-based supply chain solutions promise to use the power of networks to optimize processes in place, without the need to model them separately. Agents in the supply chain do not need to have visibility across the entire supply chain to act intelligently. Instead, optimal scheduling and allocation decisions emerge from the interaction of the agents as they draw information from ESs and negotiate commitments based on costs, resource availability, lead times and other variables (Sauter and Parunak, 1999). Giving over control of supply chain processes to software agents might sound risky, but given its successful work with the BiosGroup, Procter & Gamble envisions installing software agents at each decision point along the supply chain (InformationWeek, 2001). ES software vendors are also exploring agent-based technologies: SAP has announced work with the BiosGroup to build agent technology into its supply chain management software (Ranger, 2001). And at least one start-up software vendor, Outerware, is offering an agent-based solution that it claims will automate supply chain business processes

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

and adapt the supply network to changes in demand, supply and even infrastructure. Direct ES connections among firms Most importantly, all the SCM vendors will be looking for breakthroughs in what promises to be the next major phase of supply chain initiatives: actual system interoperability among suppliers, customers, and other business partners to create highly leveraged value chains. In this environment, your system will talk directly to mine without manual intervention and will the last human being please turn out the lights. All the enterprise application packages now support Internet-based customer-to-supplier value chains for electronic commerce. Whether third-party vendors are able to perfect ``middleware'' to do the job, or the major vendors make such add-ons unnecessary, the linkages will soon be built for a customer order to communicate seamlessly across the multiple members of that value chain. Expect to see real-time, extended enterprise synchronization become a reality but expect that it will take many years. How will these connections be accomplished? In earlier days, firms wanting to synchronize their operations employed EDI, in which standards for transaction processes and information had been negotiated for their particular industry. In the late 1990s, the expectation was that companies would exchange supply chain information primarily through exchanges and online marketplaces. However, many such exchanges went out of business as rapidly as they were formed, and while they still have a potential place in connecting supply chains, it is a much smaller and more sober place than was previously envisioned. Most companies now prefer to have their ES communicate directly with each other using XML over the Internet, but as with EDI and online exchanges, they still must determine either individually or as members of an industry group how to interface their information and business processes with their trading partners. They must ensure that both parties to a trade agree on what ``order quantity'' and a vast number of other information entities mean, and on what steps are required, for example, to check the 15

customer's creditworthiness and to complete the many other processes that cross organizational boundaries. Neither ERP nor XML nor the Internet have made such negotiations any easier. Even when two companies have the same enterprise system package, they may well have configured their information and processes very differently. In the EDI era and now, there have been two alternative approaches to connecting to other companies. One is to develop one-by-one interfaces between a company's ES and the ES of customers and suppliers. The other is to develop common linkages among members of an online industry consortium so that an individual firm need only connect with a central hub. Either approach has its complexities, and many firms are sufficiently uncertain of the most likely outcome that they are pursuing both approaches. A number of companies are undertaking projects to integrate their ES with those of individual customers or suppliers on a one-by-one basis. This approach to inter-organizational integration demands that trading partners either agree on information entities and process flows, or employ an approach to translation of one party's system to meet the requirements of the other. Most firms choose the latter approach, employing integration tools from organizations such as WebMethods. One firm that has pursued this approach aggressively is PolyOne, a $2B chemicals firm formed in the merger of Geon and M.C. Hanna. PolyOne uses the SAP R/3 enterprise package, and its supplier OxyVinyls also has SAP (in fact, PolyOne and OxyVinyls were at one time the same company). Using WebMethods translation software, PolyOne was able to implement a direct connection between its SAP system and OxyVinyl's. When PolyOne takes an order from a customer, its systems automatically send notification to OxyVinyls of the materials PolyOne needs to manufacture the order. Assuming that OxyVinyl's system confirms availability, a message is sent in the opposite direction that the shipment has been sent. PolyOne has now connected to eight different supplier and customer ES. While each new connection requires incremental effort,

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

PolyOne IT staff have become skilled at developing the required interfaces, and can implement them quickly. PolyOne recently installed a new ES to fit its new business model (its third in six years), and the close fit of this new system to the business makes implementing interfaces easier. The other predominant approach for interconnecting ES is to go through an intermediary organized by an industry consortium. This is an appealing approach, because in theory it allows a company to make only one connection between its ES and the industry hub and be done with the work of integration. What kind of industry hub would perform this ES interconnection role? Increasingly, the industry consortia that were originally organized as online e-markets are evolving in the direction of being ES interconnection hubs. The most aggressive mover in this direction has been Elemica, the chemical industry consortium. Its primary mission now is to connect the ES of the 22 chemicals firms that sponsor it. The mission is made particularly feasible by the fact that practically every chemicals firm has installed SAP. And the interconnection mission is more desirable for an industry group than that adopted by many e-markets; Elemica explicitly says it does not allow ``price discovery'', or shopping around on the basis of price. Elemica has already established connections between several of its sponsors for some key processes. It is working on extending the business processes it supports and the types of information it can deal with. It had a running start in establishing XML information standards because of the progress the industry had made on EDI standards through, the Chemical Industry Data eXchange (CIDX). Now Elemica is extending the range of companies to which sponsors can connect with its link to Transwide, a shipping hub through which chemical firms can arrange transportation services. Of course, some companies may hedge their bets and participate in both interconnection approaches. PolyOne, for example, is a sponsor of Elemica, but PolyOne managers are not yet certain how the group-based approach will coexist with its one-to-one approach thus far. 16

PolyOne has developed a direct connection with Millennium Chemicals, another member of Elemica that is hedging its bets. Millennium reports that the link to PolyOne had a ``six-figure'' price tag, however, providing motivation for pursuing a less costly approach through Elemica. While Elemica is perhaps the most advanced ES-to-ES interconnection hub, it is likely that other e-markets will move in this direction. Envera, another chemical industry hub that is now part of ChemConnect, has already implemented an ES-to-ES connection, and Exostar, an aerospace and defense hub, has announced that one is coming. Most other consortia e-markets have thus far restricted their connections to Web browsers, but these, of course, require a human sitting before a screen to interpret the information and then put it into an ES. The increased efficiency from direct ES-to-ES connections will probably force other consortia to offer them, particularly if Elemica is successful over the long run. If a company already participates in an industry group that has made progress on process and information standards, it should encourage the consortium to develop ES hub interconnection capabilities. If there is no such association, a better strategy will be to pursue one-by-one ES interconnection with a company's largest customers and suppliers. In either case, it will probably be several years before widespread ES interconnection takes place in most industries. Given the probable lag time for widespread ES interconnection, companies may ultimately opt for an emerging third solution: Web services (Hagel and Seely Brown, 2001). The idea behind Web services is similar to commonly-used application programming interfaces (APIs): expose a piece of a software application's functionality way so that other applications may access it. The Web services vision, however, goes beyond APIs by giving the application interface a standardized structure and setting up an Intranet-based infrastructure for companies to both publish and access Web services. Web services do not solve the problems of integrating information and processes mentioned, rather they provide a common and more flexible way for applications to interconnect. Although Web services are

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

currently being used by only a small percentage of companies, almost all of the major software firms have announced support for the technology and expect it to be a standard method for companies to connect in the future. RFIDs and the electronic product code There are also more technology-intensive approaches to establishing direct connections between suppliers and customers. Some of the most innovative companies are already working on a technology that will help them take full advantage of these connections as they are created. The Auto-ID Center (an academic consortium of MIT, Cambridge University and Adelaide University, supported by more than 40 corporate sponsors) is developing an automatic identification (Auto-ID) system that promises to deliver more accurate, timely and granular data across the entire supply chain (Kambil and Brooks, 2002a, b). The new Auto-ID system replaces the ubiquitous barcode and Universal Product Code with Radio Frequency Identification (RFID) technology and an Electronic Product Code (EPC). The system should significantly lower labor costs and data error rates associated with scanning items and will extend identification to individual objects. This higher quality information will allow companies to track literally billions of objects across the value chain, increasing the efficiency of individual processes, improving asset utilization, increasing the accuracy of forecasts, and improving the ability of companies to respond to changing conditions of supply and demand. One estimate, based on a pilot of a similar system run by CHEP, a provider of shipping pallets and containers, is that this type of Auto-ID system could lower total supply chain costs by as much as 14 per cent. RFID systems are already being used by a number of companies for focused business applications. These systems identify and report on physical objects by tagging them with a memory chip that can be scanned by wireless readers strategically placed in the environment. Depending on the particular system, the chips may communicate an ID number or other information about the object over a scan range of a few inches up to hundreds of yards. Companies can benefit from using RFID 17

applications at points throughout the value chain. For example: . Ford tracks parts in its assembly lines with RFIDs to make sure that parts arrive where and when they are needed. . Figleaves.com, an apparel e-tailer based in the UK, uses the technology in its pick-and-pack operation to reduce errors to fewer than one in 10,000. . Associated Food Stores, a wholesaler cooperative for over 600 grocery stores in the western USA, uses an RFID-based real-time locator system to monitor trucks and trailers in the yard of its distribution center to reduce cycle times and increase asset utilization. . Goldwin Sportswear tracks clothing through its distribution chain with RFIDs to reduce labor costs and prevent ``gray market'' distribution outside partners' authorized areas. . Prada is piloting the technology in its New York Epicenter store to enhance customers' experience with linked information, increase opportunities for cross-selling, and track items in the store and out the door. . ExxonMobil's SpeedPass is an RFID-based consumer payment system that increases customer visits by one per month and increases the amount purchased by 2-3 per cent. Current RFID systems have two characteristics that will need modification, however, before the technology is suitable for widespread supply chain applications. First, current RFID tags cost too much: about 50 cents compared to the penny cost of barcode labels, so they are limited to use with high value items. Second, RFID systems made by most manufacturers are incompatible, meaning that companies wanting to use RFIDs across the supply chain could not independently choose a technology vendor. The Auto-ID Center has efforts underway to correct both of these problems. It is working with tag manufacturers on new production techniques that can reduce the cost of tags by an order of magnitude at large volumes. It is also collaborating with system vendors to develop open technology standards that will promote system compatibility.

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

In addition to efforts to create a suitable RFID technology, the Auto-ID Center is working with industry standards groups the Universal Code Council and the EAN International to develop the electronic product code (EPC) numbering system. The EPC will contain enough bits (between 64 and 96 in various versions) to individually identify all the products and major components manufactured in the foreseeable future. Needless to say, managing the data about all those items, as well as their individual histories, will be a Herculean task. The center envisions a distributed, Web-based data architecture that will allow companies to manage their own blocks of data, and will make information accessible in a manner similar to how Web browsers locate an individual Web page in cyberspace. As the center's Auto-ID technology matures, ESs will need to adapt to the newly-available data. Software vendors must first create interfaces to access the distributed data network and will need to develop applications that can use the individual item data to its fullest potential. Although widespread implementation of the new Auto-ID technology is certainly some years off, some major ES vendors are already preparing for its arrival. SAP, for instance, is an Auto-ID Center sponsor, and is working with major customers to identify key applications and to define requirements for them. These innovators will shape the initial functionality of the software to their liking, and will be able to move more easily and quickly to incorporate it into their business processes. ES and supply chain outsourcing One last major trend in ESs with real implications for SCM is the growing option to outsource them. There are two fundamental reasons for outsourcing an ES and its supply chain components. The first is when an ES is viewed as a commodity from which no competitive advantage can be achieved. In such circumstances, it makes sense to outsource to a provider with economies of scale and experience. Many companies have already outsourced their ESs, including supply chain functionality, on this basis. At the other extreme, supply chain capabilities can provide organizations with 18

critical competitive advantages, but they may be too difficult to operate successfully. Planning and optimization software requires high levels of supply chain expertise, and changes rapidly over time. It is not hard to imagine that a company would outsource in this scenario to a firm of supply chain experts. One company aiming to fill such a niche is Cendian Corporation, a strategic venture of the Eastman Chemical Company that provides lead logistics services to the chemical industry. Chemicals logistics is exceedingly complex, and even in the late 1990s, no single company had developed integrated logistics software for the industry. Chemicals are shipped across multiple modes (bulk truck, dry van, marine, rail and air), with varying degrees of fragmentation among the different types of logistics providers. In addition, the handling and shipment of chemicals requires detailed information, such as the status and history of individual reusable bulk containers (such as truck or rail tankers), allowable routes for hazardous chemicals and the designation of local ``first response teams'' in case of accidents. According to an interview with Cendian executives, Eastman laid the groundwork for the expertise and service provider relationships required for managing chemical logistics globally, and with the growth of the Internet the company recognized an opportunity to integrate the separate solutions available to enable optimization across the entire logistics network. While it might have developed this new solution for itself, Eastman saw greater potential in leveraging it across the scale of the entire chemical marketplace. To deliver on this promise, Cendian enhanced its fundamental value proposition through extensive product development, and supported its growth with the recruitment of over 200 new professionals. Now, only three years after its formation, Cendian serves more than 30 chemical industry clients and has over $1 billion in logistics services under contract. Another variation on outsourcing may involve networks of companies. ESs ``commodify'' certain aspects of organizations when many firms in industries adopt the same processes, information, and other organizational arrangements. Because of these ES-driven similarities, it may become easier for organizations to align in the future with

Enterprise systems and the supply chain

Thomas H. Davenport and Jeffrey D. Brooks

Journal of Enterprise Information Management Volume 17 . Number 1 . 2004 . 8-19

companies in their own businesses or in closely-related parts of the supply chain. Logistical and supply processes, for example, may become part of a ``shared services'' activity across firms, or may be turned over to outsourcers that excel at supply chain processes and information management. It is already the case, for example, that several Canadian oil companies have collaborated to build a commonly-owned refinery, with shared financial management processes and a shared ES across the consortium. It is not hard to imagine the extension of such arrangements to purchasing, replenishment, delivery, and other supply chain processes.

extended enterprise will be nothing short of amazing.

References
Bios Group (2002), ``Supply network revolution at Procter & Gamble'', case study, available at: www.biosgroup. com/solutions/supplynetworks.html Davenport (2000), Mission Critical: Realizing the Promise of Enterprise Systems, Harvard Business School Press, Boston, MA. Davenport, T.H., Harris, J.G. and Cantrell, S. (2002), ``Get with the program'', Outlook, No. 2, pp. 48-55. Gormley J.T. III, Woodring, S.D. and Lieu, K.C. (1997), ``Supply chain beyond ERP'', Forrester Research Report on Packaged Application Strategies, Vol. 2 No. 2, May. Grant, L. (1998), ``Outmarketing P&G'', Fortune, 12 January. Hagel, J. and Seely Brown, J. (2001), ``Your next IT strategy'', Harvard Business Review, Vol. 79 No. 1, pp. 105-13. Informatica (2002), ``HP imaging and printing gains control of its supply chain'', case study, May, available at: www.informatica.com/customer/customer+stories/ 0502_cs1290b.pdf InformationWeek (2001), ``Behavior change for supply chains'', 2 April, available at: www.informationweek. com/shared/printArticle?article=infoweek/831/ complexity.htm Kambil, A. and Brooks, J.D. (2002a), ``Seize the day: the silent commerce imperative'', Whitepaper, Accenture, July, available at: www.accenture.com/ silentcommerce/ Kambil, A. and Brooks, J.D. (2002b), ``Auto-IDs across the value chain: from dramatic potential to greater efficiency and profit'', white paper, Auto-ID Center, Cambridge, MA, September, available at: http:// autoidcenter.org/main.asp Ranger, S. (2001), ``SAP adds intelligent agents to SCM product'', Computing, 25 June, available at: www.computing.vnunet.com/News/1123416 Sauter, J.A. and Parunak, H.V. (1999), ``ANTS in the supply chain'', paper originally presented at the Workshop on Agent-Based Decision Support for Managing the Internet-Enabled Supply Chain, Agents 99, Seattle, WA, May, available at: www.erim.org/cec/papers/ Ants.pdf Stedman, C. (1998), ``Strong links in the chain'' ComputerWorld, 25 January, p. 59.

Conclusion: it is payback time


ESs are already bringing about a revolution in the way supply chain managers think about their work. Supply chain issues will similarly revolutionize how software vendors and their corporate customers see as the real work of ESs. Increasingly, it is becoming clear that the greatest impact of, and payback from, ESs is in SCM. Over the next five years, the systems you are installing today will allow you to integrate seamlessly with entities outside your firm your customers, your suppliers, your outsourcers, your alliance partners. When you get an order, your supplier will not need to be told to replenish your raw materials. When your distributor detects a new pattern in sales, your marketers will instantly perceive it, too. The technology involved will be daunting and it will not even be the hardest part, compared with the process and behavior change required. But the new capabilities you will have at your fingertips all the power and reach of an

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