ERI January/February 2006
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Welcome Ram Viswanathan

Core Business Focus
Beyond the Four Walls


The hottest consumer markets exist not in developed nations, where most ERI companies are headquartered, but in the developing world. Populations in emerging nations such as China, India, and Brazil are younger than in the US, Western Europe or Japan and also experiencing rapid gains in disposable income, resulting in a surge of consumer demand. Intercorporate process integration will be crucial for ERI companies located in the developed world who want to serve the needs of customers located in areas with less-than-ideal communications and supply chain infrastructures.
Pressure from both category-killer retail chains and cost-conscious consumers forces many ERI companies to operate at low margins. The best way to increase revenues is to decrease expenses, and the supply chain is historically an area that the extended retail industry focuses on to find savings. Intercorporate process integration is a crucial component of any ERI company’s attempt to enhance supply chain efficiencies.
As governments continue to relax international trade restrictions, ERI companies are presented with both an opportunity and a challenge. There are more options for sourcing, assembly, and manufacture than ever before, but there is also increased competition among companies scouring the globe for the best deals. Intercorporate process integration allows ERI companies to effectively obtain and move goods from almost anywhere to almost anywhere.

The continuing development of sophisticated collaborative supply chain solutions makes intercorporate process integration easier to achieve than ever before. In addition, communications enablers such as XML and AS2 data exchange allow even companies with radically different internal data structures to efficiently exchange information in a common format. ERI companies that take advantage of integration-enabling technologies will find themselves at a significant strategic advantage.


Intercorporate Process Integration Links ERI Demand Chain

By Dan Berthiaume
Managing Editor

Intercorporate process integration. The words don’t quite roll off the tongue like “customer service” or “distribution.” Although it may be a mouthful to say, intercorporate process integration is a fairly simple concept. Less simple is the fact that any participant in the extended retail industry who cannot effectively perform intercorporate process integration will have a tough time surviving in a consolidating and ever-competitive marketplace.

At its most basic level, intercorporate process integration is the cooperative alignment of internal processes and systems among partners in the ERI supply chain. The industry has been moving toward this type of collaboration for some time. “There is a greater realization now than ever before among manufacturers and retailers that processes need to be integrated, forecasts need to be shared, capacities need to be aligned,” says Ram Viswanathan, president of ERI consulting firm Nathan Research, a company that has been advising the extended retail industry for three years. “In the delicate balancing act of what you do vs. what your partners do in extended supply chains, (integration will ensure that) everybody is well prepared to act (and) make the wheels of the supply chain turn, in good times and bad.”

However, intercorporate process integration goes beyond the scope of well-documented collaborative efforts such as CPFR. It is a holistic approach to business that assumes all partners in the consumer demand chain function like a single entity. Naturally this doesn’t extend to sharing proprietary information or sacrificing competitive advantage. It does extend to taking the standards and practices used by supply and demand chain partners into account when establishing internal processes and procedures. When executed properly, internal process integration creates efficiencies and savings for all partners.

“There are more practical approaches now that take into account the need for and the value that different entities bring in the operations of an extended supply chain, whereas in the past this used be an extremely adversarial process,” says Viswanathan. “Companies are evaluating specific initiatives such as sourcing and capacity planning and looking critically at partners, volumes and margins, combining supply chain operations with financial incentives much more effectively. In several industries, especially those where there is postponement and some level of ‘last-mile customization and manufacturing’ involved, there is still opportunity for efficiencies, from the time material is extracted to the time  a product is made available for consumption at retail. The entrenched practices and the relationship dynamics of yester-years still have a strong influence but are slowly changing.  It’s really a combination of science and art to effect significant supply chain shifts and put in the necessary disciplines, workflows, and new models and get participation from all nodes of the supply chain.”

For many ERI companies, the true challenge of intercorporate process integration is not internal realignment, but external collaboration. Viswanathan illustrates this with the example of supply chains with a heavy use of brokers, contractors and other intermediaries. “Intermediaries such as brokers and sub-contractors have a major effect in the functioning of several extended supply chains,” says Viswanathan. “While there is a legitimate value that these entities provide, such value should be directly attributable to and measured by the services they provide, and not be a vehicle for added margins on materials itself that these entities help procure and these services are tied to. Buying companies will want to un-bundle the material from services, more and more. Paradoxically however, several product-centric companies are trying to figure out ways to generate service-based revenue models.”

Another key aspect of successful intercorporate process integration is accounting for fluid or uncontrollable demand chain factors. The fluctuating cost of fuel is one such factor. “Partnerships with 3PLs have run into rough weather recently in several situations because of rising fuel costs and unclear expectations set among shippers and receivers of goods and the 3PL,” Viswanathan says. “3PLs are now providing a quote for the main line cost and adding a fuel surcharge. The relationships and contracts are put in place with good intentions but fuel price dynamics were not factored in many situations. Shippers and receivers are saying, ‘You should have planned for this risk. Why are you trying to charge me more now?’ “

To effectively integrate intercorporate processes, 3PLs and their clients could negotiate some type of fuel cost risk-sharing into their contracts before starting to do business together. Other common ERI demand chain variables related to logistics are shipping delays (especially from the Far East), taxes, duty fluctuations, and currency valuations. Getting all demand chain partners on the same page in dealing with these variable factors is just as important as establishing common item descriptions.

Considering that the extended retail industry only started taking significant steps toward real demand chain collaboration about 10 years ago, ERI companies can take pride in the progress they have made toward achieving true intercorporate process integration. But work has only just begun, and most companies must make many more internal and external adjustments before they can reap the full benefits that this sort of collaboration can provide.

“There has been a lot of discovery and true progress over the years,” comments Viswanathan. “Along the way, we have realized what really works and what needs tweaking. As an example, third-party exchanges held a widely different set of expectations during their formative years and have evolved since. Now we know how these models work and how they should be best put to use.”Beyond helping ERI companies realize the maximum potential of their demand chains today, intercorporate process integration can also help them prepare to leverage the new efficiencies of tomorrow. As Viswanathan points out, “RFID will create whole new processes we haven’t even conceived yet. They must be conceptualized, defined, and integrated with other functions.” ERI

Other ERI Companies who “Get It”

Redcats USA
Home shopping retailer Redcats USA recently selected the TradeBeam GTM product suite to serve as a platform for collaborating with hundreds of supply chain partners and managing the flow of goods around the globe. In addition to managing data related to international supply chain processes, Redcats will also utilize its new collaborative platform to perform an automated screening check each time it issues a purchase order. The company thus hopes to ensure that it conducts business with partners who meet corporate standards such as C-TAPT authorization, vendor quality compliance, and social compliance.

Pacific Alliance
Apparel manufacturer Pacific Alliance is leveraging the TradeStone Unified Buying Engine and Unified Order Management modules to work more efficiently with key retail customers, including Kohl’s and JC Penney, and integrate manufacturing facilities acquired in a recent merger. Pacific Alliance has set a variety of intercorporate process alignment-related goals, including improving work-in-progress (WIP) visibility at the factory level to improve order delivery, and collaborate both externally with overseas partners and internally among departments. The company is also streamlining all purchasing activities into one view.

Subaru of America Aligns Supply Chain Wheels
Service Parts Business Relies on a Well-oiled Machine

Keeping customers equipped with the service and replacement parts they need is an important aspect of the business for automotive importer Subaru of America, Inc. The company offers a product line of 47,000 parts for the previous year’s models. Different partners in Subaru’s service and replacement parts supply chain need to align their processes for it to run like a fine-tuned performance vehicle rather than a broken-down jalopy.

Subaru manufactures nearly half of its vehicles in Japan, in addition to its North American manufacturing plant in Lafayette, Indiana. Thus Subaru of America obtains about 50 percent of its parts and accessories from Japan, and 50 percent from domestic vendors. The company manages US parts distribution from a network of six corporately-owned warehouses and one contracted third-party warehouse. How does it bring all these disparate supply chain players, not to mention a network of nearly 600 US dealers, together to operate smoothly?

“Rather than just launching orders, I’m trying to partner with vendors and treat them like my own factories,” says Carlo Sacco, National Parts & Inventory Manager, Subaru of America. To that end, Sacco says Subaru of America reviews lead times, minimum order quantities, and pack sizes with each parts vendor. The company uses a mainframe-based data management system to analyze lead times by part number and feed performance measurement reports to both internal personnel and external vendors.

“We want to grow into vendor performance scorecarding,” says Sacco. Currently, Subaru of America rates automotive accessory vendors on 15 criteria including accounting, paperwork, and on-time delivery. Top-performing vendors receive awards. “The awards are highly prized and sought after,” comments Sacco. “Vendors like to have that plaque on the wall.” Sacco says that Subaru of America would like to expand this rating and awards program to hard parts vendors, as well.

Utilizing the Click Commerce Service Parts Optimization solution, Subaru of America performs a rolling 12-month forecast with 40 of its larger parts vendors. Armed with forecast information, vendors can make better decisions regarding raw materials orders, safety stock, set-up and run times, and lot sizes. In one instance, Subaru of America reviewed set-up and run times with a vendor  who previously had a 65 percent success rate with on-time deliveries. “Now they deliver 90 percent on time and have reduced the lead time on 15 percent of their parts from 90 to 30 days,” Sacco says.

Subaru of America also employs process alignment and technology to ensure all the different internal players in the internal service and replacement parts supply chain operate in unison. The company records orders by dealer and warehouse (assigned by geographic region), and then analyzes the orders with 13 algorithms provided by its Click Commerce system. Based on this analysis, Subaru of America determines how many parts it will order from which vendors. Sacco says that this year, the company will begin nightly reviews of dealer inventory and daily usage data to recommend forecasts and safety stock levels by dealer and part number. Dealers could then accept or reject these recommendations. This will replace a process where dealers evaluate their own inventories.

Three Steps to Effective Intercorporate Process Integration

Obviously there are more than three easy steps involved in realigning a company’s business processes and strategies to achieve intercorporate process integration. But any company with serious collaborative intentions would be wise to follow these three steps to help ensure success:

1. Look Inward
How effectively does your company collaborate internally? Are different departments pitted against one another in a competition for precious funds and resources, or do all departments cooperate in achieving common goals? Is data distributed efficiently and uniformly throughout the enterprise, or do different parts of the company have access to different databases that provide them with different information? How regularly are interdepartmental meetings held? Before you can realistically expect to collaborate with external partners, you must have any problems with collaboration among internal partners worked out. Perform an honest assessment of the state of internal collaboration and take any necessary actions to resolve outstanding issues and create a smooth operational flow.

2. Look Outward
How well do you know your demand chain partners? What are their goals in conducting business with you? Do they run a bleeding-edge IT environment or are they using the same mainframe-based legacy systems they were using in 1982? How do they classify products? Collaborating with external partners requires knowing them - really knowing them. Perform site visits and invite them to do the same. Form steering committees with representatives from all demand chain partners to establish common parameters for doing business. Of course, a certain level of trust is necessary to share information with outside entities. If that level of trust doesn’t exist, it is probably time to find new partners.

3. Look Ahead
At its most effective, intercorporate process integration helps prepare members of the ERI value chain for future changes in technology and business practice. This requires participants to carefully evaluate current trends to determine how the ERI landscape will likely shift in the next few years. How will the proliferation of RFID-based tracking systems affect your demand chain? How will increasing globalization affect where and how your goods are sourced and manufactured? How will new communications technologies affect the exchange of data with your partners? Anticipation of the future is key, understanding the present is not enough.   


(ERI Journal, January/February 2006)
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