19 Nov 2001  Research & Ideas

Wrapping Your Alliances In a World Wide Web

HBS professor Andrew McAfee researches how the Internet affects manufacturing and productivity and how business can team up to get the most out of technology.

 

Editor's Note— In his chapter "Manufacturing: Lowering Boundaries, Improving Productivity" from the book The Economic Payoff from the Internet Revolution: Brookings Task Force on the Internet, HBS professor Andrew McAfee, discusses how the Internet has increased manufacturing productivity, lowered costs, and enabled businesses to form mutually beneficial alliances.

Once two or more companies agree to do business with each other on activities beyond simple procurement, they again face a challenge in executing many joint processes as efficiently as possible. In addition, these processes are typically less well defined in advance than those of the procurement cycle; there is, therefore, the added challenge of process definition before automation can take place. At present, Internet technologies are being widely deployed to meet these twin challenges—to build rich point-to-point links between alliance partners and to enable communities of manufacturers to work in harmony.

Point-to-point links

The most obvious intercompany use of the Internet is probably construction of a point-to-point link between two alliance partners. These are companies that have agreed to do a substantial amount of business together and so are willing to invest resources in building a highly functional link, especially one that allows their information systems to interact on routine tasks without human intervention. This intervention is costly and can slow down necessary activities. However, it is also currently widespread; in a survey of fifty global manufacturing companies, 62 percent reported that they used primarily manual methods to share production schedules with their partners, with one respondent stating, "Our biggest coordination headaches come from a lack of visibility into our suppliers' systems. That translates into long and inconsistent lead times." 50

book cover: The Economic Payoff from the Internet Revolution

A number of technology providers are offering Internet-based products that address exactly this problem. Some of them concentrate on integrating information systems across companies, while others focus on defining and automating processes that cut across companies and may involve multiple systems. 51 Both of these approaches have proved productive for manufacturing firms.

Multi-partner integration

In addition to enabling rich point-to-point links, the Internet is also being used to integrate groups of alliance partners, just as it is being employed to unite dispersed functional or geographic groups within a firm. While automatic process execution continues to be valuable for these networks, the greater goal of integration often appears to be better and faster decision making. For example, current versions of supply chain management and advanced planning and scheduling software embed more advanced algorithms than their predecessors and offer the possibility of optimizing decisions across an entire supply chain, as opposed to within single firms. 52 To do this effectively, this software obviously requires accurate concurrent data from all members of the supply chain, and the Internet-based technologies discussed above are rapidly proving to be the preferred channels for these data.

In addition to enabling rich point-to-point links, the Internet is also being used to integrate groups of alliance partners...
—Andrew McAfee

Better information sharing among alliance partners may have subtle yet important benefits. One of the most common and striking dysfunctions of manufacturing supply chains is the "bullwhip effect," where information gaps and delays cause small changes in customer demand to amplify as they move up the chain, leading to a counterproductive combination of spiky order patterns and inventory shortages and surpluses. 53 To the extent that the Internet can help reduce information gaps and delays, it can be expected to alleviate this situation. 54 Leading manufacturers like Dell and Cisco have, in fact, established extensive information sharing capabilities with their suppliers and appear to suffer less from the bullwhip effect as a result. 55

Process consortia

Manufacturers in many industries, realizing that their interactions are far from efficient, are exploring ways to improve. The U.S. high-tech manufacturing community is perhaps furthest along with this effort; it has created a consortium called RosettaNet to develop standards at all required levels—from XML data formats to interaction scripts (called "partner interaction processes")—to enable productive automatic interactions. To understand the goals of this effort, and the extent of current difficulties (even in this relatively IT-enabled industry), it is worth quoting extensively from the RosettaNet website's Executive Overview:

The electronic components (EC) and information technology (IT) industries remain infinitely focused on creating and selling the next generation of our fast changing technologies, and thus we have not taken the time, effort, or collective resolve to develop a set of industry-wide electronic business interoperability standards. Given the deep changes exacted by the new digital economy, coupled with the growing size of the EC and IT sectors within the overall economy, we can no longer afford to further postpone attention to efficient business process interfaces between supply-chain trading partners.

The lack of electronic business interfaces in the EC and IT supply chains puts a huge burden on manufacturers, distributors, resellers, and end-users, ultimately creating tremendous inefficiencies and inhibiting our ability to leverage the Internet as a business-to-business commerce tool. Here are a few examples:

—Manufacturers today utilize complex processes to all but guess inventory levels and locations across the supply chain at any point in time. This is because there is no agreement on something as simple as how a part number is defined or how inventory queries can be made through a standard interface. This significantly impacts production planning, channel allocation, and the cost of returns.

—Distributors, who provide pre- and post-sale technical support to their resellers on tens of thousands of SKUs, must grapple with disparate forms of product information collected from hundreds of manufacturers with no common taxonomy. The lack of product information standards makes the current aggregation and dissemination of such content an expensive and inefficient proposition—an effort duplicated by each distributor in the channel. This problem is further compounded by content's explosive rate of change.

—Resellers must learn and maintain different ordering and return procedures and system interfaces to each distributor and direct manufacturer with whom they trade, causing them to spend valuable resources in back-office operations (50 percent by some estimates), which they could otherwise use to make new sales or service their customers.

—End-users have no mechanism enabling effective procurement through uniform templates, which can be contextually linked to government authorized schedules. This often causes a nonsensical lengthening of the purchasing cycle whereby most PC orders are old technology by the time they make it through this inefficient cycle and onto the desk of the requisitioner.56

Footnotes:

50. Radjou (2000), pp. 3, 5.

51. For a description of a company with the first focus, see Karen J. Bannan, "Staying on His Target: WebMethods' CEO Wants to Automate the World's Economy," Internet World, May 15, 2000. For a case study of the latter type of inter-company process automation, see Susan Scheck, "TSMC Builds Info Alliance," Electronic Buyers' News, October 26, 1998.

52. For a discussion of the shortcomings of the long-standing material requirements planning algorithm, see Hopp and Spearman (1996, ch. 3).

53. The bullwhip effect is explored in Sterman (1989) and Lee, Padmanabhan, and Whang (1997a and b).

54. For a case study of this process, see Hammond (1994).

55. For discussions of these companies' information sharing activities, see Magretta (1998) and Nolan and Porter (2000).

56. See www.rosettanet.org/general/index-gencral.html [August 2000].

References:

Hammond, Janice H., 1994. Barilla SpA (A). Case Study 9-694-046 Harvard Business School (June 14).

Hopp, Wallace J., and Mark L. Spearman. 1996. Factory Physics: Foundations of Manufacturing Management. Burr Ridge, Ill.: Irwin.

Lee, Hau L., V. Padmanabhan, and Seungjin Whang. 1997a. "The Bullwhip Effect in Supply Chains." Sloan Management Review (Spring):93-102. -1997b. "Information Distortion in a Supply Chain: The Bullwhip Effect." Management Science 43(4): 546—58.

Magretta, Joan. 1998. "The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell." Harvard Business Review 76(2) (March-April): 72-84.

Nolan, Richard L. and Kelley A. Porter. 2000. Cisco Systems Inc. Case Study N9-699-133. Harvard Business School (January 27).

Sterman, John D. 1989. "Modeling Managerial Behavior: Misperceptions of Feedback in a Dynamic Decision Making Experiment." Management Science 35(3): 321-39.

Excerpted with permission from The Economic Payoff from the Internet Revolution, Brookings Institution Press, 2001. Robert E. Litan and Alice M. Rivlin, editors.

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Andrew McAfee is an assistant professor in the Technology and Operations Management area at Harvard Business School. His research investigates effective e-business approaches, and the novel companies, alliances, and markets that are emerging in the Network Era.