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E-Business & Logistics Unlocking the Rusty Supply Chain

by David Bovet and Joseph Martha

Pressure from customers is increasing relentlessly. Today, just about everyone wants customized products - right away, and preferably bundled with high-value services such as guaranteed delivery or technical support. But as Internet shoppers have discovered, real-world buying experiences rarely live up to these expectations. Meanwhile, many traditional retailers and suppliers haven’t even begun to respond to consumers’ desires for superior service and tailored goods.

A key problem in many industries is the supply chain. The standard supply chain begins with components. These are assembled into a product, and the product is then launched through distribution channels in the hope that someone will buy it. Within the constraints of this sequential and rigid system, managers can improve operations only incrementally.

But there’s an alternative to this unhappy mismatch of customer needs and supplier performance, something we call a value net. A value net is a dynamic network of customer/supplier partnerships and information flows that’s activated by customer demand and can respond rapidly and reliably to consumers’ product or service preferences. A value net is so named because it creates value for all the participants - the company and its suppliers as well as the customer - and because it’s based on a collaborative, often digital, network that links the numerous parties in the system.

A well-designed value net enables companies to solve customers’ problems, rather than simply sell them products. Office- furniture manufacturer Herman Miller recognized that, for small businesses, the typical process of ordering office furniture was a pain in the neck - slow, cumbersome and expensive. So it rolled out an innovative new unit called SQA, for “simple, quick, affordable.” Computer software allows customers to see a complete office arrangement in three dimensions. Changes in size, fabric, or other variables can be viewed and priced immediately. Each of SQA’s component suppliers has access to the same real-time information on orders, shipment schedules and inventory. Accurate and timely information reduces suppliers’ inventory costs and ensures delivery when promised. By solving a huge hassle for the customer, Miller SQA has generated 25 percent sales growth (versus 7 percent for the industry), along with higher profit margins and inventory turns than the parent company.

A value net enables companies to respond rapidly to customer demands. Zara, a Spanish clothing retailer, produces “fashion for the masses” of young, hip, urban consumers. Store employees regularly tour urban hot spots on the lookout for new trends, reporting back to designers at headquarters. Knowing that what’s in today may be out next month, Zara is organized to take new fashion ideas from the drawing board to the store shelf in 10 to 15 days. Capital-intensive steps are executed in factories owned by Zara’s parent company. Labor-intensive steps are outsourced to small shops with which Zara has collaborative, exclusive arrangements that include providing the shops with the necessary technology and logistics capabilities. Customers love the results of this high-velocity operation. They queue up in long lines at Zara’s stores on designated delivery days - a phenomenon dubbed “Zaramania” by the press.

A value net also enables companies to build a strong brand by providing valuable services. Canadian National, for example, has been investing in several Internet initiatives aimed at improving service reliability, increasing customer loyalty and further streamlining the railroad’s operating costs. As one of many features, CN’s Web site offers customers complete information, updated continually, on the estimated arrival times of shipments, and customers can submit online shipping instructions and service requests.

CN has also developed an automated tool to resolve problems. Such service attributes are, according to Mercer’s research, a key driver for customer satisfaction and competitive advantage in logistics and value net settings. CN has integrated its “Customer Support Log” into the operating system so that customer service agents or trainmasters can share information to respond to customer inquiries or complaints. The system helps decentralize and speed up customer service, as well as gather customer and competitive intelligence. Originally available to employees through an internal system, the railroad is now attempting to move such functionality onto the Internet.

CN is also digitizing its revenue management activities, from bill of lading to invoicing and payment. For example, the company is in the process of providing online bill presentment and payment to customers. The ability to pay online further reduces paperwork and increases accuracy. Shippers will be able to access their invoices with CN online, including information regarding invoice status. Other features will be available to help shippers better manage their accounts payable and logistics administration. For small shippers, this provides more convenient back-office administration; for large corporations, electronic invoicing provides substantial savings and value-added information on procurement or distribution economics.

Through the development of valuable new revenue management features, CN addresses a key priority of shippers for better responsiveness and convenience, which strengthens CN’s relationship with existing and new customer accounts and thus builds its brand.

Even mundane items such as cement can delight customers if they are tailored to specific preferences—and if the delivery is fast, reliable and convenient. Many companies—many entire industries—are struggling to reach this objective. The computer industry is already there. Automakers are working on it. For managers in pulp and paper, building materials and a hundred other laggards: Would a value net differentiate you from the competition?