Exchanging Ideas

TORONTO (06/28/2000) - Online exchanges. Business-to-business portals. Trading hubs. Trading networks. E-marketplaces.

While there may be little agreement about what to call them, electronic supply chains are emerging fast and furious to allow buyers and sellers to come together to purchase and sell goods and services over the Web.

That is, they are emerging fast and furious in the United States. Canada is a different story. But with the Web being a global medium, whether the originating product source is located in Toronto or Topeka, Kansas, matters little to most buyers -- just as long as the product is high quality, well priced and available.

Online exchanges (we'll settle on that moniker) have the potential to dramatically alter the procurement process for office supplies, raw materials and manufactured goods. By bringing together communities of corporate buyers and sellers, the cost of locating and evaluating products is significantly lowered for purchasers, as is the cost of acquiring customers and marketing products for vendors. At the same time, companies can expand their list of available suppliers and streamline their supply chain processes.

These are just some of the compelling reasons to consider using an online exchange vs. retrofitting an existing enterprise resource planning (ERP) system to create an internal e-supply chain.

B2B EXCHANGE VS. ONE-TO-ONE E-COMMERCE

If there was a Canadian-based medical/surgical equipment supply exchange, Mark Rivette says his organization would consider using it.

"There's definitely an interest for us," says Rivette, director of administrative systems for the Calgary Regional Health Authority (CRHA). "It would be something that we would either want to take part in or participate in a leadership role in a development process for that."

While a Canadian medical exchange does not exist -- at least not yet -- there are about three main ones in the United States, Rivette says. CRHA plans to evaluate these U.S. exchanges over the next six months to determine whether they provide the same vendors' material sources as are used currently in Canada -- healthcare being one industry where product differences from country to country do matter.

What Canada does have is a large EDI (electronic data interchange) network operated by CareNET Services Inc., which Rivette says may at some time evolve into an online exchange environment. "We're in discussions with them about their future direction of possibly becoming an exchange," Rivette says.

At the same time, CRHA is also piloting two separate one-to-one Internet commerce projects with a medical/surgical equipment supplier and a stationery and office supply vendor. The back-end system supporting the Internet commerce pilots is based on Oracle's financial and supply chain management applications, which CRHA deployed in April 1999 as part of a Y2K remediation project.

"The intranet design of the Oracle applications gives us the foundation for allowing Internet commerce to occur," Rivette says.

CRHA is a CAN$1.2-billion-annual organization that covers the full breadth of healthcare services, including acute care, long-term care, home care and public health services. From a product inventory perspective, CRHA purchases and consumes approximately CAN$200,000 worth of items every day, according to Rivette.

"A key benefit (of Web-enabling the supply chain) for us is developing sourcing or procurement contracts, and reducing contract 'leakage' by using systems to automatically order things," he says. He explains CRHA has contracts in place for all of its inventory items and having an application that automatically replenishes inventory as it is needed would reduce contract leakage to next to zero.

However, barriers to implementing a full e-procurement model are that healthcare organizations are generally cautious adopters of new technology and very few of CRHA's 4,500 listed vendors are in a position to participate in an Internet procurement environment.

"In healthcare, you're dealing with a broad spectrum of vendors from high-end multinational corporations to very locally provided goods and services. As such, you also have a wide range of technically capable organizations," Rivette explains.

WEB-ENABLING THE SUPPLY CHAIN

Gildan Activewear Inc. of Montreal is looking to streamline its internal supply chain processes before going the route of B2B procurement. As with many medium-sized enterprises, the wholesale apparel manufacturer is still in the throes of rolling out an end-to-end ERP system to tie together its disparate knitting, dying, cutting, finishing and sewing operations located in North and Central America.

According to Francois Vinette, vice-president of IT for Gildan, as recently as late 1998, the company was about five or six years behind where it should have been technologically at that time.

"Last year from January to December, we probably technologically caught up on three years. I intend to do another three years again this year," Vinette says.

At that point, Gildan will be ready to capitalize on supply chain efficiencies it expects to achieve through the ongoing deployment of ERP software from J.D.

Edwards, Vinette says. Gildan currently is using J.D. Edwards software for its financial group, and it has plans to phase in software modules for distribution and manufacturing over the next several months.

The plan is to eventually adopt a B2B type of platform, Vinette says.

"Business to consumer is not obvious to us yet because we don't sell directly to customers, but B2B is where we see great gains," Vinette says.

IBM Global Services was contracted by Gildan to conduct a supply chain assessment in 1997, which led to the selection of the J.D. Edwards ERP solution. Brian Smith, principal of IBM Canada's supply chain and industrial sector consulting practice in Markham, Ontario, says Gildan is a good example of what many mid-market companies are going to go through in terms of improving their supply chain to meet market demands.

"Their business model is that they sell to a relatively small number of large distributors, they're not selling to end retailers. That means any delivery problems they run into can have a significant negative effect on the business, because they've got a large percentage of their business with every one of their customers," Smith says.

According to Smith, the majority of companies who have deployed an electronic supply chain system have done so after implementing ERP.

"To really be able to make effective use of any kind of specialized supply chain system...it requires accurate data and information. An ERP system is probably the best foundation upon which to build the supply chain system," Smith says.

"However, that data or information can also come from a legacy system. But efficiencies and the accuracy or timeliness of data really get exposed if you create problems when implementing a supply chain system."

TO ERP OR NOT TO ERP

Tom Norwell hopes that using a hosted trading network -- such as that expected to emerge from a recent alliance announced by IBM, i2 Technologies and Ariba -- will allow his company to forgo a move to ERP. The executive vice-president and chief operating officer for Concord, Ont.-based Denninghouse Inc. says his company has been in talks with IBM/i2/Ariba and six other solution providers to determine the best Web-based trading solution that will meet its needs.

One of the attractions for using an online procurement solution, in Norwell's view, is the possibility of skipping the ERP step altogether.

"In the investigation that we've done, no one is telling us that we have to [implement an ERP system]. To the contrary, some are saying if you have [implemented ERP already] then you would be able to do away with it -- which is great news to us," Norwell says.

Denninghouse's legacy supply chain systems consist of ACCPAC accounting software, a proprietary Web-based catalogue system and a proprietary purchasing module. The company operates 250 franchise-based A Buck Or Two dollar stores across Canada. Norwell estimates Denninghouse will have about CAN$200 million in retail sales this year, and he says the company is growing at a rate of about 30 per cent year over year.

A key criterion for whichever online exchange solution Denninghouse chooses is that it be flexible. Norwell explains 30 per cent of the dollar-store chain's product inventory is in constant flux. "It's not a static offering," he says.

Being able to take part in an exchange with numerous suppliers will provide flexibility, Norwell says. Other benefits include the ability for suppliers to cooperatively purchase logistics services and achieve greater efficiencies within the supply chain.

"In Canada, the buying communities are becoming so small, so there would be economies of scale," he says. "Canadian retailers face a number of different challenges than do our brethren in the United States, and the majority of those are around logistics issues. The demographic and geographic differences between the two countries make it a lot harder for us to get product to market. So you may have to look at different ways of doing that.

"If that means collaborating with other retailers, it might be a solution. It's obviously a solution in the Web world," Norwell says.

However, Norwell isn't entirely convinced an industry-wide Web-based trading community would work.

"On the store side, I'm not sure whether or not all of us would be willing to trade on the same cyber trading floor in a potentially open market," Norwell says. " And equally, on the vendor side, in our industry the vendors compete very strongly with one another...They're all competing for our market share, so I'm not sure how willing they would be to work on an open system."

LOOKING BEYOND THE ORDER PARADIGM

The most successful online exchanges will be ones dedicated to particular materials, such as steel or paper, according to Christine Kelly, program manager for supplier relationship management solutions at SAS Institute.

"Companies source many, many things. It's great for them to say we'll go to e-STEEL and get the best prices. Because it's a faster way of doing the RFI or RFP process. These 'Net markets make it easier to go to one place and look at the information," Kelly says.

However, companies need to look beyond the "best price" aspect of online exchanges, Kelly warns. She cited the example of beverage company Welch's who held a grape auction online last year and negotiated the best price it has ever achieved.

"The company who won the bid has been a long-standing supplier, so [Welch's] was elated," Kelly says. "Now that's great, but if that's your best supplier and you've pushed him to be 10 cents less than his profit margin, how is he going to survive a year from now?"

This is where supplier relationship management comes in, according to Kelly. In order to build strategic relationships that are beneficial to all concerned, organizations need to look at the whole picture regarding e-procurement, she says. SAS calls this concept "strategic sourcing".

"The goals are to understand what you are buying through some sort of commodity analysis, who you are buying it from (through supplier analysis), and then figure out what strategic models you want to have in place so you can go ahead and source appropriately -- whether they're the auctions going on right now or if you want private bids or the automation of that total process," Kelly says.

"We say, 'Look at everything.' Net markets will not replace internal processes going on inside a company."

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