Good morning. When it comes to electronic commerce and global supply chains ...
There's good news, and there's bad news. The good news is that this e-commerce thing is starting to live up to its hype.
Forrester Research just came out with a report predicting that global e-commerce will reach an astounding 6.8 trillion dollars by 2004.
The bad news is that we might not be ready for it.
In the same report, Forrester predicted that all that extra volume will (quote) "crush today's brittle supply chains."
The report went on to claim that today's inefficient global logistics system is "held together with string and bailing wire."
Now, those are fighting words.
But can we really argue?
Not if we look at statistics that demonstrate that too many e-commerce companies are stumbling on the back end.
Last year, about one-third of all orders placed over the Internet were not fulfilled exactly as promised.
Anderson Consulting conducted its own little test with online retailers and found that only 45 percent of orders arrived by the date promised.
As Steve Manes, editor of PC World, recently wrote: "There are plenty of online retailers who know how to take the order ... just not many who know how to fill the order." A toy retailer that ventured online recently fired its CEO after supply-chain incompetence led to big problems. A logistics engineer with the toy company described the situation this way:
"People would come to me and say, `We've lost 2,000 Pokemon cards. Can you trace them down?' or `Uh oh, we lost a million dollars of inventory, can you find it?'"
It's not just B2C and dot.com companies that are struggling with e-logistics, by the way. About 85 percent of today's e-commerce is generated in the B2B realm. And companies are still struggling with managing B2B supply chains that are not totally under their control.
I don't mean to sound pessimistic or critical ... you can't really blame companies for not following the rules when the rules keep changing.
In fact, e-commerce logistics is a whole different ball game than the kind of logistics we were used to dealing with. With e-commerce, the business of getting goods from suppliers to customers is even more complicated than usual.
Why? Because of the nature of e-commerce transactions. For starters, orders and shipments are much smaller. That's because end users are the ones who are doing the ordering over the Internet ... there are fewer middlemen buying in bulk.
Orders are not only smaller, they are more frequent. And they are also more time-sensitive. Which makes sense--just-in-time, electronic supply chains rely on just-in-time deliveries of raw materials and finished goods.
Here's another e-commerce complication:
Transaction volumes are more unpredictable. When you've got a global audience of customers just a mouse-click away, predicting sales volumes is much trickier.
The timing of the volume is unpredictable, but the direction of that volume is unmistakable. It's going up.
Take a look at this UPS commercial, which illustrates the danger of unexpected online volume.
Video
Remember that each of those orders probably had a package delivery attached to it.
Package deliveries generated from online sales are growing at about 20 percent a year, testing the capabilities of distribution networks around the world. UPS driver Victor Porter doesn't have to read the statistics--he lives them every day.
The 29-year-old UPS driver--whose route takes him through Manhattan's Upper West Side--was recently interviewed by the Wall Street Journal.
Victor estimated that he delivers 800 to 1,000 packages every five days, and about 300 of those packages come from Internet companies.
Reports Victor: "I carry those boxes up and down stairwells all day ... because of the longer hours I put in, I'm making a lot of overtime.
"But even though I'm making more money, I don't seem to have the time to spend it."
If you think Victor is feeling the strain of e-commerce ... what about the 85 percent of small and medium-sized companies that say they can't fulfill orders internationally because of the complications of customs and currency and taxes? E-commerce is no respecter of borders, which means that companies that conduct transactions online had better have access to a global distribution network.
Global requirements ... Smaller, more frequent, more time-sensitive orders ... Unpredictable volume. The "e" in e-logistics certainly doesn't stand for "easy," does it?
We can see why Forrester is ringing the alarm bell.
But our supply chains don't have to be brittle. And they don't have to be unprepared for the coming crush of e-commerce.
In the remaining minutes, I'd like to lay out a strategy to prepare our global supply chains for the future.
This strategy involves integration--integration of the three primary flows of commerce.
If you think about it, a commercial transaction always involves three components: goods, information, and funds.
All three levels are involved in just about every transaction on the planet. You nearly always have a physical transfer of goods or services that flows from suppliers to customers.
Someone, or some organization, has to make sure raw materials get from supplier to manufacturer, that inventory is sent to the right warehouse, or that goods go to the right distributors, retailers or end customers.
The second flow of commerce involves the exchange of information about the goods or services being sold.
Information that is used to answer questions like:
* What features does the customer want?
* When are the parts supposed to arrive from the raw materials vendor?
* When do we start the production line?
* Out of which warehouse will the product be delivered to the customer?
The third component of any transaction involves the exchange of funds. The customer pays the seller. The seller pays the other suppliers. The suppliers pay their lending organizations.
Ignore any one of these three flows--goods, information and funds--and you're asking for trouble.
You'll either be out-of-stock ... out-of-answers ... or out-of-business.
Integration is the key to ensuring that the order ... the information about the order ... and the payment for the order are synchronized throughout the supply chain.
UPS has expanded to manage the supply chains of thousands of our customers ... through our logistics subsidiaries ... and we have learned that the key to supply-chain integration is collaboration.
That might seem curious coming from an independent, 93-year-old company known for insisting on "The UPS Way."
But electronic supply chains leave my company--and your company--no other choice.
To overcome the complexities of e-logistics, we all have to give up some of our independence and rely instead on a group of trusted supply chain partners.
You see, we've entered the age of the Collaborative Economy.
Instead of vertical integration, we have virtual integration ... through a collaborative network of suppliers, partners and customers.
Business Week recently called this collaborative network ... this extended electronic supply chain ... an "ecosystem."
Here's how Business Week describes this ecosystem:
"True 21st century corporations will also learn to manage an elaborate network of external relationships. That far-reaching ecosystem of suppliers, partners, and contractors will allow them to focus on what they do best and farm everything else out. And it will let them quickly take advantage of fleeting opportunities without having to tie up vast amounts of capital."
Whatever you call it, building a collaborative network is not just an exercise in synchronizing information systems and linking up production data ... Though we all know that's no piece of cake.
It also requires applying many of the elements of a good marriage: communication, vulnerability and trust.
After all, you have to share sensitive customer data with your supply chain partners, and you have to trust them to do their part to help you serve your customers.
The Collaborative Economy, in fact, is creating what we call a web of relationships:
* Buyers collaborating with suppliers.
* Fierce competitors coming together to form buying co-ops.
* Manufacturers taking over inventory management for retailers.
* E-commerce companies depending on third-party logistics partners.
* And companies collaborating with their customers.
Let me give you a few living, breathing examples of these different kinds of collaboration ... And how they work to integrate goods, information and funds.
Purchasing co-ops--B2B exchanges--are one sure sign that the rules of business have changed.
An astounding 50 percent of all B2B e-commerce is expected to flow through these buying exchanges by 2004, up from only 1.4 percent today.
Talk about goods, information, and funds coming together: buying exchanges are like an online farmer's market, where buyers inspect the merchandise and haggle over prices and discuss payment terms.
There are the big, neutral exchanges--like Free Markets--that hold thousands of auctions and help all types of organizations and industries shave 10 to 20 percent off procurement costs.
And there are the specialty, industry-specific exchanges, like the chemical industry's ChemConnect.
Then there are the corporate customer exchanges -- like Boeing's--which lets 350 different airline customers order spare airplane parts.
But the most curious development of late has been the buying co-ops formed by otherwise fierce competitors.
GM, Ford, and DaimlerChrysler are fierce competitors, but they've put aside their differences long enough to form what could turn out to be the world's largest B2B exchange.
Covisint, as it's called, will connect more than 50,000 prospective auto parts suppliers.
It hopes to slash transaction costs by 90 percent.
This is competition with a twist--it's co-opetition-D ... a new kind of collaboration designed to streamline procurement at the front end of the supply chain.
And we're likely to see more of this kind of co-opetition as customers use the Internet to demand the best products for the lowest prices.
If competitors can cooperate, then so can manufacturers and retailers.
I read a story in the Wall Street Journal about an interesting partnership between Kimberly Clark ... maker of Huggies Diapers ... and fast-growing discount retailer Costco.
Kimberly Clark and Costco have worked out a deal: If Kimberly Clark agrees to take over responsibility for replenishing stock of its Huggies Diapers on Costco store shelves ... then Costco agrees to share real-time, detailed electronic scanning information about its diaper sales with Kimberly Clark.
Each morning, Kimberly Clark data analysts study spreadsheets downloaded from Costco's point-of-purchase systems. Their mission is to keep each Costco's store's inventory as low as possible without risking empty shelves.
They dispatch trucks filled with diapers to individual Costco stores when inventory trigger points are reached. By transferring the costs and risks of inventory to the manufacturer, Costco saves money on staff and storage. And for its trouble, Kimberly Clark gets to be the primary diaper supplier at Costco stores.
What you see here is a demonstration of communication, vulnerability, and trust in a business setting. Experts expect this kind of supply-chain collaboration to intensify as pressure to cut costs and streamline the supply chain increases.
The big vision is to tie store sales directly to production. As one executive at Procter & Gamble put it: "A shopper buys a roll of Bounty paper towels, and that would trigger someone cutting a tree in Georgia."
Another type of collaboration is the growing trend toward outsourcing e-logistics to trusted third parties.
With all the complications presented by e-logistics we discussed earlier, more companies are letting outside experts manage their supply chains. The most conservative estimates predict that 15 percent of all B2B e-commerce companies will outsource their logistics by 2004, up from seven percent today.
Earlier this year, Ford hired UPS logistics to redesign its North American transportation network for finished vehicles. The automaker wanted to reduce by 40 percent the time it takes to get cars from its 22 U.S. factories to its 6,000 dealers ... and, in the process, improve the tracking of these vehicles so dealers could let customers know exactly when their cars are expected to arrive.
In other words, this isn't just a transportation challenge. It's an information challenge as well.
UPS's first step involved redesigning Ford's transportation network, which uses both trains and trucks. UPS redesigned and simplified the routes so that we could minimize the number of times a Ford vehicle changed trains or tractor trailers.
Then we set out to apply what we had learned about tracking packages to tracking cars.
We required that each transportation carrier provide UPS with real-time, Web-based information about each vehicle they handle. We feed this information into a specially designed tracking system, which collects data about each "event" that happens as a vehicle makes its way to the dealer.
Instead of bar codes, we identify each car through its Vehicle Identification Number--or VIN.
Using special optical scanners and radio frequency technology, we can track the progress of each vehicle along regular mileposts.
If a car is behind schedule, an alert is dispatched--either via e-mail, fax or pager.
UPS logistics managers then have the option of putting the vehicle on a faster mode of transportation or combining it with another load. Meanwhile, Ford dealers can check on the precise location of a vehicle by typing in its VIN number.
Eventually, customers will also be able to check the status of their cars as well--right over the Web.
As we stare in the face of a 6.8 billion-dollar e-commerce opportunity, there's no reason not to be inspired.
Sure, we've got some global supply-chain issues to iron out. Let's be honest about our shortcomings, and then let's be diligent about addressing them.
Fortunately, the Collaborative Economy forces us to work together to solve problems we couldn't handle on our own.
That's bad news for companies unwilling or unable to collaborate.... and good news for companies smart enough to know that they aren't smart enough alone.
Thank you very much.
Chris Mahoney, Sr. is vice president operations, United Parcel Service. His remarks were presented at The Worm Purchasing Conference, New York City, November 10, 2000.
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