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Online Data Exchanges Boost Efficiency

June 2000

STANFORD GRADUATE SCHOOL OF BUSINESS—The Internet and other forms of rapid data exchange are creating more efficient supply chains. How companies are building these "exchanges" was the key topic at the Stanford Global Supply Chain Management Forum this summer where representatives from 170 companies gathered.

The forum, "Information-Smart Supply Chain Management," featured speakers from dot-coms, such as Winebuyer.com, and traditional brick-and-mortar companies, such as drugstore chain CVS Corp., that are using the Internet to cut costs while increasing responsiveness to customer needs. "A lot of these companies are figuring out how they are going to use the Internet to create values," said Forum director Hau Lee, who is professor of operations, information and technology at the Business School.

Several of the conference speakers emphasized the importance of using online business-to-business exchange sites to gather information from multiple customers and suppliers and process it rapidly into orders and deliveries. This, in turn, said Greg Owens, president and chief executive officer of Manugistics Group Inc., an e-commerce management company in Rockville, Md., will create horizontal companies that efficiently handle one segment of an item's production, sale or distribution before handing matters off to a manufacturing supplier in the production chain.

This wave of the future has already hit Japan, said Seungjin Whang, associate professor of operations, information and technology at the Business School. Whang discussed 7dream.com, a joint venture between the Seven Eleven Japan (SEL) convenience store chain and six other Japanese corporations, including music vendor Sony and Fuji Photo Film, that makes ordering from the Internet as easy as, well, dropping by the local 7-11. Customers are able, as a result of the
alliance, to order and pay, in cash, for tickets, books and other commodities. They can also download music disks on site and process digital film.

Data streamlining occurs at the backend as well. Cashiers at the convenience stores estimate the age and record the gender of each customer. This information, in turn, is compiled overnight and distributed, giving both SEL and its supplier a precise picture of who buys what when. In response to the fluctuations in demand, SEL stores change their lay-outs several times daily in response to expected customer demand.

The success of 7dream.com in Japan has been such that the SEL's market valuation has quadrupled. However, Whang cautioned that it was unclear whether this success would automatically translate into other markets. He pointed out that there were several factors that contributed to SEL's success that were not applicable in the United States, such as a preference for cash payments, relatively few PCs and the tendency of the Japanese to commute by rail and walk by convenience stores on a daily basis. "Will this work in the U.S.?" Whang asked. "Of course, as a professor, I don't have the answer."

Whang did, however, introduce Linda Heasley, vice president of merchandise planning at CVS in Woonsocket, R.I., which has attempted to implement some of 7dream.com's strategies in the United States in the past year. So far, the information gathered from customers has made it possible to reduce inventory and more effectively tailor store content.

"As we expand, we will be able to edit assortment," Heasley said. In addition, CVS' Internet site makes it possible to offer more depth and variety in areas such as vitamins. Whereas CVS stores offer an average of 550 units, the online pharmacy offers 5,000.

Not all online options seem to appeal to customers, however. About 68 percent of CVS' customers prefer going to the store rather than getting home delivery, while automated teller machines in the stores have been largely ignored by customers, Heasley said.

Nonetheless, Heasley was optimistic about integrating e-commerce with bricks-and-mortar. "It can work here," she said in response to Whang's question.

Dr. Koichi Nishimura, CEO of electronics manufacturing services provider Solectron Corp. explained that high tech supply chains experience special problems not faced by other supply chains. "Right now, we are seeing component shortages that are causing problems for everyone. When you combine that with incredibly short product life cycles, you have a very tough situation. It is not like the retail or grocery supply chains. The ingredients for ketchup don't change every six months."

The key to efficiency, said Dr. Nishimura, is a robust back room. "Companies must align their processes so there can be seamless integration. It is like a relay race. The problems occur in the hand-offs between runners."

Joseph Pyne, senior vice president of marketing and corporate development for UPS agreed. "E-commerce is just commerce, using technology. It's not just about having a beautiful website. You have to look closely at your back-end. You have to ask yourself if your fulfillment system is capable of delivering to Dublin, Ireland." The supply chain is undergoing another complete transformation," Mr. Pyne continued. "It's about the three Ts: time, transparency, and trust. Lightning velocity, invisible to the customers, and careful branding of services to gain the trust of the customer. That is what it is all about."

Greg Owens, president and CEO of Manugistics, painted a picture of the brave new world of collaboration enabled by Internet technology. "While there is chaos in the market now, with a number of e-marketplace models, the ultimate winners will be the most powerful players. Users should look for transaction volume and industry experience. Which players are providing value-added services? We believe that business trading networks of the future will incorporate exchange frameworks, procurement and sourcing, logistics brokering and overall trading network optimization."

Other forum speakers included Matthew Johnson, vice president of procurement at MCI Worldcom in Clinton, Miss.; Rani Merritt, executive vice president and general manager of the worldwide marketing organization at BroadVision in Redwood City; Keng Lim, president and CEO of Escalate Inc. in Redwood Shores and Vic Verma, president and CEO of Savi Technology Inc. in Sunnyvale.

The Stanford Global Supply Chain Management Forum is a leading research institute in partnership with industry, the School of Engineering and the Graduate School of Business at Stanford University, that advances the theory and practice of excellence in global supply chain management. Working with approximately 60 industrial organizations, the Forum is actively engaged with a broad cross-section of leading and emerging industries to identify, document, research, develop and disseminate best practices in a dynamic and increasingly global economic business environment.

— by Margaret Young

Related Information

Research Center
Stanford Global Supply Chain Management Forum

Executive Program
Managing Your Supply Chain for Global Competitiveness

Audio

Supply Chain Management: The First Decade, Professors Haul Lee and Jin Whang provide an overview of research into Supply Chain Management.
Audio File (1:10 hours, RealPlayer® format)