Integration Liberation

The era of do-it-yourself supply chain integration - its costs, its risks and its drain on your IT resources - is coming to an end. Help has arrived

Nine months. That's how long it typically took Agere Systems' IT staff to set up an electronic trading connection to a major supplier or customer.

Nine months for each and every one.

"We did every bit of integration ourselves, and every supplier's connection had to be different," says Chris Morris, the director of IT infrastructure and operations at the semiconductor maker.

Worse, those connections - whether via e-mail, the Web or more complex linkages like electronic data interchange (EDI) or the high-tech industry's own electronic lingua franca, RosettaNet - were all supported by different and ultimately inefficient processes inside Agere. Procurement staffers had to chase down orders via phone, fax or e-mail, and manually key in EDI data into Agere's Oracle ERP system. And Oracle could do little to help. Morris says Oracle's supply chain tool had neither the external-facing, automated service capabilities nor the reporting, metrics and error-handling features that Agere wanted and Morris felt the company needed.

There had to be a better way to make the connections.

There was.

The Trail of Broken Links

Morris, of course, isn't alone. Plenty of today's supply chains are slowed and even crippled by entrenched manual processes and disconnected enterprise systems. Right now, says Noha Tohamy, a supply chain and pricing solutions analyst at Forrester Research, "there's no significant integration between manufacturers and their suppliers' and customers' enterprise systems". Supporting her claim, more than 60 percent of companies responding to an April 2006 Aberdeen Group survey described their current supply chain processes as manual, spreadsheet-intensive, only partially automated and dependent upon different software systems within their own companies.

In short, the current state of the supply chain is not too good.

The reasons for the disconnects with supply chain partners are many, beginning with the fact that CIOs are still struggling to integrate their own ERP applications with their own supply chains, never mind connecting to and integrating with their partners'. Indeed, 60 percent of the respondents to a 2005 Aberdeen Group survey said complete internal integration would give them a competitive advantage - if only they could manage to do it.

The back-office enterprise systems in most companies weren't designed to support the multi-application, external-facing services that real-time supply chains require. They're too inflexible. "When you want to make a change [to your legacy ERP or SCM system], it's basically like ripping up concrete," says Beth Enslow, senior VP of enterprise research at Aberdeen Group.

But whether they realize it or not, the era is over of CIOs thinking that they can connect multiple, external systems, that they'll have the money and staff expertise to do it, and that communications protocols like EDI and RosettaNet will somehow magically integrate their supply chain information for them. Done. Finished. Why? Because that thinking has rarely produced any value for the enterprise. In one Forrester report, nearly 60 percent of the companies surveyed said they did not achieve the expected ROI from their supply chain management technology solutions.

"Traditional electronic data interchange, value-added networks are dead," says Benoit Lheureux, a research director in Gartner's application development, integration and Web technologies group.

For many CIOs, this is very bad news indeed.

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A New Way to Integrate

Fortunately, hope for supply chain information integration did not die with those old, kludgy networks. As Agere and many other companies have discovered, there's an emerging category of third-party, hosted options that successfully blend traditional value-added network (VAN) capabilities with on-demand hosted supply chain software and back-office integration services. Companies in this evolving market, such as E2open, GXS, Inovis and Sterling Commerce, offer a single point of data exchange - whether using EDI, RosettaNet or XML standards - that acts as a gateway for partner-to-partner, enterprise system integration and collaboration. For companies like Agere, it's now possible to make a single electronic connection to all customers and suppliers if they use E2open. Even better, that task can be taken care of by a third party.

Indeed, Lheureux claims that over the past few years this new strategy has so transformed the possibilities in supply chain networking that companies and CIOs that haven't investigated the new services "have an understanding of the market that is obsolete".

The Long Wait for Integration

According to a July 2006 IDC survey (IDC is a sister company of CIO) that asked companies to describe how they collaborated with their supply chain partners, the most cited method was e-mail (88 percent). Also making the list: fax (73 percent), telephone (62 percent) and snail mail (59 percent).

These tools, which depend on employees' fingertips, have prevented many companies from capitalizing on real-time B2B collaboration. In a September 2005 Aberdeen Group study, 75 percent of survey respondents with annual revenue of more than $US1 billion report that their supply chain applications limit - not enhance - the services they can offer customers.

A root cause of this, according to analysts, is "a huge underinvestment in technology to support global supply chain processes", says Aberdeen's Enslow. "Microsoft Excel is still the most popular supply chain planning system. [However], it's not scalable and it does not promote collaboration - either internally or across trading partners."

Agere's Morris says he had a wake-up call when his staffers started taking a closer look at their supply chain processes during the evaluation of E2open's services. It was not a pretty sight. "We didn't realize that this was the way we did things," he recalls glumly.

EDI, which Agere relied on, has been a staple of many companies' systems (63 percent in the IDC study) for a long time. But EDI has limitations. To begin with, the cost of having a VAN provider maintain EDI communications between trading partners has been prohibitive for many small and midsize companies. And although EDI facilitates the electronic transfer of information between partners, that data does not flow internally between ERP and CRM systems because different vendors' applications and systems, which follow different networking and communication standards, can't interoperate. That forces companies to use manual processes to update ERP and SCM systems, generating inefficiencies and errors.

More challenges come with the internationalization of business. CIOs must deal with suppliers from every corner of the globe with varying degrees of technological sophistication, as well as multiprotocol communication mechanisms that all have to hook back into the CIOs' internal systems. According to Enslow's research, global supply chains in large enterprises were not nearly as automated as their domestic supply chains. This dependency upon a supplier's questionable systems, upon their e-mails, faxes, and phone calls, "completely stresses out ERP and spreadsheet systems", Enslow says.

Enslow's research revealed that an astounding 90 percent of enterprises say their global supply chain technology is inadequate to provide their organizations with the timely financial information they require.

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Inside the Hosted Supply Chain: A Case Study

In 2001, Agere was made an offer it couldn't refuse. One of its biggest customers, disk-drive maker Seagate Technologies, strongly suggested that Agere sign on to E2open because Seagate, IBM and others in the high-tech industry thought E2open's services represented the supply chain future. (E2open had morphed from its beginnings as a dotcom-era online exchange into a vendor of hosted supply chain software.)

By June 2005, Agere had dutifully switched its supply chain front end over to E2open and with it brought along 80 of its primary component suppliers. In a fashion similar to the way Seagate "suggested" that Agere begin using E2open, Agere, according to Morris, "persuaded" its suppliers and customers to use E2open's services by showing them the value it could return to both parties. ("Of course, some of our suppliers are a lot bigger than us," Morris points out, meaning that he couldn't simply force a partner to sign on.)

Through E2open's single, Web-enabled connection, Agere (and those of its trading partners that have signed on to use E2open's hub) now has a more accurate, timely view of demand and order management data than it did previously, when it depended largely on manual processes, including fax, e-mail and phone calls. For example, the buyers in Agere's procurement group are now able to quickly adjust order amounts to match new (and more accurate) forecasts and then modify supplier shipment data before it becomes a problem (an incorrect amount) in the back-office Oracle 11i system. On the back end, the purchasing group, which tracks the ebb and flow of purchase orders worldwide, is now able to send and receive purchase orders that are now both more up to date and accurate. And many of those manual processes are becoming a memory as supplier data is now able to flow automatically into Agere's Oracle ERP applications through E2open's hub. From a business process perspective - as well as from the IT side of the house - the savings are immense.

"With one single integration point, E2open shields us from doing the actual integration work ourselves," Morris says. "We don't see any of those problems any more. Now [integration work] is E2open's headache."

Currently, Agere uses E2open's hosted services for forecasting, generating orders, demand and supply synchronization, and logistics visibility. Of Agere's 80 primary component suppliers hooked into E2open, four are "fully integrated", Morris says. That means that supply chain data "flows directly from their systems through E2open's and to ours without anybody touching it at all". Agere's Oracle 11i ERP system, based in its Allentown, Pennsylvania, headquarters, receives all the inventory and forecasting updates automatically. If they choose, Agere employees can go into the E2open site to see metrics on how their suppliers' goods are tracking or to look at forecasts.

Those 76 Agere suppliers not yet fully integrated still are able to input their data into an E2open-hosted customized Web page, where they can view all transactions, orders and status. But even when those suppliers add supply chain data to the site manually, Agere's side of the equation stays electronic, with the data flowing automatically into Agere's Oracle system. From Morris's point of view, even if all his suppliers never get to the full integration stage, it's been worth it already because of the efficiencies gained from working with real-time data, the savings that come with reducing manual-entry errors and the greater systems integration achieved by Agere's suppliers and customers.

Implementing E2open's package only took Agere nine months, which is one of the big selling points of the outsourced, supply chain service providers: faster implementation times with measurable returns on investment.

Ron Vance's investment in E2open was "very modest". "It's not like we put a couple of million dollars into this thing," the CIO of Tyco Electronics says. "It's more like a couple of hundred thousand."

Ranga Jayaraman, CIO of Hitachi Global Storage Technologies, says that going with E2open's system versus going with a home-grown one provided his company with a 33 percent reduction in onetime costs.

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Staff Liberation Through Hosting

Along with reducing costs (which all CIOs are under pressure to do) and increasing the accuracy of forecasting and tracking (which all business users depend upon), CIOs also want to expend fewer internal IT resources on customization and troubleshooting in order to free up their staffers to work on more strategic projects, says Aberdeen's Enslow.

At Imperial Sugar, an $US800 million sugar processor and refinery, VP and CIO George Muller is running Sterling Commerce's services for order management and inventory. Since going live with Sterling's services in 2004, he's found that his IS staffers are "managing exceptions rather than every transaction". "They can," he says, "focus instead on higher-value activities."

For example, whereas Muller's team previously had to find and fix exception transactions that wound up in what Muller calls an "edit and correction bucket", now, because these exceptions are fewer and more easily identified, his team can focus on development and system enhancement requests that "drive business value versus day-to-day maintenance".

There's another advantage of using an outsourced integration service provider: The hosted front end of an enterprise's supply chain system has the ability to communicate with the different communications protocols found in today's supply chain. Jayaraman says that E2open's ability to translate from one language to another is hugely significant for Hitachi. For example, say a company's systems can communicate only in the "language" of RosettaNet but the company's partners speak in EDI, XML or iDoc. E2open enables the front-end translation from one language to another and updates the back-end systems as well - which is where current enterprise SCM systems really fall down. As Muller says, "If you're a customer of ours, you can have it your way."

Of Course, Nothing Is Ever That Simple

Gartner's Lheureux says that right now he's tracking more than 85 vendors that claim to offer some sort of integration services for all forms of multi-enterprise integration, including the supply chain. (For a menu of the services available, see "The Hosted Supply Chain Menu", page 100.) Market leaders currently include GXS, Sterling Commerce, Inovis and E2open, and Lheureux estimates the market right now to be worth around $US1 billion.

The first challenge for these vendors will be overcoming resistance from CIOs. According to an Aberdeen Group survey, CIOs worry about data security, integrating on-demand solutions with internal systems and downtime problems; in addition, they're concerned that outsourcing their supply chain applications will compromise their ability to tweak these applications for individual customers. "As a CIO, I believe I can do things internally as well as turning the keys over to an outsourcer," says Imperial Sugar's Muller. But as he investigated what Sterling Commerce offered, Muller was forced to confront his staff's limitations: "With EDI and VANs, that's just not something I can do. Just like I wouldn't go out and build a general ledger system or a data centre."

Another challenge for the integration vendors is signing on enough enterprises to bring on what analysts call a critical mass of suppliers into each vendor's systems and trading hubs. Without that critical mass, CIOs wonder what will become of those vendors and, more important, what would become of their clients if they go under. "If [E2open] can't get that [critical mass], I don't know how they're going to remain in business," Agere's Morris says.

Ironically, the flexibility and ease of integration these vendors provide could also be their downfall because the costs of switching between them become much lower than with traditional packaged application vendors. For Tyco Electronics' Vance, going with E2open wasn't "a bet the ranch proposition. I wouldn't be hard-pressed to bring in another tool to do the same kind of process," he says. "It's a tool; we're not locked in."

While CIOs may not be locked in, many are locking on to this new and more efficient way of doing business with their suppliers and customers. And, given the results so far, no one wants to go back to the bad old days. "It is inconvenient for us to do business in a different way," says Hitachi's Jayaraman. "If we should start faxing things, [our employees] would quit.

"We don't have very many fax machines left."

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SIDEBAR: Their Software, Your Problem

Why the big enterprise vendors are not (and probably won't be) riding to the supply chain rescue

Some CIOs, according to Beth Enslow, senior VP of enterprise research at Aberdeen Group, seem to be waiting for their enterprise vendors to solve their supply chain technology problems for them.

They could have a long wait ahead of them.

On-demand supply chain applications just aren't their ERP vendors' core competency. "PeopleSoft, even with 300 different software modules, did not have an EDI translations software suite," says George Muller, VP and CIO of Imperial Sugar, who uses Sterling Commerce's services for order management and inventory. "PeopleSoft would handle everything very well within [our] four walls, but outside the four walls, PeopleSoft was behind the curve."

A possible reason for ERP vendors' reluctance to develop tools to integrate their customers' systems with their suppliers' and customers' systems is that it would impact their business model: selling on-premises software to a captive customer base. With the new, hosted model, customers of the enterprise software vendors could conceivably "turn off" the connection and go to someone else if they chose.

Representatives from SAP and Oracle, the biggest enterprise systems vendors, say that they are following the on-demand, hosted SCM market with interest, but, so far, don't have anything to offer. "We are looking at the demand for this market, but we are not yet offering an on-demand model with these kinds of solutions," says Hans Thalbauer, VP of supply chain management solution management at SAP.

"When you look at that opportunity space, that is not a service that Oracle has much interest in and competency in," says Julian Trotman, director of enterprise integration applications development at Oracle.

However, both point to their companies' fledgling on-demand CRM offerings to illustrate their technical capabilities within the on-demand model. "It's a model that we've tried to hone over the last three to four years," says Trotman. "It's going to be a large part of our business going forward."

As for the rise of the on-demand SCM vendors, SAP's Thalbauer doesn't seem too worried about E2open, GXS and the others. "I don't view them as a threat," he says.

SIDEBAR: Trust, but Verify

Should you open your kimono for your suppliers and customers? It depends on how well you know them

The age-old issue of trust rears its head once again as the hosted supply chain model allows - and encourages - enterprises to let their suppliers and customers look behind their collective firewalls. According to Noha Tohamy, Forrester Research supply chain and pricing solutions analyst, most companies feel that multi-enterprise integration is the only way that they can improve their supply chains "but when the rubber meets the road, companies are very cautious about what information they will share with their trading partners, and certainly what, if any, type of integration they are willing to have directly between their and their partners' systems".

Ranga Jayaraman, CIO of Hitachi Global Storage Technologies, agrees that these issues must be smoothed out before the real benefits of supply chain integration can be realized. "The trust between companies has to be there," Jayaraman says.

One way to decide how far to go with suppliers and customers is to analyze the nature of the partnership and make some hard decisions. Is it a small supplier that you can afford to lose? - in which case you might consider dropping it rather than getting stuck dealing with its manual entry work - or is it your most important supplier? - in which case you may do everything short of paying its monthly bills to get it to use your hosted service. Is the supplier's facility totally dedicated to your company, or does it supply other customers from which it draws higher margins on its products? - in which case it may be more resistant to your blandishments.

For example, Imperial Sugar VP and CIO George Muller is trying to help one of Imperial's biggest customers get up and running on some basic EDI transactions (as well as with its ERP rollout), which will lessen manual work for both companies and lay the foundation for an integrated supply chain with Imperial in the future. Because this is such an important customer for Imperial, Muller says he's putting in the hours and providing his expertise for his customer's benefit, doing everything he can to make it work. If the customer were not so important, Muller might not be extending himself to that extent.