Less chain, more links: Think big, start small

Frank Lerchenmueller, Vice-president, e-business strategy for the industrial sector, IBM

E-markets can take costs out of the supply chain and so benefit suppliers and original equipment manufacturers. But companies should plan their strategies for e-business carefully and make sure all their staff are involved.

Over the past few months, many large manufacturers have appointed e-business vice-presidents. This is a breakthrough because it indicates that these companies understand the importance of e-business and that it cannot be left in the hands of line managers or the IT department.

I think their next step is to develop a well thought-through plan. Companies should think big but start small. They should get their people involved, otherwise they will achieve little, and they should ensure that their processes are streamlined.

Of course, they should also understand the main technological changes that are driving the move towards e-business. First, the internet offers unprecedented speed of communication, and further developments in speech recognition and automatic translation from one language to another will make it much easier to use.

Second, computing is becoming pervasive with microprocessors being installed everywhere. And third, new software based on open standards is being developed to exploit the internet.

One area where we are already beginning to see the impact of these changes is in the creation of private and public e-markets where global buyers, sellers and service providers are being brought together.

Many markets have been announced in the past six months. Some have generated a lot of hype and few benefits for the participants, although the newer e-markets are focusing on creating value for the participants.

From our experience at IBM, the benefits of e-markets are compelling. We set up a private e-market with our suppliers three years ago through which, this year, we will purchase $40bn (£26bn) worth of goods. It has saved us $1.7bn in supply chain management costs and billions in procurement costs. For example, over this period we have reduced the cycle time from order to delivery from 35-65 days to 2-23 days, increased the proportion of on-time deliveries from 75% to 95% and cut demand/supply planning time from 45 to 20 days.

For IBM, a private e-market was a logical starting point because we wanted to ensure we had efficient internal processes in place. Now we are planning to go a step further and set up a public e-market with electronics and telecommunications companies from the US, Europe, Japan and South Korea. It will provide e-procurement and a number of services, including finance and logistics.

E-markets create greater transparency, which will make it easier to distinguish between efficient and non-efficient suppliers. But they are not being formed with the sole aim of pressing suppliers for lower prices. The main savings will come from process improvements. If we can reduce the inventory that is held by original equipment manufacturers and their first and second-tier suppliers, we can take cost out of the system, which is good for everyone.

In future, e-markets will have an impact on how industries are structured. There will be less vertical integration as companies concentrate on their core competencies and outsource the rest. In the past, the only practical way of achieving vertical integration between processes like product development, manufacturing and logistics was by having them in-house.

While the public can choose whether or not to use the internet, businesses cannot, because the internet will be a major factor in determining their future competitiveness. But we are just at the beginning of internet development.

Biggest constraint: Understanding the capabilities of the technology and how to exploit them will be a major challenge for many companies.

Biggest push-factor: Three key technological trends – the further development of the internet, pervasive computing and a new breed of software.

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