Enterprises are now moving “over the firewall” to link with suppliers and customers in an increasingly more integrated value chain. Operational benefits increase with the level of integration, but so do integration costs and risks.
The potential benefits of value chain integration are many. Value chain initiatives have the potential to drive down costs and increase efficiency by eliminating bottlenecks and blind spots, and taking advantage of the Web. You can also be more responsive to key events, such as a sudden change in demand.
Take Earthgrains, the US-based bakery our researchers studied. Earthgrains uses point-of-sale information (POS) from more than 2,000 retailers to automate payment from its retailers and to determine what assortment of bread to stock shelves with on the following business day.
Prior to implementing scan-based-data (SBD), Earthgrains delivery people had to stand in line at the retailers’ back doors to have their deliveries counted. Now they no longer line up, nor do they deliver only during restricted back-door operating hours. They stock the shelves themselves, based on historical POS information available through a shared database of prices and products hosted by third party viaLink.
Caution Comes Before Collaboration
It’s not all good news. What seem like small differences between enterprises – in data, processes and standards – can make integration technically challenging. Whatever the vendors may say, integration is difficult. To get it right requires care and experience.
One challenge is the sheer number of parties in a value chain. It can be unclear how to make that selection, and what level of integration will yield the most benefits. Another challenge is that processes change over time, due to new products, new
types of orders, new kinds of contracts, and different fulfillment processes. When you share these processes, it’s difficult to make changes swiftly. A third challenge is agreeing on what information to exchange. Some parties may work with your competitors. How can you protect your interests?
Benefits Vary with Level of Integration
We identified three major levels of integration: loose integration is characterized by ad hoc information-sharing, where both parties and their IT remain separate. Close integration is characterized by more formal information exchange, where there is significant overlap between parties and their IT. Tight integration is characterized by business-process sharing; the parties and their IT are intertwined.
Before tightening the integration of an inter-business process (IBP), you first need to be convinced that the benefits are justified. And you’ll want to manage no more than a few such relationships – the ones where the benefits are really worthwhile.
To simplify the process of integrating IBPs, we found leading companies were using “pre-built” solutions and standards wherever possible, including standards that are dominant in their industry.
A good example is the use of XML by Whirlpool, the consumer durables firm. Whirlpool formed eWhirlpool in 1995 and has been integrating its retail channel ever since. But process integration has proven difficult with many of its largest customers because their proprietary EDI systems have limited functionality and flexibility. Smaller customers, though, which had not built such solutions, have been able to take full advantage of the flexibility of eWhirlpool’s XML-based
The Future Isn’t What It Used To Be
So where is IBP integration heading? Three trends in particular stand out: increased integration, increased virtuality, and the use of IT to track relationships.
Despite the cautions I have outlined, there’s a clear trend to increasing IBP integration because the costs and risks are falling relative to benefits. Growing dependence on outsiders for all but an enterprise’s core competencies is also fuelling the importance of IBPs and placing more of a premium on effective management. As an enterprise’s web of relationships becomes more complex, IT becomes an indispensable management tool for tracking what’s going on.
So despite the hype, there is still a long way to go with the smart implementation of IBPs. Most enterprise value chains are only now coming to grips with the real possibilities for truly IT-enabled business processes. IBP linkages are even
more challenging. But if you start with caution and understand the risk and rewards, there are real benefits to be gained.
Dr Marianne Broadbent is Group Vice President and Global Head of Research for Gartner’s Executive Programs.