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A supply-chain revolution in the making

Jennifer Fonstad explains how a new breed of renegades is turning the old central forecasting-software business inside out.

For years, we've heard a lot about the promise of supply-chain automation. Then came Nike's recent earnings hit, which management attributed to a failed i2 Technologies project, illustrating how many of these promises remain broken.

Still, we are at the cusp of a true revolution. Many young companies have turned traditional supply-chain religion on its ear, creating an unprecedented opportunity in the market. IDC estimates that what was in 2000 a $6.9 billion industry will surpass $30 billion by 2004, quadrupling in four years.

Clearly, this is something of revolutionary proportions.

Yet, while the older supply-chain models continue to make some headway, the renegades thumb their noses at the old ways of doing business.

Companies such as i2 and Manugistics may sport Web-enabled face-lifts, but they still follow the old-line thinking born of the days when planning-based, materials-driven, internally focused forecasting systems were in vogue.

If you want to know what's wrong with the old systems, just ask Alan Greenspan. In his mid-February testimony before Congress, the Federal Reserve chairman highlighted how businesses--even those producing supply-chain automation products--failed to anticipate the slowdown, building up inventories and manufacturing to inappropriate production levels.

Despite the stubbed toe with Nike, i2 continues to dominate the landscape. Meanwhile, renegade companies such as Saltare (a Draper Fisher Jurvetson company), Agile and RedKnife have made substantial inroads by following a new religion. Some estimate that the new, demand-driven technologies, if implemented, could reduce excess inventories by more than $30 billion.

While the old approaches do automate supply-chain management, they use a forecasted model, which gathers information primarily based on an individual company's own internal supply chain.

This intra-enterprise, planning-based approach is likely to create system-wide dysfunctional behavior. Besides suffering from significant information latency, the system breaks down as supply chains become more complex. What's more, it's also hampered by misaligned incentives that focus on the company level instead of the full, inter-enterprise supply chain.

This makes the system as a whole more combative, inefficient and unbalanced. The upshot: excess inventory, overcapacity, and poor results at each step in the supply chain.

A new religion
The new renegades have built systems that turn many of the old central, forecasted models inside out.

Using everything from Java-based intelligent agents and an Internet platform to a fully distributed peer-to-peer architecture, many of these new companies promise real-time, event-driven supply-chain management across the full intercompany supply chain. Instead of focusing on material flows, several of these new systems focus on managing capacity--keeping the pipe filled.

By ordering and delivering inventory on demand, businesses can create options for themselves based on demand and capacity needs. Manufacturing costs drop significantly because of decreased inventories, reducing the need for buffers. But perhaps more importantly, a company can create real flexibility in pricing and capture additional demand at the margin.

What's amazing is that these systems are starting to get widespread adoption with some promising results. Saltare's LEAP technology enables manufacturers to monitor consumption across multiple sites, in real time, and optimize both replenishment and production schedules for each locality. This provides incentives to Saltare's customers and trading partners to jointly optimize across the entire supply chain. Ultimately, Saltare's customers benefit by reducing inventory while providing additional flexibility for their trading partners to manage capacity levels and ultimately, potentially capture incremental demand.

Sycamore Networks recently expanded its lead in the optical networking market when it incorporated Agile into its design and manufacturing process. By enabling instantaneous communication throughout its integrated supplier network, Sycamore was able to go from product concept to prototype in less than five weeks.

Several other renegade companies are leading the charge in enabling fully distributed, real-time vendor management in other areas such as distribution, retail and manufacturing design. Vizional (a DFJ company) pioneered real-time collaboration in the distribution area by enabling companies such as ProLogis and CSI to integrate multiple distribution points and provide collaboration for their hundreds of customers.

Similarly, in retail distribution RedKnife linked companies like Microwarehouse and Webvan to their trading partners, providing real-time visibility and supply-chain event management services throughout the entire transaction. Citadon innovated by providing a similar platform for manufacturing design.

Each of these emerging companies shares a common thread in that their technology is native to an Internet transport platform.

As the Internet becomes the venue of choice for businesses, real-time data access and full integration with trading partners will become the de facto standard. Companies like Saltare, Citadon and RedKnife are defining that standard, forcing companies like i2 to start looking over their shoulders. Nike is not the only one looking for a better solution; many are demanding it. Welcome to the supply-chain revolution.