Craig Knight, Asia-Pacific Digital Business and Customer Services Manager of Eastman Chemical Company, had been given a mandate to sell Eastman's philosophy for an integrated electronic supply chain, otherwise known as the Integrated System Solution (ISS), to its business partners in the region, and to encourage its adoption. Having invested in a state-of-the-art technical architecture that would support interconnectivity with all parties along the supply chain, Eastman was keen to realise the full benefits to be gained from an integrated e-supply chain on a global scale. Following numerous rounds of discussion with key business partners in the Asia-Pacific region, some progress had been made. Nagase & Co., Ltd. of Japan had agreed to adopt ISS connections with Eastman, but had some reservations regarding the extent of integration. Although the benefits of integration were proven, suppliers, customers, distributors and other interested parties were faced with numerous limitations and considerations that would have significant implications for their established business processes and even the shaping of their corporate strategy. Adoption was not a simple choice. Craig understood these shortcomings and was making every effort to ease the adoption process by identifying the longer-term benefits to Nagase and other business partners of applying XML technology to their businesses.
Analysis of Issues
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In the past, chemical companies have relied on traditional strategies for growth and competition, such as extracting additional value from existing assets. Hence, in the 1970s and 1980s they focused on the functions of sales and operations; in the 1990s they focused on consolidation and restructuring to reap economies of scale and capture synergies to realize cost savings. However,
in the 21st century, such traditional strategies are no longer the means for creating shareholder value. Knowledge is becoming an increasingly important part of a company's capital. Companies will have to focus on knowledge-based strategies to support long-term growth. Knowledge-based strategies are becoming synonymous with Internet-based strategies. The Internet has become a tool or channel for exchanging knowledge, all with the ultimate goal of satisfying end customers.
The single greatest efficiency to be gained from Internet technology is value chain integration (Davydov 2001). The integrated supply chain that Eastman wants to achieve facilitates optimization of information flow at each transaction point of the chain. It allows for substantial improvements in profitability and efficiency by affecting multiple factors simultaneously (such as costsavings, better inventory management, and reduced trade-cycle times). While these benefits are commonly identified by many companies and industries as essential to competition today, students should appreciate from the case the peculiarities of the chemical industry and how these peculiarities lend themselves to the full potential offered by Internet technology.
Chemical manufacturers face a number of challenges beyond the manufacturing process itself that directly affect the fulfillment of an order. These include the range of logistics options, the quality of the chemicals, and health and safety issues. They are faced with questions such as whether they can find a chemical tanker that can ship in time; whether the shipping company will preserve the necessary qualities of the chemicals; and whether the quantity of impurities in the products will be acceptable. While these issues have traditionally been resolved offline, companies such as Eastman are now trying to handle these issues electronically. As yet, no e-marketplace or organisation offers the full range of services required by chemical manufacturers. Eastman believes that these offline services can be managed more efficiently through the Internet. Its investment in state-of-the-art technological infrastructure was aimed not only at creating benefits for Eastman's own business, but also at creating opportunities for it to sell its services and expertise to other players in the industry. To address the peculiarities of the industry and give it a head start in realising its goal, Eastman formed Cendian, a chemical logistics service provider, which it later spun off. Cendian's role in Eastman's e-supply chain is crucial. By setting the technical standards and establishing XML connections with Cendian, Eastman is pushing the industry to adopt the same standards.
The integration with Cendian provided the "proof-of-concept" for Eastman in realising the benefits of being able to pull information from Cendian's systems and push information out from Eastman's internal systems to Cendian's. Being able to share information and knowledge in this way gave Eastman the impetus to connect its systems with its wider network of suppliers, customers, and service providers. The traditional EDI approach to supply-chain e-commerce failed to achieve 100 percent compliance. However, the Internet provides a new solution to achieving 100 percent compliance. It is less costly, uses a new means of digital document presentation, and accommodates diverse ways for distributing business documents among trading partners. Hence, many of the small, unsophisticated trading partners have the opportunity to participate in the e-business network. New mechanisms for data transmission and presentation (e.g., XML) have created new ways of presenting business documents to technologically unsophisticated users that are required to have only minimal software and hardware. This ability to share information beyond geographic and corporate boundaries for the benefit of all parties in the supply chain in fulfilling the customer's requirements in a timely, efficient, and cost-effective way is what Eastman sees as its potential competitive advantage. The Internet has forced down the traditional cost barriers to supply chain collaboration. It has also shifted the emphasis to adding value rather than simply competing on price.
Analysis of Options
Always on Time
Marked to Standard
1. Eastman Online Storefront
The portal approach allows customers to input orders to Eastman through Eastman's Website, eastman.com. This was the approach Nagase had been using. Within the Website is a Customer Center where Nagase would log in, place orders, check the order fulfillment status, and so on. However, this was a manual process of ordering, which had its limitations. The manual process was slow and prone to human error.
Industry solutions are available to Nagase. Middlemen, such as ChemConnect, provide online services that connect buyers to sellers using XML technology. In September 1999, Eastman held an equity interest in ChemConnect, making it the first charter member (refer to Exhibit 2). ChemConnect is a vertical marketplace for the transaction of all types of chemicals.
With over 2,000 members, it is the world's largest online chemical exchange. Subscribers to ChemConnect effectively outsource their XML architecture to the third party. The advantage of this is that subscribers do not have to be too concerned about implementation, as ChemConnect handles the customisation of information systems for them. This is appealing to companies that lack technical expertise. Subscribers also gain access to a ready pool of trading partners with which they can transact online. (Refer to "E-Hubs: The New B2B Marketplace" for additional reading about the future role of e-hubs such as ChemConnect and Chemdex.)
However, the downside to this option is that Nagase would lose some flexibility in the architectural design. The implementation could also be costly, depending on how capable the team is in managing the project. In projects of this nature, the hardware is not the most expensive part; rather, the manpower costs could escalate. Having access to a ready pool of trading partners is also not without its cost. ChemConnect charges annual subscription and per-transaction fees. Nagase would have to assess the value of its investment and the volume of communication and business it would gain from the ChemConnect members, compared with the volume of business transacted with trading partners that do not subscribe to ChemConnect. For Eastman, which had its own XML-based architecture, subscribing to ChemConnect became too costly, and (although this is not mentioned in the case) it decided to relinquish its membership.
3. System-to-System Integration (ISS)
ISS, based on the CIDX standard, automates the purchase-order loop. By linking front-end and back-end systems, Eastman can work with its trading partners to affect vendor-managed inventory (VMI) processes, outsourcing of logistics functions, and so on. ISS allows companies to by-pass the middlemen, and provides greater flexibility for customization based on the customer's needs. The CIDX standard defines sets of information (or modules) that must be provided in every purchase order, logistics request, and invoice. Adoption of the CIDX standard would enable Nagase to communicate with other companies, besides Eastman, that also use the CIDX standard.
Nagase's back-end systems, although simplistic, are good enough for applying ISS. Nagase can make use of the webMethods services and tools, but the extent of integration will be dependent on
â€¢ the extent to which it is willing to reengineer its business processes
â€¢ the amount of financial investment it is willing to make
â€¢ the commitment of senior executives to adopting electronic means of doing business
â€¢ the technical capabilities of the company
To achieve full integration, systems need to be able to communicate using common standards. Eastman adopted the CIDX standard. However, it is limited by the challenge of interfacing information flowing between its systems and its partners' systems because the latter may not have the necessary IT infrastructure to support the CIDX standard. As Ted McDermott (2000) puts it, "Becoming e-connected with poor quality data from lower IT systems will do nothing to improve efficiencies in the supply chain or reduce costs."
Standards are essential for realizing a fully integrated supply-chain. However, convincing players in the supply chain to adopt a radically different approach to doing business can be a painstaking task, as can be seen from the case. For small players, minimal capital investment is required to link their basic back-office systems with those of their trading partners. Eastman provides the webMethods partner server, Trading Networks, and CIDX Adapter licence free-of-charge to its partners. However, for the larger partners, such as Nagase, the implications of adopting XML standards must be assessed in terms of the benefits they would gain from connecting not only with Eastman but also with all the other trading partners in their supply chain. Although Eastman provides the infrastructure for connecting with its partners regardless of the partner's systems, be they ERP, legacy, or an EAI engine, its partners (seeing the longer-term potential of XML-based technology) want to gain more from their capital investment. They do not want to be in a position where they are giving up control for what they see as a limited payback. The true benefits of the e-supply chain can only be realized when the systems that manage the supply chain reach right back into the systems that manage the manufacturing and back-office processes. But achieving operational integration between disparate systems and processes to deliver immediate and reliable results to customers and all the partners in the supply chain is not an easy task.
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In order to integrate technical and business processes, large trading partners are having to assess the value that may be gained from various collaborative business scenarios across the supply chain. Such collaboration may be in the areas of engineering project collaboration, customer order and inventory collaboration, distributor-reseller collaboration, supplier and procurement collaboration, demand planning collaboration, and warehouse management and freight collaboration. The opportunities that await them are immense. However, before they can realize these opportunities, there needs to be technical and business process integration across enterprises and across heterogeneous applications that reside in the different enterprises.
Many of the back-end systems of Eastman's trading partners operate in isolation. The first problem they need to address is the internal operations inefficiencies as a result of these disparate systems. Hence, it is not surprising that PricewaterhouseCooper reported in December 1999 that chemical companies are major investors in systems, and SAP's early growth was primarily due to such investments (PricewaterhouseCooper 1999). One of the conclusions drawn by the report was that the increasing amount of investment in new technology is related to the need to control complexity and generate information for internal and external use. The major areas of expenditure are reported to be on ERP systems, plant computerization, and networks. Like other industries, the chemical industry is under pressure to change to become more responsive to market conditions. E-Business is becoming an accelerator of change and a shaper of new businesses. In an industry where 80 percent of costs are estimated to be locked into the supply chain, chemical companies are having to take a holistic approach to reengineering their processes and systems.
ERPs, such as SAP, are becoming the enabler of operational improvements. These ERPs are integrated packages of software that are deployed enterprise-wide, including human resources, manufacturing, finance, sales, and logistics. But implementing an ERP involves fundamental changes to a company's processes. While technology is the enabler, change management and project execution are critical to the success of the implementation. Furthermore, the pressure to implement an ERP comes not only from the need to resolve internal operational inefficiencies, but also from the need to link processes beyond the organization to include trading partners-the second problem. One of the fundamental underlying requirements for integration would, therefore, be to involve both internal staff and external parties who have a role to play in the supply chain. They need to develop global business process concepts that map the resources and information requirements of each party (Light 1999). A gap analysis to compare the business requirements and the systems capability of each party has to be carried out. Various decisions for business process changes and systems configurations follow. So organizations are having to reengineer the way they interact with their trading partners and customers. The task of integration is similar to business network redesign and business scope redefinition, as described by Venkatraman (1994).
Eastman needs to convince its trading partners that the full benefits of an integrated supply chain requires them to
â€¢ upgrade their IT systems at all levels to handle the new information demands
â€¢ view themselves as part of a value chain
â€¢ focus on providing value to the customer above all else
Since the objective of moving to the portal is to have cost saving, operational efficiency, revenue generation and user satisfaction, it is recommended to do a simple link between KnowledgeCurve and the portal to enable integration in the short-term to meet the portal launch timeline, while working on developing a full portal integration system to rollout in the long term. At the same time, the portal should have the functionality to authenticate and authorize user, in order to control access. Also, investment can be made to improve the technology infrastructure level, in preparation for the final full portal launch in the future.