The European supply chain ... what have we done to ourselves?

According to a recent study by IDC, the supply chain in Europe is not ready to embrace the Internet. As a consequence, many European companies may fail to be as competitive as they ought to be, says Mirko Luccs, expertise customer centre manager for IDC Europe.

“There is indeed some danger but you have to keep in mind the different dynamics of the region. In Europe there are many more smaller businesses than in North America. In the US, companies work on a larger scale and don’t have to deal with so many companies.”

This factor and a continuing inherent mistrust of the Internet’s security and performance are holding the supply chain back. “Many companies said that the Internet is definitely the future for the supply chain but they still have concerns over its capacity,” says Melanie Dubois, lead analyst of the solutions and integration strategies programme at IDC Europe and co-author of the report.

Part of this reticence can be attributed to a lack of knowledge and Europe’s risk-averse business culture. Cost is not a deterrent, says Luccs. “European companies are more careful than their American counterparts. They want proof it will work. Cost was not mentioned by anyone – it is mainly about culture.”

Alan Waller, a partner in the international supply chain management practice at PricewaterhouseCoopers, who is also chairman of the European Council of Supply Chain Management, gives another reason for the slow uptake of Internet technology.

“Businesses are not necessarily structured to take advantage of the Internet and you have to have leadership from the top. There is a major barrier there,” he says. In a recent PwC worldwide survey of 1,000 CEOs, only one third said that they thought the Internet and e-business would allow them to reach new markets and change the way they do business. Two thirds see it only as marketing tool and information medium.

Waller believes many organisations are afraid of the implications that restructuring to take advantage of the Internet might have. “There are change management issues here and in some organisations it is like asking turkeys to vote for Christmas.”

More education about the Internet is needed in Europe says Dubois. “Most companies have such a variety of clients and suppliers and they are not willing to take that risk (that Internet-based systems won’t deliver).

I think it’ll take a couple of years before Europeans feel comfortable with extending important information over the Internet.”

Mark Lillycrop, director of research at corporate information provider Xephon, says that one problem is the fact that Internet-based supply chains are relatively immature at the moment compared with EDI. “It’s not just inadequate products that are holding the market back, but the problem of implementing the architecture.”

EDI systems, he points out, have taken years to mature; they are relatively costly but also quite stable compared to extranet environments. No one wants to risk their supply chain on unproven systems, says Lillycrop.

“Weak links in the chain can have a devastating effect on a company’s ability to fulfil orders and satisfy customers. Users need to examine their relationships with business partners both up and down the chain, and work with developers, systems integrators and IT vendors to ensure that applications work together across the extranet. They also need to ensure that system management mechanisms support these looser chains.”

Companies looking at supply chain systems tend to fall into two categories, says Lillycrop; those with a major investment in EDI who see little benefit in the Internet/extranet route, and those with little or no EDI commitment, who see the Internet as a good way of building new value chains.

The fact that many have already invested considerable sums in recent times on ERP, supply chain management systems and EDI links to support them, will tend to add weight to the arguments that the Internet offers nothing additional or different. “A lot of large companies have legacy systems and they have to scale those down before they can automate the supply chain.”

The low-cost of entry however, counterbalances the legacy factor to some degree and this will be one of the key drivers for adoption in supply chain management, says Andrew Johnson, head of manufacturing and logistics at Compass Management Consulting. “The Internet is much less expensive than EDI. Smaller companies that recognise the potential will gain ground.”

Smaller firms that are able to implement Internet-based systems quickly may have considerable advantages over larger competitors for a time.

Compass has recently completed a survey in conjunction with Cranfield School of Management looking at the attitude of manufacturing companies and their use of e-commerce in the supply chains. The survey canvassed the opinions of 258 senior executives from Australia, Europe and North America. Some of the results confirm IDC’s findings: that all supply chain managers believe the Internet is important to them, for example.

Almost three-quarters of respondents identified e-commerce as the area of greatest potential for improving supply chain performance. But most companies only have a low or moderate investment in supply chain technology infrastructure according to Compass and Cranfield.

Investment in Internet-based supply chain systems varies according to the industry sector, says Johnson. In some areas – the electronics sector, for example – it is moving quickly, driven by competition. In others – pharmaceuticals, for example – it is seen as adding little immediate value.

In the sectors with high investment in IT, the pressure is building; larger firms can afford to invest more while small players are continually struggling to keep up with the investment in technology. Early adopters may have taken a lead already, but small-medium players who can’t keep pace with investment will struggle. So Internet adoption in the supply chain of an industry will hasten consolidation.

Being able to respond swiftly to any shift within a particular sector towards Internet-enabled supply chain management could be key to surviving the transition to Internet-based supply chains. While most European businesses believe the Internet will be important, it could take larger firms between six months and three years to implement their plans once they make a commitment, says Luccs.

So, smaller operators who invest early in Internet-based supply chain management, may gain a competitive edge on their larger competitors. Larger firms will be able to afford to invest more in supply chain systems – companies that are stuck in the middle, that have grown and developed some legacy, but are not so large that they can keep investing in IT constantly, will be the most vulnerable.

But even when the Internet is being embraced by the supply chain managers, Johnson believes many organisations may still fail to address the fundamental issue of integration and the measurement of effects on performance and on costs.

In the Compass/Cranfield research, 74 percent of companies said that e-commerce was one of the areas of greatest importance to the supply chain in the future, and 68 percent said that the supply chain was vital to corporate strategy. Yet only 30 percent have close integration between IT and supply chain strategies.

The implication is that the two won’t be properly aligned when the Internet is used to support supply chain management. Of even greater concern is the finding that, within three years, 32 percent of all spending on supply chain management will go on IT.

“Our concern is that people are not tying the IT, Internet and supply chain strategies together and when they do, they are not measuring performance and in particular the cost of delivery.” While industry exchanges may help to reduce procurement costs, other factors – such as the cost of individual shipments – are not being considered fully, says Johnson.

Waller agrees with this assessment. Procurement, he points out, is fairly independent of the rest of the supply chain issue. So are business to consumer transactions. But most of the supply chain is inter-dependent and changing one part means changing everything.

For this reason, he says, Internet adoption in the supply chain in Europe will not happen quickly. But there seems to be no questioning its significance for the future. European businesses may be wise make sure they are ready to run with the Internet before they leave the starting blocks, but they must not hesitate for too long, or the race could be over before they have really got started.

HIGH LEVELS OF SPENDING ON THE SUPPLY CHAIN IN EUROPE

Spending on IT-based supply chain management solutions is growing fast in Western Europe according to IDC. Corporate spending on supply chain services in Europe was $7.4bn in 1999 and is projected to grow at a compound annual growth rate (CAGR) of 42 percent until 2004. If it achieves this rate of growth it will be worth $42bn in 2004.

The largest proportion of this, 46 percent, goes on implementation services, 29 percent is spent on consulting, 16 percent on operations management, and 9 percent on support services.

IDC expects that the rise of the Internet and e-business will become a primary driver for supply chain management investments in Europe in the next few years. But instead of “blindly” jumping on the e-business train, European companies first want to ensure that their supply chain is capable of handling the new delivery requirements of e-business.