Icc whitepaper

Herman Miller

Herman Miller, Inc. (HM) is the second-largest office furniture manufacturer in the world by production volume and revenues. Historically, HM’s success and growth have been driven by design excellence (including the Aeron chair and the Eames lounge chair) and innovation (HM invented “systems furniture” or cubicles in 1968, revolutionizing office spaces worldwide). Products are manufactured and assembled for the large, medium, small, and home office (SOHO) markets from millions of products and product variations. Despite the fact that office furniture is considered “low tech,” the company has firmly embraced technology, the Net, and organizational flexibility in pursuit of further excellence.

There is no doubt that HM is successful and revolutionary. Fiscal year 2000 revenues were $1.9 billion and the average five-year growth was 13.2% in an industry that grew at 7% over that same time period.1 HM’s 7% net profit is the highest in the industry. As of February 15, 2001, the company’s price/earnings ratio of 13.5 reflects success in the market given the industry average ratio of 10.02. In the first six months of fiscal 2001 (to December 2000), sales and orders grew in excess of 23% compared to industry growth of 8.8% and 7.0% for sales and orders respectively for the same period.3

Business Context

The traditional custom furniture industry targets 100+ seat (employee) firms with elaborate office design needs. Many customers view office furniture as a strategic purchase that will increase productivity. Design and quality are the main buying criteria, with less emphasis on delivery time. By the mid 1990s this market segment was stagnant, and manufacturers were competing on price, turning what was previously a custom product into a commodity.

Industry consolidation characterized the 1990s. At the start of the decade the industry had only one manufacturer with sales over $1 billion. By 2000, through acquisitions and organic growth, four companies clocked in over the $1.5 billion mark, with Steelcase (the largest) realizing over $3 billion in revenue.4 These larger companies, HM among them, invested heavily in manufacturing and inventory management software to further exploit economies of scale in custom manufacturing. HM also created a second supply chain called SQA (simple, quick, and affordable) where suppliers provide semi-finished products that are assembled by HM. Customers have less choice but products arrive much faster, in as little as 5-20 days.

In 1999 and 2000 the market seesawed. According to the Business and Institutional Furniture Manufacturers Association (BIFMA), the office furniture market shrunk in 1999 (-1%) but rebounded in 2000 (9%). The 2001 forecast is for a slowdown in growth to 5.6%. Market dynamics are also changing: “Much of the growth in the US economy is

1 Herman Miller 2000 annual report http://www.hermanmiller.com/us/pdfs/investors/00ar.PDF.2 Hoovers http://www.hoovers.com/enterprise/landscape/6/0,3091,13676,00.html. 3 Hoovers, Herman Miller Feb 5 press release http://www.hermanmiller.com/us/index.bbk/10422.4 1999 Herman Miller financial presentation, www.hermanmiller.com/investors/dlpresentations.html.

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occurring in small and medium-sized companies. Many Fortune 500 companies are downsizing and, as a result, are not requiring furniture for new employees.”5 The SOHO (small office home office) market segment has different product and service needs than larger customers, including more sensitivity to price and delivery time. HM’s SQA line was created to address these needs.

BIFMA states that competitors are concentrating on cost control and production efficiency to keep prices down. Also, “differentiation…based on service is often the only way to distinguish oneself from competitors.”6

Herman Miller responded to these business conditions by focusing on three strategic goals:

Differentiate on superior customer service. HM focuses on providing the fastest, most accurate delivery in the industry. The on-time, accurate shipment rate is over 99%. The company’s 5-28 day delivery time leads the industry.7

Improve speed to market of new products. Drew Schramm (vice president, supply chain management) estimates that HM can bring new products to market 15%-20% faster than the competition.8

Create new markets and increase the pace of innovation in the industry. For HM, creating a new market means one of two things: being first to attack a market segment like SOHO; or creating new systems that improve design efficiency.

Challenges and Opportunities

HM recognized that capitalizing on new opportunities, like the growing SOHO market, required new production and service skill-sets. To offer semi-customized office furniture systems faster and cheaper, HM needed to operate with more speed and agility. There were also clear implications for HM’s relationships with suppliers and dealers. Business processes—from supply and inventory management to ordering and design—had to be aligned and integrated with production in order to respond quickly and accurately to market demands.

HM’s large, diverse supplier base presented an additional challenge. It involves over 600 suppliers (125 of them “prime”), ranging from enormous conglomerates to tiny “mom and pop” shops, each with different levels of technical sophistication, importance to HM operations, and financial strength. HM’s goal is to empower and collaborate with suppliers, so both parties realize greater value from the relationship. For example, HM wants suppliers to deliver higher value, semi-finished goods rather than commodities.

5 BIFMA industry analysis: http://www.bifma.org/stats/stats_over2.html. 6 BIFMA industry analysis: http://www.bifma.org/stats/stats_over2.html.7 Mark Schurman, director of corporate communications, Herman Miller Inc., interview by Dave Cosgrave and Terrence Hibbert, Digital 4Sight, 22 January 2001.8 Drew Schramm, vice president supply chain management, Herman Miller Inc., interview by Dave Cosgrave and Terrence Hibbert, Digital 4Sight, 22 January 2001.

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Gaining alignment with the dealer community (still responsible for 70% of HM’s sales) would also prove challenging. Though HM continues to view dealers as value-adding intermediaries, it acknowledges that the nature of their value is changing. By offering new integrated design, sales, and order management tools, HM helps dealers operate more effectively and focus on higher value customer relationship management and service activities.

HM uses ICC to achieve speed to market and rapid innovation. Only by working more closely and collaboratively with suppliers and dealers can HM create and dominate new markets. Herman Miller was among the first in the industry to understand these changing relationship dynamics. Says Schramm; “Our competitors thought that we were just doing rapid delivery.”9 In reality, HM reinvented the entire supply chain.

ICC Deployment

Herman Miller’s ICC deployment strategies contribute to all three strategic goals shown in Figure 1 below. Technology and the Internet are used to deploy information intelligently and distribute decision-making.

Strategic Goals Deployment Strategy ResultSuperior customer service

Supplier decisions based on complete access to demand and inventory information

Accurate orders shipped on time.

Total cost reduction Lower prices to customers

Supplier rationalization Improved quality and speed due to increased collaboration

Z-Axis visual design collaboration

Faster time-to-order

eZconnect customer Web sites

Easier to re-order

Speed to market with new products

Collaborative product and process design

Faster design process

Commodity managers Better information flow to all participants, better forecasting

Creation of new markets

Collaborative product and process design

Faster design process. Easier to predict trends as input comes from multiple sources.

9 Ibid.

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Figure 1

Buy side

Herman Miller has gone beyond automating its supply re-order system; it lets suppliers actually manage component inventories. Information deployment empowers suppliers to make strategic decisions in response to changes in demand, resulting in lower inventory and production costs throughout the supply chain. Suppliers have access to real-time demand and production information through one of two Web-based information systems—Supply-Net and SIGN. According to Bill Bundy, vice president of operations, “all that a supplier needs to access demand and inventory data in real-time is a PC, a Web browser, and a password.”10 Suppliers can also check electronic invoices for accuracy, ensuring prompt payment and maintaining cash flow. HM even has an automated alert system to warn suppliers of discrepancies in invoices or orders. This saves both HM and the supplier wasted time and effort in chasing down problems.

HM also collaborates closely with suppliers to reduce total component costs. By analyzing costs at any point in the supply chain, components and processes can be singled out and analyzed for cost reductions. This is very different from the traditional model where manufacturers simply impose price reductions on helpless suppliers. The joint decision-making based on technology-enabled open information provides an excellent case for intelligent collaborative commerce.

Herman Miller enables further supply side agility by collaborating with a smaller number of suppliers to create deeper, more flexible relationships. The goal is to transform tactical, reliability-focused relationships into strategic relationships rooted in information transparency and trust. HM uses a “bucket system” to rate suppliers along quantitative and qualitative measures. Bucket one suppliers not only deliver over 99% accuracy but also share complete costing information and can adapt quickly to change. Bucket two, three, and four suppliers share fewer and fewer of these qualities.

The criteria are strict: of HM’s 600+ suppliers, only two are in bucket one. Drew Schramm indicates that the company has at least one major supplier who provides critical parts but risks being replaced because of its policy of not sharing cost information. Royal Plastics, a bucket one supplier, accesses SIGN and Supply-Net via the Net to get orders, inventory, forecasting, and payment info. “It helps us plan and keep better track of information,”11 says Perry Franco, Royal’s HM relationship manager. Franco indicates that many manufacturers simply demand that suppliers reduce prices and lead times, whereas HM “puts the tools in place to make it happen.” The tools enable intelligent collaboration between HM and Royal to achieve mutually important goals of leaner production. Similarly, Pent Assemblies shared cost breakdowns of a plastic part (labor, material, transportation charges, overhead attributed, cycle time of machinery). HM and Pent then were able to target the cost of the plastic resin as the main variable for the entire cost of the part. Working together, the two companies came up with a solution that

10 Bill Bundy, vice president of operations, Herman Miller, interview by Natalie Klym, Digital 4Sight, 11 April 2000.11 Perry Franco, Royal Plastics Inc., interview by Terrence Hibbert, Digital 4Sight, 5 February 2001.

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saves $50,000 annually. Schramm believes that there are many processes that can provide similar (or greater) cost savings.12

Make side

Collaborative design pushes design information to all relevant parties and solicits input from all simultaneously, thus reducing the cycle time and increasing product quality. This practice allows HM to gain competitive advantage by increasing the pace of innovation in the industry. The process can also be applied to manufacturing and sales process innovation. As Schramm says, “our…suppliers literally have engineers sitting in our new product development teams adding to the value of the product as it’s coming down the pike.”13 He estimates that this collaboration allows HM to bring high quality new products to market 15%-20% faster than the competition. Franco indicates that his company will sometimes get involved two years before a product launch. Royal Plastics can lower costs by designing parts that it knows are less labor-intensive.

HM intends to automate the design process by implementing software that enables virtual collaboration, thus saving time and resources involved in physically co-locating participants. Challenges may come from some suppliers who prefer to pay to send engineers to HM to physically manipulate the product. “I am typically trying to get my engineers to [HM’s] site to reduce headaches further on [during production],” says Franco. “They like to touch and feel the product, understand how it is used and its purpose.”14 For HM to be successful at virtual collaboration, it will have to simulate product manipulation.

At HM the commodity manager is responsible for collecting information on a particular commodity (plastics, wood, raw steel, steel products, etc.) and disseminating it throughout the supply chain. The objective is to improve product design and trend forecasting, both of which are necessary to increase speed to market and improve production quality.

Sell side

Herman Miller shortens the sales cycle by embedding business and design process rules into customer-facing technology. Shorter sales cycles increase dealer revenues without increasing resources, and enable the pursuit of new market opportunities. Z-Axis is a virtual room that allows dealers to collaborate with customers to design SQA systems in real time. According to Lee Eilers “[Z-Axis] allows a customer to make better decisions on a more timely basis so it can meet its targets.”15 The software intelligently displays only the SQA furniture that can be delivered within the specified period and automatically produces an accurate bill of materials. Traditionally, designing systems

12 Drew Schramm, vice president supply chain management, Herman Miller Inc., interview by Terrence Hibbert, Digital 4Sight, 16 February 2001.13 Drew Schramm, op. cit., 22 January 2001.14 Perry Franco, op. cit.15 Lee Eilers, (()), Herman Miller Inc., interview by Dave Cosgrave and Terrence Hibbert, Digital 4Sight, 22 January 2001.

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with CAD (computer-aided design) is a long and arduous process, particularly where changes are required. It could take months to complete sales to large customers. The cost for sales to smaller customers was prohibitive. Z-Axis allows dealers to reduce the sell cycle to weeks or even days and pursue the previously unfeasible medium-sized office market.

eZconnect is a Web-enabled tool HM created for large customers to re-order, or make changes to its order, online. Through eZconnect, dealers progress from a traditional transactional relationship with the customer to a permanent contextual relationship that keeps the dealer, and HM, permanently in the customer’s mind. It enhances the customer experience by intelligently displaying only the furniture systems ordered and embedding the order processing rules.

eZconnect was originally intended as a way for HM to connect directly with customers, to increase speed and efficiency. Unfortunately it displaced dealers in the process. “Literally, the product had to be enhanced or scrapped,”16 says Lee Eilers, who is in charge of the product for HM. By collaborating with dealers (who felt they were being disintermediated) and customers (who weren’t knowledgeable enough to order directly), the tool was recast into its current form. Intelligent collaboration in technology redesign creates the ongoing learning process that will help HM to “increase the clockspeed of the industry.”17

Herman Miller’s technology is the glue that links all strategic goals. There is a very experimental culture around technology. “It’s not a bad thing if technology doesn’t work if we gain some intelligence about it”18 Drew Schramm says of the supply side software he has used. The team applies the learning from the implementation of technology, even failed technology, to be able to implement the next technology faster and more efficiently. This organizational learning extends to technology that is used by suppliers and customers.

16 Ibid.17 Mark Schurman, op. cit. Clockspeed refers to the work of Dr. Charles Fine wherein he describes the pace of innovation in an industry.18 Drew Schramm, op. cit. Which interview date?

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On the sell side, Z-Axis and Oasis Order Entry System provide the interface for dealer orders. Customers, on the other hand, enter purchase information directly on eZconnect or hmstore.com. The next generation of software will be completely Web-based and designed to maximize customer usability.

On the buy side, HM and Menlo Logistics send information to suppliers via SIGN and Supply-Net. This information is critical in the decision-making processes of suppliers and they have input into any updates to the technology.

The make-side software feeds SIGN and Supply-Net through enterprise software like manufacturing resource planners, execution systems, and ERP systems. The company currently uses two ERP systems but have plans to reduce it to one. HM creates a collaborative learning environment where programmers and users can share experiences and leverage the lessons learned over multiple technologies.

Measures of Success

Herman Miller’s reliability score (a measure of on-time and complete shipments) is a measure of ICC success. Everyone in the value chain understands that 100% reliability means that the ordering, production, and fulfillment processes are running effectively. This measure of effectiveness is complemented by measures of efficiency that are the result of collaborative processes. Efficiency is measured by the time it takes for new products to get to market or for changes in design to be implemented in production, and also includes cost reduction through better design and production methods. The company view is that effectiveness brings new customers, while efficiency improves the bottom

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Figure 2

line. HM’s high growth and industry leading 48.7% return on equity, 15.1% return on assets, and 36.7% return on invested capital all indicate success in effectiveness and efficiency.

Herman Miller also values its ability to create new markets and its ability to innovate at any point in the value chain. To do so, HM relies on economic value-added19 (EVA) metrics to push information and authority to innovate or make decisions out to the most appropriate organizational level. Schramm’s technology team uses EVA to decide whether or not it should implement a new technology: “If my group says it wants to spend $25,000 on a new piece of software, and it’s going to be EVA positive, there isn’t a person that stops us, we just go out and do it.”20 Achievement of EVA targets also drives corporate bonuses, which creates further incentive to use it as a decision-making tool.

A telling metric for evaluating how well HM is working with its suppliers is how many are in the bucket one category. As more suppliers progress into bucket one, HM will benefit from having better collaboration and opportunities to increase effectiveness and efficiency.

Future Vision

Herman Miller will face challenges in deploying its ICC strategy internationally. Face-to-face collaborations are more expensive, and HM must rely on embedded business and process rules in software to collaborate virtually and maintain effective distributed decision-making. Success will lead to furniture systems tailored to local tastes, rapid growth in market share, and continued flexibility. There may also be new cultural barriers to face around the principle of open information. The benefits of information sharing for total cost reduction and rapid innovation must be communicated and the bucket system expanded.

The company also wants to gather and harness more customer knowledge to enhance the purchase experience and design of future systems. According to Mark Schurman, HM is “implementing collaborative, remote interactive technology in our design process that we believe will add speed and reliability to our new product commercialization process going forward, including a ‘virtual’ development lab.”21 To begin with, the company will create a “customer team” to solicit feedback from customers directly. Conversations will yield valuable information and be disseminated throughout the value chain. HM plans to reap information on preferences and dislikes directly from dealer software and Web tools. If a certain office layout is never chosen, it may need more focus. If, however, the layout is seen by many customers but never chosen then it can be eliminated. This level of unbiased detail is difficult to obtain from conversations and illustrates the importance of the ICC principle of capturing business information at the source of creation.

19 EVA is a measure designed to give companies a more accurate way of estimating real economic profit than traditional financial metrics. It calculates after-tax net operating profit for a given period, less the total cost of capital over the period.20 Drew Schramm, op. cit. Which interview date?21 Mark Schurman, Herman Miller Inc., interview by Terrence Hibbert, Digital 4Sight, 16 February 2001.

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General Electric

“[Through the use of collaboration software, suppliers] will be working as if they’re part of our team. We think it will change the whole paradigm of how we

work with suppliers.”22

Chris Fuselier, general manager of technology, GE Industrial Systems

General Electric is an expansive global corporation whose offerings range from jet engines to financial services to the television show “Will and Grace.” Not only is the company in the Fortune 500 (it’s #5), but 13 of its business units are big enough to qualify individually. Business processes and markets vary widely from one business unit to another—consider the difference in innovation strategies between nuclear reactors and equipment leases.

Despite its size and varied mix of offerings, General Electric eschews the sluggish behavior typical of a behemoth conglomerate. GE is an early adopter of innovative business practices: the company was quick to embrace Economic Value Added23 as a key business metric and passionately pursued Six Sigma excellence.24 During the 1980s, when most companies divested assets and outsourced down to core competencies, GE, under legendary CEO Jack Welch, constantly revamped its portfolio of businesses. Retaining only business units that could consistently be ranked #1 or #2 in their markets, the company sold $10 billion and purchased $19 billion worth of businesses. By 2000, the traditional manufacturing company that Thomas Edison started in 1878 was generating more than 60% of its revenue through services. This revenue is not just realized by prized assets like GE Capital and NBC, but also through after-sales service contracts on the company’s equipment business.

Business Context

Unlike many other global firms, GE did not react to dot-coms with panic or studied indifference, but instead saw them as a challenge and opportunity. Welch announced that the company’s e-commerce strategy would “change the DNA of GE forever by energizing and revitalizing every corner of this company.”25 Welch imparted a sense of urgency: “One cannot be tentative about this. Delay and you risk being cut out of your own market, perhaps not by traditional competitors but by companies you never heard of twenty-four months ago.”26 Simply adopting Internet technology and streamlining

22 David Drucker, “Virtual Teams Light Up GE,” Internet Week, April 6, 2000.23 EVA is a measure designed to give companies a more accurate way of estimating real economic profit than traditional financial metrics. It calculates after-tax net operating profit for a given period, less the total cost of capital over the period.24 Adapted from the 18th letter in the Greek alphabet, the term “sigma” is used in statistics as a measure of variation. Each sigma represents a standard deviation. Within a set of random data, one sigma means 68% of goods are acceptable and two sigma means 95% are acceptable. Six sigma means 99.999997% of goods are acceptable (or 3.4 defects per million).25 Howard Rudnitsky, op. cit.26 Ibid.

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operations will not generate a competitive advantage—all of GE’s competitors could do that. To succeed, GE needed to leverage Internet technology faster with more focus.

Then, in the aftermath of the 2000 NASDAQ correction, many large companies let out a relieved sigh, engaged in a little schadenfreude27 at the expense of some former dot-com billionaires, and sent e-commerce to lower priority status. Not so General Electric. Welch promises that e-business will realize $10 billion in savings between 2000 and 2002. These savings will, in large part, result from GE’s aggressive adoption of collaborative practices across business units and with customers and suppliers.

Challenges and Opportunities

GE’s corporate mission is to completely transform the company through effective use of technology. Jack Welch set a clear direction that the entire company be digitized. In fact, the company now tracks the number of computer printers and fax machines “retired” for a given period, as proof that digitally captured data had replaced paper. This simple metric understates GE’s challenge. Going ‘digital’ means patching together numerous legacy systems, coordinating multiple data models and enabling more and better communication between them.

GE’s overall corporate strategy has four components: continued globalization, further pursuit of Sigma Six quality, increased revenue from services, and the pursuit of e-business. Intelligent collaborative commerce, aided by corporate level investments in technology, supports each of these initiatives.

ICC Deployment

In only four years GE’s Sigma Six quality initiative, a relentless commitment to reducing production and performance errors to fewer than four per million, has become deeply ingrained in corporate culture. For example, only those employees who fully ‘buy in’ to Sigma Six qualify for senior positions in the organization. Thus far, the initiative has yielded better than $4 billion in savings.

With the emergence of the Internet as a collaborative platform, GE now employs a new set of tools in pursuit of ultra-high quality and speed. Lonnie Edelheit, a senior technology and research advisor to GE, points to a number of Internet based collaborative efforts the company now employs, including e-engineering and customer configuration.

Historically, GE operated with basic engineering tools, and relied on “intuition” to predict customer demands. Its internal and external co-engineering efforts were highly inefficient. Ram Matta, a senior GE research engineer, recounts a recent project where his team was building jet engine wheel disks. At multiple stages of the project, an actual 10 ton wheel was shipped around the globe as engineers worked on interacting parts. Other engineering activities were put on hold until the wheel was returned. According to Matta, “it added 12 months to my cycle time and left me hostage to one supplier.”

27 A German term referring to the malicious enjoyment of another’s misfortune.

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Utilizing an Internet based e-engineering backbone, GE now ‘ships’ knowledge and information, not physical prototypes, to its global engineering teams. Information, from precision design specs to extensive test data, is deployed to the right people at the right time. In the process, the e-engineering platform administers a complex system of work and information flows, approvals, change management and multi-layered data access to ensure product quality. Matta expects it will reduce cycle times from years to months.

GE also deploys mission critical information to customers (and dealers) via the Internet. Each of GE’s manufacturing businesses offers ‘wizard’ software tools to facilitate intelligent product configuration. For example, customers can select product types and colors, receive cost estimates, and view digital representations of custom-made products on line. GE captures these customer preferences digitally and in real time.

Doing so required that much tacit organizational knowledge, including important design and business rules, be captured and embedded in the software. According to Joe Hogan, vice president of e-business, GE Medical Systems, “Some of these pieces of equipment can be pretty complicated. That information used to be in a person’s head, and the only way you could get it was to make a phone call or send a fax, and someone would take a look at it and suggest what the configuration should be.”28 Both GE and its customers benefit from reduced sales cycles and better product matches.

General Electric considers its size and diversity of business activities a tremendous strength. Adopting best practices from other business units or outside the company is encouraged—competitive intelligence-gathering is required of all managers. Internally, executives consider GE to be a “boundaryless” organization. A commitment to collaborating with suppliers and customers is nothing new. In 1993, Welch wrote in a letter to shareholders: “We involve suppliers as participants in our design and manufacturing processes rather than treat them as vendors, left to cool their heels in waiting rooms. It means having major launch customers like British Airways, Tokyo Electric Power, or CSX in the room and involved in the design of a new jet engine, a revolutionary gas turbine, or a new AC locomotive, or a panel of doctors helping us develop a new ultrasound system.”29

By 2001, this collaboration was fortified by effective use of collaborative Internet applications. GE targeted conventional workflow pitfalls, like data hoarding, information bottlenecks, rework, and long cycle times, for improvement using the Internet.

As a key part of the solution, GE has mandated the use of Matrix One collaboration software, eMatrix, for all new product introductions. Consider the case of GE Appliances. This division launched a program to enable the participation of Indian suppliers very early in the design process. Using eMatrix, India based companies Tata and Satyem co-design new products with GE engineers located in Kentucky. Workflows, approvals, and information access levels are managed over the Internet. Design cycle times and costs are slashed. Moreover, intense collaboration with suppliers results in better manufacturing cost models, and ultimately higher margins.

28 “GE’s E-Biz Turnaround Proves that Big Is Back,” InternetWeek, date?29 Robert Slater, Jack Welch and the GE Way (New York: McGraw-Hill, 1999), p. 131.

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The GE Power Systems group realized $40-60 million in yearly savings after migrating product and service data to the Internet. It has built powerful Web portals, integrating more than 50 disparate legacy systems, to service its large power plant customers. Linked to real time performance data from a global install base of power generation equipment, GE is better positioned to offer higher value proactive services to customers.

Within the GE Industrial Systems business unit, technology enables deep relationships with customers. Product engineering is highly collaborative, which strengthens relationships between the company and its clients and increases the customers’ cost of switching suppliers. According to Chris Fuselier, general manager of technology, GE Industrial Systems, “[Collaboration] gets us a lot closer to our customers. They’re going to be more involved, more frequently. We’ll be much better able to meet their needs, and we think it will result in great customer loyalty.”30

Co-engineering is common practice within GE’s Aircraft Engines business, where supplier engineers have full access to data and participate in system design. The engine test data system is moving off an IBM mainframe and onto an Internet platform. The data is reliably and securely stored in an organized fashion and is available to both GE and Boeing engineers.

Enabling Technology

Figure 3 illustrates the three main branches of GE’s collaborative activity. For each of sell side, buy side, and make side, the main activities and supporting technologies are shown. Note that the same players and technologies often operate in multiple branches. MatrixOne is present in all three segments, as it serve as a universal integrator of various technologies. For example, Web City, an internal collaboration system, helps to manage projects and creates virtual folders that allow GE industrial systems to capture best practices and expedite repetitive tasks. Also, Web Methods software works with eMatrix to enable GE Power system’s transformation from legacy systems to Web technology.

30 David Drucker, op. cit.

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GE has also increased collaboration in supply chain management. In October 2000, GE Operations Services implemented GE Global VMI (vendor managed inventory), a collaborative supply chain software product that supports inventory management, forecasting, and logistics. According to Steve Pittman, General Manager, GE Operations Services, “excessive inventories are often the hidden costs associated with inefficient supply chain management. The GE Global VMI service allows for supply chain monitoring and control 24 hours a day, seven days a week. Its inventory management system can deliver up to a 50% inventory reduction of returned orders, leading to a 5:1 return on investment. This opens up new opportunities in supply chain efficiency for suppliers and customers.”31 The results of this initiative, however, go beyond increased efficiency and actually make the relationship between GE and its customers more synergistic. Improved communication and transparency increase responsiveness and reduce inventory costs. Products can change rapidly to adapt to market conditions and inventory obsolescence is reduced or eliminated.

Measures of Success

GE’s commitment to e-commerce and intelligent collaborative commerce has been unqualified. Although a great deal of work remains to be done to meet Welch’s aggressive goals, the company has seen some promising early results (Figure 4).These include baseline cost improvements resulting from transactional efficiency, to higher order collaborative benefits such as shorter product development cycles.

31 “GE Launches Collaborative Supply Chain System,” Quality Today, October 26, 2000.

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Buy-side ICC More than $15 billion worth of commodity products were bought online in 2000. According to senior vice president and chief information officer Gary Reiner, “if all of the [4 million per year] transactions went to the Web, transactions costs would drop from an average of $75 each to as low as $5 per transaction.”32

Internet transactions are already important, accounting for more than $5 billion of GE’s $112 billion of worldwide revenue33

Sell-side ICC Customer service costs decrease. For example, a customer call answered by a phone operator costs $5; a Web interaction costs 20¢. According to Reiner, “You’re talking about a more than 90% reduction in costs. [In fleet services] telephone order inaccuracies run at about 45%. The same transactions done over the Web, with software that helps get and give the right information, drives down the error rate to one tenth of one percent.”34

The use of eMatrix within GE Power Systems alone will result in yearly savings of $40-60 million

Make-side ICC Administrative costs decrease. GE management believes that through Internet-enabled cross-functional collaboration the company can save from 20% to 50% of selling, general, and administrative expenses. This saving would increase operating profits by almost 50%.35

Innovation cycles decrease. Web City has cut 30-40% out of innovation cycle times; more is expected when suppliers are fully integrated.36

Using predictive modeling, GE reduced the time needed to make a product modification for Seagate from over 100 weeks to 42 weeks. With full ICC, this time should be further reduced to 8 weeks.

Infrastructure development

Global Exchange handles $1 billion transactions per year (2000) totaling $1 trillion in volume.37

Future Vision

When Jack Welch was asked to imagine GE in 2020, he replied, “I hope it will be the greatest learning institution in the world. I hope it will always look outside. I want it to have curiosity.”38 The fact that Welch endorsed Jeffrey Immelt, the head of GE’s medical-systems business, as his successor makes a lot of sense—Immelt’s career at GE has been exclusively within business units that depend on high-tech engineering and that are most likely to benefit from successful ICC deployment.

The next step is to utilize advanced tools—Web collaboration, digital prototyping, advanced systems engineering—to completely transform the way GE interacts with customers: “GE and the customer are seamless partners in the design process, like a

32 Howard Rudnitsky, op. cit.33 Ibid.34 Ibid.35 Ibid.36 David Drucker, op. cit.37 “GE’s E-Biz Turnaround Proves that Big Is Back,” op. cit. 38 Robert Slater, op. cit.

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Figure 4

strand of DNA.” says Edelheit (See Figure 5). His main goal for GE is to expand the innovation process beyond the boundary of the organization. Figure E illustrates the evolution to true customer collaboration.

Historical Present FutureTools Basic engineering

toolsIterative guesswork

DFSS 39and predictive models

Web collaborationDigital prototypingGlobal resources

Outcome Hard to satisfy wants Identify/meet CTQs40 Delighting the customer

Development Time Years Months Customized products within weeks

Source: Lonnie Edelheit, Senior Technology and Research Advisor, General Electric

The GE corporate R&D team plans to enrich its collaborative activities through deeper use of technology such as eMatrix. Ram Matta believes that when GE achieves his vision, it will leverage digital design and optimization to reduce manufacturing costs by a factor of two.

39 Design for Six Sigma.40 Critical to quality.

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Figure 5

ON Semiconductor

“Our knowledge management and its integration within our business process will be a significant differentiator for our company. We have customers and we have partners that say we are far ahead in this area of understanding, in terms

of driving the knowledge management side of our business.”1

Colum O’Neill, director of e-business, ON Semiconductor

One of the world’s leading suppliers of performance chips for power management in electronic systems, ON Semiconductor is an employer of 14,000 worldwide. ON separated from Motorola in 1998 and went public within a year. In 1999, its annual revenues reached $1.6 billion.

ON Semiconductor’s products include integrated circuits for high-bandwidth data applications, analog integrated circuits for power management, and low-voltage power transistors. Though relatively inexpensive, semi conductors are a key driver of technology in the new economy. ON collaborates with leading edge customers such as Lucent, Cisco, Ericcson, and Nortel on a variety of products, including portable electronic devices, networking equipment, and high-speed modems. Its participation in pioneering ventures such as RosettaNet has made it a leader of product collaboration within the semiconductor industry.

Business Context

ON operates in a crowded market, with many of its competitors producing similar – if not identical products. In this intensely competitive industry, differentiation is critical to success. Many of ON’s competitors compete on shipping, price, delivery, and service, and margins in this business are becoming tougher and tougher to sustain.

ON ships approximately 22 billion units per year at an average price of 7.5¢ per unit. 60% of its revenue – approximately $1 billion, is generated from what it considers commodity products. ON also designs customized solutions, developed collaboratively with its customers. Due largely to a doubled R&D budget, ON also doubled its new product introductions from 200 in 1998 to 400 in 1999. Integrating its business processes and enabling greater product collaboration with customers are key elements of ON’s strategy for dominating emerging product segments. ON’s customers operate in fast-paced industries with extremely short product lifecycles. Some of their products (cell phones and computers, for example) may have only 6-9 months of shelf life before becoming obsolete. Short product lifecycles are sustained through rapid product development. ON’s OEM customers face relentless pressure to come to market faster with products that have considerable advantages over existing ones, and/or to target new customer segments. Product engineers are challenged to innovate at an accelerated pace. ON’s peer suppliers must match their pace. Intense,

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intelligent collaboration, from the conception of new components through their manufacturing and delivery, is the key to speed.

“There has always been collaboration in this industry, but up to this time it has been paper-based and labor-intensive,”2 says Colum O’Neill, ON’s director of e-business. The evolution of the Internet as a collaborative platform, and the emergence of powerful enabling applications are driving the widespread adoption of digital collaboration.

ON is turning to Internet technologies to create efficiencies. According to Jim Thorburn, ON’s COO, “Shifts in our business model are customer-driven, and to remain competitive, we must change the way we interact with its customers.”3 Integration with key customer business processes, information sharing, and new technical platforms are driving ON’s e-commerce activities. Changing customer relationships are driving internal change as well, affecting processes, people, and technology, and their interactions with one another.

ON is strategically repositioning itself from efficient manufacturer to a collaborative innovation driver, to meet the competitive challenges of its industry. The goal is to lead the industry in anticipating the customer needs, and to build the infrastructure to deliver against them.

Challenges and Opportunities

ON’s business partners—customers, suppliers, and employees—need information: the right information at the right time. Information-driven interaction with its customers is an ongoing challenge; the collaborative infrastructure necessary to compete in emerging segments is more complex than ever before.

According to Thorburn, ON needs to improve its understanding of three key elements of its business: how ON builds its products; how ON sells its products and how customers use these products. ON is transitioning its perspective on business practices, from having been primarily internally focused, to becoming shared externally.

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Build

Sell

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Time

Process

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Process

Design

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Figure 6

Traditional New

Figure 6 illustrates both the traditional and new approaches to sequencing the “design,” “build,” and “sell” phases. The new model enables greater interaction, earlier, while further integrating the design and sell phases. Customers become more active in the product development cycle through collaborative product design, resulting in better, higher value relationships. To build these new relationships with its customers and to promote efficient collaboration, ON is working to develop seamless internal processes and knowledge management solutions.

Although ON is a “new” company, it operates on legacy systems inherited from Motorola. While these systems are adequate, they lack the functionality for more complex workflow planning, information deployment and process integration, according to Rebecca Glenn, CIO4. Access to accurate, real-time data, which legacy systems can’t easily accommodate, is essential to doing business internally.

As ON strives to become more collaborative, system inflexibility becomes more than just an internal obstacle. ON must be able to effectively ‘plug’ its business processes into those of customers, and ensure the integrity of data exchanged. Consider the implications for collaborative product development, a key element of ON’s strategy, where several hundred people from various organizations might access product information through design to manufacturing. Inaccurate, incomplete or out-of-date information has wide reaching, negative effects.

In addition to structuring activities and disseminating information, business systems contribute greatly to the culture of an organization. ON’s evolution from manufacturing supplier to value added collaborator requires a new set of cultural norms around information transparency and sharing, inter firm co-operation and decentralized decision making. ON’s emerging Internet based business systems are built around these norms, and are helping enact cultural change through the organization.

ICC Deployment

One of ON’s early e-business initiatives was to develop a Web presence with functional linkages back to business processes. Though small, this initial step has unleashed a multitude of future opportunities. “We did not want to build a façade, we wanted to ensure that our Web site had product information that was linked back to our business,”5 states Colum O’Neill.

The dissemination of product information to customers is a core collaborative function that has been migrated to the Web. Don Lambert, ON’s product information manager, indicates that 700,000 documents are downloaded from its Web site, and half a million product summary pages accessed, every month. These documents are linked directly to internal product information management systems (PIMs), rather than managed as a separate catalogue function, which preserves ON resources, and more importantly ensures that the information is correct and up to date.

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ON will ultimately render all relevant business information accessible, via the Internet, to all its b-web partners. By deploying a new set of capabilities and porting to the Internet, static data will form the input to more dynamic, rich information. (Figure 7)

Clearly, there are implications to such information transparency: “Before we can begin to share our data with our suppliers or customers, we must ensure that the data is correct, that it is able to flow through our organization, and that it is the data our customers are looking for,”5 says O’Neill. To this end, ON is developing a single data model to capture information and codify complex information relationships between business processes. The single data model ensures that whenever information is accessed, it is the best and latest available.

Moreover, where information is modified, changes must instantly be deployed wherever they are relevant. “Dynamic documents must be integrated back to the business or there will be misinformation floating around your customers’ organizations,”6 in Lambert’s words. This implies the need for a seamless, secure network capable of pushing information into multiple functional contexts. The same network must also be capable of enforcing multiple business rules – from information access control to dynamic pricing schedules. When ON’s engineers alter a design parameter, for example, the change must instantly be reflected in ON’s manufacturing and ERP systems, as well as its CRM and PIM systems. If the change is mission critical to a customer, then it must instantly flow through to its planning and production systems. These data exchanges are the foundation of efficient collaboration.

Utilizing Matrix One’s Web-based software eMatrix, ON was able to build this single data model, or what Colum O’Neill refers to as the “hub middleware.” This layer of architecture allows ON’s processes and content to flow through to its customer-facing applications. Key customer information is gathered through the same hub. The single source of information is the “engine” that feeds ON’s customer-facing applications such as its product catalogue on the Web site and B2B market involvement.

According to O’Neill, “ON has only just begun.” The company will continue to offer customers new collaborative, Internet based-services with real-time functionality and

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ChangesInfrequently

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ManufacturingProcesses

Static

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Reported & Analyzed

Result of Processes

Dynamic

Figure 7

links back to business processes. One example involves product numbers. ON currently assigns every product an internal product number. Customers, after purchasing ON components, assign their own numbers, creating certain inefficiencies when product engineers re-order parts. ON maintains a separate cross-reference database so customers can re-order components using their own numbers, but the system is imperfect. The database lacks true process linkages.

In the next six months, ON will migrate this database into the eMatrix environment and, through embedded business rules, fully automate the product number translation process. Both ON and its customers benefit from new efficiencies. The creation of seamless business process intersections supports ON’s mission to become the easiest company to do business with in the industry.

There are also plans to improve linkages between product information systems and its Siebel Systems CRM applications that aid the sales process. Ultimately, the systems will be capable of automatically ‘recognizing’ customers and making intelligent recommendations regarding product compatibility, business decisions and design. The system will rely heavily on design and business logic embedded in software. For example, ON could recognize an incompatibility between a low-voltage transistor and a power management chip in a customer design and suggest an alternative. Or, it might suggest an entirely different chip configuration to improve performance or lower costs. There are also plans to make the system ‘smart’ enough to recommend ON’s components over those of competitors, based on functionality or price advantages.

ON also collaborates with customers via RosettaNet, an industry initiative dedicated to the development and deployment of standard e-commerce interfaces to align the processes of global supply chain partners. As O’Neill explains, “RosettaNet is true collaboration that leads to efficiencies.”11 Through RosettaNet, Lucent product engineers conduct complex, cross-vendor parametric searches from their own operating environments. ON is the first semiconductor company to participate in this venture. The collaboration offers both cost and revenue benefits for ON and Lucent; the integration of processes and the sharing of information allow the two organizations to communicate and collaborate in real-time.

Measures of Success

ON is committed to measuring the results of its collaborative efforts, to ensure a healthy return on investment. Early results from performance scorecards, used to monitor the progress of key metrics over the last 6 months (March-December 2000), indicate that improvements are being made.

The company set aggressive targets for percentage of their product portfolio available to designers via the Internet, and are on their way to meeting them. The number of customers requesting product samples online, for example, has increased ten-fold. ON has also instituted an effective email notification program to inform customers of new products. Indications are that that ON’s customers are finding value in their collaborative

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strategy. On time delivery has improved, delivery time of internet sample orders has decreased, and they now have more channels available to them for tracking orders.

ON has also improved internal quoting mechanisms and hence its ability to respond quickly to market opportunities. The company both increased the number of quotes and expedited their delivery over the measurement period. There has been a dramatic increase in new orders being acknowledged internally within 24 hours. In addition, customers now have the option of receiving quotes through the telephone, or the internet (pilot project) and there are plans to expand this to include more B2B marketplaces (XML) beyond RosettaNet.

Finally, ON has realigned compensation policy for product engineers, in order to promote collaboration. This new program includes bonuses for new projects won, as well as new patents registered. The intent of the program is to urge product developers to utilize the new tools and technology available to drive innovation and interaction with customers.

Future Vision

Moving fast and managing change are key to ON’s future. “Collaboration at its best will be measured by time to market,”12 states O’Neill. With a solid foundation in place, ON will continue to roll out applications that enable further integration with customers. This will culminate in the creation of a single, Internet based environment where ON employees and customers can easily and efficiently work together. Collaborative product development will continue to be the focus of ON’s strategy

Collaborative forecasting will also come to the forefront as ON continues to develop its ICC strategy. Forecasting models, focused on the supply side of their business, will allow for more efficient production. To date, ON’s focus has been on the customer side of the business, though sustained advantage will come from promoting efficiency and collaboration across the value chain.

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