Customers Move into the Driver's Seat

Personalized products become viable with the Net

By Otis Port
Business Week

October 4, 1999

A Copernican revolution of sorts is under way. Executives used to imagine their companies as the center of a solar system orbited by suppliers and customers. The Internet is changing that--dramatically. Now the customer is becoming the center of the entire business universe.

For companies in the business of making products, the challenges ahead are particularly daunting. That's because every manufacturer is surrounded by rings of suppliers and distributors. To become customer-centric in the Internet Age, they all will have to perform complex, synchronized movements. The solution: also the Internet. Increasingly, the Net is forging direct links between customers and factories, so buyers--now mainly corporate customers--can tailor products the way they want them. But online consumers can flex just as much muscle as corporate customers. Already, Dell Computer Corp. (DELL) and others encourage shoppers to customize products to their liking on their Web sites.

Next, in a much more involved effort, General Motors Corp. (GM) and Ford Motor Co. (F) will soon join Toyota Motor Corp. (TOYOY) in giving the same power to car buyers. "The customer will be able to configure the vehicle over the Internet" and climb behind the wheel within a few days, declares Mark T. Hogan, the manufacturing executive named to head GM's new online division, dubbed e-GM. Today it takes weeks to get a customized car, because assembly lines are geared to turning out standard cars. To fill orders in Internet time, the mass-production model pioneered by Detroit will have to be revamped--and perhaps eventually scrapped. Where the carmakers go, other manufacturers are sure to follow. Soon consumers may be able to personalize almost any standardized product, from cellular phones to kitchen appliances.

Pulling this off requires a vast network of computers to deal with the flood of data unleashed by online orders. "With Internet commerce, you're dealing in lots of 'eaches,' not a truckload of identical products," says Michael A. Schmitt, senior vice-president at J.D. Edwards & Co., a Denver software vendor. Each custom order can require a slightly different mix of parts for the final product, and that triggers dozens or even hundreds of purchase orders to parts and materials suppliers. "If you tried to handle all this on paper and over the phone, it would never get done," says Schmitt. "Computers have to talk to other computers."

Pivotal Change. Earlier, companies tried to automate such transactions with private networks. Detroit's Big Three and retailers like Wal-Mart Stores (WMT), Sears (S), and Dayton Hudson (DH) have electronic data interchange (EDI) systems that zip information around the supply chain. However, EDI systems are costly to install and operate, "so no company ever connected with more than the top 20% of its trading partners," says John J. Fontanella, director of supply-chain research at market-watcher AMR Research Inc. in Boston. Now the Internet is cheap enough that even small job shops can afford to hook up. As a result, "we'll see 90% of manufacturing move to the Internet" in short order, predicts Fontanella.

That's because the Net is bringing on a pivotal change in manufacturing economics: Custom manufacturing can be cheaper than mass production. If that seems hard to imagine, take a squint at how it works for Cisco Systems Inc. (CSCO) First off, Cisco outsources most production to contract manufacturers that operate 37 factories, all linked via the Net. Suppliers not only make all the components and perform 90% of the subassembly work but even do 55% of the final assembly. So suppliers regularly ship finished Cisco computers to Cisco customers without a Cisco employee ever touching the gear. The result is "savings of between $500 million and $800 million this year," compared to what it would cost to own and operate those plants, says Carl Redfield, Cisco's senior vice-president for manufacturing.

In addition, roughly 80% of Cisco's sales are generated on its Web site. Customers use a program that walks them through the task of configuring a system to fit their specific needs. After the software double-checks the orders, they zip straight to Cisco's gun-for-hire producers. Thus, Cisco needs fewer salespeople, technicians, and paper-shufflers. "We can go from quote to cash without ever touching a physical asset or a piece of paper," boasts executive vice-president Donald J. Listwin. "You've heard of just-in-time manufacturing. Well, this is not-at-all manufacturing."

One risk of heavy outsourcing is that a company can lose touch with the manufacturing expertise that contributes to continuing product improvements. To preclude that, Cisco also designs the production methods--and uses the Internet to monitor operations at its contract producers around the clock. "We develop the entire process, and we know what every supplier is doing every moment," says Redfield. "The source code for all this is developed here and maintained here. So the innovation is all here."

Virtual Partnership. The sea change flowing from the Net is so profound that owning a factory is increasingly regarded as a liability. Hewlett-Packard (HWP), IBM (IBM), Silicon Graphics (SGI), and others have sold plants to contract producers such as Solectron, SCI Systems (SCI), Flextronics (FLEX), and Celestica (CLS)--then signed up these manufacturing specialists as suppliers. Some experts imagine that many enterprises will ultimately become tripartite virtual partnerships. One arm will handle product development and engineering, another will take care of marketing, and the third will do the production chores. ''We've got a whole different world emerging,'' says Bryan D. Stolle, president of Agile Software Corp. (AGIL), a San Jose (Calif.) provider of supply-chain management software for coordinating distributed manufacturing.

In theory, even the auto industry could switch to not-at-all manufacturing. As a practical matter, though, the unions may never allow that. Hogan of e-GM has long advocated more outsourcing--largely in vain, because of union opposition. But if GM can get its supply chain in sync, it could still get its factories in better tune with car buyers. "We'll very quickly get to the five-day car," says Hogan.

Me-Too Projects. The five-day car is a revolutionary concept pioneered by Toyota and other Japanese carmakers in the early 1990s. They envisioned the Cisco and Dell approach: Customers would pick and choose from a menu of onscreen options, then hit a button to send the order straight to the factory. Toyota has been equipping showrooms in Japan with Internet terminals since 1995.

Japan's vision "captured everyone's imagination," says Hogan, and ignited a flurry of me-too projects in the U.S. and Europe. Already, Ford's Volvo subsidiary is testing factory-direct sales via the Internet in Beligum. So Hogan admits GM has some catching-up ahead.

Auto makers aren't planning to offer customized cars just to make customers happier. They also want some of the bottom-line savings that companies like Cisco have achieved. All those mass-produced cars sitting for weeks in dealer lots represent a huge investment that yields no return until a buyer comes along. Studies indicate that shifting from mass production to direct factory sales could slash car prices by up to 30%. "Trimming that inventory would take out a lot of cost," Hogan says. "But it will require moving at Internet speed in the back end of the business"--on the assembly line and on the shop floors of GM's parts and materials suppliers.

That's where new types of software can help. Since 1978, companies have been putting in ever more sophisticated systems to boost manufacturing efficiency. One is enterprise resource planning (ERP) software from such vendors as SAP, PeopleSoft, Oracle, J.D. Edwards, and Baan. With ERP, factory operations are tied to other corporate departments, such as purchasing, so parts can be ordered for just-in-time delivery.

Until recently, though, ERP systems didn't know what was happening on the shop floor. Newer software is bridging this last gap. A manufacturing execution system (MES), for example, coordinates shop-floor operations and provides a real-time picture of how the plant is running. When a problem pops up--a robot goes haywire or a parts delivery fails to arrive on time--an adaptive planning system analyzes its impact. Then it modifies the production plan to make optimum use of whatever resources are still available.

These new technologies will be crucial to handling tomorrow's steady stream of custom orders from the Internet. ERP without MES is like running a modern factory while using the Pony Express for communications, quips Schmitt of J.D. Edwards. But together, they can work wonders. For instance, J.D. Edwards teamed up with MES specialist Camstar Systems Inc. in Campbell, Calif., to help Lexmark International Inc. slash production cycles for computer printers by 90%. A printer that used to take four hours to assemble now gets made in Internet time--24 minutes.

So industry finally has the tools to create virtual enterprises, with online links that span the entire manufacturing chain, from automotive giants to local job shops. If the carmakers can coax their thousands of suppliers into the online galaxy, even the most traditional companies could soon be exploring new manufacturing realms that give customers precisely what they want.

Copyright 1999, by The McGraw-Hill Companies Inc. All rights reserved.