The Internet was supposed to usher in an age of immediate fulfillment—anybody anywhere would be able to get anything anytime. So far, though, it hasn’t worked out that way. In recent months, persistent shortages of key components have made it all but impossible to buy popular products, from Sony’s PlayStation2 to Palm’s m100 personal organizer. HBR’s Bronwyn Fryer recently spoke with Bryan Stolle, chairman and CEO of Agile Software, a San Jose, California-based provider of products that enable collaboration in manufacturing and commerce, to find out what’s behind the shortages and what companies should do about them. Why are so many companies struggling to meet demand? I thought the Internet was going to make demand more predictable. First of all, the Internet is not smoothing out demand; it’s actually making it more erratic and harder to predict. By putting up e-commerce sites that take orders at the speed of light, companies are training customers to place orders at the last second and to expect overnight fulfillment. The assumption of just-in-time ordering and immediate delivery characterizes the entire supply chain, from the end customer back through the assemblers and manufacturers and on to the suppliers. In fact, many customers today care more about whether you can deliver a product tomorrow than about how much the product costs. With orders going in at the last second on the assumption of immediate fulfillment, all the slack is taken out of the system. If one supplier makes a bad guess about the demand for one component, everything breaks down. Sony executives found themselves in this situation with PlayStation2. They advertised the product heavily, but because of a component shortage, they couldn’t satisfy the demand they had stoked. And because consumers have little patience these days, Sony lost a lot of customers—like me, for instance. I tried to buy a PlayStation2 for my son on-line, but no one had them. So I bought a Nintendo console instead. Millions of consumers and businesses make these kinds of switches every day. Studies show that for every week of delay in the shipment of a product, the chance that a customer will cancel the order goes up 5 % . But wasn’t the Internet supposed to facilitate the flow of information through the supply chain, making it easier for suppliers and manufacturers to produce exactly the right quantity of goods? That hasn’t happened. Right now, the back-end supply chain cannot handle the huge, unpredictable influx of orders coming from manufacturers’ sales via the Web, and suppliers aren’t getting the information they need from manufacturers. Manufacturers have been quick to take orders over the Internet, but they’ve been slow to change the way they deal with the supply end of their business. They’re still forecasting sales the way they’ve always done it, based on historical patterns and the best judgments of salespeople, and many are still issuing the same old once-a-month purchase orders to their suppliers. Think about what recently happened to a computer company that decided to sell a new server on the Web. It predicted it would sell 2,000 of the servers per month, but it had already sold the first 2,000 by the end of the first week. By the end of the third week, it had taken orders for 10,000. Suddenly, the company needed components it hadn’t anticipated needing. The suppliers were completely sideswiped by the unexpected demand—they, too, had cut all the inventory out of their production systems—and it took weeks for them to catch up. The result was a lot of unhappy customers and a lot of lost sales. How can manufacturers deal with the supply crunch? It’s not enough to just make sure you have backup suppliers. When component supplies run low, nobody has any. For example, most electronics manufacturers are now chronically short of supply in 24 of 48 key commodity categories. When this first started happening, we thought it had to do with regular business cycles or with natural disasters, like the Taiwan earthquakes. But now it’s becoming clear that shortages are due to the fundamental changes in supply and demand wrought by new business models, customer expectations, and the Internet. Manufacturers and suppliers simply haven’t figured out how to deal with these changes. We’re all writing the book as we go; nobody learned this in business school. So the first thing manufacturers have to do is face reality: in the Internet age, the supply crunch won’t go away. Certainly, they can’t expect suppliers, who have even less information about demand, to solve these problems. Pounding on suppliers when you get a big, unexpected order may be a natural reaction, but it’s counterproductive—you’ll just alienate important partners. Instead, manufacturers need to totally overhaul their procurement processes. They need to find ways to get wired tightly with suppliers, so that the suppliers at least know what the manufacturers know. What’s the best way to do this? In the old days, you used EDI—electronic data interchange—but that was cumbersome and expensive. EDI just can’t keep up with supply problems on the scale we see today. You have to look to the Internet. The Net exacerbated the problem of supply shortages, but it’s also the best way to address the problem. You can use the Internet to share information with suppliers in real time, ensuring that they always get the same demand information you get, as quickly as you get it. Forget once-a-month purchase orders; you need to update your purchase orders on at least a daily basis. Look at what Dell is doing—it posts its actual manufacturing schedule on a private Web site for suppliers to access. Suppliers can grab the production data in XML format so they don’t have to translate between Dell’s systems and their own. Suppliers also need to be wired in to product changes. Before your engineering department commits to a product change, you need to ask your suppliers whether they can handle it. Suppliers often have to keep up with thousands of changes coming in from manufacturers. Consider this: the Intel 486 motherboard had about 100 passive components, but the AMD Athlon motherboard has more than 600. Computer companies like Dell go through well over 1,000 evolutionary changes—call them “new models”—a year. The Web can help suppliers stay on top of demand as products change. Does all this portend a fundamental shift in the manufacturer-supplier relationship? Absolutely. When a manufacturer is getting demand information in real time, its survival depends on its ability to respond to that demand faster and better than the other guy. That means it has to have closer, more trusting relationships with its suppliers. You know, a lot of the early activity in business-to-business e-commerce focused on enabling manufacturers to beat up on suppliers by forcing them to bid in reverse auctions. That’s not a sustainable model. In two to three years, companies will realize that the only way to compete in a market with rapidly fluctuating demand is to cater to suppliers. More and more manufacturers will band together with cadres of suppliers to create semiprivate exchanges in which they share detailed information about product parts and assembly, as well as their own business processes. Companies already going down this road—like Dell, Solectron, Compaq, Cisco, and Lucent—will have the edge. They’re already creating a shared business infrastructure with their suppliers. Other manufacturers are going to have to play catch-up.
