One (NASDAQ: CMRC) has announced a wide-ranging collection of partnerships
and offerings whose net effect is to place the company in a central position
in the industrial supply chain. The purpose of the newly announced Commerce
One MarketSite Portal is to add capabilities for procurement of Direct
Materials and Mission-Critical Maintenance, Repair and Operations (MCMRO)
materials for the company's current offerings.
this context, Direct Materials refer to the components of a finished manufactured
item. Thus, for a chair manufacturer that manufactures its own wooden
parts but purchases hardware, fabric and decorative ornamentation, the
latter three items would be considered Direct Materials. PRTM, a Massachusetts-based
supply chain consultant that will develop Direct Material supply chain
strategies for Commerce One, estimates that most industry segments spend
between 30 and 60 percent of revenue on direct materials.
traditional MRO goods, MCMRO materials are products and services that
are directly tied to the goods and services sold to customers. In some
industries they represent the majority of spending.
parts of the series of announcements are enhanced services from the MarketSite
portal. These services support the flow of information along the supply
chain. To see the implications, consider Figures 1 and 2.
1 shows the materials and information flow along a manufacturing supply
supply chain management the goal is to let each pair of partners coordinate
their processes. So, in Figure 1 where materials are flowing right to
left (along the black lines) from Suppliers (S1, S2,) to Manufacturers
(M1,M2) to Distributors (D1,D2,D3) a manufacturer would like to make its
production depend of the needs of the distributors and to have its suppliers
coordinate their production so as to meet the manufacturer's needs for
inventory - preferably with as little warehousing as possible at any point
in the chain. To effect this, the various entities need to coordinate
information, as shown by the red information flows.
all entities coordinate directly; typically a company attempts to coordinate
with its immediate suppliers and with the immediate consumers of its product,
although in some industries there is a key step in the chain, the "manufacturer,"
with enough leverage to coordinate more than one step in each direction.
This is difficult, in general, because of the need for vastly different
kinds of record keeping systems to interface with each other.
Commerce One is attempting is a radical change, expressed as an ideal
by Figure 2.
Here, all the material flows remain the same, but all of the information
flows go through one central process. In theory, this will allow for a
higher degree of coordination between the various companies in the supply
chain. Any element of the chain will be able to determine which suppliers
can best meet its needs, taking into account such variables as cost, on-hand
inventory, and ability to produce. The ability of a supplier to produce
goods depends on its suppliers. In the ideal pictured by Figure 2 a unit,
say Manufacturer M1, would not need to rely on estimates made by suppliers
S1, S2, and S3 about their ability to obtain the supplies they need. The
manufacturer would either be able to access information about indirect
suppliers S4, S5, and S6 directly or would be assured that S1, S2, and
S3 were giving reliable estimates because they were using the same software.
are other software systems that attempt this same level of information
integration, but Commerce One's approach, if successful, will be an order
of magnitude more effective. This is because existing systems may be able
to integrate planning information but do not provide a mechanism for the
purchase of goods. Such a mechanism works in two ways. It creates an efficient
market mechanism, one in which prices are more tightly tied to instantaneous
supply and demand. It also places the direct information about purchasing
and shipping activity within the purview of the supply chain coordination
is a natural evolution for Commerce One, and we'll be surprised if others
are not close behind. We expect Ariba to make a similar announcement at
its mid-March Users Group meeting, and to see both SAP and Oracle follow
suit by year-end. It is also quite possible that traditional supply chain
vendors will attempt to add E-procurement capabilities to their offerings,
perhaps by buying a mid-market procurement company.
We are quite interested in Commerce One's cryptic comment that "the new
direct materials solution completes the company's procurement offerings,
enabling MarketSite portals to automate 100 percent of enterprise spending."
We suspect that this does not mean that Commerce One will rest on its
laurels and let all of its entrepreneurial managers drift off. In the
words of West Side Story, "Something's coming, something good. If we can
This technology, in its early days, applies to the largest enterprises.
The first two customers are Commerce One's existing clients GM and Shell.
Enterprises of that size and scope will be extremely interested in these
enhancements to MarketSite, as will those near enough in size to have
move also suggests to us that Commerce One will continue to focus its
direct efforts on very large clients, and will leave mid-range and merely
large clients to smaller E-procurement vendors that serve as on-ramps
to Commerce One.