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With Commerce One, Your Reach May Be The Same As Your Grasp

Written By: D. Geller
Published On: March 17 2000

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Event Summary

Commerce 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.

In 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.

Unlike 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.

Also 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.

Figure 1 shows the materials and information flow along a manufacturing supply chain.

With 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.

Not 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.

What 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.

There 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 software.

Market Impact

This 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 wait."

User Recommendations

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 pretensions.

This 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.

 

 
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