Willing to Gamble?

Supply chains offer big promise.

Frank Urbaniak has the weight of 80,000 employees and a 142-year-old institution on his shoulders.

The vice president of information systems program management at Great Atlantic & Pacific Tea, better known as A&P, is helping to implement a massive new supply chain system throughout the companys 750 stores and with its hundreds of suppliers. The $250 million implementation is unlike any other technology project the company has ever undertaken because of its scale, complexity and future integration into Internet marketplaces.

Succeed, and A&P believes it can right a half-century of decline in the nations grocery store business. It still operates a $10 billion business but has been steadily losing market share to such rivals as Safeway and Albertsons.

Fail, and A&P could literally be thrown back so far in the competitive landscape that it might never recover.

Urbaniak and company Chief Information Officer Nicholas Ioli, say its a "bet-the-company" gamble.

"There are big risks in any project of this size, and we have them all," Urbaniak says.

Urbaniak says of the initiative, dubbed Project Great Renewal, "We told the board [of directors] there was going to be a lot of blood on the floor, a lot of crying and lots of change."

Despite the tremendous risk, A&P is far from alone in its decision to bet a huge amount of resources and its entire future on a new supply chain installation. Increasing numbers of Global 2000 companies are embarking on projects to electronically link their planning, forecasting and inventory systems with those of major suppliers or customers via any number of public or private exchanges.

The potential downfall of these systems became only too apparent earlier this year, when Nike was forced to admit to shareholders that problems with an implementation of software from i2 Technologies led to a substantial shortfall in third-quarter revenue. While blame was being passed between the two companies, the ultimate result was that models of some shoes were overstocked, while some of the companys most popular models were understocked. The errors resulted in a loss of revenue between $80 million to $100 million and could take another six to nine months to resolve, Nike officials say.

The obvious question that arises: Why risk so much on a supply chain installation? The answer is that many corporations cant afford not to. Forrester Research analyst Steven Kafka brings up a recent example between arch rivals Nokia and Ericsson to demonstrate how much of a competitive weapon supply chain management systems have become.

In March 2000, lightning struck a Philips Electronics semiconductor manufacturing plant in Albuquerque, N.M., setting off a fire that was doused in 10 minutes. At first, Philips officials said the damage was minor and the plant, which produced key chips used in both Nokias and Ericcsons mobile phones, should be back up to full production in about a week.

Nokia, which was tied electronically into the plants production systems via a proprietary collaborative planning tool the company calls the Nokia Global Supply Web, saw quickly that production was not scaling back up and that something was seriously amiss. Ericsson officials, relying on verbal assurances from Philips executives, remained in the dark.

The result is that Nokia began shifting production to other plants around the world immediately. Engineers also began working earlier with Philips to design replacement chips that could be quickly produced at other Philips plants.

Ericsson admitted to shareholders that, in large part because of the Philips problems, it lost as much as $400 million in potential revenue by not having enough handsets to meet demand. The incident contributed to a January decision by the Swedish firm to outsource all of its handset production to Flextronics.

"When you ask that question [about why companies are risking so much on supply chain installations]," Kafka says, "the answer is the difference between looking like Nokia or looking like Ericsson."

While i2 took a bit of a beating on the Nike situation, the company insists it will fix the problems and deliver substantial savings to the shoemaker. Katrina Roche, i2s chief marketing officer, outlines a long list of potential benefits. She says customers have seen a 90 percent reduction in the order-to-delivery cycle. Average supply chain costs have been reduced 30 percent to 60 percent, largely by eliminating manual processes, and procurement spending cut by 30 percent, again through reduced paperwork and by enforcing corporate purchasing policies.

Companies have been able to trim inventory costs by an average of 30 percent by using just-in-time delivery cycles, Roche says.

Roche says i2 recognizes that companies are uncomfortable with the risks involved in such large-scale implementations, particularly in light of the economic downturn, so the software vendor will bring forward products that can be implemented in smaller chunks.

At A&P, which is primarily working with supply chain vendor Retek on its installation, Urbaniak says the end goals are to "achieve and sustain a world-class in-stock position." In other words, to ensure the right products are on the right shelves at all times. Beyond that, to free resources to focus on improved customer service, and to eliminate costs.

By spending $250 million, A&P hopes to achieve $498 billion in benefits over five years.