Truth or dare?

Information Age (London, UK), April 10, 2002

Product recalls and production stoppages: for many organisations, these are "moments of truth", according to Bruce Richardson, senior vice president of research strategies at market analyst company AMR Research. But moments of truth, he adds, can also be positive outcomes, such as zero 'out of stocks' at a retailer, or zero lost cases at a manufacturing firm.

"Moments of truth," Richardson explains, "come at a point when a company recognises what success or failure looks like in hard, measurable terms - at the point when it really counts." They also, he adds, create opportunities for organisations to create new, more collaborative ways of conducting business.

Richardson first heard the term earlier this year, when it was used by a colleague, Roddy Martin, who heads up AMR Research's consumer goods service. "I immediately loved the concept," he says. "In Roddy's previous life developing the IT strategy for a major brewing company in South Africa, the moment of truth was whether or not the right beer was available, cold and presentable, that is, in a clean bottle with the label properly attached, when the consumer went to purchase it. Sounds simple, but one AMR client told Roddy that stock-outs cost his company well over $1 billion per year," says Richardson.

Personal computer manufacturer Dell, for example, had its own moment of truth when it successfully predicted a surge in demand for PCs with 2 gigabyte (GB) hard drives, at the expense of PCs with 1GB hard drives. In response, it contacted its key hard drive supplier, and ordered a switch to the larger drive - enabling it to meet demand.

But as a result, one of Dell's competitors experienced its own moment of truth. It was offered 1GB drives at a big discount by the same supplier. Since it was working with six-week old demand forecast data, it eagerly purchased the drives - only to see demand for PCs with 1GB drives plummet.

"The competitor lost significant market share and was forced to make massive write-offs," says Richardson.

Today, says Richardson, Dell is a model of collaborative working. The company keeps a firm grip on its demand chain: it conducts surveys to gauge the trade-offs that customers are willing to make between technology and price; it updates order information every two hours to provide customer support staff with real-time availability, pricing and promotions data; it can forecast component prices six months ahead of time; and 70% of its customers use the Internet to check order status, invoices, and purchase orders, at a much smaller cost to Dell than if these enquiries were dealt with by call centre staff.

The company exercises a similar level of control over its supply chain. "Dell has elevated supplier rationalisation to an art form," says Richardson. "Its top 30 suppliers represent about 75% of its total spend, while the top 50 account for 95%." The company, he adds, writes off between 0.05% and 0.1% of revenues in excess and obsolete inventory, compared to an industry average of between 2% and 3%. It can forecast what components it will need between four and 12 weeks in advance, and keeps just four days of inventory in its warehouses, and two hours of inventory in its factories.

The hard way By contrast, handheld computer manufacturer Palm learnt the hard way how inadequate forecasting can be disastrous. In early 2001, the company's chief executive officer, Carl Yankowski asked senior managers at the company: "Can we get the m500 [handheld computer] line out in two weeks?" The answer, says Richardson, was a unanimous 'Yes'. The m500 product was officially launched on 19 March 2001, and was expected to achieve volume production by early April.

But the m500 ran into a number of entirely avoidable delays, says Richardson. "Meetings to manage the supply chain were infrequent. Forecasting demand was poor. The product was not adequately tested before manufacturing, and Palm ran up against critical parts shortages." The m500 finally hit volume production in May. By this time, sales of existing Palm products had slowed in anticipation of the new model's debut, leaving channels stuffed with inventory. This, in turn, led to inventory write-offs and a quarterly net loss at the company.

The catalogue of disaster continued throughout 2001 at Palm. By mid-May, sales were 70% below forecasts. In September, chief marketing officer Satjiv Chahil told the Wall Street Journal, "When a company is in growth mode, it tends to focus on meeting the growth instead of paying attention to keeping a tightly tuned organisation." This had clearly been Palm's problem. In November, Yankowski resigned and 250 other jobs were slashed across the company.

Avoidance tactics "Learn from Dell and Palm," Richardson advises. "Recognising and taking advantage of a moment of truth requires rethinking a lot of things - the supply chain, customer facing processes, product lifecycle management, sourcing policies, metrics, benchmarks, and so on."

They can make the challenge easier if they approach collaborative commerce in three stages, says Richardson. First, establish internal readiness. Second, roll out initiatives to select trading partners. Third, create the 'real-time enterprise'.