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Want a peek at the topic that will dominate the discussion in Internet circles for the next year, just as portals and e-retailing set the pace a year ago and business-to-business commerce dominates the landscape today? Think supply chain.

What's the big deal? For companies that have sped through the initial phases of e-commerce--from brochureware and e-commerce transactions to early extranet connections--applying the Internet and the Web to their supply chain is the truest test of whether a business is really committed to becoming an e-business.

"It's a supply-chain vs. supply-chain world today. Companies don't only compete with each other but with an extended web of suppliers," says Rob Rodin, CEO of electronics distributor Marshall Industries.

Indeed, just as the assembly line symbolized the industrial age, the supply chain will become the symbol of the Internet age.

"Our children may be studying the Dell direct model--e-commerce driven by a fine-tuned supply chain--like we studied Henry Ford," says Alan Dabbiere, CEO of supply-chain vendor Manhattan Associates. "It is the evolution of how close you can get to your customer."

Users in InternetWeek's Transformation Survey understand the value of Web-based communication and collaboration with suppliers, but formal supply-chain projects over the Web are still in their early stages.

For example, companies conducting business-to-business e-commerce jumped from 32 percent of respondents last year to a whopping 76 percent today. Yet, when asked about specific Web-based applications running within their companies today, users most frequently spoke of customer support, marketing or sales, with inventory management coming in at just 37 percent. Supply-chain management ranked dead last at just 30 percent.

Clearly, the industry is in the very earliest days of the supply-chain revolution. Challenges for companies aiming to aid velocity to their supply chains include: old or broken legacy systems and ERP implementations, business processes unprepared to move at Internet speed and a lack of incentive for suppliers to overturn their own business processes to get on with the program.

Even in the face of these very serious challenges, it's hard to deny the power of more information-rich supply chains driven by ubiquitous Internet connections. "The basic value the Internet brings is scalable communications," says John Fontanella, an AMR Research analyst. "Today, at best, you might have 20 percent of your business partners in a trading community electronically connected. What the Internet promises is connection rates of 90 percent to 95 percent."

E-commerce leader Cisco Systems used both a carrot (the chance to participate in its phenomenal Web-based success) as well as a stick (participate or get dropped) to move its suppliers onto its Web-driven supply chain.

"It didn't hurt that we said, 'You've got two years to make the transition or you'll no longer be our supplier,' " says Cisco CEO John Chambers. "We provided both the carrot and the stick, and I think many companies are in the position to nudge the supplier base that way. I also think many suppliers are beginning to realize that if they don't change, many of their leading-edge customers will ultimately require them to change, or they'll get left behind."

But Web-based supply chains aren't only about reach. They are about better data, and the chance to use that data to bring new velocity to a company's business practices. "What it allows is rapid, real-time communication and a common view of data across suppliers, manufacturers and customers. That lets you take inventory in the supply chain and allocate it and reallocate it to real sources of demand versus forecasts of demand," says analyst Fontanella.

Quite A Process
Supply-chain management is the process of optimizing a company's internal practices, and the company's interaction with suppliers and customers. It includes demand forecasting, materials sourcing and procurement, inventory and warehouse management, and distribution logistics. Companies that marshal their supply chains to perform these functions can deliver products quicker and at a lower cost or higher profit margin than their competitors. However, today's supply chains are too often focused inward, targeting the requirements of the players in the supply chain rather than the customers. The Internet makes that orientation even more dangerous, as customers expect instantaneous service, and customization and build-to-order processes find a universal and instantly accessible front-end in the Web.

Indeed, in this environment, it is the customer, not the plant manager, who ultimately keeps track of an order via self-service Web sites where he can find, configure, price and schedule delivery of products.

Consider Alliance Entertainment. The giant distributor of music, videos and games counts on the Web to connect more directly with its e-retailing customers, and, in the process, finds itself acting not only as a distributor but as a strategic partner. Alliance customers include Barnes and Noble, Artists Direct, The Ultimate Band List and Wherehouse Entertainment. The distributor is using the Internet to enhance its supply-chain relations in several ways.

The first is to extend traditional EDI transactional capabilities to smaller e-retailers. "EDI value-added networks can be very expensive," says Perry Patterson, director of operations and consumer direct fulfillment for Alliance. "We've provided tools so that some mom-and-pop shop over the Internet can place an order directly with us through a secure connection."

The Internet automates transactions for more retailers, and it also sets up Alliance as a key partner. "Overnight, we can drop the order into our system and commence the pick, pack and ship process," says Patterson. Alliance also provides a variety of value-added services for the retailer--including custom packing and labeling, dealing with inserts and gift wrapping, and online couponing and promotions. That kind of support gives e-retailers the freedom to outsource most of their fulfillment operations, yet still retain a personal touch with their customers.

Alliance also provides its retail customers with deep insight into its available inventories. That's crucial for providing Web-based customer service. "We can allow them, through secure mechanisms, to access our inventories in real time and present to the consumer up-to-the-moment information on what product is available for shipment," says Patterson. Alliance also has PC- and Web-based tools to make searching the distributor's massive product database easier. Retail customers can find new products, and also download content like descriptions, artists' biographies and album art they can use to merchandise their Web sites.

Most of all, the Internet lets Alliance "get away from the batch mentality of EDI and related technologies to provide real-time access to information," says Patterson.

While Amazon.com is getting a lot of attention these days for building out its own distribution warehouses, Alliance says most of the e-retailers it works with keep their inventories virtual. "What we're seeing, actually, is tremendous pressure on us to perform. E-retailers recognize their core competency and seek out fulfillment companies that can perform the back-end processes for them. It puts more and more pressure on us as suppliers to be good at what we do."

The Sears Chain
Web-based supply chains can bring new velocity to traditional retailing processes, as well. Retail giant Sears says leveraging the Web can cut cost and time out of how the company moves products into its stores. "In capsule, we've found the faster we can flow information, the faster we can flow product," says Pete Rector, vendor management director for Sears Roebuck & Co.

For years, Sears has been working with its vendors to bring up compliance on advanced ship notices, or ASNs, an EDI message set that lets the retailer know where the products it's expecting are in the supply chain.

"We've been at it for 10 years, but only recently did we impose a set of standards--within the last two years--that virtually mandates that if you can't do an ASN yourself, the vendor has to use a third-party system," says Rector. And those third-party systems, from vendors including SPS Commerce and Quick Response Services (QRS), use Web interfaces to let vendors that can't afford or manage the complexity of EDI to move their product and ship data electronically. With those systems and requirements in place, Sears has been able to move ASN-compliance from the high 80 percent range to 99 percent, says Rector.

"In many small companies, the EDI staff is a secretary named Emma," says Rector, adding that forms-based Web interfaces--starting at about $500 per month --give those small companies the same level of competency as mega-million dollar corporations.

Sears is also using the Web to solve another major supply-chain issue: the plague of bad data.

About 5 percent of all ASNs come across "sick or wounded," meaning they have some error that makes them unusable. To combat such problems, Sears set up an "ASN Hospital" extranet site, complete with "virtual gurneys," or filters, to bring ailing ASNs into the system. There, the ASNs are analyzed and fixed, and the vendor that sent the sick ASN is informed via e-mail so they don't make the same mistake again. Sears also built an extranet site, dubbed the Sears Business Exchange, to let key suppliers see sales and supply data on their products down to the store level. That lets all parties in the supply chain improve planning.

"What that implies is that the vendor can use that information and start to manage its production, raw material needs," Rector says.

With early Web-based supply chain efforts paying off, Sears is working on two more advanced projects. One, which Rector calls total supply-chain visibility, will help Sears determine precisely where items are in shipment--for example, "the truck-driver just stopped to get a hot-dog in Cleveland," Rector quips--to bring even greater efficiency to the supply chain.

A second project, called dynamic building and routing, takes advantage of product shipping information to better manage transportation costs. If Sears and its vendors can better communicate the cubic size and weights of shipments, they can fill their trucks more and move products more efficiently, Rector says. "When you're running $800 million in transportation expense annually, a decrease of 10 percent to 15 percent is a huge savings," he says.

Web-based supply chains also benefit manufacturers ultimately feeding retail channels. Timberland, which makes footwear, apparel and outdoor gear, is rolling out a new Web-based supply-chain collaboration tool from Manugistics to work more closely with retailers to help them get the products they need, says Yusef Akyuz, Timberland's vice president of information services.

Timberland and its retail partners will use the platform to develop business forecasts and plans in a more collaborative manner, replacing old methods, including voice communications, faxes, e-mails and shared spreadsheets.

"Basically, we'd throw over the wall a forecast and a business plan, and our retail partners would look at it, adjust it and tweak it, and throw it back over again. It added significant time to develop a plan that everybody bought into," Akyuz says. Now, with a Web-based collaborative environment, all the parties can more easily share data, see forecasts and quickly implement changes.

Timberland is early in the process, and will roll the new Web-based system in phases, starting with its own sales force, then adding headquarter's business analysts, then a large retailer or two, and finally its entire retail base. Eventually, the collaboration data will begin to flow to the back end of the Timberland supply chain, helping it make decisions about the materials that go into its products.

Leading the Way
Not surprisingly, Web-based supply chains are probably most advanced in PC and other high-tech manufacturing processes. Dell might get all the attention, but the technology industry is packed with vendors and suppliers using the Web to wrench every efficiency out of their supply chains.

One of the most advanced supply chains may belong to Marshall Industries, which is using the Web as a neutral middle platform to tie together disparate ERP systems across its supply chain.

"We can take any of the participants in our supply chain, bring them behind our firewall, take them and connect them into our data warehouse, cleanse data from disparate platforms, and run the data against an inference engine we've built that includes forecast, product-change and collaboration tools," says Marshall CEO Rodin. By using the Web and making this mediation layer (dubbed MACRO) something that sits outside traditional enterprise apps, Marshall can keep its supply chain agile and up to date with the latest technologies.

Elsewhere, telecom vendor Pairgain Technologies is using the Web to build what it calls a "super team" of suppliers to speed time to market and better manage just-in-time product changes, says Gary Lenik, Pairgain's director of materials.

Pairgain undertook its major supply-chain re-engineering back in 1995. By improving logistics and building a better schedule for contract manufacturers, Pairgain was able to cut cycle times by a factor of 10, reducing suppliers from 250 to 12. The whole process "wasn't so much Web- as EDI-based," says Lenik, but it was the rigidity of EDI that kept it from reaching its full potential.

When a customer wanted a change in a Pairgain product, a flurry of faxes and e-mails ran up and down the Pairgain supply chain as customers described what they wanted and Pairgain went to its suppliers to see if it could acquire or tweak the components necessary to make the changes.

By building what he calls a "virtual change control board"--basically a Web-based, collaborative extranet site--Pairgain was able to bring all the parties together online and boil down the process to a matter of days in some instances, instead of months, Lenik says. Which is what supply-chain management is all about.