5.37 Private Industrial Networks

As the name suggests, private industrial networks are web-enabled networks that coordinate transactions between specific companies — in all aspects and all divisions: suppliers, distributors, retail, procurement, delivery and so on. Such systems are also called collaborative, as they facilitate efficiencies throughout the network. Many large companies (Wal-mart, Coca-Cola, Nike, Hewlett-Packard, IBM, Microsoft, Cisco Systems, Dell and General Electric) operate private industrial networks, which indeed form the largest part of B2B ecommerce today.

Specific objectives include:

1. More efficient buying and selling throughout an industry.
2. Resource planning on an enterprise- and industry-wide scale.
3. Increased supply chain visibility to all interested parties, i.e. inventory levels of buyers and suppliers can be monitored and kept to efficient levels.
4. Closer relationships between buyers and suppliers, improving demand forecasting, communications and conflict resolution.
5. Transglobal operations.
6. Risk reduction, with financial derivatives, insurance and a futures market employed to prevent supply and demand imbalances.

Unlike industrial consortia, which are collectively owned by several major companies, private industrial networks generally have a single, sponsoring company that sets and enforces the rules, only inviting other companies to participate at its own discretion.

Examples

Ace Hardware

Ace Hardware, a cooperative of 5,100 retail stores employs a private industrial network to manage inventory levels and liaise with suppliers. Previously, some 30 procurement managers were employed and some 7-10 days were required to process an order. These have been replaced with 14 Ace distribution centers and 9 key suppliers. And whereas suppliers previously had no access to Ace inventory levels, they can now forecast demand with some accuracy. Manco, one supplier of 200 products, has been able to reduce distribution costs by 28% and freight costs by 18%. {2} {3} {4}

Wal-mart

Wal-mart operates the largest supply chain in the world, which it has aggressively developed from EDI-based collaborative system of the late 1980s. A Retail Link was introduced in 1991, which connected large suppliers to Wal-mart's own inventory management system, requiring them to track sales by store, replenishing items by rules of Wal-mart's devising. In 1997, Wal-mart moved Retail Link to an extranet, and then upgraded the system to a more collaborative forecasting, planning and replenishment system. In 2002, Wal-mart switched to an Internet-based private network, adapting an AS2 package from iSoft for the purpose. Wal-mart's rapid growth required extension of its financial services system, and it hired SAP to build a global system. As a result, Wal-mart continued to grow during the the 2009 recession, while competitors suffered 10-20% declines in revenues. Such successes have spurred competitors to also build private industrial networks: e.g. Agentrics and J.C. Penney. {5} {6} {7}

Chrysler

Chrysler's Supply Partner Information Network (SPIN) allows suppliers worldwide to access both Chryslers real-time procurement, inventory and demand forecasting systems, and its long-term strategy considerations. Within SPIN, Chrysler's Part Quality Supply System tracks all production parts from supplier to shipper, factory installation and after-sales replacement. Chrysler estimate the system has improved productivity by 20%. {8} {9} {10}

Collaborative Commerce

Private Industrial networks are more than efficient supply chain systems, but can coordinate efforts in product design and engineering. CPFR (collaborative resource planning and replenishment) can help, throughout the network, to forecast demand, develop production plans, coordinate stocking, warehousing and shipping to ensure retail inventories are kept at optimal levels. By keeping everyone in the loop — company, suppliers and customers — such systems can exercise quality and quantity control, ensuring that products meet their manufacturer's claims, and that customer suggestions and needs are fed back to production.

Fair Competition

Information sharing between competitors in the fields of airline reservation, railroad terminal facilities and film distribution has generated a large body of case law and scholarship that determines when such collaboration becomes illegal. Much is tolerated, in fact, until competition is harmed and customers face higher prices and/or reduced selection. There are many academic papers on the subject of antitrust legislation in business-to-business marketplaces, and the US Federal Trade Commission continually monitors behavior for collusion, monopsony power and exclusionary behavior.

Questions

1. Distinguish between eprocurement, digital exchanges, industrial consortia and private industrial networks.
2. Under what keywords would you undertake a search for private industrial networks on the Internet?
3. Explain how private industrial networks work. What are their advantages?
4. Provide three examples of their commercial use.
5. What legal challenges could private industrial networks face?

Sources and Further Reading

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