SOA for Value Chains

This tip discusses the value chain, from the suppliers of components to the assembly of those components into finished goods to the end customer is a complex web of interactions.

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Enterprises of all sizes have long sought to automate business-to-business (B2B) interactions in a reliable and secure manner. The chain of interaction, or value chain, from the suppliers of components to the assembly of those components into finished goods to the end customer is a complex web of interactions. Each manufacturer of finished goods has relationships with dozens or hundreds of suppliers, each of which in turn have relationships...

with dozens or hundreds of manufacturing customers. These interrelationships have enabled increasing sophistication in the way that companies buy and sell raw materials and sell their products on the market. The increasing globalization of business has resulted in suppliers existing anywhere in the world, covering many different countries, languages, and time zones. This globalization has added challenges and pressures in the effort to optimize supply chains, increasing the value proposition of agile, flexible IT systems bas ed on SOA.

In order to understand how Service Orientation is changing the value chain, we must first understand the definition of a value chain. In many ways, the concept of a value chain is like trying to understand the relationship between the two related concepts of supply chain and demand chain, which are like thunder and lightning. Is thunder the sound of lightning, or is lightning what thunder looks like? It all depends on how you look at it. So it is with the notion of supply chains and demand chains. A supply chain is the set of companies and their products and services that form the component parts of a finished product. Supply chains connect the raw materials to the finished item through every step of the manufacturing and assembly process. A demand chain, in contrast, is the set of companies (or consumers) that connect a finished product with the final consumer of that product.

Sometimes it's clear where a supply chain ends and a demand chain begins. Take automobiles, for example. The supply chain begins with iron ore, rubber trees, petroleum, and the rest of the raw materials that go into each car, and ends when the finished auto rolls off the assembly line. The demand chain begins with shipping the cars to the dealer and ends with the consumers who purchase them. However, in other cases, the distinction between supply and demand chains depends entirely on which way you look at the situation, much like thunder and lightning. Take, for example, an assembly robot that the auto manufacturer uses in the factory. The robot rolls off its own assembly line, placing the last link in its supply chain—but its demand chain is a part of the car manufacturer's supply chain.

Hence the need for the term value chain, which recognizes that supply chains connect to demand chains and that the distinction between one and the other can be vague and fundamentally unimportant. Value chains, therefore, connect raw materials to the consumers of finished goods and services, and include all the participants along the way.

Where EDI Failed

The increasing automation of portions of the supply chain allows suppliers and consumers to gain increasing levels of awareness of the efficiencies in the supply chain process and greater security and reliability in the interactions between partners. Companies track their products, via their stock-keeping units (SKUs), from the time they roll off production lines at numerous suppliers to the time they arrive at end-user locations. This increase in automation allows the supply chain to move from a simple linear set of steps to a complicated web of interactions among different companies scattered throughout the globe. The key to making this web work is the use of automated, audited B2B interactions that are reliable and secure in order to reduce the need to track the movements of goods and services manually on paper.

Many large firms will tell you that they've been accomplishing the goals of reliable, secure, guaranteed interactions between companies for decades, in the form of Electronic Data Interchange (EDI). Although EDI has gained widespread acceptance over the years, it is a rigid and tightly coupled technology that uses arcane document formats and aging networking technology to enable point-to-point interactions between disparate enterprises. In addition, even though EDI provides a rigid format for how companies exchange information, the large degree of variability among different applications of EDI leads to significant ambiguity when implementing the standard. Users must resolve these ambiguities in a tedious, manual manner, which can be quite cumbersome to companies that must deal with dozens, hundreds, or even thousands of trading partners.

Nevertheless, EDI gained significant traction within a wide range of industries, because it not only simplified interactions with third parties, but also addressed the critical security and reliability needs of end users. Through the use of the Value-Added Network (VAN), a pre-Internet way of connecting companies with each other, companies could interact using EDI-formatted messages with large numbers of suppliers and partners without having to worry about handling security and reliability on a point-to-point basis with each trading partner. The VANs emerged as a means to provide basic connectivity between supply chain participants in the form of store-and-forward mailboxes that provided protocol conversion, security, and guaranteed delivery.

However, the EDI VANs left a sour taste in the mouths of many companies due to their steep implementation costs, monthly line charges, and per-transaction fees that racked up as the number of interactions increased. A key problem of traditional EDI VANs is that their cost structure made them prohibitively expensive to implement for the majority of businesses, especially as the Internet blossomed as a potential alternative. Only the largest of suppliers could afford the costly setup fees associated with complex EDI software tools and the exorbitant per-transaction fees. As a result of these high costs, many small and medium-size firms simply could not afford to participate in the electronic, automated supply chains of their larger trading partners. Without their participation, the value of these electronic trading networks were dubious indeed—companies simply could not replace their paper-based processes with electronic ones, because they still had to support the small firms t hat could not afford to connect electronically.

Then the Internet and the Web came along, with the hopes of speedily bringing about the demise of EDI and the VAN. The Internet as a ubiquitous communications network promised not only to simplify dealing with multiple systems, but also to reduce the cost of connecting to various business endpoints. Yet, while providing the communication backbone for enabling B2B integration, the Internet itself is insufficient to handle the integration needs of most companies. For one thing, the Internet has no inherent security or reliability that matches the functionality of the EDI VAN to guarantee secure, reliable interactions between partners.

SOA Fills the Gap for Internet B2B

Today, standards-based interfaces and document formats are fast becoming the lingua franca for disparate, heterogeneous information on the network, and Web Services represent a newer, open standards-based approach to getting systems to integrate with each other. Rather than planning in advance how a specific application will tie into another application, Service Orientation advocates the concept that developers can now think about how a specific application exposes itself as Services to any application that cares to speak to it. The use of standards-based Services allows arbitrary applications to communicate with each other without concern as to the other system's internal implementation. Thus, it is no surprise that enterprises and IT vendors alike are latching on to SOA as the primary means for solving B2B integration issues.

The business benefits of Service-oriented B2B integration over the previous, tightly coupled approaches of EDI are clear:

  • Enterprises can reduce their cost of integration because they have agreed on the interfaces between their systems and businesses in advance—reducing the dependency on complex, expensive, and/or custom integration approaches.
  • Enterprises can reduce the total cost of ownership of their heterogeneous systems since standards-based, interoperable systems give businesses more choice of vendors and the flexibility to solve their specific business needs.
  • Enterprises can realize a significantly expanded market opportunity since rather than relying on partners and suppliers to implement specific, proprietary technology approaches, vendors can provide solutions that will work in their customers' environments, allowing them to reach partners that may have been inaccessible in the past.
  • Enterprises can reduce their time to market because they can increasingly depend on critical architectural and infrastructural elements to exist in their partners' IT environments and rely on the interoperability of those elements to reduce their need to develop time-intensive, expensive, and proprietary solutions.
  • The ZapThink Take

    Companies are finding that SOA provides not just a framework for dealing with their short-term B2B integration challenges, but also gives them a way to increase their competitiveness in all industries, particularly where margins are slim. As a result, many companies that ZapThink talks to are making enormous progress implementing Service-oriented approaches today—to reduce the cost of integration, both internally and externally in order to improve their competitiveness, increase their visibility and control in their organizations, and create new business opportunities that were not feasible before. Service Orientation, after all, affects how both business and technology work, and how they work together in the context of enterprise architecture. And, as we've repeatedly have said in the past, enterprise architecture involves the entire environment of an enterprise, including its extended value chain.


    Copyright 2005. Originally published by ZapThink LLC, reprinted with permission. ZapThink LLC provides quality, high-value, focused research, analysis, and insight on emerging technologies that will have a high impact on the way business will be run in the future. To register for a free e-mail subscription to ZapFlash, click here.
    This was first published in December 2005

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