(FORTUNE Magazine) – Many of the brightest ideas for new pieces of computer hardware emanate from companies like Adaptec, a Silicon Valley outfit that turns over most of its production to people on the opposite side of the Pacific. But in a business that can change course in a week, 105 days used to elapse between an order for computer boards from Adaptec's headquarters in Milpitas, Calif., and shipment from its Singapore assembly plant. Then Dolores Marciel, the company's vice president of materials management, saw the light. Treating her suppliers like partners and, not incidentally, installing new computer software and using the Internet, she slashed the cycle to 55 days. Not only did customers get faster delivery, but in addition Adaptec cut its work-in-process inventory, or WIP, in half.

Adaptec is part of a growing vanguard of companies benefiting financially and in other ways from closer ties in their supply chains. Unifi, the leading U.S. maker of synthetic yarn, shares production-scheduling and quality-control information daily with Du Pont, a principal supplier of raw materials. Boeing's Rocketdyne unit uses supplier expertise to help reduce the time and money it spends building engines for space vehicles. And Mercury Marine, the big boat-engine producer, is starting to use the Internet to tighten connections with boat builders and engine dealers as a way to fend off Honda, Yamaha, and Volvo.

In companies that have made such moves, executives speak with the zeal of religious converts. Rocketdyne has cut WIP by $2 million in the past year alone, says general manager Byron Wood. Bigger shrinkage lies ahead, he asserts, along with a reduction in cycle time by a whole order of magnitude. When Adaptec established close computer links with its supply chain, its chip supplier, Taiwan Semiconductor Manufacturing Corp. (TSMC), was so impressed that it created a similar setup of its own. As a result, says Monty Botkin, TSMC's director of customer support in the U.S., he can now "service more customers with fewer people."

Software sellers and consultants say you ain't seen nothing yet. One enthusiast is Dave Cope, vice president of Extricity Software, a private company in Redwood Shores, Calif., that supplied the software being used by Adaptec and TSMC. Get him started, and he paces the room, describing the promised land with the passion of a tent-meeting evangelist. As Cope and others envision it, the future belongs to giant complexes of "virtual companies," tightly integrated from raw-materials suppliers all the way to the consumer, with information flowing front to back and back to front at the blink of a video monitor. More than linear supply chains, these leviathans will be assemblies of companies, tight schools of individual fish with a few always joining and others departing, while the mass moves synchronously in perfect, immediate response to customer demand.

The terminology and details vary with the speaker. Some talk of the "extended enterprise," while others expound on the "borderless corporation." But the gospel is much the same: Integrate the supply chain into some sort of virtual keiretsu and, promises consultant Ann Gracklin, a vice president of Avicon in Natick, Mass., you'll get "lightning-speed responsiveness while cutting a layer of inventory."

More and more corporations are buying in. Extricity's sales, on the way to tripling this fiscal year, are doing the Silicon Valley quickstep. Consulting companies are gathering clients on both sides of the Atlantic. Andrew Berger, a partner in Andersen Consulting's London office, says, "Six months ago it was like talking to fish about land." But no more. Berger says the reason for the interest is simple: "Value is leaking out of the supply chain." That's blood in the water for chief financial officers. Reengineering and continuous quality improvement have already picked up the big gains on the factory floor. The remaining economies must come from cutting the cost of moving, handling, and storing whatever comes in the back door or goes out the front.

At the same time, nearly everybody's encountering the computerized, Internet-connected buyer who, says Douglas Aldrich, a Dallas-based managing director of the A.T. Kearney consulting firm, "decides who gets to play, why they get to play, and, frankly, what price he or she is willing to pay for something." Aldrich has bad news for laggards who delay wringing out supply-chain costs. Lots of businesses, he says, are going to have to deal with "price points that are no place near the sum of costs plus a margin that most people have been used to living on."

Many companies are joining the parade for another reason: A querulous CEO wants to know what happened to the return he was promised on ERP, the enterprise resource planning computer system that took so much money to buy and so many months to install. "A lot of people thought ERP was going to enable them to have a tighter supply chain," says Robert Derocher, a senior manager at Deloitte Consulting. "A lot of them are realizing it doesn't."

ERP programs weren't designed to manage and report usefully on the hodgepodge of machinery and processes in the plant. But that's necessary if suppliers are to anticipate customers' needs and those customers, in turn, are to plan on orders arriving just in time. Dave Cone, CEO of Camstar Systems in Campbell, Calif., which sells a software program he claims does these jobs, says eight out of ten potential customers in recent months had ERP systems that they had put in about four years ago only to find that "the stuff didn't work in the factory." A year ago Camstar's customer base was mid-sized electronics companies plus the occasional early adopter like yarnmaker Unifi. Today it includes big-league players like Dell Computer and Corning.

Improving supply-chain management builds on trends that are transforming much of American manufacturing: outsourcing noncore activities, reducing the number of suppliers, and building only after orders come in rather than for inventory. But supply-chain integration still can't happen without seamless exchanges of order, marketing, and production information. That's well beyond the capabilities of electronic data interchange (EDI), the inflexible system widely used for years to place and confirm orders but dismissed by Silicon Valley snobs as "glorified fax." Enter the Internet, the Web, e-commerce, and the almost inevitably quoted Forrester Research forecast that the annual value of business-to-business transactions over the Internet will reach $1.3 trillion by 2003.

The Internet brings hazards, of course. By making it easier for buyers to get bids from anywhere, e-commerce could mean that many are called but few are chosen. Deloitte's Derocher foresees that "where specs are tight and turnaround is critical, companies will have strong, deep relationships with partners." Other suppliers will see their products commoditized as nonstrategic items go out for Internet auction among qualified bidders. The low bid today wins this chunk of business. The lowest tomorrow wins the next.

The new environment is already on the way at Solectron, a big Milpitas, Calif., electronics contractor. Kevin Burns, vice president of global material services, says that by the end of 2000 about half of his purchases will be made under vendor-managed inventory programs that require close cooperation between supplier and Solectron. For other purchases, it's meet the takedown, that is, the quarterly price-reduction target, or, says Burns, "I'm going to explore other alternatives."

Generally, though, the streamlined supply chain is more aspiration than reality. Sandor Boyson, co-director of the Supply Chain Management Center at the University of Maryland's business school, says, "Lots of companies haven't even begun to get a handle on the supply chain, let alone fashion extended-enterprise concepts." Boyson and his associates found only a fourth of 117 companies in an e-commerce association that claimed extended trading relationships with partners.

And claims can be just that. Says Joe Bellini, president of C-Bridge Internet Solutions, a consulting firm in Cambridge, Mass.: "If you look at most supply chains, even ones that are touting that they are a fully integrated, collaborative environment, in just about every one you can find a point where they're still following the old methods: 'We'll just prebuild what we think the market's going to buy, and then we'll adjust as we get the actual demand coming in.'"

Two major roadblocks are precedent and people. Bellini explains, "The technology is there to tightly couple these supply chains on a daily basis and collaborate, but the management processes, the way contracts are written for supply and demand between the nodes in the supply chain, just aren't able to support it." Moreover, other consultants say, as information filters through any chain, each participant is sorely tempted to adjust or manipulate it for his own reasons or because of prior experience.

Even among Silicon Valley's early adopters, the flow of information from point of sale to basic suppliers like chipmakers is not what it could be. TSMC's Botkin complains: "I'm at the bottom of the food chain. We're buying millions of dollars of equipment based on information that has been filtered down to me. I'm looking back up the supply chain, and really all I have is what I've read in the newspaper and some comments here and there from customers. It's not part of the culture in electronics to share that kind of information."

For many, sharing isn't what they've been taught. Says Christopher Gopal, an Ernest & Young global director: "They still look at procurement as a semi-adversarial deal where you propose your hardball bids, come up with somebody who has the lowest price, and then try to get that price down." These tough negotiators are now being asked to cooperate and trust. "To work effectively," says Deloitte's Derocher, "you've got to believe that if you make the pie greater, everybody benefits." Accepting that will take time. Adaptec's Marciel has it right: "Although people say they like change, they only like it when it doesn't include them."

Poster children for the cause are big-box retailers like Wal-Mart, which has long required suppliers to manage their portion of its inventory, and a few Silicon Valley players like Cisco Systems, which has a vested interest in expanding Internet use. Any morning after 4 A.M., 7,000 Wal-Mart suppliers can go into Wal-Mart's database and find out which store sold how much of their products for a two-year period ended the previous midnight. In its last fiscal year, Cisco ran up revenues of more than $12 billion with only 500,000 square feet of its own manufacturing space.

Customers now call up Cisco's Website to configure, price, and order $1 billion of its networking equipment a month. Cisco then sends orders back out across the Internet to board producers and assemblers including Celestica, Flextronics, Jabil, and Solectron. Products are built and tested to Cisco standards, sometimes with procedures run remotely by Cisco. Most are drop-shipped to buyers, untouched by human hands on Cisco's payroll.

Wal-Mart and Cisco are so dominant that supply chains follow their dictates instead of functioning as completely cooperative efforts. But lots of collaborative efforts are under way elsewhere to tighten the relationship between buyers and sellers. Chevron, for example, is getting its predominantly independent gas stations to work together. Says C-Bridge's Bellini, who is helping with the project: "Chevron now has the ability to go back to the Cokes and the Pepsis and the cigarette makers, and negotiate for 8,000 locations." The aim is not to hammer down prices, says Bellini, but to raise the question, "Is there a way where everybody wins--suppliers, Chevron, and the retailers?"

Companies working at integrating frequently start by looking in the direction along the supply chain--upstream or downstream--where initial gains are easiest to get. They're in a hurry because they are under stress from new competition or new technology. What follow are the recent experiences of five companies, all stressed, and all reacting by forging closer relationships with suppliers or customers, generally with the help of the Internet. While most of the tales describe new links between independent companies, the last tells of supply-chain improvements that resulted when two companies merged.