Leaps of faith
Distributors that implement electronic commerce systems and integrate their firms with end users may be the ultimate winners
By Ken Brack -- Industrial Distribution, 8/1/1999
The old saying that you must learn to crawl before you can run certainly applies to electronic commerce. For a few years e-commerce, along with consolidation, has been the big buzzword in the distribution industry. Depending on a company's technical prowess and perhaps its size, e-commerce means different things. It may include exchanging basic transactional data with your trading partners, offering catalogs with real-time inventory to being integrated with customers' planning and procurement systems.With all the hype surrounding it, you may have trouble determining what level of e-commerce is appropriate for your company. It's worth considering the various stages of functionality, and how some distributors have assessed their situations before moving into the so-called "digital networked economy."
When considering a move - or an upgrade - into e-commerce, firms naturally must first define what they want to achieve: marketing benefits; serving customers and working better with suppliers; and improving long-term profitability.
While that sounds simple enough, it may help to first consider the major stages of e-commerce currently in force throughout distribution.
- Buy-side applications that make it easier for customers to find and order products
- Supply-side networks such as private extranets which link manufacturers and distributors
- Integrated systems which provide items like product data and reports for an end user's enterprise system.
"I'd say a large set of companies on the EDI side are not even at stage one. Those who are realize that it helps customers to search for products on the Web," says Rand Walker, executive manager of electronic commerce at Macola Software. "There's a large number in the under $100 million range that are not leaders and are responders."
In addition, e-commerce itself includes a variety of activities for different objectives. A new book by industry experts Steve Epner and Bruce Merrifield, "Electronic Commerce for Distribution Channels," examines two growing areas: interactive Web commerce and so-called inter business process re-engineering among distributors and their suppliers.
Interactive Web commerce includes activities such as extranets, online catalogs with parametric product searching and more. A growing example of this is large end users linking their suppliers' catalogs and databases with their computer networks to help plan and control their supply chains. The emergence of third party vendors that organize inventory and conduct online auctions for buyers is another emerging Web-based activity.
The second trend involves what Merrifield and Epner call continuous replenishment applications, which so far include major initiatives in at least five different distribution channels. Those are vendor managed inventory by manufacturers; the reduction of supply chain costs by mass merchandisers like Wal-Mart; and efforts by the grocery, food service and health products industries to respond quicker to consumer demands.
"E-commerce is not Amazon.com," says Dave Griffith, CEO of Modern Group Ltd., a material handling and construction equipment distributor, referring to the online bookstore which is often cited as a first-of-its-class example of the digital economy. "It's business-to-business communications and information and customer service ... Anything that binds a customer to us is what we care about. It drives efficiency and speed and it differentiates us in a highly commoditized market."
Define what you need
To further define what type of e-commerce functionality your company wants, software executives and others offer several tips:
- Don't be held back if customers, particularly smaller ones, are not using e-commerce yet. Your most valuable customers will soon go digital.
- Determine your prime audience for buy-side e-commerce. Are you trying to attract new prospects? Or is the key meeting existing customers' demands to order seamlessly?
- Determine the marketing benefit you will gain from options such as opening a Web site with basic corporate and product information, participating in an inventory-sharing alliance, presenting a catalog, etc.
- Determine the core features you want to deliver in a Web site and additional ones to add later. This depends in part on the content and amount of data resources you already have.
- Consider the costs to maintain a Web site, such as updating product specifications.
- Consider the added value to customers and suppliers from doing Web-based transactions. This may include giving them reports on purchasing trends, buying profiles, new customer analysis etc.
- Check with software vendors about security, reliability and working with trading partners.
- Finally, and perhaps most important, try to redefine the supply chain with technology.
Using e-commerce to change the supply chain might sound pie-in-the-sky to many business owners. But industry analysts such as Epner and Merrifield warn that distributors who try to simply "webulize," or merely add a Web site without bringing other efficiencies to the traditional channel, will fall short. Increasingly, large end users of MRO items will try to cut deals directly with manufacturers and design customized, electronic distribution channels, they predict.
John Matson, a partner with Ernst & Young, says firms that invest in technologies to change their supply chains and come up with new models will be the ones still in business a few years ahead. Dell computer, for one, redefined its supply chain and benefits from doing more than 60 inventory turns annually, compared to its rival Compaq, which averages about 16 inventory turns.
Making a move
While the costs to set up and maintain EDI and Web-based commerce with suppliers and customers are dropping, the price for Web-based applications can still be daunting.
One software vendor told an audience at the ASMMA/I.D.A. Spring Convention in May that it costs about $50,000 to set up an individual Web site and convert product data to a catalog with real-time inventory capability. As an alternative, the vendor says it typically costs between $20,000-$30,000 to convert product data into a catalog that becomes available as part of a distributors' alliance.
The annual cost to maintain Internet-capable EDI services typically ranges from $650 to $1,000, compared to as much as $10,000 only a few years ago, Merrifield and Epner report. Meanwhile, EDI usage is growing at a 20 percent clip because EDI users and software vendors have found new ways to marry EDI to the Internet and Web documents.
There may be other costs as well. Distributors that want to synchronize product data with suppliers' and customers' numbers may pay from $2-$6 per SKU for each item master file, says Bill Haskitt, vice president of sales at Howard W. Sams Co. There are other fees to keep the data up to date.
This is a lot to ask many firms to invest, as many distributors do not have MIS departments. Just ask Don Taylor, president of a small industrial hose distributorship in San Antonio, Texas, who says he is considering creating a Web site himself.
His company, Taylor Made Hose Inc., has been listed with the online Thomas Regional Directory for more than a year and he says that attracts customers. But Taylor believes going through the directory adds an unnecessary step to ordering. Customers tell him that to source a product they will more likely use an Internet search engine.
"My long-term goal is to have order entry, the short-term is a page with a line list and get it up and in as many search engines and words as we can," he says. He expects to do "full e-commerce" over the Internet with about 30,000 line items in perhaps three years, and is preparing to go back to school to learn Web site development. Even doing that himself, he expects to spend at least $10,000.
"It will be the biggest single job that I have tackled in many years," says Taylor. "I may get into it and say - I've jumped in [too] deep here."
In another case, Ownings Mills, Md.-based TIPCO Technologies, Inc. is upgrading its e-commerce abilities at the request of a major customer that wants to transmit orders via the Internet.
Robert Lyons, president of the $5.9 million hose and accessories distributor-fabricator, says his firm began using EDI in the early 1980s. But the use of EDI faded among its older industrial customers and TIPCO' s client base shifted to biotech, pharmaceutical and other industries. Lyons expects to continue a multi-media approach by continuing to be listed in an online register, having a paper catalog and setting up a Web site this summer so customers can connect directly. He anticipates $3,000 in annual costs for the Web site.
"At this point I don't think anyone in our industry is at the point to put a 4,000-page Web site up there now and order and click away," he says. "It might be applicable for more commodity industries. The danger is, once you put a catalog up there it's public information and people can beat prices. But obviously that's where the world's going."
Digital journey
Bristol, Pa.-based Modern Group Ltd. began its e-commerce odyssey about six years ago. CEO Griffith says managers at the $140 million employee-owned firm committed to building a PC literate workforce with the proper bandwidth and software to support it. The goal was to adopt technologies to reduce customers' costs and enhance trading relationships. Since then Modern Group has gone through two generations of PCs and software, and has a fourth-generation Web site.
He says there have been missteps along the way integrating digital tools, but the capabilities and results are staggering.
For example, Griffith recalls struggling to create a new rental pricing strategy, which he began late one night working with a spreadsheet program. He e-mailed the draft to other senior managers, who made suggestions. Within two weeks everyone had a new rental rate sheet.
Salespeople spread across 24 locations in several mid-Atlantic states use much more than e-mail to connect with customers. They employ CD-ROMs, templates and quote tools, and modify PowerPoint presentations for new prospects. The firm's Web site is a magnet for hits about used equipment and other products.
"We see e-commerce more for our existing installed base than we do for prospecting," Griffith says. "I envision a time when you're delivering proposals and exchanging information in real time back and forth."
Internet-active at Kelly Supply
Nebraska-based distributor Kelly Supply is using Web-based commerce to reach two distinct customer groups and differentiate itself.
Three years ago Kelly Supply realized its technology was woefully behind its competitors' and inadequate for customer service. Customers calling a branch for product information typically had to wait for someone to call headquarters or look up a paper file. The company, which sells plumbing and electrical supplies in addition to general industrial tools, had used outdated, homegrown software at its remote locations.
Company executives had a vision of where they wanted to go, but no road map. They wanted an interface with customers who could look up their account history, make orders, open quotes and more -- which meant adopting a secure, integrated package. Through this spring the firm spent about $80,000 on hardware, software and middleware.
"We realized the time was coming," says information technology director Tonja Broadwell. "It's not really there strongly with our customers yet but we wanted to look at it."
"We called it a leap of faith, knowing or believing strongly that the ROI [return on investment] will be there, and knowing where we need to be when the whole thing busts loose," she says.
The firm now has two Web sites with catalogs -- one for established, registered customers that have special pricing, and which Broadwell says acts like an extranet. A second site has a different look and purpose: it targets new customers through a new subsidiary, Integrated Supply Co., and takes credit card orders only. Three years ago Kelly Supply's owners also launched an Internet service provider.
Despite all the work, Broadwell says it's been difficult getting many customers to do transactions electronically. As a result, the distributorship recently began offering rebates and incentives to do so. "If we're willing to take their hand, they'll get there," she says.
Beyond the buzz
The buzz of e-commerce initiatives can quickly become a blur: OrderZone.com, milpro.com, Pipeline, e-MRO, to name just a few. It seems that every few days some new procurement software is announced, distributors and third party providers form virtual malls or a manufacturer upgrades its Web site.
What all these activities appear to have in common is an attempt to reduce procurement costs for end users.
Some of the results are already encouraging for distributors. W.W. Grainger, Inc., expects $70 million in sales through its Web site in 1999, after an investment of more than $25 million. Its one-stop online shopping center with Marshall Industries and others expands Grainger's offerings to non-MRO products and may serve as a virtual mall model for other firms.
Some observers say the most far-reaching e-commerce initiatives will place product data in end users' screens, and that Web sites alone are only a short-term step.
Providers of enterprise resource planning software like SAP have taken notice of distribution and are linking with growing e-commerce content providers such as Requisite Technology, Inc. and Isadra, Inc. The point, says Requisite CEO Barbara Mowry, is to serve end users who want product finding mechanisms that connect easily to their ERP systems. So far, giant manufacturers are the major ERP customers, but Mowry and others see smaller end users going that way.
"Buyers are the key drivers," says Haskitt of Howard W. Sams. "They're buying SAP systems and today it's at the Fortune 500 level, but tomorrow it will drop down."
"When I talk to customers just starting with Web catalog publishing, this is something that may be the focus of [their] business today, but in five years, the primary focus won't be Web or print, it will be data formats that populate customers' sites," says Alister Gibson, CEO of Flow Systems Corp., another content provider. "Very quickly companies that are using buy side tools ... they won't go to a Web site to buy product, they'll use software that's on their network."
E-commerce resources on the Web
We asked AMR Research for a list of who's who in e-commerce. Here's the list and accompanying Web sites:
Customer Oriented:
Broadvision - www.broadvision.com
Click Interactive - www.clickplanet.com
Interworld - www.interworld.com
Ironside - www.ironside.com
Open Market - www.openmarket.com
Signal Internet - www.signalnet.com
Supplier Oriented (Direct Procurement)
General Electric Information Services (GEIS) - www.geis.com
Harbinger - www.harbinger.com
Sterling Commerce - www.sterlingcommerce.com
Supplier Oriented (Indirect Procurement)
Ariba - www.ariba.com
Aspect Development - www.aspectdv.com
Commerce One - www.commerceone.com
RightWorks - www.rightworks.com
In addition, many software providers to the industrial distribution industry have added an e-commerce module to their existing software product.
Web Help
To help distributors learn more about the rules of the road on the information superhighway, here are a few Web sites to check out:
E-commerce Times - www.ecommercetimes.com
The Electronic Commerce Guide - http://ecommerce.internet.com
National Electronic Commerce Resource Center - www.ecrc.ctc.com
U.S. Government Electronic Policy Site - www.ecommerce.gov
Net Market Makers - www.netmarketmakers.com
Web-based e-commerce takes off
Many distributors for years have used electronic data interchange, which is one type of e-commerce activity and often includes transmitting purchase orders, invoices, and shipping notices.
Fewer firms so far have gone further with e-commerce than post a corporate Web site that lists products and services or put their catalog online. By several measures, that is changing rapidly:
Supplier purchases
Within five years, distributors will purchase electronically from two-thirds of their suppliers [accounting for two thirds of their purchases] and sell three times as much product online, according to "Facing the Forces of Change," a report by the National Assn. of Wholesaler-Distributors.
More Web sales
Sixty seven percent of wholesaler-distributors expected to be doing business over the Internet by this summer, and 82 percent of large companies had that expectation, according to a new book published by NAW.
Integrated EDI
Sixty-two percent of small distributors and 95 percent of the large ones planned to be using EDI on an integrated basis by this summer, the study reports.
Redesign business processes
Less than 40 percent of EDI users used it for some form of business process redesign more than 18 months ago, but more than 80 percent hoped to be doing so this summer, the study found.
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