E-COMMERCE is not new. It's been around for over three years.
Nor is it dead or dying, despite gloom-and-doom pronouncements.
“In the press today, you hear a lot about how dot-coms are dead, and they've now started describing the people and the companies of the dot-com business as ‘dot-bombs’,” said Sam Prather, senior vice-president of engineering for Commerce One, which manufactures electronic procurement software.
“You understand that's just as much overhyping reality — that's the press overstating what's really going on — as much as they previously overstated that the dot-coms were going to change your life entirely, including what you had for breakfast.”
Prather said the reality is that e-commerce is only starting to impact companies. He said the real benefits of the Internet are only going to be realized in the next four or five years.
Why? Because changes as big as those that have come with e-commerce and the Internet typically come in waves that take years to complete before they arrive at the mature state. Just as not everybody had a refrigerator when it was first developed, not everybody is taking advantage of e-commerce. He said the first wave was just completed. The second wave will be even bigger than the first “in terms of its real economic value” — as opposed to stock-market predictions.
$438-Billion Market
Prather said he expects the market to grow 70-100% this year, with revenues growing at a 56% annual rate to $16 billion by 2004. It's difficult to attach a value to the 200 e-marketplaces in the world because many are private, but Bear Stearns, a financial investment service, estimates it at $100 billion. By 2004, $438 billion of the $1.7 trillion anticipated in B2B online transactions will occur through e-marketplaces.
In the beginning, the idea was to use a Web browser to order goods from an Internet catalog and transmit it electronically to a supplier. From there, it became e-procurement: the software was sold primarily to purchasing managers and was intended to decrease the typical purchase-order cost that averages $70-125 in a large corporation.
The difficulty was in connecting to suppliers because of the different ways data was transmitted. So the e-marketplace (or exchange) was created, taking a large number of buyers and connecting them with a large number of suppliers, eliminating the awkwardness of individual connections.
“You start thinking about aggregating the demand for multiple buyers, optimizing the supply chain through multiple tiers of suppliers so I can radically change how long it takes for the guy who makes ball bearings to find out that my forecast for how many trailers I'm going to manufacture has changed significantly,” he said.
“If I can shorten that planning cycle significantly, I can begin taking a lot of inventory out of the system. And if I can do that, I'm going to change the cost structure of doing business in a significant way. That means I'm going to change my profit margin significantly.”
Prather debunked the notion that e-commerce is simply about selling products on the Internet, saying there are a lot of products that people aren't going to buy in that fashion.
“I can tell you that when I buy a horse trailer, I'm going to kick the tires,” he said. “So there's a lot of confusion about whether it's about selling books on the Internet — which is quite successful today — or whether it's something much, much bigger than that. And the much bigger thing is business-to-business e-commerce, or changing the entire supply chain and cost structure.”
Delays and Uncertainty
Prather said that every participant in a supply chain has to carry inventory to deal with the uncertainty of supply and demand. If a forecast changes, the tier 1 supplier needs a few weeks to factor that into its plans, and vice versa for the tier 2 and 3 suppliers.
“So it's a planning cycle that's never better than six weeks and often three months,” he said. “But if you collapse that so information flows simultaneously to all tiers of the supply chain so shared planning information is available, you can change the uncertainty and therefore how much confidence you have in the forecast and how much inventory you have to carry.
“And if you change the inventory in every step of the supply chain, you're going to significantly change the cost structure of the whole supply chain. Which means at the end of the day, as a manufacturer you're going to make more money or have more pricing power.
“If you were going to make a change where the result was only 10% in profitability, that would be really dramatic. But there are a lot of people who think it's going to be higher … 25-75%.”
Prather said the other benefits are: improved visibility (real-time communication in the supply chain creates a parallel supply chain); better responsiveness (reduced time to detect demand, commit, produce, and fulfill); reduced inventories; optimized supply and demand matching (synchronization of supply-chain participants); shorter cycle times; and improved customer satisfaction.
Questions and Answers
In the question-and-answer period that followed, it became obvious that while the NATM members may believe e-commerce is valuable, they also have no idea how to implement it, doubt that their suppliers are sophisticated enough to utilize it, and are unsure that either party would spend the necessary money to set up a system.
One member said that the presentation “went over my head” and questioned how he could get started. Prather explained that he could hire a consulting service — either Commerce One or the other major ones — to prepare a business analysis to determine which changes should be made and at what cost.
Another member said most of it is “over our suppliers' heads” because most of them don't have planning forecasts, nor do they do anything online. Prather described how GM laid down the law to its suppliers, requiring them to adhere to GM's guidelines or cease to be suppliers.
“GM has that clout,” Prather said.
“But we don't,” the member said, drawing a chorus of laughter.
Prather said that while Covisint, the e-marketplace created by GM, Ford and DaimlerChrysler, cost $200 million, a small exchange would cost $10 million — which would still be much more sophisticated than a trailer manufacturer would need. He said an e-procurement application would cost an estimated $250,000.
He suggested the most cost-effective solution for an NATM member would be to become part of somebody else's e-marketplace.
Marketing Advantages
Responding to a question about the marketing and sales advantages of e-commerce, Prather said that while the Internet now reaches 50% of America's households, the growth rate will slow down. The good news: NATM companies are in a “discretionary-spending business,” which means the target audience for their products is more affluent households where the percentage is 70-80%.
The key is to work with a Web consulting firm to make sure the company lists pictures and key features of its products, which will ensure that if a customer is looking for an extra-tall trailer for Dutch Warmbloods, the company will show up in a Web search.
“That can change the number of sales leads you get,” he said, “and if you work through dealers, you can say, ‘Here are the dealers that carry my products — using links to their sites — or you can set up Web sites for your dealers, so it really highlights your products, even though the dealer sells other people's products. That will change your relationship with your dealer.”
By the end of the presentation, one attendee had heard enough of technology talk. He wondered about the “impersonal” nature of the Internet and what he perceived to be the ride-the-e-commerce-wave-or-get-left-behind tone of Prather's presentation.
“Transmitting orders electronically doesn't mean you don't still have a relationship with suppliers,” Prather said. “I think there are certainly some instances where e-commerce makes it more impersonal. If you're just going to go after bids for a part and you don't care where you get it or what the relationship is and all you're looking for is the lowest price, that's impersonal.
“E-commerce enables you to do it efficiently. I don't think that means I or any smart person who's doing e-commerce thinks you should change the practice of having strong relationships with your suppliers that are personal and are about a whole lot more than money. The fact that you can save yourself and your suppliers money doesn't mean you have to take away that personal angle.
“You may always send orders to some of them by fax. E-commerce's intent is to make that easier when it can be. There are some things you're not going to change.”