Back to B2B eventually:
DJN: WSJ(4/17): E-Commerce Report: Revamping The Model: Where The Money Is
By Douglas A. Blackmon
Back in the early days of electronic-commerce euphoria -- when it finally
became clear that more would happen on the Internet than e-mail and
late-night techie chat sessions -- an army of analysts already was pleading
for the dot-com-obsessed to see where the real action was going to take
place.
It wouldn't be at the early consumer sites getting so much attention, like
Amazon.com, CDNow, eToys or any other place where some tiny percentage of
all consumers was opting to buy nonessential goods, the analysts said. The
big money plays would happen when giant corporate transactions -- the
bedrock of the economy -- moved online.
Businesses would buy and sell from one another on a massive scale. The
entire inventories of store chains would be ordered and managed online.
Factories would requisition and coordinate delivery of all raw materials and
parts on the Web. Hundreds of billions of dollars in sales would ring in
cyberspace. Massive inventory efficiencies would be created through
sophisticated electronic communication. And unlike the relatively paltry --
but complicated to execute -- consumer sales that were getting so much
attention, the Internet would bring fundamental change to the core of the
U.S. economic system.
Obscure Web sites selling light bulbs and computer components sounded like a
big bore in the mid 1990s. But as the difficulty of turning a profit at
consumer-oriented e-commerce sites became increasingly clear in recent
months, the markets and, more important, venture capitalists began swarming
into the business-to-business, or B2B, scene.
Gyrating stock markets and the proliferation of Internet B2B players have
taken some shine off the phenomenon recently. But analysts say that while
some players in overheated markets will falter, the benefits of the systems
are too great to be stopped. The only question is who will lead the
transformation -- the existing Old Economy players or the strongest among
hordes of New Economy start-ups.
The allure of B2B is the potential for the Internet to become a kind of
central computer system for whole industries -- allowing companies to
instantly check the inventories of their suppliers or make huge purchases --
all with digital speed and efficiency. Companies expect overhead to decline
as Web systems eliminate the need for many of the workers who make
traditional fax and phone-driven purchasing offices run. And many expect
prices for material and components to drop dramatically as suppliers are
forced to compete head-to-head online.
"There seems to be an explosion in B2B marketplaces," says Laurie Orlov, a
research director at Forrester Research Inc. in Cambridge, Mass. Things are
moving so fast, she says, that a Forrester report on B2B issued in February
-- predicting juggernaut growth in online commercial transactions -- already
is too tame. "We have not even reached our full hysteria on this," she says.
The Forrester report concluded that within the next two years, more than 90%
of companies that sell goods to other companies will be transacting business
on the Web. A little more than half do so today. Forrester predicts that B2B
online sales will jump to nearly $2.7 trillion in 2004, up almost sevenfold
from the $406.2 billion in B2B Web sales it expects this year.
But even as B2B e-commerce mushrooms -- and continues to dwarf online buying
by consumers -- not all industries lend themselves so easily to online
trading. Heavier products that cost more to ship than to manufacture, or
valuable, highly customized products such as prefabricated steel beams, may
not work well on the Internet at all. Shipping costs mean the products must
be manufactured near the buyers, and uniquely engineered goods don't lend
themselves to computer-based comparisons.
Because B2B systems usually leverage companies' existing electronic
inventory databases, those that haven't traditionally embraced high-tech
information systems will lag behind. Moreover, in industries where there are
hundreds or thousands of manufacturers and suppliers -- such as food and
building materials -- it will take longer for online marketplaces to take
hold. Many analysts expect no more than 10% of construction purchases and
12% of food to be on the Web by 2004.
Even if the online trading systems work flawlessly and Forrester's
predictions are borne out over the next five years, only about 17% of all
U.S. commercial trade will be occurring on the Internet.
Instead, B2B online transactions will have the most dramatic effect in
industries where components and supplies are highly standardized and lend
themselves to spot pricing or auction sales. That includes basic office
products, factory supplies, electronic and mechanical components, and
medical and laboratory supplies. Databases of such products can easily
recognize and organize comparable information about prices, specifications
and availability and display it instantly on the Web.
Electronics components, for instance, are the vanguard of B2B. That's
because the tens of thousands of parts that go inside almost all brands of
computers are largely interchangeable, and the primary manufacturers of
components are intensely competitive.
Forrester predicts that 40% of all electronics and computers will be sold
online in five years. The same goes for auto parts, which are expected to
generate $411.5 billion in online sales in 2004, up from $35.1 billion this
year. That would represent 26% of all such purchases.
As different industries sort out how much of their purchasing can go online,
a variety of new business models are emerging to create competing Web
marketplaces.
In January, a group of major computer-parts suppliers and other big
investors formed a company called Viacore Inc. Backed with $34 million from,
among others, Ingram Micro Inc., Santa Ana, Calif.; Arrow Electronics Inc.,
Melville, N.Y.; and Avnet Inc., Phoenix -- all major electronic-parts
suppliers -- Viacore intends to build a hub for processing electronic
purchases between manufacturers like Intel Corp. and wholesalers like
themselves that supply components to computer makers such as Dell Computer
Corp.
Unlike other B2B sites which take commissions on the sale of goods, Viacore
is trying to eliminate the need for many online marketplaces. It will make
money primarily by charging companies subscription fees for using its hub.
In return, the Viacore system is supposed to create enormous cost savings
for Old Economy companies, by shaving just a few dollars off the processing
cost of each of its big orders, without the businesses having to invest
millions in overhauling their existing mainframes.
Viacore's hub is the first to support a new set of computer communication
standards created by Rosetta Net, a nonprofit consortium of big companies.
The Rosetta standards, called partner interface processes, are designed to
seamlessly transmit highly detailed order and processing information between
different companies' electronic purchasing systems. Using the standards,
electronic purchasing programs are capable of far more complex communication
than electronic data exchange, or EDI -- the prevalent form of electronic
ordering before the Internet. In addition, they claim to be far superior to
the often-undependable consumer-oriented purchasing systems now prevalent on
the Web.
By cutting costs on processing big orders, Arrow Electronics and other
similarly positioned companies can add millions to the bottom line,
regardless of whether they sell more components. Arrow buys more than $1
billion of goods annually from its largest vendor, Intel. Those purchases
involve nearly 500,000 separate transactions. If the Viacore system, or
those of other marketplace brokers, works, Arrow can eliminate personnel
involved in order management, reduce errors and place real-time orders --
doing away with delays of up to 48 hours in processing EDI-generated
purchases.
Moreover, the system will facilitate complex transfers of information, such
as product data and bar-code data for hundreds of thousands of new items
every year. Arrow adds about 5,000 new parts numbers to its inventory every
month.
"When Intel creates a new microprocessor, there's an incredible amount of
work that has to be done to get that part number activated in our system and
then for us to show the customers that we've activated that part," says
Stephen P. Kaufman, Arrow's chairman and chief executive officer. "Right
now, that happens manually. Intel sends us literature and what date it will
be effective. We have to type that in. That creates some aggravation. With
Rosetta Net standards, that's all going to be computer-to-computer."
But creating seamless direct communication between the big computer systems
of disparate companies can be complicated. Supply-chain software programs
are in use at thousands of U.S. companies, but last year Whirlpool Corp. and
Hershey Foods Corp. had famously disastrous snafus when problems with the
systems paralyzed the companies' deliveries. Indeed, when Arrow recently
made one of its first purchases from Intel using the Rosetta standards, a
computer glitch misplaced a decimal point -- turning a $31,500 order into
one for $31.5 million.
Those problems are quickly fixed, but avoiding the hassle of integrating
systems is one of the attractions of more-conventional so-called vertical
B2B models. In Web parlance, a vertical marketplace is one that sells every
conceivable product desired by a particular industry. Horizontal markets
are those selling products aimed at several different industries.
(END) DOW JONES NEWS 04-17-00
12:14 AM
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