June 26, 2017


















Article 7.3

"ELECTRONIC COMMERCE" IS TARGETING DISTRIBUTION CHANNELS

To see and get to the future first, we sometimes have to connect seemingly unrelated news bits to gain insights, and then start betting resources to be opportunistically prepared. Although forecasting is a precarious art form, letís try an inferential thinking exercise with the following four news items:

ITEM #1: An article in the February 20th issue of Fortune magazine entitled "Purchasing's New Muscle." It has case stories on why and how big corporations can save "10-25%" on MRO purchases with centralized deals with sole (integrated) suppliers. Nothing new here. This type of publicity, however, might help to turn a trend into a stampede for which many MRO distributors, their consortia, and W.W. Grainger's Unified Services division have all been racing to accommodate.

ITEM #2: IBM's "electronic commerce" division announced (2-21-95) that it has developed an "Electronic Purchasing Service" which is being pilot tested with the "Big 6" firm, Coopers and Lybrand. The ordering is done electronically through IBM's "Global Network", and total procurement costs for some MRO items "can be reduced up to 60%." There are also "hooks" in IBM's software to allow for electronic funds transfer (EFT) and corporate purchasing card billing, if desired. Interesting?

ITEM #3: Fast growing Ryder Logistics has announced (1-30-95) that "OASIS" will be available to corporate desktops with Windows software by year-end. This will let any end-user track their ordered goods on a real-time basis if Ryder is handling the receiving and delivery process into the plant. Ryder's goals are to use infotech to replace inventory investment and stops between the producer's factory and the final consumption point. If Ryder wants to displace these traditional distributor activities, will OASIS give them much of an edge over traditional distributor methods? Don't UPS and FedEx already have this software offering for their customers?

ITEM #4: Since April 1994 national bank consortia have been forming to troll for big corporations that want to do EFT with their suppliers. This concept will eliminate paperwork as well as headcounts in both receivables and payroll departments for any two trading partners. Consensus opinion has been that EFT will be slow to take off because of EDI standards inertia, conversion costs and reluctance to give up trade credit float.

PUT THESE ITEMS TOGETHER WITH IMAGINATION

If a VP of purchasing at a big firm decided to "re-engineer MRO purchasing" would they confer with their information services (IS) department? And guess what? IBMís mainframes are sitting in about 80% of the big firms, and their "global network" is apt to be there too. The network currently is servicing 25,000 customer firms and supporting 7,000 local area networks and 5,500 interconnected networks.

So, if a VP decided to test IBM's electronic commerce product, what would be the costs? Maybe an incremental cost to install PC software; pay X cents per network transaction; and pay maintenance fees for product listings in the electronic catalog which suppliers might share. IBM's goal is to be a utility charging a small fee for each transaction. How many transactions must they be planning on to impact nearly 70 billion in existing revenues?

This electronic catalog allows users to check text, graphics, specs, availability, and database discussion notes. Notes? Yes, expert answers to frequently asked questions (FAQs) about products will be on an easy search database. Novel application problems now can be solved once and shared instantly and permanently with all end-users with this system. Neophyte users can instantly confer with experienced end-users anywhere else within their corporate realm or perhaps with "the expert" at the manufacturing supplier's plant. Could this reduce the demand for many of the traditional channel experts who have provided solutions in the traditional, slow, expensive, face-to-face or ear-to-ear mode?

The IBM system also could allow for the best benefits of both centralized and decentralized purchasing. The central folks could negotiate the best comprehensive, nationwide deals and then monitor all transaction flow to their Big Brotherís hearts' content. The local users could buy more easily, quickly and assuredly. But here is a twist, what if the locals were allowed to log on alternative supply choices that either beat the economic or utilitarian value of central's one-size-fits-all solutions? This would counter the goal of reducing total suppliers, but what if all transactions were 100% electronic? Then, the cost of finding ever better value through redundant suppliers would be less than the new value found.

The IBM solution would then become a dynamic, electronic, reverse auction system for would be suppliers. If margins on commodity goods drop significantly, can the supply channel keep offering all of those slow turning items that are currently cross-subsidized by the winners? The same question applies to cross-subsidized customers, services, employees and sales territories. The days of lumping all operational costs together and hoping that an average margin rate and volume will more than cover all expenses will be over.

How could IBM make the total purchasing cycle 100% electronic? They could "partner" with two bank consortia, three+ credit card firms, and the big Contract Logistics players like Ryder, FedEx, and UPS. IBM could probably even dictate one EFT protocol standard, because together they would be offering the biggest end-users end-to-end channel solutions that were 100% electronic and trackable.

Within this scenario, any other would be supplier could also plug into the IBM electronic commerce standard. Then, they too would be able to sell many large end-users on an electronic basis. Of course, any big user could switch to an alternate supplier with ease and low switching costs. Will these end-users prefer to use a supply solution built around - a supplier's software; one bank consortium's protocol; or IBMís neutral, more universal solution that provides maximum supplier flexibility?

How do the Contract Logistics players figure into this scenario? They have mostly focused on just-in-time parts programs. Do they have the ambition and the credibility to go after consolidated delivery of MRO needs into plants? Cass Information Services of St. Louis is forecasting the industry's growth to go from 16 billion in 1994 to 50 billion in 2000. Sounds ambitious!

As for credibility, consider Ryder's PR about their GM/ Saturn Plant account in Tennessee. Over 340 suppliers in 39 different states who average 550 miles from the plant all deliver their goods to the Ryder warehouse just outside Saturn's gates. Ryder then delivers everything into the plant just-in-time. Some parts are turning 300 times per year. With OASIS end-users can monitor the flow of all goods. Could these folks deliver mops and paperclips too? If so, it would reduce in-bound trucks and (electronic) paperwork into the plant which are currently extra costs in the supply chain.

WHERE SHOULD WE PLACE OUR BETS?

There are many flavors of MRO integrated supply solutions that are either being tried or in development like IBM's. Perhaps many of these solutions will enjoy some success, but which ones will excel? How should producers, distributors and their consortia hedge their bets? All things considered, a good move would be to research, track, and be ready to sell into IBMís emerging electronic commerce desktop standard. Perhaps "partnering" with them and selling their solution into smaller accounts might become a possibility; a whole new IBM Value Added Reseller (VAR) industry could crop up.

Perhaps we should also be ready to sell at less than half of today's margin rate with most services unbundled for a fee. This will empower each end-user to choose what services they value. It will also allow a firm to more readily be a piece of some of the total channel, electronic solutions that might emerge.

These measures raise tough transitional questions that need answers - such as: How should existing field salesforces be downsized, reinvented and unbundled? We can't sell at necessarily lower margins if we don't first cure or eliminate cross-subsidized customers, products and employees/managers - can we measurably and psychologically do this?

Won't this electronic commerce tidal wave eliminate many traditional channel firms? If so, who will be: the successful and unsuccessful consolidators; the early sellers for more; and the late sellers for nothing. Will there be room for virtual re-sellers who make no money on the tangible goods and all of their profit on unbundled pre-sale and post-sale services? Could, for example, electronic commerce purchasing service firms help smaller end-users get on the supply saving's bandwagon? And finally, can we solve these problems fast enough to be able to catch and ride this tidal wave instead of being crushed by it?

Merrifield Consulting Group, Inc.

Distribution Opportunities Essay # 11, Article7.3