INVOICE? WHAT'S AN INVOICE?Electronic commerce will soon radically alter the way business buys and sells
Ever since Wal-Mart Stores Inc. revolutionized retailing by linking its computers to those of suppliers, executives in every other industry have been dreaming of doing the same. They've seen how Wal-Mart's pioneering use of computer networks to conduct business electronically squeezed costs and time out of clunky supply chains and helped it outgun just about all of its rivals.
Well, hang on. Electronic commerce, once little more than a management buzzword, is about to radically alter how all companies sell to and buy from each other. The techniques that Wal-Mart and giants such as General Motors, Eastman Kodak, and Baxter International have been perfecting on private networks for the past decade are evolving and are now about to move to the wide-open Internet.
SIZZLE. U.S. companies already buy $500 billion worth of goods electronically each year, reckons Torrey K. Byles, a director at market researcher Giga Information Group. That's a small fraction of their total purchases, but it shows why Internet experts believe that business-to-business links--rather than glitzy online malls--will be the first form of Web commerce to pay off. Doing business on the Net is ``a cost-reduction and efficiency-improvement play,'' says Jim Sha, vice-president, new ventures at Netscape Communications Corp., the sizzling Web software maker.
E-commerce could have profound effects on efficiency. As more transactions move from the numbing pace of paper to the lightning speed of electrons, economists predict that a new era of nearly friction-free markets will arrive. Companies that don't move quickly to the new technology risk being left behind. ``Electronic commerce will happen,'' says Brad Wheeler, professor of information systems at the University of Maryland. ``People can't stick their head in the sand or they'll be dealt right out.''
Take something as simple as a purchase order (table). Even though manufacturing giants such as GM have used a scheme called electronic data interchange (EDI) to order parts automatically from suppliers since the concept was proposed in the early 1970s, most business-to-business sales still are done with paper forms--a reminder, in triplicate, of outdated methods. If you eliminate paper, you spend less time and money re-keying information into different computers and correcting the resulting errors. By some estimates, E-commerce could slash the cost of processing a purchase order from $150 to as little as $25.
Once the software--and security measures--are available, the Internet's World Wide Web will become the global infrastructure for electronic commerce. IBM, General Electric Information Services (GEIS), Dun & Bradstreet, Microsoft, and a raft of others are scurrying to build what's needed--everything from software for securing payments and building electronic catalogs to services that authenticate a new trading partner's electronic identity. One company, Industry.Net Corp., headed by former Lotus Development Corp. CEO Jim P. Manzi, is developing a sort of industrial mall to help companies find customers and suppliers in cyberspace.
EARLY BIRDS. ``I really see the Internet as an explosion of electronic commerce,'' says Hellene S. Runtagh, president and chief executive of GEIS. That company is rushing to extend its EDI services, currently delivered over a private network, out to the Internet so it can reach thousands of new businesses. By putting global markets at virtually anyone's fingertips, Runtagh says, the Net should trigger the creation of a multitude of new companies worldwide. ``This is the most exciting sea change to hit commerce globally in the last 100 years,'' she says.
In the meantime, some companies are already rigging E-commerce systems on the Net. Fruit of the Loom Inc., until recently a self-confessed technology laggard, is using the Net to make up for lost time. Led by computer executives hired away from Federal Express Corp. and elsewhere, the apparelmaker is using the Web to one-up Hanes Cos. and other brands in the market for blank T-shirts and other items sold through novelty stores and at special events.
Fruit depends on some 50 wholesalers nationwide to ship its goods in bulk to thousands of silk-screen printers, embroidery shops, and similar outfits. And now, it's offering to put those wholesalers on the Web, at virtually no charge to them. Fruit's plan is to give each one a complete computer system, called Activewear Online, that's programmed to display colorful catalogs, process electronic orders 24 hours a day, and manage inventories.
One of Fruit's major goals is to avoid losing customers when a wholesaler is out of stock. If, for instance, a silk screener needs 1,000 black T-shirts in a hurry for a Megadeth concert and the wholesaler is low, Fruit's central warehouse can be notified to ship the shirts directly to the customer. ``We'll make Fruit's inventory a virtual inventory for our wholesalers,'' says Charles M. Kirk, Fruit's chief information officer.
Until now, it would have taken years to build such a rich E-commerce system--even if it were possible on the closed, mainframe-based EDI networks run by companies such as GE and IBM. But for Fruit of the Loom, Connect Inc.'s software, called OneServer, and a catalog program from Snickleways Interactive helped it get online in just a few months. And its retailers need only an ordinary PC with a modem and Web-browsing software.
Along with Connect, players such as TradeWave, TSI International, OpenMarket, Netscape Communications, and Microsoft are chasing a Web commerce software market that should hit $750 million in 1999, according to Forrester Research Inc. New software from Premenos, GE, and Sterling Commerce, meanwhile, is starting to move traditional EDI traffic over the Internet, too--at a fraction of the cost that the private EDI nets currently charge.
For large-scale E-commerce initiatives, however, the private EDI setups still have the edge for now. Campbell Soup Co., for instance, has just spent $30 million to redesign its order-processing system around EDI. Called Compass, the new setup is scheduled to go live in August. One goal: Double the portion of paperless orders that the food company receives to 80%, whether from salespeople's laptop computers or the ``continuous replenishment'' systems that companies such as Flemings Cos. use to automatically restock warehouses.
Compass should reduce Campbell's costs by $18 million a year and speed deliveries, says Ronald W. Ferner, vice-president for low-cost business systems. Just cutting out the errors would be a boon. Mistakes now creep into 60% of the orders that Campbell gets by fax and phone. The result: Sales-people spend 40% of their time straightening out problems instead of selling. Compass, which relies on software from Industri-Matematick, a Swedish firm, and an IBM SPsuperscript/2 computer, will turn around orders within 18 hours, down from 48 now. It will even book space on delivery trucks and reserve time at customers' loading docks. Says Ferner: ``Even the trees are happy. We're not chopping them down to make paper.''
BIG SAVINGS. As impressive as that is, the Web promises to take E-commerce much farther. AMP Inc., for instance, has put up a multilingual catalog of more than 40,000 connectors and other electronic parts on the Web. Eventually, the Web site may take orders, but for now that's being left to distributors. But CEO William J. Hudson Jr. says the catalog is already saving money compared with the $8 million a year it costs to print and mail paper catalogs. And the Web catalog's fresher data should generate more orders.
Ultimately, E-commerce will take place in virtual marketplaces. These trading posts will allow buyers and sellers who may not know one another to meet electronically and trade in goods and services without the aid--or cost--of traditional agents and brokers. Industry.Net now collects fees from more than 4,000 makers of all kinds of industrial gear in return for listing their products and services in a large electronic catalog. Purchasing agents and engineers from all over the world browse the data for next to nothing. Now, purchases continue to go through local distributors. But CEO Manzi wants Industry.Net to process orders and transfer payments, too--for a service fee on each transaction. To develop a system capable of handling thousands of transactions hourly, he hired Mark Teflian, a computer expert who helped to design United Airlines Inc.'s reservation system.
Meanwhile, a consortium that includes D&B, AT&T, Digital Equipment, and SHL Systemhouse has created International Business Exchange, or IBEX. It's a sort of electronic bulletin board on which companies in any country can list goods they want to buy or sell. The system lets them negotiate anonymously and, if a deal gets far enough, helps them initiate credit checks, arrange financing, and get legal and customs paperwork completed by local companies. ``Electronic commerce is really a massive information management job,'' says Mady Jalinous, president and CEO of Global Business Alliance, IBEX' major investor.
The Web is seeing all sorts of specialty markets sprout up, too. EarthCycle Inc. in Woodland Hills, Calif., runs one that deals in chemicals recycled from industrial waste. In September, an online market for buying and selling electricity is to go online. Sponsored by a consortium of 170 utilities and cooperatives, it's intended to help meet a federal mandate to increase competition in the wholesale power market and smooth out price imbalances across the nation. The system is being designed to support futures contracts and other sophisticated commodity trading.
As powerful as the E-commerce concept is, it won't spread evenly across the economy. ``People who are powerful sellers may be able to delay the development of electronic markets,'' says Thomas Malone, head of the coordination science department at Massachusetts Institute of Technology's Sloan School. After all, despite NASDAQ, a vast electronic market, the New York and American stock exchanges rely on humans and paper, and they're still entrenched. But, warns Malone: ``Those who try to delay it will be fighting a losing battle. In the long term, buyers migrate to the market that's better for them.'' Get ready, there's an electronic market coming to a screen near you.
By John W. Verity in New York
Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.