Winners and Losers in the World of Electronic Commerce
By Christopher Gopal -- Supply Chain Management Review, 6/1/1997
Electronic Commerce (EC) is one of today's hottest business areas. Not only is it being widely discussed, it also is receiving heavy investment as many companies—from startups to massive multinational corporations—get involved in this new way of conducting business.
What is Electronic Commerce? There seem to be as many definitions of EC as there are players in the game. Still, a common definition of Electronic Commerce is necessary to understand its potential impact on supply chain operations. A description that most of the players would agree on is this:
Electronic Commerce is the buying and selling of goods and services (or the enabling of such activity) through electronic networks, including the Internet.
Electronic Commerce is not a single technology, nor can it be accomplished by any one company operating alone. It also is not the replacement of paper-based procedures by the electronic transmission of information.
Electronic Commerce already exists in several forms, but it has not yet fully developed. Many people believe that Electronic Data Interchange (EDI) is Electronic Commerce, but in fact it is but one step in that direction. EDI, efficient though it is, essentially offers a one-to-one (or one-to-a-few) electronic relationship. True Electronic Commerce, on the other hand, will allow simultaneous, many-to-many relationships.
There is no doubt that true Electronic Commerce is coming. A survey of top executives conducted by Ernst & Young LLP indicates that they clearly accept the premise that Electronic Commerce is coming fast. Survey respondents reported that within 10 years, they expect to be generating 40 percent of their sales over the Internet.
It's vital that companies prepare now for that eventuality. Electronic Commerce will create a completely new set of customer-supplier relationships and introduce a whole new dynamic into the supply chain. For some companies, their ability to exploit EC's capabilities may well determine who will win—and who will lose—the battle for customer loyalties.
Managing the Buyer-Seller Relationship On-LineConsider the following scenario: Let's say you're looking for a new computer. You log onto the World Wide Web and check out what various manufacturers have to offer in their electronic catalogues. Next, you use a software application that compares different products to your particular requirements and price limits. The program chooses Manufacturer A.
Now you specify the options and software you want (clicking on each), confirm the order (another click), type in a credit card number (click), and indicate when you want everything delivered and how (click). Finally, you specify whether you'll need a technician to install the equipment, while porting over all the data from the old machine. If you can't stand the suspense of waiting for your order to arrive, you can check its status on-line. Great—your new computer is scheduled for delivery in two days.
One day later, you receive an e-mail alert from Manufacturer A via the Internet, telling you that your new computer will be delivered between 9 and 11 a.m. the following day via a major overnight carrier, and that a service technician will visit your home between 3 and 5 that same afternoon to install it.
Everything happens right on schedule. But delivery and installation doesn't end your interaction with Manufacturer A. Three months later, the manufacturer contacts you again—via your new computer, of course. Are you interested in some new software or an update of your existing software? You order the upgrade. It's delivered over the Internet, you download it, and pay for it on-line.
Now imagine what goes on behind the scenes at Manufacturer A while you place your order and await delivery. There, procurement managers are doing some digital shopping of their own, searching the world electronically for the best buys in monitors, for example. They are looking for a specific number of monitors to be available within a specific time frame, with certain specifications and delivery parameters—at the lowest possible price, of course.
At the same time, monitor manufacturers, other suppliers, and even competitors that have excess stock to unload are making electronic "sales calls" on Manufacturer A's procurement managers, pitching what they can deliver, at what volume, for how much, on what payment terms, and how soon.
Meanwhile, after your on-line order has been accepted, it automatically is transmitted to a supply chain manager (probably collated with others according to destination ZIP code and type of delivery). The supply chain manager begins shopping—electronically, of course—for the lowest-cost carriers serving the required lanes that also can meet the desired delivery parameters. The supply chain manager also alerts a third-party maintenance and service organization in your area to your service requirements.
Once availability has been confirmed, the supply chain manager sends you an order confirmation, followed by an advance shipping notice. At the same time, the manager transmits packing and shipping instructions to the shipping department.
All of this order-fulfillment activity is based on which products and components Manufacturer A's system indicates is available, either from subcontractors or in its own manufacturing and configuration centers. As the order is completed, that system updates the demand/supply projections that the supply chain manager has developed with his or her counterparts in supplier organizations.
Electronic Commerce Will Revolutionize the Supply ChainWelcome to the world of Electronic Commerce...a world sure to be full of turmoil. The impact of Electronic Commerce on individual businesses will be profound, but it also will bring about significant change in entire industries. Those changes may range from improving business processes within the supply chain to restructuring of some industries, or perhaps even giving rise to new ones.
EC also is changing almost everything about the way a supply chain works. It is affecting nearly every functional area, with the possible exception of the manipulation and movement of materials. Exhibit 1 shows a typical supply chain's functional structure, minus material movement. Electronic Commerce has the potential to enhance, enable, or motivate every function in this supply chain model.
One of the most compelling reasons for companies to adopt Electronic Commerce is that it offers solutions to several marketing problems. For example, products that have been unprofitable in smaller markets, with their attendant high distribution and return costs, may turn out to be highly profitable when sold via EC's huge global marketplace. EC can open up new sales and marketing channels and broaden a company's geographic reach.
Electronic Commerce helps companies capitalize on new markets for information-based products, services, and applications within the supply chain. It also provides a means for them to provide differentiated customer service through innovations in customization, ordering, fulfillment, replenishment, and value-added service, to name a few possibilities.
Equally important is the fact that the technology and processes involved in Electronic Commerce can lead to significant cost reductions within the supply chain. One way EC can achieve such reductions is by automating business transactions, which results in streamlining (or even eliminating) company functions, processes, and procedures. An example of an area where that could be a real advantage is sales and marketing. For some kinds of industrial, standardized (commoditized) products, the cost of buying and selling may amount to more than 40 percent of the total product cost. In such a case, purchasing and sales would be prime areas for Electronic Commerce applications.
Electronic Commerce also will help companies reduce the cost of sourcing. Today, many companies select supply chain partners from which they purchase all their materials. Electronic Commerce, by contrast, will enable a buyer to scan an industry on a global basis, checking availability and seeking the best prices, while allowing a manufacturer, supplier, and customer to collaborate on forecasting and replenishment to maximize product availability and minimize working capital.
EC and its "many-to-many" networking also provides a broader vision of supply chain activities, thus allowing for reduced inventory levels, competitive pricing, quick replenishment, more accurate forecasts, lower procurement costs, and significant consolidation opportunities. It also can reduce working capital and response times.
Even more important, perhaps, is the certainty that Electronic Commerce will encourage changing customer demands—which inevitably will affect how companies respond to those demands. Exhibit 2 shows current business and consumer trends that are supporting the growth of EC (left-hand column) and how they are likely to impact supply chain operations (right-hand column).
From the customers' vantage point, EC will serve to raise their expectations regarding price, sourcing, ordering, delivery, returns, payment and service. EC also will force manufacturers and distributors to broaden their product lines. Instead of simply offering what the biggest customers want, Electronic Commerce will open the way for more customization, even for small customers. This effectively will level the playing field for all buyers.
Such demands are not trivial, and their impact on the supply chain is clear. For one thing, it will strain the linear capabilities of a traditional supply chain, in which a single thread marks the course of a simple pipeline from supplier to manufacturer to distributor to customer. This consecutive approach often results in insufficient linkages with sales and marketing, lost connectivity within the supply chain and with partners, and unacceptable delays due to sequential information flows throughout an organization. These problems translate into a rigid and inefficient response to a dynamic market, and that will lead to lost market share.
These and other possible influences of Electronic Commerce on the supply chain—driven by the new connectivity infrastructure and process-specific applications—inevitably will lead to the development of several important business dynamics:
- Dematerialization is the substitution of electronic information (text, audio, video, and so forth) for the exchange or movement of physical goods. Such information might include: Product information for on-line bidding, procurement, and auctioning, including specifications for use and substitutability; asset information to match supply and demand, including the locations of assets, capacities, availability, and capabilities; and inventory information to increase the velocity of materials through the pipeline. This last includes standard information such as status, demand, requirements, shipping/delivery needs, and notification, as well as those not traditionally associated with this area, such as replenishment triggers and consolidation opportunities.
- Disintermediation: This trend toward eliminating one or more intermediaries in the supply chain signals a period of vulnerability for many middlemen. This does not automatically mean their demise, however. Middlemen such as distributors, resellers, and wholesalers have a choice of competitive and survival strategies that will help them to escape the threat of elimination that EC represents. They can, for example, partner with suppliers or form consortia in order to provide customers with a "bundled" product and/or service offering. They also can provide value-added services, such as returns-management systems or order fulfillment.
These value-adding activities fall into two categories: either they add value to the products themselves through manufacturing, assembly, design, delivery, or service, or they take on functions traditionally reserved for the manufacturer, such as customer management, inventory planning, and purchasing. Exhibit 3 illustrates some of these value-adding activities. Those near the intersection of the two axes are "commoditized" activities that commonly are available at relatively low cost. As the activities move closer to the outer edges of the axes, they become more complex and therefore more important means for middlemen to differentiate themselves and improve their competitive positioning.
- Electronic Affinity Groups: EC will make possible several variations on the theme of affinity groups, in which companies or individuals with a shared interest or objective can exchange information for mutual benefit. One such development will be the creation of "marketspaces" of products and services that are linked electronically to provide customers with full-service solutions. Customers will be able to transact business with multiple suppliers via a single, specialized electronic "location." One example might be a company that is networked with its product suppliers, logistics providers, healthcare providers, business advisors, and customers to source, manage and deliver complete customer solutions.
Another will be the creation of "virtual private networks." These are the electronic equivalent of procurement clubs, in which only members can participate, possibly for a fee. Members might purchase goods or even services. These groups are likely to be organized along specialty interest or industry lines, such as consumer electronics or discounted software. Service and asset providers, as well as product marketers, will find that selling to these network members will be very lucrative.
A third possibility under Electronic Commerce will be the formation of "communities of interest." These groups will comprise members of a single industry or profession—automakers, say, or health-care providers—that want to share information. For example, one might gather around an electronic "roundtable" with like-minded professionals from all over the world to exchange news and gather information on a particular subject—best supply chain practices in the retail channel, for example. Vendors and service providers probably will pay for the privilege of gaining electronic contact with the participants, since it offers them the opportunity to accurately target potential customers.
Who Will be the Winners and Losers?EC will have its greatest impact on business when it evolves from a means of replacing paper to an enabler of changing operations, and finally to a generator of new business models, channels, and markets. It is the success of this transition that will determine the winners and losers in the supply chain game.
Even at this early stage, a picture of potential winners and losers already is emerging. As Exhibit 4 indicates, the winners are likely to include companies that own the "pipelines" through which Electronic Commerce will be transacted; "nimble" manufacturers and distributors that know their customers best and respond to trends through their supply chains; and technology companies that provide all the hardware and software EC will need.
What are the common characteristics of this next generation of winners? More than ever before, the future belongs to the nimble. The biggest gains will go to companies that:
- Have a direct relationship with the customer. Just as the monitor manufacturer will want to know all about Manufacturer A, Manufacturer A in turn will want to know all about its individual customers—whether they be small office, home office, personal or corporate users. The traditional middleman will fade into history.
- Gather and own extremely detailed information about those customers. They'll have intelligence on their customers' inventories and turnover rates, their delivery preferences, which products they'll be needing next, and perhaps how much they're likely to pay for them. Think back to how computer monitor manufacturers and dealers solicited business electronically from Manufacturer A. Multiply that scenario ten thousand-fold, and you'll get a glimpse of the coming global electronic bidding war.
- Own the knowledge of the supply "market"—what's available, when, for how much—on a global basis. This will likely be the model for the new "distributors" of the future.
- Provide "value-added" services, such as consulting or owning the applications technologies that allow them to leverage across industries, markets and products. The forward looking players also know they can't always go it alone, and this is particularly true in relation to Electronic Commerce. Thus, they are creating consortia within their respective supply chains that include manufacturers, logistics providers, applications developers and system integrators, and finance houses. These consortia also may be driven by retailers or distributors.
If these will be the winners, who, then, will be the biggest losers? The losers probably will be traditional middlemen and salespeople. At particular risk are those that do not make the transition to owning customer information, or that don't provide value-added services to prevent their offerings from being commoditized.
Growth is Inevitable, But Barriers RemainThe purpose of any business endeavor is to increase revenues, build a loyal customer base, secure a market position, and cut costs. It is for those reasons, too, that business trends emerge, and EC is no exception.
Despite the enormous potential Electronic Commerce offers, barriers to its success remain. Among them are the lack of applications sophistication, the current linear models of supply chain fulfillment, and the need to create a market. In the United States today, for example, out of a population of 250 million potential customers, only an estimated 20 percent of the population has electronic access to public networks.
Insufficient security of network transactions also is holding back EC's development. Consumers worry about electronic theft of their credit cards, while companies worry about security of sensitive data—as well they should. To date, business has only limited protection for competitive and proprietary information traveling over the Internet, although this is less of a concern with private networks.
Another concern is what role the federal government will play vis à vis Electronic Commerce. Will government try to regulate EC by setting access prices? Or will it mandate equal access? Perhaps it will limit what can be sold electronically and the price at which it may be sold. Or will it move in the other direction and back away from any regulation whatsoever?
That approach could open a Pandora's box of unknowns. For instance, suppose the network providers imposed huge increases in access prices. That could well have the effect of squeezing out smaller (and perhaps more innovative) players, leaving electronic commerce as a virtual monopoly of large companies.
Just as problematic is the fact that EC has no national—let alone global—technological standards. Imposing order on such potential chaos will add dramatically to the substantial cost of investment that companies will have to make in EC hardware, software, and training.
Formidable though these barriers to advancement may be, they are unlikely to stand for long in the way of EC's progress. It is the next frontier in supply chain management, and those who anticipate the future and prepare to exploit EC's capabilities will succeed in dominating their business sectors.
Electronic Commerce, with its potential to seize the opportunities and resolve some of the challenges that supply chain management presents, is on the verge of entering the supply chain "mainstream."
The commercialization of World Wide Web technology is making that possible. By the end of this decade, Electronic Commerce will be ubiquitous, embedded in every company's supply chain.
| Author Information |
| Christopher Gopal, Ph.D., is the director of Supply Chain Operations at Ernst & Young LLP. |
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