B2B E-Commerce - How to Keep the Web from Becoming a Trap

Ken Jeanos, director of inside sales and operations with Panasonic Industrial, once believed the Internet would make his company more efficient. The company, a multibillion-dollar division of Matsushita Electric Industrial, distributes electronic components, storage devices and semiconductors, among other products, to original equipment manufacturers and electromechanical subcontractors. Panasonic Industrial had used electronic data interchange—a standard means of exchanging purchasing information—for more than 15 years, and it worked well for the company. Nevertheless, the Internet promised to streamline some business processes that weren’t EDI-enabled and to generally help the company meet customer needs more quickly, at a lower cost.

However, in 2001, just as Jeanos’ expectations for the Internet were rising, a handful of Panasonic’s customers asked him to stop using EDI altogether and to use their extranets exclusively to exchange purchase orders, invoices and forecasts. Jeanos understood why. According to industry analysts and CIOs, shifting to extranets can allow a company to shut off its EDI networks, and save as much as several hundred thousand dollars a year on fees for value-added networks (VANs), the private network providers that lease communication lines for EDI, map data between trading partners and test systems.

But the move to extranets from EDI is not nearly as advantageous for Panasonic Industrial. In fact, extranets are eroding efficiencies Panasonic gained from EDI, because extranets create more manual work for Panasonic employees. "I have people spending all day on one customer, going to their website to confirm purchase orders and post advanced shipment notifications and invoices," Jeanos says, adding that if Panasonic’s customers continue to force him to use extranets, he will have to increase his headcount up to 10 percent in the area of customer service.

For example, if a customer requests a forecast from Panasonic, one of Jeanos’ demand planners has to go to the customer’s extranet to find the information the customer wants in the forecast. The demand planner then has to type that information into Panasonic’s ERP system. Once the ERP system creates the forecast, the demand planner has to manually enter the forecast into the customer’s extranet. With EDI, that entire process had been automated. Jeanos says integrating Panasonic’s ERP system with each of its customers’ extranets isn’t an option either, due to the expense. Even if integration were financially feasible, some of Panasonic’s customers wouldn’t allow it because of security concerns.

Like Panasonic Industrial, many manufacturing suppliers feel increasing pressure to abandon EDI, and they’re experiencing plenty of pain as a result. The trend has affected the electronics and high-tech industries most acutely, although it has emerged in other industries as well. According to David Sommer, vice president of e-commerce with CompTIA, an electronics industry association, OEMs want to ditch the mixed transaction environments in which they currently operate (where they use some combination of EDI or B2B portals and multiple data formats, including XML and Excel files) and to standardize on one electronic transaction method to save money. Portals have become their system of choice because they are Web-based, and therefore the OEMs think they can cajole all their trading partners into using them. Portals also give OEMs "a cheap way to collect data," according to Sommer, because the portal puts the onus for data entry on suppliers. A CompTIA survey on B2B e-commerce last fall found portals are becoming more widely used: 31 percent of respondents said they had done more trading using portals in the previous year than ever before.

But in the process, suppliers are getting squeezed. In the same survey, 77 percent of respondents said trading over the Web provided fewer advantages than other B2B trading mechanisms like EDI. For instance, CompTIA found that manually inputting information from an ERP system into a portal can take as much as 90 minutes while the same process using EDI takes just five minutes. It also increases the possibility of errors, such as mistyped product numbers and quantities, that don’t occur when systems communicate through EDI.

Although standardizing on one trading platform sounds sensible in theory (who wouldn’t want to reduce their costs and their technical complexity?), the idea that buyers could force their trading partners to dump EDI strikes some CIOs and e-commerce experts as preposterous. Abandoning EDI "is a giant step backwards," says Ranga Jayaraman, CIO of Hitachi Global Storage Technologies, a $4.2 billion disk driver maker. "It doesn’t make sense," says Steve Phillips, CIO of Avent, an $11.1 billion electronics manufacturer and distributor. "If you already have EDI set up, the cost of switching is prohibitive."

Not only that, but it could be bad for business. Forcing suppliers to the Web could cost buyers in the long run, as suppliers pass their increased costs back up the supply chain, according to Bill Swanton, vice president of research with AMR Research. Furthermore, one platform can’t realistically support every trading partner and every business process. "We usually give our clients a shortlist of five different solutions for getting their trading partners onboard electronically, including a portal, file transfer, XML, EDI and Web services," says Benoit Lheureux, a research director in Gartner’s architecture and infrastructure group. "That way, they cover their bases and will be a good company to do business with because they’re not being myopic."

In other words, for the foreseeable future, most companies will have to operate a hybrid trading environment and make the best of it. For OEMs, this means resisting the urge to drop EDI because it’s so entrenched in the supply chain. For suppliers, it means compromising with customers, perhaps by using third-party B2B integration providers to send and receive information. For both, it means the challenge of finding other ways to control costs by building a system for converting data from one format to another or by outsourcing this work to someone else.

Great Web Hopes

To understand why manufacturers are so enthusiastic about portals, it helps to recall the beginning of e-commerce. And the beginning of e-commerce was EDI. Back in the 1960s, EDI was a revolutionary technology—the first standard way of exchanging data about orders, shipments and financial transactions. It promised to make manufacturing supply chains more efficient through automation of paper-based processes. And to a large extent it succeeded.

But adoption of EDI through the 1970s and 1980s was limited to big companies that could afford the hundreds of thousands of dollars each year to license the software, operate the linkages, support multiple protocols, connections and data formats, and to pay the VANs. So, although large companies did benefit from EDI, the gains did not extend to their transactions with smaller suppliers, which couldn’t afford to implement it. When the Web made its big splash in the late 1990s, CIOs seized on it as the solution to interacting electronically with their smaller trading partners. According to Mark Settle, CIO of Arrow Electronics, they also viewed the Web as the solution that would help them achieve their dream of managing their inventories in real-time (EDI transactions were traditionally conducted in batches). Thus, companies established Web-based portals that these small suppliers could use in lieu of their phones and fax machines to place and confirm orders.

Around the same time that the Web was growing in popularity as an e-business platform, 40 companies in the high-tech industry, including IBM, Motorola and Sony, formed a nonprofit consortium called RosettaNet to develop open standards based on XML for real-time B2B trading. Herman Stiphout, president of RosettaNet, says B2B trading had become so complicated in the high-tech industry that each company in a supply chain had its own way to quote prices, disseminate shipping information and reconcile invoices, including different varieties of EDI. RosettaNet’s founders wanted to create standard, automated ways of executing business processes like product design, inventory management and distributing product information. In practice, observes Arrow’s Settle, RosettaNet has become a supplement to EDI for companies in the electronics and automotive industries that can afford to deploy the new technology and that use it for complicated processes that are not yet automated. For everyone else who wants to do Web-based e-commerce, portals are the easiest option.

The Problem with Portals

Yet the cost and complexity associated with supporting multiple B2B e-commerce platforms is precisely why some companies, like the mid-market paper distributor Central Lewmar, are trying to standardize on one platform. "We don’t want to have two, three or four e-commerce connections and operations running with different vendors. It complicates our business and adds to the cost of doing business every day," says Kevin Whitfield, vice president of IT for the $750 million company. Most of Central Lewmar’s business is done over the phone or by fax, although two of its customers use EDI. Recently, Central Lewmar chose a portal hosted by Liaison Technologies as its standard. Not only that, but the company is trying to push its portal as the de facto B2B trading platform for the paper industry.

Central Lewmar chose a portal because the XML-based system lets the company check suppliers’ inventories in real-time. This helps the company serve its customers, which include marketing, commercial printers and graphic design companies, more quickly when they call to order paper. AMR Research’s Swanton says portals are popular because anyone with a browser can access one. And if the majority of buyers’ trading partners are using the portal, buyers figure it makes sense to go with what the majority uses and coax the minority using EDI onto the new platform. By getting more (if not all) of their trading partners to use the portal, buyers maximize the investment they’ve made in building them. Portals are also attractive to buyers because, as is the case with Central Newmar, they shift the burden of data entry onto suppliers. Buyers integrate their B2B portals with their back-end systems for inventory management, purchasing and accounting, so their business processes associated with purchasing and invoicing are automated on their end.

The problem with automation using portals is that it tends to be one-sided. Suppliers can’t achieve the same level of automation because the Web portals don’t easily integrate with their back-end systems. Suppliers could use a third-party integration services provider to connect their systems to their buyers’ portals—the approach Central Newmar has offered its suppliers. But that’s too expensive for a supplier to do for all of its buyers. Consequently, only one of Central Newmar’s trading partners—International Paper, its largest supplier—is using the portal. Whitfield says some suppliers are reluctant to do business through an intermediary, and others lack the technology to support XML transactions. (For more about how adoption of B2B portals is affecting mid-market companies, see "A Strategy for the Mid-Market," Page 70.)

EDI, meanwhile, has shed some of the disadvantages of the past—batch processing of transactions, for example—that have generated criticism. "Ten years ago, when I worked for an oil company, we ran EDI cycles twice a day" because VANs charged per batch of transmissions sent and companies didn’t want to send them too often, says Arrow’s Settle. Now EDI can be sent over the Internet, providing the real-time advantages of newer transaction methods. While EDI remains a sizeable investment, the Internet makes it less expensive. The VANs have also lowered their prices due to the competition they’ve seen from portals and new standards such as RosettaNet.

Rob Barrett, vice president of solutions engineering for E2Open, which provides software and services that help companies conduct B2B e-commerce, blames the debate over portals and EDI on those vendors who have created products that can’t easily be integrated. Because portal vendors’ solutions can’t process EDI transmissions and vice versa, companies are forced to look to a middleware vendor to integrate those systems, he says. Since most companies don’t want to undertake such costly integration efforts, they’re forced to choose one system, and they tend to choose the portal because more people can access it. Their business partners who’ve used EDI are suddenly forced to use the portal too. "Shame on the vendors for making what should be a discussion about business processes between trading partners a lengthy religious debate about technology," he says.

Two Ways to Cope

The technology debate won’t be resolved anytime soon, which means most companies will have to support a variety of platforms, from legacy investments in electronic data interchange to the latest Web-based system. Although supporting multiple environments is more expensive than standardizing on one system, two companies, Arrow Electronics and Hitachi Global Storage Technologies, have found ways to control the costs.

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