TECHNOLOGY - Trade expectations

Far from taking over from EDI, Web-based e-commerce is following its example.

Electronic commerce will fundamentally change the way we do business example. - or so the pundits say. But in reality, e-commerce practices are very similar to those of traditional business.

For example, selling to customers over the Web is not radically different from the conventional telesales mail-order operation.

The customers take over some of the work by filling in the purchase order themselves, but unless the vendor is selling a product that can be digitised, compressed and then sent down the wire - such as software, music or images - the goods still have to be physically delivered. The rules of fulfilment have not changed.

Consequently, although many retailers are running virtual shopping pilots, they are spending far more on acquiring store premises. Don't expect to see too many retailers selling all their shops and following Egghead into exclusive Web sales.

In the business-to-business arena, Web-based e-commerce can provide streamlined trading between business partners on an ad-hoc basis. Whereas in the conventional world 'business partner' infers an established trading relationship between mutually trusted parties, in the virtual world it is used loosely to mean any customer, supplier, or even a financial or governmental institution, such as a clearing bank, Customs & Excise or the Inland Revenue.

But again, in reality, the rules of Web-based electronic commerce are very similar to those of conventional EDI.

The Web pundits would have us believe that Web-based e-commerce will quickly sweep away traditional VAN-based EDI on cost grounds alone and bring with it a previously unimagined wealth of functionality. But this is simply not the case. For e-commerce purposes, private VANs and the Web will co-exist for many years, especially in large organisations where security, reliability and return on investment are key issues.

'You still need an established relationship with business partners on the Web because you have no way of knowing who they are, or even if they are who they say they are,' says Cathy Hotka, vice president for IT at the National Retail Federation in Washington.

'Traditional EDI will have nothing to fear from the internet for some years,' Hotka says.'

Forrester surveyed 50 Fortune 1000 companies in October 1997 and 58 per cent said they expected the use of EDI in their companies to grow over the next three years; 36 per cent said its use would stay the same, and only six per cent said it would decline.

'If large companies thought they could abandon private networks and go to the internet, they would do it,' says Harvey Seegers, CEO of GE Information Services (GEIS), one of the leading providers of EDI software and services.

'But we are not seeing them rushing to the internet in droves.'

The Web pundits' vision of a loose community of trading partners is alien to the hub-and-spoke model that prevails in traditional EDI. But Web-based e-commerce is following the same model.

Alison Taylor, research director of e-commerce and extranet applications at Gartner Group, identifies three types of extranet. The most common is the channel master, a traditional hub-and-spoke model driven by a large customer. It says: 'If you want to do business with me, adopt my model.'

There are some very strong EDI communities, such as Swift (Society for Worldwide Interbank Fund Transfer), an international electronic settling system used by the banking industry, which handles transactions worth about $2 trillion a day. Run on private networks between long-established partners, these systems have grown organically over many years.

More frequently, EDI networks are driven by a large customer, around whom smaller suppliers orbit. Clothing manufacturer Benetton, for example, has about 2,000 sub-contractors across Europe making garments to Benetton's designs.

'It used to come to the plant and pick up designs, but its labour costs are high and it is not a good use of its time. It needs automating,' says Bruno Zuccaro, organisation director at Benetton. 'We provide manufacturers with EDI software and, yes, it does create a barrier to them doing business with our competitors.'

EDI enables Benetton to transmit purchase orders and detailed specifications for garments, but not all the sub-contractors have the necessary IT set-ups for EDI.

'We can connect with the bigger manufacturers, but we also have to deal with manufacturers in small countries such as Romania that don't have reliable datacomms,' says Zuccaro.

Chrysler, the US motor manufacturer, is also running a campaign to drive its 8,900 suppliers online and thus cut costs in the supply chain. So far about 1,600 Chrysler suppliers have gone over to EDI, saving the company roughly $2 million a year.

'We still need powerful hubs like Chrysler and Benetton to persuade suppliers to come on board,' says Antoinette Gawin, vice president for manufacturing industries at GEIS. 'Big customers help to drive this because people want to do business with them.'

In the UK, Dixons Stores Group embarked on a similar effort last month, although 320 of its 374 merchandise suppliers are already using EDI. UK grocery leader Tesco is also encouraging suppliers to adopt it.

The supermarket trades with 2,000 EDI-enabled suppliers, but also has more than 600 small and medium-sized companies, among whom IT equipment - let alone EDI - is a rarity. EDI is complex and expensive, both to set up and run. So Tesco and Dixons are unusual: companies rarely manage to reach more than 40 per cent of their business partners through EDI. There are more than two million businesses in the UK, but only 17,000 EDI users.

Previously, large customers have been able to dictate terms to smaller suppliers and bully suppliers into setting up an EDI relationship.

'Anyone who has a contract to supply us for more than a year must have EDI,' says Peter Deutsch, electrical and mechanical supplies purchasing manager at Consolidated Edison, the gas and electricity utility which supplies New York.

'You have to decide what role coercion plays in your e-commerce set-up,' says David Taylor, vice president of applications technology at Gartner Group.

EDI suppliers and their biggest customers know they have been heavy handed in the past and have had limited success. But now they have the tools for a more friendly approach. 'When it comes to getting people to use e-commerce, we've been guilty of using too much stick and not enough carrot,' says Seegers. 'We can phone suppliers and say: "Listen, we have a great proposition for you: you can sign up to do electronic commerce with X; or you can lose the business." This works to a certain extent, but we also believe that what these companies need is software that's easy to install and use and that is designed to get the trading community working together.'

Web-based EDI is more carrot than stick, especially for smaller suppliers.

Subscription to a Web-based electronic trading network like TradeWeb - which is used by Dixons and Tesco in the UK - can cost as little as #65 a month for a supplier, claims GEIS. Subscription for customers' buyers is free.

Both parties have to pay for client-side software, of course, but this is still a far cry from the huge up-front costs for a traditional EDI set-up plus the monthly charge for running it over a private VAN.

'In the software market, we might be dealing with a certain publisher because it has the best game at the time, but six months later we might be doing no business with it at all, so it's hard to insist that it adopts EDI,' says Pam Bingley, commercial systems controller for Dixons.

One of the important spin-offs of Web-based EDI is that it can provide buyers with a much wider choice of suppliers. Popular wisdom says customers should be reducing the number of suppliers they deal with to cut costs.

But this reduces competition and tends to make prices go up rather than down. Extending the hub-and-spoke EDI model onto the Web provides buyers with more choice and increases competition. If the suppliers are on an electronic trading network, then the administrative burden on the customer of managing an increased number of bids is reduced.

Deutsch adds that in the case of privatised utilities, where tenders and bids must be fair and transparent if they are to satisfy mergers and monopolies authorities, this is especially vital.

'You have to provide tools to buyers so they can conduct real bids,' he says. 'If you send out three bids for a product - one to the authorised distributor and two to unauthorised distributors who buy from the authorised one - the auditors are happy because you sent out three bids and chose the lowest one. But is that a real bid?'

When GE Lighting put its tenders out on the Web, a supplier in Hungary - that no one had ever heard of - put in a bid and won the business.

'It's important that you don't just rely on whoever you bought a product from for the last 20 years,' says Deutsch.

The Web has also enabled EDI communities to be built much more quickly than before. 'In the past, if you ramped an EDI community it followed the 80/20 rule: 20 per cent of your suppliers were responsible for 80 per cent of the business, so these are the ones you concentrated on,' says Gawin.

When Chrysler began its campaign to recruit suppliers to EDI, it set a target of 1,000 companies in the first year. It achieved that in only nine weeks. The driving force is cost-cutting.

Ken Horn, procurement and supply manager at Chrysler, estimates that the motor manufacturer saves $1.3 million a year for every 1,000 suppliers who go online.

What isn't clear yet is whether or when these hub-and-spoke communities will ever become the collaborative extranets that the Web pundits have predicted. In some cases, communities are beginning to form where suppliers caught up in the orbit of a big customer are in turn bringing their suppliers and other trading partners into the community.

This has happened with GE Lighting and is also happening with ANX, the automotive network exchange. This is an extranet involving the big three US motor manufacturers - Ford, General Motors and Chrysler - and their suppliers. ANX aims to cut the time it takes to design a new generation of car from five years to three by enabling the motor manufacturers to pool information and collaborate on design with their major suppliers.

While EDI is limited to transmitting only textual information, ANX allows engineering diagrams and drawings to be exchanged.

Similarly, Benetton has found that the Web enables it to provide colour images of garment designs as well as the textual data traditionally supplied by EDI.

Tesco's Information Exchange (TIE) is another example of EDI evolving via the Web into something richer and more collaborative. Tesco fits the traditional EDI model as the large customer, but also has many sizeable suppliers - companies such as Proctor & Gamble, St Ivel and Nestle that operate on a global scale.

TIE is a pilot extranet aimed at smoothing the supply of products on promotion. It enables the suppliers to access up-to-the-minute sales data from Tesco's stores and tweak supply to fit demand accurately, avoiding the risk of empty shelves or rotting heaps of yoghurt that has passed its sell-by date.

Tesco and its EDI supplier GEIS are looking to establish TIE as a standard across the grocery industry so that the big suppliers have only one type of promotions extranet to master.

These industry-specific manifestations of e-commerce fall into the second and third categories of extranet identified by Taylor at Gartner: the community of shared application logic and shared data by equal partners in a business relationship; and a truly collaborative effort where business processes for specific applications and projects are attached.

'Nobody knows how communities will grow from hub-and-spoke to many-to-many, whether vertically or horizontally,' says Evan Starzinger, vice president for retail industries at GEIS.