Your company wants to do e-commerce, but have you thought about e-operations? You can sell it, but your ability to fulfill orders can spell the difference between success and failure. E-commerce expert Louis Columbus talks about a critical facet of e-operations: procurement.
Collaboratively being able to share information throughout companies, streamlining the procurement and purchasing functions, and addressing the continual need for sharing information are just a few benefits of integrating e-operations into an e-business strategy. This is the area of an e-business strategy where the greatest benefits and quantifiable gains in financial returns will be generated. With the immediacy of information made possible by the Internet and the constant need for information in companies, e-operations is clearly going to dominate the direction of e-business for years to come. The promise of the Internet in terms of its ability to increase communication is fulfilled in the areas of e-operations.
The area of e-operations encompasses the processes of how customer commitments get fulfilled through products and services within companies. This includes procuring products, arranging shipping and transport, and handling productionin short, developing fulfillment systems for handling the business that e-marketing and e-commerce generate. The ability to fulfill orders and having the e-operations tools in place to handle them can spell the difference between success or failure with online initiatives. One example of taking the e-operations approach first and then having the e-marketing and e-commerce areas reflect the fulfillment capabilities of a company is exemplified in the evolution of Amazon.com.
How Fulfillment Makes Book Orders Happen at Amazon.com
When Jeff Bezos read a statistic that online usage would grow at 2,300 percent in the last half of the 1990s, he started brainstorming about ideas for how he could build a business that would grow at a correspondingly rapid rate. He settled on books because, as a product category, more products are involved than in any other area of commerce, and because books are one of the more efficient goods for fulfilling orders. Bezos and his wife set out for Seattle to start their company, originally called Cadabra.com. When venture capitalists either mispronounced it or mistook it for another name, Bezos realized that he wanted a name which would appear at the top of listsa name starting with an A was a consideration, as was a name that was easy to identify and spell. With these considerations in mind, the decision was made to take the world's largest river and build an allegory to what Bezos wanted to be the world's largest bookstore. The name Amazon.com was then born.
Seattle had been chosen for the strength of technical talent in the area and the fact that there was a major book distribution center to the south, in Oregon. The two factors, Bezos reasoned, would allow the fledgling company to get the necessary talent to build the fulfillment systems and also the ability to be responsive with orders. The first priority that Amazon.com focused on was building a scalable, robust fulfillment system that would work with the ordering needs of book distributors and the ability to attentively deal with a single customer's order. The fulfillment system would need to aggregate orders of comparable books and to place orders in minimum blocks of 10 to the distributors. It has often been said that book distributors can deliver any book that you want virtually overnight as long as you order a pallet of the same title. It's the internal fulfillment systems of the distributors that capitalize on volume requirements. This same allegory holds true in many other industries as well, especially in the computer industry. Amazon.com's fulfillment systems acts as an aggregation point where individual orders are grouped into orders that book distributor's fulfillment systems can work with.
As the fulfillment system continued through development, the Amazon team worked with book distributors to test and refine orders, returns, and queries of inventory position. Because the book distribution companies could work with only minimum orders of 10, Bezos and Amazon.com even offered to pay a fee per transaction for having an individual book provided. The distributors couldn't provide the service because their systems deal with entire blocks of books as a single unit; there was no way to split them up. Bezos and his team solved the problem by finding obscure book on lichens, which was hardly ever in stock. For testing the fulfillment systems at Amazon.com, the lichens book was ordered to round out orders to get to the minimum order levels required. Testing the fulfillment systems then continued.
As development progressed, the Electronic Data Interchange (EDI, for short) links back to the book distributors were developed and tested. These links gave Amazon.com the chance to take all the orders from its site, group them into batches, and send them overnight to book distributors. EDI is a commonly used technology for communicating orders between companies that do a high volume of business with each other. The EDI links initially set up by Amazon.com could handle more than 100 times the amount of orders initially taken.
With Amazon.com being singularly focused on building a scalable fulfillment system, another aspect of its e-operations strategy was to develop relationships with UPS and Federal Express. Bezos, with his house now full of orange cables and programmers building the Amazon.com fulfillment systems, met in a local Barnes & Noble café with vendors that his company would need as part of the overall fulfillment efforts.
Once the fulfillment systems were built and tested, online transactions from friends and family were next sent through the system. The credit card verification processing tasks were tested over several months; at one point, Bezos got a credit card just for testing and testing the ordering systems. As the site was completed, actual book orders started streaming in from friends, family, and people in Seattle curious about how the new online bookstore would work. Bezos recalls the first order from a customer that no one knew. Everyone kept asking each other if they knew of this customerwhen they realized that it was someone new, the team realized that it had its first true customer.
With Amazon.com open for business, word spread quickly that the new online store had a great selection and could ship overnight, if necessary. Soon Jerry Yang, of Yahoo!, heard about Amazon.com and called Bezos to see if he would be interested in having Amazon.com on the What's Cool area of Yahoo!. In 1995, Yahoo! was the portal of choice for millions using the Internet for both business and pleasure. The result for Amazon.com was a steady yet unmistakable rise in traffic, with orders following. Soon the industry press was picking up Amazon.com, and within months, the orders had grown so fast that developers and programmers would work until 2 or 3 a.m. packing books from orders placed during the previous day's sales.
The sales volume was greater than Bezos and his team had predicted. With the rapid sales growth and industry coverage, soon The Wall Street Journal had heard of Amazon.com and featured the company on the front page. The result was even more orders, along with the need to create fulfillment systems that could deal with the manual processes of getting books out the door for customers. The fulfillment systems worked and provided the books necessary to fulfill orders. With the manual aspects of fulfillment being the next challenge, Bezos opted for creating warehouses to hold the most popular books to ensure responsiveness to customers.
As the history of Amazon.com shows, getting the fulfillment systems in place makes growth possible. Instead of focusing on e-marketing, the Amazon.com team took the most critical linksthose with their suppliers and partnersand worked to make sure that they were as scalable as possible.
E-Procurement in Business
The aspects of e-operations that lend themselves to measurement the best are those that have an immediate impact on the costs of doing business. The area of e-procurement is one of the hottest areas of e-business because it directly impacts the costs of procuring products and very often contributes to the profitability of a company quickly. With immediate gains possible and the returns so quantifiable, e-procurement is attracting new companies into the industry every month. Companies that already have a presence in the enterprise-wide applications area are quickly building applications to address the need for e-procurement in companies of all sizes.
E-procurement is the application market that covers applications written to allow an entity to conduct business-to-business transactions over the Internet. Applications typically include the ability to interact with another entity to obtain information, create a request that can be routed for approval, issue a purchase order to the supplier and fulfill the request with a receipt, receive delivery notification and order updates, as well as provide an electronic means to settle the payment.
When considering an e-procurement solution, realize that these applications are delivered through the use of a portal or exchange, a trading community, or even online licensing, with the day-to-day functioning of the application possible over only a browser.
Starting in 1998, the e-procurement marketplace started with applications that have been used for processing orders for indirect materials under the maintenance, repair, and operations category (MRO). Typically, these MRO goods and services include computers, safety and janitorial equipment, and office furniture and supplies. Increasingly, these applications are processing orders for services such as airline tickets and hotel reservations, and intercompany orders of manufacturing services. These Internet commerce procurement applications have also started to cover orders for direct materials that usually go into a company's finished product, such as an automobile or aircraft engine, or a transmission tower for the telecommunications industry.
Previously, legacy applications or enterprise resource management (ERM) software handled the data processing of orders for direct materials. Companies that had previously been providing these ERM applications are now in the process of creating Internet-enabled versions of the programs. Companies including Baan, PeopleSoft, and SAP now have extensive programs for developing Internet-enabled applications. These three companies have the strongest customer bases in the legacy and ERM markets and have significant influence on the ERM to e-procurement transition now underway in the applications arena. Once the applications of these companies are completed and Internet-enabled, the worldwide market size of e-procurement applications will grow significantly. This, in turn, will translate into a wider and more diverse series of applications, tools, and techniques for companies looking to adopt e-procurement into their operations.
In defining e-procurement, there are four major segments. These include buy-side applications, sell-side application, catalog conversion, and trading communities. Each of these segments are briefly described next.
This is the area of e-procurement that is getting the most attention today because the benefits of companies trading electronically with each other show significant cost savings for both companies involved. This application area covers software applications written to allow an entity to conduct business-to-business transactions over the Internet with another company, where both information and transactions can be shared. Companies adopting this type of applications are those in the procurement business itself, including distributors and service industries such as rental car providers and hotels.
Sell-Side Procurement Applications
Although sell-side procurement applications have functions similar to those of buy-side applications, they are primarily marketed to sellers that want to automate the process of connecting to their business buyers. For example, a number of computer distributors installed applications that allow their corporate customers to use the Internet to look up items, place orders, and settle payments under pre-negotiated contract prices. The ability to deliver the inventory position on a specific product or part is one of the benefits of employing applications in this market area.
Catalog Conversion Procurement Applications
One of the most challenging aspects for larger corporations is taking their catalogs and creating electronic catalogs that reflect all the features, functions, and benefits of the products listed. There is an entire industry devoted to assisting companies creating online representations of larger catalogs. In response to this need in organizations, companies including Aspect and Requisite Technology are building catalog conversion applications.
Trading Community Procurement Applications
Applications that are designed to build either vertical or horizontal market portals are called trading community procurement applications. Think of this as "infrastructure" software, providing tools to build a trading community. Examples of this are Plastics.com and Metals.com.
With many applications becoming available in these four segments, the market for e-procurement software is expected to grow more than 300 percent per year. Strong user demand is fueling the growth of the Internet commerce procurement application market. With the compliance issues related to the year 2000 largely behind CIOs and CFOs, Internet procurement represents a golden opportunity for businesses to lower costs, improve productivity, and maximize efficiency.
In a recent survey completed by International Data Corporation, the majority of users cited several strong benefits for taking on e-procurement applications. These early adopters of e-procurement applications report that processing a requisition order over an Internet procurement system versus a manual one takes just a fraction of the time. These early adopters also mentioned that the e-procurement applications that offer reporting capabilities also make it easier for users to consolidate suppliers, curb maverick buying, and, finally, secure steeper global discounts.
With the immediate benefits being measurable from buy-side and sell-side applications, the majority of companies in e-procurement are focusing initially on these two areas. Early entrants into the e-procurement marketplace are briefly profiled here.
Ariba was formed in September 1996 and shipped its first e-procurement application in June 1997. Over the next two years, Ariba established itself as a pioneer in the burgeoning business-to-business e-procurement market with an e-procurement solution that it called Ariba ORMS (Operating Resource Management System). Ariba is now the leading application vendor in the e-procurement buy-side marketplace.
Ariba has attempted to differentiate itself from its competitors by building a robust buy-side application. Although it recognizes the future potential for large transaction revenues associated with trading communities, Ariba remains committed to ensuring that its buy-side application is the best in the market. For example, Ariba offers industry-specific solutions to the financial services, high technology, pharmaceutical, manufacturing, telecommunications, and government sectors. Both Ariba and Clarus share the same vision for their applications, although the Ariba e-procurement solution is geared toward the high end of the market.
Over time, an increasing percentage of its revenue will come from transaction and subscription fees generated by Ariba.com, its e-procurement portal. The difference between CommerceOne and Ariba in portal strategies is that Ariba is being more cautious in terms of not relying too heavily at this point on the viability of the transaction-based portal model.
In April 1999, Baan entered the online procurement software market by announcing its e-procurement application, which delivers self-service requisitioning capabilities. The application went into beta test in the third quarter of 1999 at a price of $150,000 for 150 named users. Over the next year, Baan estimates that the application could win between 50 and 100 customers.
Baan is having significant difficulties penetrating this marketplace and has suffered through several channel initiatives. Baan's e-procurement solution is not positioned as a standalone point solution, but rather as an enhancement to Baan ERM.
Founded in 1991, the Suwanee, Georgiabased Clarus Corporation started out as a developer of financial and human resources management software. After going public in May 1998, Clarus entered the e-procurement area through its acquisition of ELEKOM Corporation in November 1998. Based on the ELEKOM solution, Clarus's e-procurement application is built on a Windows NT platform. Clarus has seen a significant slowdown in the growth of its financial and human resources management software over the past 12 months, while its e-procurement business has blossomed. The company just announced that it is selling its financial and HR applications business to Geac Computer Systems, Inc. (based in Markham, Ontario), allowing it to focus entirely on business-to-business e-commerce.
That means that Clarus is putting its entire focus on business-to-business e-commerce, and specifically its e-procurement solution. Internally, Clarus had already gone through a process of reorganizing its business into two distinct business units: ERM and e-procurement. Its decision to completely focus on e-procurement is a good sign for potential alliance partners looking to exploit B2B e-commerce opportunities.
Clarus's e-procurement strategy has been directly focused on the buy-side market. Unlike Ariba and CommerceOne, who are scrambling to build trading communities, Clarus would rather generate momentum for its buy-side application, called Clarus E-Procurement. A byproduct of this approach is Clarus's intention to make its e-procurement solution compliant with prevailing Internet standards, whether the standard is OBI or an iteration of XML, such as the schemas being proposed by the BizTalk initiative. The Clarus strategy rests on its ability to develop an application that is adaptable to any Internet standard.
CommerceOne, based in Walnut Creek, California, was originally established in 1994 by Mark Hoffman and Thomas Gonzales (although the company was originally called DistriVision Development Corporation). Before co-founding CommerceOne, Hoffman was the CEO of Sybase, Inc., a company that he co-founded in 1984. The company name was changed in 1997 to better reflect the company's business-to-business e-commerce focus.
CommerceOne has based its strategy on the transaction revenues from e-commerce portals or "trading communities" around the globe. Its goal is to establish a market site in each major geographic region. Marketsite.net is the market site for the United States and will be operated directly by CommerceOne. The remaining market sites will be licensed like a franchise to large telecommunications companies in each major geographic region. CommerceOne has already "sold" franchises to British Telecom in the United Kingdom, NTT in Japan, and SingTel in Singapore.
CommerceOne's e-procurement strategy is also characterized by its open architecture. Unlike Ariba ORMS, the BuySite application has the ability to interface with any trading community that supports open Internet standards such as OBI and XML. Rather than limiting itself to one trading community, BuySite enables buyers to interact with multiple communities over the Internet.
Each market site will generate revenue based on the number of transactions being driven through these "portals." CommerceOne believes that most of its future revenue will be generated in this manner. Supporting this strategy is an aggressive pricing model for its applications. BuySite's buy-side application software is being priced well below the competition to maximize the number of potential buyers and therefore drive higher levels of traffic through market sites. This strategy largely accounts for the increasing losses being posted, especially over the last five quarters, as the company pushes to reach critical mass.
Intelisys Electronic Commerce, LLC (Intelisys), was a spin-off from the Business Development Group at New York-based Chase Manhattan Bank. With an initial venture capital infusion of between $20 million and $30 million (Chase Manhattan Bank and Summit Capital were the principal investors), Intelisys was formed to develop the e-procurement technology that was the initial vision of the Business Development Group at Chase Manhattan.
Intelisys is very focused on deploying its buy-side application, called IEC Enterprise. Its strategy is to sell the buy-side application and then aggregate 100 percent of the suppliers with which its customers want to do business. This aggregation of suppliers makes up Intelisys's supplier e-commerce portal, called B2Bonramp. Unlike some vendors, such as Ariba, Intelisys makes its portal accessible by any buy-side application that supports open Internet standards such as OBI and XML.
A key element of the Intelisys strategy around e-procurement is to keep catalogue content outside a user's firewall and its maintenance and updates in the hands of suppliers.
Netscape, now part of America Online, formed an alliance with Sun Microsystems to further develop its e-commerce software applications, which include BuyerXpert, the e-procurement component. In 1998, Netscape secured 12 customers for BuyerXpert. That represented just a small fraction of the deals that Netscape won in business-to-business e-commerce last year. As a result of the Sun-Netscape Alliance, the companies will launch a revamped marketing strategy this year as the alliance begins to market its combined solutions under the iPlanet banner.
The Sun-Netscape Alliance is undergoing a major rebranding campaign to promote the "iPlanet" moniker. The e-procurement solution will fall under the iPlanet banner and is considered one of the key applications that will drive its e-business solution set forward. Despite significant enhancements to its buy-side application, called BuyerXpert, iPlanet is more keen on providing the platform for e-business using Sun Server and Netscape technology (in direct competition with Microsoft).
Like PeopleSoft, JD Edwards has opted to partner rather than to build an e-procurement solution. In this case, the agreement is with Ariba. The JD Edwards-Ariba alliance has not been engineered to the same level of commitment as the PeopleSoft-CommerceOne partnership. JD Edwards will integrate Ariba ORMS into its OneWorld ERM solution, effectively acting as a reseller for Ariba (JD Edwards has a similar arrangement with CRM vendor Siebel Systems).
Although Ariba is the market leader in the e-procurement buy-side application space, there is a disconnect between the two companies. Ariba is squarely focused on selling its solution to Global 2000 companies, while JD Edwards has always viewed the midmarket as its sweet spot. JD Edwards may be looking to move up market using Ariba's customer base, but it appears to be an unusual combination.
Bedford, Massachusettsbased PSDI provides maintenance management software for companies in large process manufacturing, transportation, and heavy manufacturing. The company's flagship product, MAXIMO, is used to plan and manage ongoing maintenance and repair operations. The client/server version was released in 1991. In April 1999, PSDI branched out into indirect procurement with the creation of its MRO.com subsidiary. PSDI is a public company trading on the NASDAQ market under the symbol "PSDI".
PSDI has been very successful in the maintenance and repair markets with its MAXIMO product. The creation of MRO.com is a natural extension of its expertise in this area, and the company is focused on cross selling its buy-side application, mroBuyer, to its existing MAXIMO customer base. Like Ariba and CommerceOne, PSDI has developed both buy-side and sell-side solutions in addition to an e-business portal (www.mro.com). Its business strategy revolves around leveraging its existing customer base to sell mroBuyer. The company admits that it will be difficult for it to penetrate new accounts with its e-procurement solution because of the intense competition from Ariba and CommerceOne. Where PSDI has an advantage is in being able to seamlessly integrate MAXIMO with mroBuyer to manage a company's entire maintenance, repair, and operation processes.
Recognizing the threat posed by upstarts such as Ariba and CommerceOne, enterprise software giant Oracle is accelerating its push into the e-procurement space. In May 1999, Oracle rolled out a series of programs designed to jump-start its e-business offerings. Among them is the Fast Forward program, which promises to help organizations implement an Internet procurement application in less than 60 days. The price of this type of implementation ranges from $175,000 to $750,000, depending on the number of users and transactions. The prices do not include the cost of converting the catalogue content from the suppliers, which is likely to be handled by Requisite or TPN Register, Oracle's primary partners in content conversion.
Oracle promises swift and substantial payback on its Web procurement application. It estimates that the application will allow savings of more than 50 percent in processing time and at least 10 percent in procurement costs.
Oracle will also be promoting its Business Online application outsourcing service to enable users to outsource its Internet procurement application.
Unlike rivals Oracle and SAP, PeopleSoft will deliver its e-procurement buy-side solution using CommerceOne's BuySite application. The partnership between PeopleSoft and CommerceOne is far-reaching and goes well beyond most application vendor partnerships. Highlights of the agreement between the two companies are detailed here.
PeopleSoft has provided CommerceOne with a one-time payment of $15 million for the right to integrate, enhance, and resell BuySite to its base of 3,000 enterprise application customers. Before making this royalty payment, PeopleSoft has already invested $8 million in CommerceOne, which makes the company a major equity investor. PeopleSoft and CommerceOne have formed a joint development team to enhance the capabilities of the PeopleSoft e-procurement application. CommerceOne will then have the option of bringing these enhancements to its own BuySite application. CommerceOne has agreed to not sell its BuySite application directly to PeopleSoft accounts. The companies have identified 3,000 named accounts to which PeopleSoft has the exclusive right to sell its e-procurement application. PeopleSoft will take a share of transaction revenue generated by the business flowing through Marketsite.net.
SAP's e-procurement solution, called SAP BTOB Procurement, was rolled out in early 1999. The SAP solution includes a robust set of tools, including a workflow and business rules engine, and of course fully integrates with R/3. In May 1999, SAP launched a number of initiatives to help its customers pursue its business-to-business e-commerce strategies (what SAP is branding as "mySAP.com"). By working with content conversion vendors Aspect Development and Requisite Technology, SAP is able to deliver a complete online procurement solution.
Under the alliance between SAP and Aspect, which specializes in component management systems for the electronics industry, SAP will bundle Aspect's MRO express catalogue into its Business-to-Business Procurement application. This will allow users to access more than two million MRO items in the catalogue over the Internet. In addition, SAP signed a deal with Requisite to offer its catalogue engine as an option within the Business-to-Business Procurement application.
Although Tradéx dabbled in providing buy-side solutions to the e-procurement market, its strategy going forward is to concentrate on providing the infrastructure required to build e-commerce portals. The fact that Tradéx has in the past offered a buy-side solution has more to do with its need for short-term revenue. However, the company does not plan on delivering a buy-side application.
Clearly the e-procurement aspects of e-operations is growing rapidly, with the best-known companies in the enterprise software arena driving the innovation in this marketplace. With the quantifiable gains of using e-procurement, the pace of change, which will be seen in these applications, will quicken over time. In looking at e-procurement as a potential application to be enabled in conjunction with an ASP, check to see the extent of partnerships in place with the companies mentioned here. These companies are the market leaders, driving the partnerships that today deliver value to midsized and larger corporations. It is much anticipated that these companies will work toward a small business application suite enabled through their portal and exchange strategies aimed at companies with less than 250 employees.