Business e-commerce expanding

The Economy

January 09, 2000|By WILLIAM PATALON III

DURING THE holiday shopping season, e-commerce companies such as Amazon.com grabbed the spotlight, since 1999 was the first year consumers would do a lot of their shopping online.

These "B2C" (business-to-consumer) e-commerce companies didn't disappoint. Consumers spent about $10 billion online, were usually able to get the products they wanted, and received most on time. But with Christmas now history, this tinsel-framed e-commerce story has faded. The tale that should replace it is even better: the tale of "B2B" (business-to- business) e-commerce, which may be one of the most important economic stories of the next five years.

"Business-to-business e-commerce will dwarf business-to-consumer e-commerce," says Matt Sanders, associate analyst on the Business E-Commerce Research Team for Forrester Research Inc.

By 2003, the business-to- business e-commerce marketplace will be $1.3 trillion and will, in one form or another, touch the life of nearly every consumer, according to the Cambridge, Mass.-based Forrester. To understand just how large that is, consider that the entire U.S. economy is roughly $8.8 trillion.

Business-to-business online commerce is simply trade between businesses that's facilitated by computers. For instance, Ford Motor Co. buys steel from Bethlehem Steel Corp.'s Burns Harbor Division, and the original order, the shipping instructions, and the billing is done electronically via the Internet.

But e-commerce is destined to become much more sophisticated. Entire marketplaces for such commodities as chemicals, steel and laboratory supplies are evolving online, so that everyone will know a product's market price at any time. The upshot: Quality of service -- and not prices -- will determine which companies get orders.

B2B e-commerce will become the ultimate inflation fighter. For instance, a typical purchase order costs $75 to $125 to process, because receiving, processing, filling and filing it are largely manual activities. According to consultant Paul Engle, with e-commerce, the cost of processing that same purchase order falls -- to $3.

With B2B e-commerce, costs and waste are stripped away in other ways, too, says Engle, a senior manager and manufacturing consultant for Grant Thornton LLP, an accounting and consulting firm with offices in Baltimore.

Companies operate using what management experts call a "supply chain." Consider the PC business. Chip-makers sell chips to other firms that make such components as disk drives or motherboards. Those components are sold to distributors. The distributors sell them to the "box-makers" -- either branded such as Dell, or "white-box" clones -- that use them in building their computers. The finished computers are then sold to customers: directly to end-user consumers, or indirectly through retailers like a computer superstore.

With B2B e-commerce, that supply chain gets tied together and automated via the Internet. The PC maker can tap into the inventory system of the retailer to see how well its computers are selling. If sales are brisk, the manufacturer can start building more computers. Via the Internet, it can then peer all the way back into the inventory system of the chip-maker at the start of the "supply chain," to make sure there's no shortage. By doing so, the PC maker gains valuable time to find an alternate supplier if the shortage exists.

In fact, with vendors and customers increasingly tying their inventory systems together, in many cases, the vendor's system is programmed to automatically ship parts or products if the customer's inventory falls below a certain level. That's efficient.

If a peek through the Internet at the retailer's sales figures can show that PC sales are slow -- it's an early warning that the PC maker should curtail production, or find other channels to sell into.

Across corporate America, inventory measured as a percentage of sales is at its lowest level in history. And it's going lower, meaning companies are increasingly able to run lean and save money by not having to stock as much inventory. That's especially important at a time when products such as computers become obsolete quickly, sometimes as they sit in a warehouse awaiting a place on a store shelf.

"There will be savings," says Grant Thornton's Engle. "The amount of excess inventory that's written off every year must be in the billions, if not the hundreds of billions."

With B2B e-commerce systems, much of that waste will be slashed, cutting costs for product makers, service providers and retailers, and making them more profitable. In turn, that will allow these companies to hold prices steady, even cutting them in some cases.

In some industries, the "middleman" distributors will be cut out, no longer needed because of the efficiency-boosting e-commerce system, says Pradeep Ganguly, an economist and director of the Office of Business & Economic Research within the Maryland Department of Business and Economic Development.

According to Engle, being e-commerce compliant is fast-becoming a requirement for small companies who wish to sell to big ones.

Business-to-business e-commerce is progressing at different paces in different industries, says Forrester Research's Sanders.

Saving money isn't the only focus of the business-to-business e-commerce game.

Business-to-business e-commerce also enhances productivity -- the ability to turn out more products without boosting staffing.

Improved productivity has been cited often by Federal Reserve Chairman Alan Greenspan as a key reason the economy has been able to grow so fast without inflation. And it's the impetus for the "New Economy" label economists are using to describe the current period of prosperity.

With B2B e-commerce, that productivity will only improve.

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