Buying Into E-Commerce

While buying books and music on the Web may be a great convenience for consumers, the biggest impact of electronic commerce will be on business-to-business trade, where the Internet is already revolutionizing the way companies deal with one another, industry experts say.

Forrester Research estimates that business-to-business Internet commerce will rocket to $1.3 trillion by 2003 from just $43 billion last year, accounting for 90% of all commerce conducted over the Internet.

“In the past, companies have focused on improving productivity internally,” says Steve Bell, researcher at Forrester. “Electronic commerce is a way of organizing external relationships. There will be huge productivity gains.”

Not surprisingly, technology companies have been the first to embrace e-commerce. Santa Clara, Calif.-based networking company 3Com says it plans to conduct 80% of its transactions over the Internet by the end of the year, up from just 30% last year.

Under its new Web-based “supply chain” system linking 3Com to its suppliers, production increases at its factories will automatically trigger expanded orders for cardboard boxes and other supplies, says Eric Sternberg, recently appointed e-business vice president for 3Com. Customers who buy networking products will automatically be sent marketing materials about related products.

The savings to customers from e-commerce can be substantial. RS Components, Britain’s largest distributor of electronic components, says one customer cut the cost of obtaining parts to $16 from $90 per transaction by ordering online.

It’s not just high-tech companies that are exploiting the Web to buy and sell. Manheim Auctions, which auctions used cars to dealers around the country over the Net, handled $1 billion worth of sales last year. Stock-market-like exchanges have popped up to handle worldwide trade in paper products, chemicals, steel and even food.

E-commerce enthusiasts even suggest that Internet-based commerce could eventually help tame the wild swings between shortage and oversupply, the bane of every economy. Manufacturers, tightly linked with suppliers, will increasingly build products to order, as Dell Computer has learned to do, avoiding the buildups in inventory that typically precede a recession.

While still a novelty to consumers, electronic commerce is hardly a new notion in the business world. For decades large corporations have been connected to many of their suppliers over electronic networks using a system called EDI (electronic data interchange).

But EDI requires complex and costly computer systems that smaller companies cannot afford. Boeing, for example, developed an EDI system to allow airlines to order replacement parts electronically. But only 10% of its airline customers used the system.

Other airlines had to wade through catalogs for parts numbers, relay requests to purchasing departments, make phone calls to check availability and finally send orders by fax. Once Boeing received a faxed order, it had to be entered into a computer, introducing delays and occasional errors.

Two years ago, Boeing exploited the growing popularity of the Internet to develop a Web-based parts system. Now any airline company with a computer and an Internet connection can check on the availability of parts and place orders by merely pointing and clicking.

“The mechanic can make the decision right from the hangar,” says Tom DiMarco, the manager in charge of the system. Grounded planes that can cost airlines hundreds of thousands of dollars a day in lost revenue can be quickly returned to service.

Motorcycle maker Harley-Davidson has established a system that lets its dealers check inventories and buy parts either from the company or from other dealers, reducing the need for a dealer to keep a large number of parts on hand.

Electronic commerce can also help companies reach markets where relatively low demand may not justify having a salesperson or distributor.

Milacron, a Cincinnati-based machine tool manufacturer, recently established a Web site (https://www.milpro.com) that allows its small customers, who aren’t typically assigned sales representatives, to buy everything from cutting tools to grinding wheels. To avoid alienating its sales force, sales representatives receive commissions for online sales made in their territory.

While these systems have great promise, they primarily improve the efficiency of a company’s trade with its existing suppliers. In some cases, the systems may actually result in decreased competition as companies work closely with a small group of suppliers to closely integrate their respective computer systems.

“It’s easier to [integrate systems] in small, closed groups,” says Beth Berling, e-commerce analyst at London-based Ovum, which recently completed an extensive report on e-commerce.

The biggest advances in productivity, over time, could come when the Web allows customers to conduct transactions from among a broader universe of suppliers than they would have originally considered.

Later this year, Portland, Ore.-based Integrated Food Sources, a large trading company in the processed-food business, will launch a Web site for matching buyers and sellers of processed food around the world.

To streamline the process, the new site will handle customs paperwork required for exports and imports, assure that suppliers are properly certified by the Food and Drug Administration and even automatically translate messages so buyers and sellers around the world see the transactions in their own language.

If a company suddenly found itself short of canned peaches from California, says Brian Bittke, an executive vice president at Integrated Food Sources, it could use the new system to find replacement products from such distant markets as South Africa, New Zealand and Greece.

PaperExchange (https://www. paperexchange.com) of Oak Brook, Ill., allows paper mills and paper users in 40 countries to negotiate deals over the Internet for everything from cardboard to high-quality paper.

Although paper mills initially saw the exchange primarily as a way to sell small lots of surplus paper instead of recycling it, PaperExchange Chief Executive Clay Maloney says the exchange has already gone far beyond that: One mill recently put 10,000 tons of paper--equal to 500 truckloads--up for bid on the system.

Maloney says buyers can either place bids for paper or negotiate directly with sellers online. PaperExchange also allows buyers to automatically arrange for shipping of products to designated ports virtually anywhere in the world.

Online exchanges can cut costs by eliminating the brokers who typically earn a significant commission on every sale. More important, the exchanges expand the markets in which businesses deal.

PaperExchange, for example, says that while most paper buyers tend to buy from distributors within a radius of 150 miles or so, it has customers in Latin America buying paper made in Japan but stored in Finland.

New York City-based E-Steel will be launched soon as a “neutral site” for buyers and sellers of steel products to negotiate deals. E-Steel will take a 1% commission for each transaction.

“There are thousands of grades of steel,” says Chris Hanan, the company’s director of business development. “To do all that over fax and phones can be very inefficient and time-consuming.”

E-Steel’s goal, Hanan says, is to serve as a sort of stock exchange for steel products: “If someone fails to deliver, they are booted off the exchange, just like the New York Stock Exchange.”

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Times staff writer Leslie Helm can be reached via e-mail at leslie.helm@latimes.com.

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Virtual Marketplace

A look at projected growth in business-to-business Internet commerce--and two categories expected to lead the pack:

Revenue From Internet Sales (In billions)

1998: $43.1 billion

2003: $1.3 trillion

Revenue from Internet Sales of Computing and Electronics Products

2003: $395.3 billion

Internet Sales of Motor Vehicles

2003:$212.9 billion

Source: Forrester Research