Realitycheck.com

In some circles it is known simply as "the letter," and, like an audit notice from the IRS, it has caused people to break out into cold sweats the way that few other form letters manage to do. It represents the latest wrinkle in the tumultuous world of e-commerce and poses a dilemma for hundreds of manufacturers that see great potential in Internet-based sales but don't want to antagonize the distributors, retailers, and other parties that sell their products. Sent by Home Depot Inc. to a number of its suppliers in May, the letter suggested that if those companies choose to sell their products directly to consumers over the Internet, Home Depot may become more "selective" in whose products it carries. The effect was immediate, as dozens of companies began to reevaluate their e-commerce strategies. The issue is so sensitive, in fact, that many companies contacted by IndustryWeek refused to discuss their e-commerce strategies. Despite ending its newest commercials by prominently featuring its www.maytag.com Internet address, for example, a Maytag Corp. Inc. spokesperson says that, "We really aren't prepared to talk about our Internet plans at this time." The letter from Home Depot is not an isolated case. As consumers grow more comfortable with online transactions, manufacturers and their partners in the distribution chain are eyeing each other nervously, each side wondering what the other may be up to. But there is a silver lining: The same technology that now is creating a feeding frenzy among trading partners also can smooth these troubled waters by enabling manufacturers, retailers, and others to team up in an efficient pursuit of consumers. It's a new reality, a sort of middle ground between reaching out to consumers directly and the business-to-business form that manufacturers have come to rely on to make their supply chains more efficient. "There are more vertical industry hubs forming," says Jim Worth, director of e-commerce at Philips Lighting Co. in Somerset, N.J. "This is the key area right now. Sites such as PlasticsNet.com, e-Steel, MetalSite, and others demonstrate the possibilities of doing business differently." These sites aren't focused on the idea of manufacturers selling directly to consumers, Worth points out, but on rethinking roles and creating new partnerships and consortiums. Ultimately the goal of selling directly to consumers, Worth says, may simply represent a brief and awkward adolescence for many manufacturers. As their e-commerce strategies mature and new possibilities present themselves, many manufacturers will, he believes, adopt a more sophisticated view. "We can ask ourselves, for example," he says, "whether we want to be just a light-bulb manufacturer or whether the Web gives us an opportunity to position ourselves differently." Worth readily admits that at this point it's difficult to foresee what possibilities will emerge. So even as Philips brainstorms on the new roles that e-commerce may make possible, it is forging ahead with a practical list of e-commerce initiatives. For example, the company has reduced by 80% the number of phone calls that concern order status. It has done this by rolling out an Internet system that gives its distributors easy access to Philips' internal systems, so that customers can track orders and place orders electronically. "Until recently, you wouldn't believe how many of our orders came in as handwritten faxes," Worth says. But he adds that while these efforts to tap the business-to-business aspects of e-commerce can produce great savings, Philips is more interested in what the future holds. In fact, it has organized its e-commerce activities in a manner that indicates the seriousness of its intent. Worth heads up a group of eight people who set strategy for the division's e-commerce efforts and who report to the executive level, as opposed to information systems or marketing. As manufacturers confront the realities of e-commerce, organizational issues become paramount. Consider General Motors Corp.'s recent move to create an entire division that will address a wide range of Internet and e-commerce. That includes everything from using the Internet on the factory floor to help deliver customized vehicles to consumers quickly right up to developing a "Web car" that would make the Internet as integral a part of the dashboard as the TV is to most family rooms. The hype surrounding this announcement was substantial, considering that the new division, e-GM, was formed with precisely one employee, group vice president Mark T. Hogan. "The rest of us are on 'special assignment' as we ramp up," says project leader Richard M. Lee, one of a handful of dedicated e-GM personnel. He says he expects the division to employ 200 to 300 people. Whether the ambitions of the new group represent genuine vision or merely reflect a desire to cover all the bases in a game with virtually no known rules remains to be seen. Lee says that the group will focus on both business-to-consumer and business-to-business aspects of e-commerce. "In a space moving this fast," he says, "you have to do both." While other manufacturers dance around the issue of whether they'll sell directly to consumers over the Web, GM makes no bones about it. "The current method of buying a car ranks just below a root canal in its unpleasantness," Lee says. He cites statistics that show that in the first quarter of this year 40% of new-car buyers used the Internet to help research their purchase, and while very few actually are buying cars over the 'Net, projections indicate that 25% to 30% of purchases will be conducted online within a few years. Does that mean GM will run roughshod over its vast dealer network, leaving dealers in the lurch as it looks to sell directly? Lee claims that nothing that draconian is in the works. In fact, he talks about building "lots of integration" among GM, its customers, and its dealers. "The Dell [Computer Corp.] model of selling [personal computers] direct gets a lot of attention," Lee says, "but cars are different. You have trade-ins, maintenance, and the need to deliver the vehicle somehow." Translation: an ongoing role for dealers, even if many customers choose to buy cars online. However, "Any time you have a fundamental change like this," Lee says, "there is lots of upheaval, and a variety of approaches become possible." But GM clearly is hoping that by creating a new business unit devoted to e-commerce it can be in the driver's seat as these changes take place, even if no one can predict what's coming around the bend. Take current state franchise laws, which now make it extremely difficult for automakers to sell directly to consumers. GM might be expected to rally its lobbyists to get such laws changed. But Lee suggests that consumers themselves will demand that restrictions to online shopping be repealed. As Lee describes e-GM's goals, "aggressive" is a word that crops up frequently. In addition to its plans to sell direct and to develop Web-enabled vehicles, the company has big plans for the somewhat more prosaic world of business-to-business e-commerce. If consumers do begin to order custom vehicles online, GM wants to be able to build and deliver them within 10 days. To do that, it plans to extend Internet links from its 20,000 suppliers right into its factories around the world. "We'll create a rapid-response system that will affect the entire supply chain," Lee says. He adds that with so many suppliers, it will take time. One major hurdle is integrating variety of older hardware and software systems into a single responsive system. "Some recent software- and systems-development work will help play a part in this," he says. However, the scope of such an effort will require a company the size of GM in order to stand a chance of success. Most manufacturers, of course, are a minuscule fraction of GM's size, and are not in a position to throw hundreds of people at a broad e-commerce effort. Far more typical is a company such as Ames Lawn and Garden Tools, a division of U.S. Industries Inc. This Parkersburg, W.Va., maker of rakes, wheelbarrows, sledgehammers, and other humble implements that are unlikely to feature Web interfaces anytime soon had been selling products from its Web site, with no complaints from Home Depot or other large retailers. Ames had been taking a modest approach and is, in fact, moving to a new system that will stave off any retailer wrath. "While it may have looked to the consumer as though we were selling direct from our Web site," says Chris Monroe, merchandising and advertising manager for Ames, "we actually were linking to a company called the Artisan Group. They handled the transaction." Monroe says the distinction is important because the site was launched with an emphasis on providing information to gardeners, which remains its primary mission. And now that a merger with True Temper Hardware Co. is complete, Ames is rethinking its approach to e-commerce, but not in the way one might expect. Instead of becoming more aggressive in selling directly, the company will steer site visitors to a number of online retailers who can fulfill customer orders. Monroe says that this approach keeps Ames' retail customers happy. "We as a manufacturer can provide visibility and traffic to their sites," he says, "and give end consumers an easy way to buy online, without we ourselves selling direct." Monroe says the company will establish guidelines for online retailers. "Any company that we provide a link to has to be able to fulfill orders in a timely fashion and provide good customer service," he says. "If they meet those guidelines, then we would provide links to anyone, from a national chain to a local hardware store." At the same time, the company now lists 60,000 retailers on the Dealer Locator part of its Web site, for those consumers who are willing to head down to the local store to check out the goods. All of which means that Ames is treading a fine line with its Web site, trying to make its retail customers happy while providing information and some form of online shopping satisfaction to end consumers. The need to achieve that sort of balance is far more common than the direct-sales focus of a Dell Computer or the global ambitions of a GM. And it's true not just for those manufacturers who may rely on powerful retail chains such as Home Depot, but for those who rely on distributors as well. Consider the Compumotor Div. of Parker Hannifin Corp. This manufacturer of servo motors and related motion-control devices recently invited a group of distributors to come to its Rohnert Park, Calif., headquarters to discuss Compumotor's e-commerce strategy. "We had a very candid discussion," says MIS manager Bud Parer. "Distributors are very worried about e-commerce. They feel that they know the customer better than we do and that manufacturers shouldn't reach out directly." For the most part, Compumotor agrees. Last fall it began demonstrating a new extranet designed to link most of its distributors and facilitate not only the buying of Compumotor's products but also the tracking of authorized repairs, invoices, and a wealth of training data. "Our products are complicated," Parer explains, so there is a need for Compumotor to educate its distributors and also to help the distributors win sales by educating customers. Using Compumotor's extranet during a sales call, for example, a distributor can show a customer exactly how a given piece of equipment works and fits in with the customer's operations. While the extranet is designed with distributors' needs in mind, Parer says that some large OEM customers do use it to buy direct. But Parer downplays this particular aspect. "Our products aren't commodities -- they are complicated and need lots of support," he says. "Distributors cement us to customers. We want the sale, and we aren't looking for ways to circumvent the system." Many observers believe that since "the system" now is undergoing profound changes, the issue is less one of circumvention than of reinvention. "In some sense, companies that sell through a dominant intermediary, like a Home Depot, are lucky," says Leif Eriksen, research director in manufacturing strategies for AMR Research Inc. That's because they can afford to go slowly with e-commerce in a way that companies that lack a strong distribution channel cannot. "In those cases," Eriksen says, "companies can't ignore e-commerce, because their competitors are no doubt moving ahead with it." Barbara Reilly, research director for electronic business transformation at the GartnerGroup, a consulting organization in Stamford, Conn., says that preparedness is key for manufacturers in another sense as well. As retailers move to the Web, they'll want to offer a greater range of custom products, and they'll expect manufacturers to meet that demand. "The Web is driving a move toward mass customization," she says, "so manufacturers will have to gather more information at every stage of the selling process and be able to respond quickly, offering more products in smaller quantities." There's a corollary to this. The Web makes it much easier for distributors and other entities to cast a wider net as they seek sources of product. Reilly believes that the bidding process will become more common. She predicts that manufacturers will have to compete on price, as well as provide service levels that are so high that it becomes too costly for a buyer to switch suppliers. That's a key part of Compumotor's strategy. The company invested in new hardware and designed its database in a way that emphasizes speed and accuracy. As a result, response time is eight seconds or less for most transactions. "Our goal," Parer says, "was to make using the system faster than doing business with us over the phone, and we've succeeded." Parer says that his goal is to make Compumotor the easiest company to do business with, and to accomplish that he talks to customers every day. "That's how you really find out what they need," he says. One result of that close contact was a decision to provide complete invoice information electronically, so that Compumotor's customers could bill their customers faster. "If they can see the total cost, including shipping charges," he explains, "they can get their invoices out a few days earlier and improve cash flow. That's probably something we wouldn't have thought of on our own, but they asked for it and we delivered." "Using the Web to replace phone calls, faxes, and mail may not be glamorous," says David Andrews, director of e-commerce product management at BroadVision Inc., an e-commerce software company in Redwood City, Calif., "but it can go a long way toward resolving channel conflicts." Andrews believes that whether manufacturers sell direct over the Web will have to be decided on a case-by-case basis, and that most of those decisions will come down to the nature of the product. Commodity products that require little support may be ideal candidates. (Levi Strauss & Co., for example, made waves recently when it decided to sell direct and to cut off any retail chains that planned to sell its jeans over the Web.) However, more complicated products that usually have high enough margins to support middlemen may not be. "What manufacturers really want," Andrews says, "is exposure to the end customer, but that doesn't mean they have to sell direct." Large retailers could pass more information back to manufacturers, for example, and that might suffice. One thing is certain, however, and that is that no manufacturer can afford to be content with a static Internet site, the "brochureware" that represented most companies' initial forays onto the Web. "E-commerce is so big," says Philips Lighting's Worth, "that when Home Depot sent that letter to suppliers, it actually was a hot topic on talk radio in the Philadelphia area." Stay tuned.