April 2000

E-commerce is posing fundamental challenges in almost every area of logistics. Peter Rowlands attempts to unravel the underlying B2B and B2C dynamics, and considers where they are leading

As consumers, we're going to buy more and more of our goods over the Internet. That much is for sure. Exactly how much more and what goods, no one is quite clear yet. Nor can anyone tell how quickly or to what extent WAP telephones and interactive television will replace the Internet as our home shopping medium of choice. But all these developments will surely happen. As businesses, we're also going to buy more and more of our goods on the Internet. We won't call this shopping, of course; it will be "e-procurement". But there are undoubtedly parallels between the two models, and for the foreseeable future the Internet is going to figure very strongly in both.

These models in essence are the "business-to-consumer" (B2C) and "business-to-business" (B2B) strains of e-commerce, and you'd have to have been on Mars not to have picked up the fever of interest they have stimulated this year throughout the business community.

Both strains have truly monumental implications for the supply chain. The pundits are fond of talking in such terms, but this is one occasion when their vehemence really seems justified. As Bruce Richardson of American research consultancy AMR succinctly puts it: "This is more than just a technological change, it's redefining fulfilment, and traditional logistics simply won't cut it."

What is interesting is that these parallel developments are having two very different effects on the supply chain. It's Internet shopping that has attracted most of the attention in the logistics world mainly because it has put new focus on home deliveries. Along with these come all the potential problems they pose in terms of picking, packing and shipping individual items for direct delivery to consumers.

In business-to-business terms the supply-chain implications of these new concepts are arguably just as radical, but are less visible and have more to do with the how than the what and why of logistics. Suppliers will still be dealing in pallet-loads and bulk distribution, but possibly marching to a different drum as they react to new e-purchasing philosophies and implement new forecasting, planning and execution systems.

Apart from the use of the Internet, one might question whether these two types of e-business have any intrinsic overlap. The answer, perhaps, is yes but only partly. B2B e-commerce probably has wider implications, at least for the near future, since it will gradually permeate all supply chains, whether related to Web retailing or not. But some aspects of this B2B revolution will also have fundamental effect in driving the take-up of B2C.

What aspects? Well, among them are the enhanced product visibility and more accurate forecasting provided by collaborative supply chains, which will make it easier to get the right product to the right place at the right time. At the same time, feedback on individual buying patterns (the much-vaunted one-to-one marketing) will help retailers and e-tailers target their markets more precisely. And increasingly refined, Web-based tracking, tracing, scheduling and telematics will help operators handle home deliveries more cost-effectively.

The B2C development is the one that is having the more profound cultural effect at the moment, since it is forcing retailers to re-think what appeared to be immutable givens about their business.

Statistics vary widely according to who you ask, but a useful measure of the growth is given by UK consultancy Verdict, which says online consumer buying will increase tenfold over the next five years. As soon as 2004, it says UK consumers will be spending £7.4 billion on Internet and interactive TV purchasing, compared with £581 million last year. Yet even the 2004 figure will account for only 3 per cent of retail sales.

What was obvious all along to those already involved in logistics, and is now being acknowledged much more widely, is that fulfilment is the hard part of Web retailing. In the words of AMR's Bruce Richardson, the assumption has been that shipping "just happens."

When Britain's grocery retailers started experimenting with home deliveries and particularly Internet sales in the late 1990s, there was no recent history to point them in any particular direction. They had to define their own methodology. As has been well-documented, they have opted for a variety of distribution models store-picking (Tesco's approach), using existing distribution centres or creating brand new ones.

There is little evidence so far to suggest that they are making much if any money out of all this. Some admit they have moved into home deliveries merely to maintain market presence and focus on customer service; the Marks & Spencer view was put clearly at a recent conference, when supply chain manager David Turner commented that its direct delivery service "owes more to maintaining good customer relations than to profitability on the bottom line" (report, page 37).

What is clear is that the extraordinary momentum behind the e-tailing revolution means the retail giants dare not drop out of this race; they simply hope critical mass and growing experience will gradually help them raise the profits they make from it. Outside the world of grocery retail, developments in Internet retailing have been more fragmented so far, and understandably the pioneers have tended to be those selling products that will fit through the customer's letterbox. That means they have been able to rely for delivery on the postal service or on the operations some of the parcels carriers.

Initially the carriers simply used their existing resources no doubt delighted with the unexpected bonanza brought by the e-commerce revolution. However, belatedly they are realising they need to devote special resources to it especially where there are returns to handle, or when an increase in consignment size means the "customer not at home" problem becomes significant.

You have only to do a fairly cursory Web search to find you can now use the Internet to buy almost anything from high-fis to washing machines, from vacuum cleaners to lawn mowers, from garden sheds to three-piece suites. For these "big ticket" items there is no substitute for a dedicated home delivery service, which is where specialist carriers such as Home Lane and Ryder and could come into their own. The catalogue retailers, too, could have much to offer if they can shorten their traditionally longer delivery lead times to match the instant-fulfilment expectations of the e-commerce age. Delivery is of course only the last stage in the e-tail chain. It is equally important to establish the right warehousing in the right place, and set up handling systems suited to unit picking. Automation sounds an ideal solution, but has yet to prove its viability in this arena. So far the approach has tended to be high staffing levels and intensive operations, but technology could change that.

The B2B revolution has been less visible than the B2C, and also more confused. What does B2B actually mean? Consider the parallel with the term EDI (for electronic data interchange); a decade ago it had a very specific meaning, involving agreed communications protocols for ordering and invoicing for goods, and the use of formal value-added networks through which to do this. Yet increasingly the term has been hijacked to mean any kind of electronic business communication. B2B e-commerce never had such a tight definition in the first place, so it is hardly surprising if you now hear it being used indiscriminately for almost any Internet-based trading activity.

No wonder that many businesses are hesitating to embrace it, even when they profess to recognise its importance. We would not presume to define what B2B ought to mean; arguably the looser the interpretation, the better for everyone. What is clear, though, is that latterly the term has tended to be used for what are being referred to as Web marketplaces. These "trading communities" have sprung into being at a dramatic rate initially in the United States, but increasingly elsewhere. According to Forrester Research, 71 per cent of American companies will link to e-marketplaces by next year. Perhaps significantly, Forrester recognises a distinction between these marketplaces and e-commerce in general, but predicts that by 2004, businesses will use them for half of their B2B transactions (that is, half of a comprehension-defying $2.7 trillion). The marketplaces basically aim offer a conduit through which subscribing businesses can order and supply materials and services under controlled conditions. Simplistically, they are like an EDI for everyone, although "traditional" EDI is expected to survive alongside them.

They have tended to emerge to serve specific vertical markets. Recent examples in the grocery world, for instance, are the GlobalNetExchange and its new rival Worldwide Retail Exchange. Sometimes the marketplaces are run by software giants, sometimes by groupings of dominant businesses in the relevant sectors. Their professed intent is to standardise and simplify transactions, but most also have an underlying profit motive, since there tends to be a transaction charge for users. There is also an "auction" element in some of these markets, in the sense that the buyer can post a requirement and "cherry-pick" the most attractive bid from suppliers. It is too early to know just how well such a model can superimpose itself on traditional procurement patterns, but the prospect is bound to be slightly unnerving to those inclined to seek more stable business relationships based on agreed service levels and mutual trust.

Be that as it may, the momentum behind these marketplaces now looks unstoppable, and it seems only a matter of time before they become the common arena for business transactions, at least wherever larger multinational companies are involved. What remains to be seen is just what the implications will be for supply chains, and how logistics activities may have to change to reflect them.

What is clear is that information technology has an absolutely fundamental role to play in all this. In the past, IT tended to be seen as having a support role in the supply chain, but now it has become truly an integral part of it. One of this year's most popular aphorisms has been that real value in a business now resides more in information than in the product itself. As IBM's Denis O'Sullivan puts it: "The reality is that no one can manage an entire end-to-end supply chain. What businesses can do is share information to manage the supply chain better."

At least the existing software giants have managed to transform themselves into something better suited to the new era, and generally avoid being sidelined by upstart newcomers. You need only look at some of the established enterprise resource planning specialists to see the change in perspective. i2, for instance, has made itself into a "provider of intelligent e-business solutions". Manugistics says half of its business now involves what might be termed e-marketplace activity. And towering over them is IBM, whose extraordinarily effective e-commerce advertising campaign has single-handedly played an immense role in heightening awareness of the potential offered by the e-commerce age.

However, new developments are by no means confined to the trading end of the IT spectrum. Vertical-market products such as warehouse management systems have also been migrating to Web-based technology. There are dual benefits in this. Web concepts mean an open environment in which these products integrate well with the rest of the supply chain; and at the same time, Web technology changes the model for distributed computing environments. In a nutshell, who needs client-server software when the client (workstation) end demands little more than a free Web browser?

One area where a new generation of software suppliers has indeed emerged is front-end e-tailing. Here a host of contenders such as Actinic and WebFusion are jostling for market position, offering even small customers the appeal of selling their wares worldwide. However, arguably the ones that will survive in the long term are those that provide robust and convincing links with back-end fulfilment systems.

These are very early days for the e-logistics revolution. E-tailing still accounts for only a small proportion of total retailing expenditure, and e-communities are mostly still at the formative stage. Massive competitive issues still have to be resolved. The real need for next-day home delivery still has to be tested. Cross-company tracking and tracing of consignments presents a potential integration nightmare. Transmission speeds on the Internet must be increased. Security issues have to be addressed.

What is most stimulating is that the technology for all this is there, or at least in sight. It can happen, and with the right structures in place it will happen. The only question is how quickly.