As I stated in my last post on the Green Coffee Association’s XML standard offers an excellent example of the Long Tail of B2B Standards.  The standard automates a highly specialized set of business processes within a niche industry subsector.  Tremendous benefits can be derived from market participants as a result of the flexibility offered from the wide variety of tendering, payment, pricing and performance management terms that can be modeled in the XML.  Such benefits would not be practically achievable with a more generalized standard such as EDI. 

Benefits of Green Coffee XML 

Examples of the benefits of Green Coffee XML include:

• Lower Days Sales Outstanding (DSOs) for sellers of coffee bean products are achieved by creating an electronic audit trail of commercial transactions that reduces the likelihood of post-shipment quality and invoicing disputes.
• Improved Order Fulfillment rates are accomplished by routing contracts directly from buyer procurement applications to seller order management systems thereby obviating the need for error-prone, human interactions.
• Reduced Total Landed Costs for transportation are realized by standardizing and digitizing the import and export processes that often delay shipments at international borders and result in unexpected penalties or fines.

Challenges of Green Coffee XML 

Specialized e-commerce standards such as Green Coffee XML offer unparalleled levels of automation and efficiency within a particular market sub-segment.  However, such niche XML standards create challenges for market participants whose core business utilizes a different e-commerce framework.  Green Coffee XML offers an all-inclusive solution for the agricultural businesses that grow the coffee beans and the specialized brokers who act as middlemen in sales transactions.  However, the standards complicate e-commerce scenarios for other market participants such as consumer products manufacturers, food service retailers, government trade ministries, transportation providers, commercial insurer and banking institutions.

• Consumer Products Manufacturers – Brand owners such as Kraft and P&G who purchase large quantities of green coffee beans can benefit from the GCA standards during procurement processes.  However, Green Coffee XML is not the only standard utilized by consumer products manufacturers.  Other non-coffee suppliers of ingredients, raw materials or packaging materials are adopting the GUSI XML standards.  Retail customers expect their suppliers to exchange information in the EDI document standard via AS2 Internet transmission protocols.  Furthermore, retailers expect product branding, pricing, packaging, promotion, taxation and regulatory data to be transmitted using the Global Data Synchronization (GDS) standards.  A wealth of information about coffee bean quality can be exchanged using GCA XML, but the data must be transformed into GDS XML formats for distribution to downstream retailers.
• Banking Institutions – Financial institutions provide risk mitigation and working capital solutions to coffee buyers and sellers.  Examples include letters of credit and post-export supply chain finance.  Cost effective and timely processing of such services requires electronic communication with the buyer and seller.  Consequently, banks engaged in coffee-related transactions must either embrace the GCA XML standards or develop a process for mapping data to and from their own preferred standards.   Financial institutions utilize the SWIFT FIN MT standards for international trade processing.  Additionally, a new set of Trade Services Utility (TSU) standards are being developed for supply chain finance.
• Transportation Vendors – Ocean, rail and ground freight carriers as well as third party logistics providers offer a variety of transportation, warehousing, freight forwarding and customs clearing services to buyers and sellers of coffee products.  The cost-effective and timely processing of coffee-related shipments necessitates electronic communications between buyers, sellers and government trade ministries.  Consequently, transportation vendors engaged in coffee-related shipments must either embrace the GCA XML standards or develop a process for mapping data to and from their own preferred standards.  Transportation providers utilize higher volumes of EDI than any other e-commerce standard.  However, due to the broad range of industries serviced by logistics providers, a myriad of standards including AS2, RosettaNet, Odette, STAR and OAG are being embraced by transportation vendors.   The emerging multi-standard model in the transportation industry is customer-friendly, but costly and complex for the carriers who must manage highly customized e-commerce infrastructures.

Coffee Product Ecosystem and B2B Information Flows

Similar challenges exist for other trading partners involved in coffee-related transactions:

• Government Trade Ministries – are charged with monitoring the import and export of coffee products across their borders.  Imports and exports must be properly classified to ensure the appropriate taxation of goods.  Incomplete or inaccurate documentation will result in delayed processing and financial penalties to either the buyer or supplier.  To expedite trade processing, governments support electronic interfaces with importers and exporters of goods.  However, government ministries focus e-commerce capabilities on broader, industry-neutral standards such as EDI or ebXML.  Such an approach creates challenges for long tail standards adopters such as Green Coffee bean buyers and sellers.
• Commercial Insurers – offer policies that compensate the buyer or seller of a coffee-related transaction for losses, damages or theft that occurs during the transportation of goods from origin to destination.  Such losses might occur from inclement weather, collisions, stranding, pirates or acts of war.  Damages might be caused by seawater, fire, smoke or chemical contact with the coffee goods.  Insurers require documentation of the shipment contents and value in order to underwrite a marine coverage policy.  To expedite the processing of the policy, insurers offer electronic interfaces to submit documents such as shipment advices, bills of lading and packing lists.  Similarly, insurers can distribute insurance certificates electronically to a buyer, seller, shipper or banker facilitating the trade.  Insurers utilize specialized standards to support underwriting, policy rating, claims processing and customer billing processes.  For example, the ACORD standards offer a highly specialized set of transactions designed to orchestrate insurance transactions.  Both ANSI X12 EDI and EDIFACT offer insurance document sets as well.  Varying standards between insurers and their customers creates challenges for all parties.

Green Coffee XML offers tremendous return on investment and unparalleled levels of efficiency for producers and brokers of coffee.  However, the value proposition becomes substantially diluted for other market participants with core businesses that utilize alternative e-commerce frameworks.  Consequently, there are tradeoffs to be considered when evaluating whether to adopt specialized, industry sub-sector level e-commerce standards or to rely on less robust, but more highly adopted standards such as EDI.   As cross-industry trade continues to grow, there will be an increasing level of tension between competing e-commerce frameworks.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

The Long Tail gets Longer 

I was visiting a US consumer products brand leader a few weeks ago to present GXS view of market trends and best practices.  Of course, one of the concepts I introduced was my theory on the Long Tail of B2B Standards.  The chart actually initiated a provocative discussion on the varying e-commerce standards in use throughout industry today.  The discussion revealed to me that the tail is even longer than I originally anticipated…

This particular brand owner markets a variety of consumer packaged goods in the coffee category.    As a result, they engage in the purchase of ingredients such as green coffee beans from suppliers in Latin America and other parts of the world.  I was surprised to learn that there is actually an e-commerce standard that governs how contracts, pricing and transportation documentation is exchanged amongst buyers, sellers, brokers and shippers of green coffee bean products.  Over the past two weeks I have been researching this standard and have arrived at a number of fascinating insights about the coffee sector…

My Coffee isn’t Green it is Brown 

This is true.  The coffee we drink is not green.  It is dark brown or some might say black.  However, the coffee does not start out that color.  Coffee is created from green beans grown on coffee plants typically harvested in large commercial plantations.  The beans are actually wrapped in a fruit-like flesh while being grown.  Once harvested, the exterior is removed to reveal the bean itself.  Prior to roasting, the beans are soaked, cleansed then dried by air and sunlight.  The roasting process transforms the color of the bean from green to yellow then light brown.  As the bean expands in density and doubles in size it will eventually crack resulting in the powdery material which is used to produce the beverage we drink every day.

Green Coffee Association (1923-Present) 

The XML standards for the coffee sector are created by the Green Coffee Association (GCA), an industry organization which serves to promote the commercial and regulatory interests of coffee growers, brokers and buyers.  GCA provides the industry with a number of critical functions including:

• Standards to ensure the uniformity of coffee contracts, bills of lading and other commercial documents.
• Liaisons with third parties such as the International Coffee Organization and Coffee, Sugar and Cocoa Exchange.
• Lobbying with the governments of various countries to promote free trade policies devoid of import quotas and fixed pricing.
• Rules and procedures for the arbitration of disputes amongst buyers and sellers arising from order fulfillment discrepancies or payment delinquencies.

Green Coffee XML Launches 

On July 23^rd, 2001, GCA launched a series of XML schemas designed to digitize and standardize processes for buying, selling and transporting coffee.  Historically, contracts for coffee were processed on standardized forms purchased by the GCA and completed using a typewriter.  As computer automation evolved, GCA sought to develop a machine-to-machine e-commerce process for buyers and sellers to exchange orders, pricing and transportation data.  The XML standards prevent trading partners from designing their own forms which may not contain sufficient detail to fulfill an order to arbitrate a dispute.  The flexibility of XML offers the benefit of standardization, while offering buyers the latitude to specify a wide variety of tendering, payment, transportation, insurance, pricing and performance measurement terms in the contracts.   The GCA XML schemas can be exchanged directly over the Internet or through a third party network. 

Green Coffee Association in 1923

Why does Green Coffee need its own XML Standard? 

The commercial trade processes for coffee beans are much more complex than you might imagine.  Below are a few examples of the variability that can exist in terms and conditions for coffee contracts:

• Contract Types – There are nine different types of coffee contracts to accommodate a variety of sales scenarios for transactions outside, inside and at the border of the country of destination.
• Quantity – Bulk coffee can be measured in metric tons, long tons, pounds, kilograms or weight denominated bag sizes (e.g. 75 kg bag).
• Packaging – Coffee can be packaged into natural fiber bags, bulk container liners or synthetic fiber super sacks.
• Insurance and Freight – parties must agree upon who will pay for cargo insurance as well as freight charges such as currency adjustments or congestion surcharges.
• Technical Descriptions - including crop year, grade, color and moisture tolerances are used to specify quality levels.
• Quality Claims – must be filed within specified timeframes such as 15 days of discharge, tender or government clearance.
• Weighing – processes are typically agreed upon in advance to specify when, where, how and by whom coffee will be weighed for invoicing purposes.
• Position – the transfer of ownership can occur at five different points in the supply chain.  GCA refers to these locations as shipment, afloat, arrival, deliver and spot.
• Tender – transfer of ownership can only occur with the presence of the specified types and numbers of documents such as the bill of lading, insurance certificate and commercial invoice.
• Payment – Funds transfer can occur directly between buyer and seller on open account terms or by a bank facilitated transaction such as letter of credit.

The Green Coffee Association’s XML standard offers an excellent example of the Long Tail of B2B Standards.  The standard orchestrates a highly specialized set of business processes within an industry subsector.  Tremendous benefits can be derived from market participants as a result of the flexibility offered via the wide variety of tendering, payment, pricing and performance management terms that can be modeled in the XML.  Such benefits would not be practically achievable with a more generalized standard such as EDI… 

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

SAP recently introduced a new application specifically designed to simplify electronic communications between companies and their financial institutions.  The new application has not received much attention by the press or analyst community, but it should have!   If anyone is well positioned to break down the barriers of straight through processing between corporate and their financial institutions, it is SAP.  In nearly every multi-national account I visit with SAP is already established or will soon become the financial platform of choice for multi-national companies.  SAP should be able to leverage its position as the epicenter of corporate cash management to provide simplified, straight through processing between its ERP modules and the treasury applications of leading banks.

What is SAP’s Bank Relationship Management module? 

So what is SAP’s strategy to simplify bank communications?  The vision revolves around the new Bank Relationship Management application, which is part of SAP’s “Financial Supply Chain Management” suite of software which also includes online bill presentment &payment; cash and liquidity management; collections management; dispute management; in-house cash and treasury & risk management.

How does SAP BRM simplify bank connectivity? 

SAP offers three key integration features that will greatly simplify bank connectivity for multi-national corporations:

1.       ISO 20022 XML support – 20022 is the new Universal Financial Industry standard developed jointly between TWIST, SWIFT, OAG and IFX.  Read my earlier post on ISO 20022 for more background information.  ISO 20022 is a game changer as it offers one file format that corporations can use to communicate payment instructions regardless of geography or financial institution.  Instead of a corporate having to create different file formats such as SWIFT FIN, ANSI X12 EDI, EDIFACT and NACHA for each banking relationship, the company can produce all its payment instructions worldwide in the single ISO standard.  SAP BRM can output payment instructions in this one standard ISO 20022 XML format which can then be directly transmitted to the bank.

2.       SWIFTNet Integration – SWIFT is a bank owned cooperative that operates a highly reliable, secure network designed exclusively for banks to exchange messages and files with one another.  Historically, access to the network has been restricted to financial institutions, but SWIFT has recently opened its services up to non-financial corporations.  Corporate Integration to SWIFT greatly simplifies bank integration by providing a single interface for all banking communications.  Instead of a corporate establishing an individual Internet (or private line) connection with each of its financial institutions, the company can send all of its banking transactions to SWIFT who will perform the routing on the corporate’s behalf.  SAP BRM includes pre-packaged adapters for corporations to connect to SWIFTNet.

3.       Enterprise Application Integration – Leveraging the Netweaver technology, SAP BRM provides tight integration with the other Financial Supply Chain modules such as cash and liquidity management; collections management; in house cash and treasury and risk management.   As a result, corporations do not need configure file transfer scripts and complex maps to route outgoing payment instructions from their financial modules to their banking partners.  Receivables and account statements flow through directly from the bank to the appropriate financial module.  Such an approach is powerful, because corporations using the full SAP financial suite can obtain straight through processing out of the box with minimal integration work.

Will SAP succeed with its ambitious plans to simplify bank communications? Yes and no.  While SAP does offer compelling technology, its solution is limited to software technology.  The challenges with bank connectivity are not the lack of strong technology or for that matter governing regulations or universal standards.  The greater challenges are related to:

• Skill Sets – The new technology paradigms such as SWIFTNet and ISO 20022 XML promise to greatly simplify connectivity processes.  However, there is currently a shortage of IT professionals with practical experience in the new technologies.
  • SWIFTNet - Connecting to SWIFTNet, for example, requires an extensive testing and certification process as well as the purchase of proprietary security technology and the establishment of expensive disaster recovery infrastructure.  Many corporates will not have the budget or expertise to perform SWIFT integration with their in-house IT organizations. 
  • ISO Skill Sets - ISO 20022, much like any XML format, is a complex document structure that requires both specialized functional knowledge to understand the various data fields and advanced technical skills to develop maps.
• Budgetary Pressures – Both corporations and financial institutions have significant investments in the legacy payment technologies and standards.  Corporate treasurers are under pressure to reduce back office administrative costs year-over-year.  Financial institutions continue to experience price erosion due to the perceived commoditization of cash management services.  Consequently, to utilize SAP’s BRM along with SWIFTNet and ISO, both corporate and financial institutions will have to fund expensive modernization projects in an environment of ever decreasing budgets.  
• Recent Investments - Many financial institutions have payment hub projects underway to replace mainframe-based legacy applications with new SOA platforms.  However, these institutions have not necessarily factored the new standards and technologies (e.g. ISO, SWIFTNet, SAP BRM) into their strategies.  Similarly, numerous corporate have established in-house banks with file and messaging gateways in the past five years.  The new corporate banking interfaces were designed to deliver similar functionality to SAP BRM.  Although the prior investment in banking gateways should be viewed as sunk costs, it will be challenging for IT organizations to secure budget to decommission and replace technology platforms they just established.

Over a five year horizon, I predict SAP’s Bank Relationship Management will become the de facto bank communications gateway for multi-national corporations.  However, adoption will be inhibited by the economic, organizational and technological factors outlined above…

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

It is hard to believe that the middle of May has arrived already.  There are only a few weeks remaining before schools let out for summer vacation.  In the coming weeks, many universities and high schools throughout the US will celebrate graduation or commencement exercises.   I was in a greeting card store two weeks ago buying Mother’s Day cards and I noticed a large rack of Graduation cards on display.  What do you buy someone these days as a graduation gift?  I’m in my thirties, but have admittedly lost touch with the Facebook generation of students that are graduating this year.  I suppose most people send a check or a gift card.  You can buy gift cards just about anywhere nowadays…except for greeting card stores.  Strangely, I have yet to see a display of gift cards adjacent to a greeting cards display in any store format.  I am certainly no expert on consumer merchandising strategies but it would seem like a logical pairing to me.  But one of the places you can now find a wide variety of gift cards at is grocery stores.   In December, I published an entry titled Gift Cards and the New Retail-to-Retail Channel in which I explored the fast growing practice of selling other retailer’s branded gift cards in stores.   I continue to be fascinated by the genius behind the gift card phenomenon in the US retail sector.  In addition, to the concept of retailers using other retailers as a channel, there are a few additional facets of the gift card business model that strike me as particularly compelling:

#1 – Near-Zero Product Development 

Brand owners in consumer product segments ranging from apparel and footwear to food and beverage will each spend billions of dollars this year trying to devise the next hot product.   The costs to perform R&D, marketing and distribution are significant for each new SKU added to retail shelves.  However, with gift cards retailers have found a way to build a new multi-billion dollar category without any product development at all.  A Tower Group study reported that US gift card spending in 2007 reached almost $100B.  This new revenue stream was created simply by re-packaging retailer’s existing product lines.

#2 – Inventory-Less Retail 

Gift cards have an almost “inventory-less” property to them.   While the cards do occupy shelf space, the carrying costs and impact on working capital is almost negligible.  The plastic cards have no value to the consumer until they are activated.   Furthermore, funds are not exchanged with the 4PLs who distribute the cards or the retail brand owner on the card until after the sale occurs. 

One could argue that retailer’s inventories are indirectly affected by gift cards.  Upon redemption of the card, the consumer will expect a rich selection of merchandise to choose from in the store.  However, the impacts on future inventories are transferred to another retailer when gift cards for other retail brands are sold.

#3 – Revenue potential per square foot 

There is an opportunity cost associated with displaying gift cards in premium locations such as end-caps or near check-out.  If gift card sales are low then the retailer loses the revenue opportunity that could be realized by placing alternative products in these high traffic areas.  However, gift cards offer revenue potential with a density few other products can match.  A $25 or $50 gift card sells for 10X more than a typical consumer goods package that would be put in the same location.  What else can a grocery retailer sell for $50 or $100 each that takes up only 2”x3” on a shelf and can be stacked 10 deep?  

On-line merchants need not make tradeoffs between shelf space for gift cards and other merchandise.  E-commerce sites have the flexibility to add more pages to accommodate gift certificates.  Some don’t even have to manage an inventory of cards.  For example, some retailers are allowing consumers to print their own gift certificate directly from a web site.  Others such as Amazon.com have been distributing electronic gift certificates with a specialized activation codes for years. 

#4 – Simplified supply chain dynamics 

From a supply chain perspective gift cards are a relatively simple product to stock, track and manage:

• Gift cards are not perishable so there are no worries about being over-stock.  There are no sensitivities to transporting or storing the cards.
• Cards are not activated until check out so there is little concern about shrinkage from backroom, warehouse or transportation staff.
• Gift cards are rarely returned.  The flexibility offered almost eliminates the possibility of returns as an option in all but extreme circumstances.

#5 – Easy Upsell Possibilities 

Gift cards also drive demand for a new category of products – gift card accessories.  Buyers of gift cards often feel guilty about taking the easy way out.  As a result, they want to buy an accessory to “dress up” the gift card so the purchase appears more thoughtful.  So they buy accessories such as boxes to store and present the card in are very popular.  Gift card accessories can be a high margin business.  For example, retailers can charge $5 for a box that probably costs $0.15.  More creative schemes for gift card packaging continue to be introduced.  Consumer electronics retailers have special CD jewel boxes that consumers can buy to present gift cards for music lovers.  Apparel retailer American Eagle has introduced a card that allowed purchasers to record their own digital audio greeting on the card.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved. 

Last weekend we had some friends over to visit our house and rather than cooking we decided to place an order for pizza delivery from Dominos.  Ordering a pizza today is amazingly convenient.  We didn’t even have to pick up the phone.  Instead we placed the pizza delivery order online using the Dominos web site and a credit card.  The fact that you can order a pizza online should probably come as little surprise in today’s increasingly Internet-centric world.  What did surprise me, however, was the new Domino’s Pizza Tracker site that provides you a step-by-step update on the status of your order.  Using the phone number that you used to place the order you can login to a graphical interface that monitors the progress of your delivery.  The web site also displays the street address of your delivery, the complete contents of your purchase and the exact time of your order.   The tracker shows five different steps throughout the food preparation and delivery process:

1. Order placement
2. Food preparation
3. Baking
4. Boxing and packaging
5. Delivery en route

My tracker even told me the name of the driver who was coming to our house!  All that was missing was a link the to the driver’s MySpace page so you could learn more about he or she before they arrived….

Dominos launched this new tracker service on January 30^th.   I am not sure exactly how it works, but the system somehow ties the local operations systems in each store to the B2C web site on a real time basis. One thing I will bet on is that it doesn’t use RFID.

The tracker site is one of the more customer friendly web experiences that I have seen in recent years.  In fact, there is even a survey that consumers can fill out after the delivery to comment on their experience.  So as I ate my pizza I started thinking about the idea of providing customers real time visibility into the status of their orders.  And I began to relate this to some of the customer visits I have conducted recently with multi-national corporations in the automotive, high tech and retail industries.  One thing that I am consistently surprised by is how little visibility many of the largest companies have to inventory moving through their supply chains.  Most of the order management portals large manufacturers provide their customers don’t come anywhere close to the supply chain visibility that Dominos offers its consumers.  So I ask you - if the average Dominos franchise with an employee base of 10 and annual revenues of $580K can notify me of the exact time that a pizza is boxed and taken out the door for delivery, why can’t a multi-billion dollar manufacturer of airplane parts be able to tell their customers when a $50M shipment of goods has arrived at a port and cleared US customs?

The good news is that many manufacturing leaders seem to be recognizing the challenges associated with lack of supply chain visibility.  At GXS, we have seen a recent surge in interest amongst large manufacturers seeking to provide their key distributors and customers with better visibility to outbound shipments.  The highest concentration of demand seems to be with industrial goods manufacturers who are seeking better quality data on ocean freight traversing long distance trans-Pacific routes.   Consumer products companies are slightly ahead of their peers in the automotive, high tech, aerospace and industrial machinery sectors when it comes to supply chain visibility.  In the industrial sector, it is not uncommon to find that neither buyer nor supplier has visibility to the location and status of shipments of goods once they leave the manufacturing plant.  Interestingly, this situation applies even to high value goods including consumer electronics such as high definition plasma televisions, kitchen appliances such as refrigerators and computing equipment such as robotic tape backup libraries.  Not only are these expensive goods targets for theft and counterfeiting, but many of them can be easily damaged without proper handling.  Due to the value of the goods, suppliers often purchase cargo insurance to protect against these types of threats.  Also due to the value of the goods, many suppliers seek out third party financing for their inventory in transit.  The financing frees up working capital that would otherwise be tied up in long distance supply chains. 

So the point here is that we have multi-million dollar shipments of industrial goods insured and financed by third parties and no one other than the transportation provider holding the actual inventory seems to know the location at any point in time.  Should industrial manufacturers hire pizza delivery persons to help them?  That is probably unnecessary.  But they should consider investing further in transportation management applications, particularly in logistics visibility suites that offer customers insights into the status of inbound freight.  I have written a few recent posts about the value of transportation management suites and some of the new software-as-a-service deployment models which are emerging that outline these concepts in further detail…

• Is Your TMS Application Costing You an Arm and a Leg? 
• SaaS – A Less Crude Approach to TMS

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

In July 2006 Chris Anderson published a book called The Long Tail which illustrated how new Internet business models from pioneers such as amazon.com, Netflix and Apple have enabled an entirely new economic model for the media and entertainment industry.  Even if you have not read the book, you are probably familiar with the concept.  Traditional mass market economics have led to product strategies focused on developing the few blockbuster “hits” that appeal to the mass market.  Niche products with smaller target markets were generally not stocked in stores, played on radio stations or featured in movie theatres due to the lack of a profitable distribution model. 

Chris Anderson states that in the traditional brick and mortar retail model, selection was limited by the “tyranny of the lowest-common-denominator.”  In other words, historically selection was driven by economics rather than actual end-user demand.  For example:

• “Wal-Mart must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit; less than 1 percent of CDs do that kind of volume.”
• “An average movie theatre will not show a film unless it can attract at least 1500 people over a two-week run, that’s essentially the rent for a screen.”

In The Long Tail Anderson proposes that entertainment industry is shifting away from the traditional mass-market model towards a broader market of niche-oriented, micro-segments.   The change is made possible by the unlimited selection of books, movies and music available through Internet channels.  Chris explained that the Long Tail phenomenon is not limited to just the Media & Entertainment sector, but can also be observed in the retail market with eBay; the manufacturing industry with KitchenAid; the advertising sector with Google and the software segment with Salesforce.com.

The Long Tail Concept Applied to B2B

I believe that a long tail effect also has developed in the B2B standards community.  During the early history of B2B in the 1980s and 1990s, EDI was the dominant standard.  There were several variants of EDI utilized in different geographies, most notably ANSI X12 in North America and UN/EDIFACT in Europe and Asia.  Adoption of B2B was concentrated primarily amongst the largest of companies. And data exchange was limited to the use of third party VANs (value added networks) whose applications only supported EDI.   The immaturity of technology and limited market combined to create economics discouraging the development of alternative standards.  In many respects, the B2B e-commerce ecosystem suffered from “the tyranny of the lowest-common-denominator effect” throughout the first two decades of standards.

In the late 1990s, the Internet began to enjoy widespread adoption.  With the Internet, the economics and technology paradigms for B2B fundamentally changed.  Documents could be exchanged using Internet protocols such as SMTP, FTP and HTTP liberating B2B from the traditional private networking models.  XML was created offering unparalleled flexibility to model new transaction types and business processes.  New groups of non-profit organizations (Dot Orgs) were formed with the goal of developing a successor to EDI.  Together these Dot Orgs have introduced dozens of new XML-based standards designed to meet the specialized needs of industry subsectors.  Examples of the new standards include PIDX in the Oil & Gas market, CIDX in the chemicals industry, SPEC2000 in the aerospace sector, RosettaNet in the high tech industry, GUSI in the consumer products sector and papiNet in the forestry market.   The new XML standards offer a level industry specialization and technology flexibility not possible with traditional EDI.  However, the new XML standards have failed to achieve critical mass.  Over 80% of B2B transactions remain EDI-based.  There are a number of Darwinian arguments that could be made about EDI’s ability to fend off multiple targeted attempts to eliminate it.  See my posts on EDI and Darwin (Part 1 and Part 2).  XML, with its genetically superior framework, has yet to achieve significant adoption beyond 10% of the target industry segment.  As a result, the state of the market for adoption of B2B e-commerce standards can be represented in a long tail diagram.

The short head is represented by the handful of dominant standards used globally across various industry sectors.  EDI, with its two major variants ANSI X12 (North America) and EDIFACT (Europe and Asia), is certainly the most prevalent.  The only other noteworthy standard I am aware of is the SWIFT FIN message format used widely in the international financial services sector.  Open Office XML is quickly gaining adoption as Microsoft’s Office 2007 is deployed to more and more desktops. However, all of the other standards remain confined to niches used by only a subset of the targeted community, but each with aspirations of migrating up the tail to become a short head player.I believe that we will see a rapid transformation in the adoption of B2B standards in the coming five years.  More and more industries will migrate from using EDI (the lowest-common-denominator, short head) standards towards industry specific XML (the highly specialized, industry-specific long tail) standards.  There are four major transformational catalysts that are emerging to offer the potential to change the economics of standards for ever.  In upcoming posts I will outline these forces and the evolution of the Long Tail of B2B Standards in greater detail….

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

In my last post, I made the argument that ERP applications are not designed to support the growing levels of outsourcing in today’s manufacturing ecosystem.  I think what is needed is an “ERP Firewall” for manufacturers to protect their enterprise systems from bad data.  Let me explain this ERP Firewall concept further:

ERP Firewall Defined 

ERP Firewall -         

noun

1.       fire•wall \’fī(-ə)r,wȯl\: an application which permits, denies or takes correction action to electronic data interchanges between an enterprises’ applications and its external business partners systems based upon a configurable set of rules or criteria. 

Restated, an ERP Firewall ensures that bad data from external business partners doesn’t enter your ERP system polluting the quality of information in your enterprise applications.  Much like a normal firewall, an ERP firewall examines all incoming and outgoing data against a pre-configured rule set.  A traditional firewall rule might be to block all incoming clear text FTP traffic on port 21.  Similarly, an ERP firewall rule might be to block all documents which are not in the manufacturer’s list of standardized e-commerce processes.  For example, the firewall might block all ANSI X12 EDI formats which are not 810, 820, 850, 856 or 997 (or EDIFACT formats INVOIC, PAYMUL, ORDERS, DESADV, CONTRL).  As a result, a document such as a 214 or 824 which is not the expected input for any ERP module does not even pass the firewall.    Another example of a rule set might be to route any 810/INVOIC documents without a street address, general ledger code or appropriate tax identifier to an exception queue for manual resolution by the supplier.

Firewall Severity Classes and Actions 

There are four typical actions that an ERP firewall might take based upon its configured rule set.  The action taken will, of course, depend upon the scenario encountered:

1.       Fatal – In this scenario, the electronic document is beyond repair.  Not only will the document fail during later processing, but it could result in financial losses to the company or its trading partners if not stopped.  As a result, the firewall should reject the electronic document entirely by sending a failure notification back to the originator.

2.       Error – The electronic document has a critical error that will fail upon attempted processing.  In this scenario, the error can be remedied, but only with the manual intervention of an end-user at the originating company.  For such scenarios, the firewall should hold the electronic document in an exception queue for the originator to review and repair.

3.       Warning – The electronic document has a minor data quality error that will not disrupt processing, but should be corrected, if possible, in future scenarios.  The firewall will pass the document through to the ERP, but also log the data quality issues in a report.  The logged warnings should be trended for frequency and root cause.  The most common occurrences should be identified and remedied through collaboration with the originating trading partner.

4.       Auto-Fix – In this scenario, the original document has an error that can be automatically corrected by the firewall.  This is the real power of the ERP firewall.   In many cases, bad data can be corrected automatically before reaching the ERP.  For example, missing fields may be looked up in a table, database or via an application web services call.  The original document is then augmented or enriched with the new fields then forwarded for processing.  What other types of auto-fix functionality might exist?  Documents can be split and routed to different ERP systems.  Conversely, outputs from multiple ERPs might be merged into a single document.  A fourth function is data filtering, in which, unnecessary data can be stripped out of incoming or outgoing documents to simplify subsequent processing at the destination.

Manufacturers are investing tens of millions to consolidate, standardize, upgrade and extend their ERP applications to optimize value from their ERP applications.  However, these efforts are undermined and compromised when bad data from business partners corrupts and pollutes the ERP.  An ERP firewall, which can be implemented at a small fraction of the annual maintenance royalty you pay your software vendor, can reduce bad data by up to 50% with just a few simple rule sets.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

This week is the annual SAP Sapphire conference in Orlando, Florida.  I didn’t make it to the show this year, but I thought I would offer some insights on ERP and its increasingly interdependent relationship with B2B e-commerce.   The ERP vendors have spent much of the past few years focused on rewriting their applications to support a services oriented architecture approach.  SAP has its Netweaver initiative and Oracle has Fusion.  However, one area I think the ERP vendors have underestimated is the need to redesign their applications to support the extensive level of outsourcing that is becoming predominant amongst their customer base.

The Outsourced Supply Chain

In today’s manufacturing market, outsourcing is becoming more the norm than the exception.  Companies have become more and more specialized within their value chains.  OEMs that traditionally have been manufacturing-oriented are increasingly outsourcing many of their supply chain functions to third parties (contract manufacturers, freight forwarders and third party logistics providers).  Back office functions such as accounts payable, human resources and IT management are being sourced as well to specialized BPO firms.  The overall result of this outsourcing phenomenon is that manufacturers are more dependent than ever on business partners to perform daily operations.  It also means that enterprise IT systems are more dependent than ever on moving data to and from business partner IT applications.  In order to gain visibility to outsourced, external processes, manufacturers must be able to synchronize data in real time with their business partners.  For many manufacturers who outsource critical manufacturing, logistics, distribution and service functions, a growing percentage of the data housed in corporate ERP systems actually originates outside the enterprise.

50% of ERP Data Originates Outside the Enterprise 

I was talking to a customer the other day who told me that over 50% of the data in their ERP system comes from trading partners.  This comment puts in perspective the critical role that B2B integration technologies play in enabling ERP.  It also underscores the need to ensure that bad data isn’t flowing in from external interfaces and thereby corrupting information quality.  Much has been written about the challenges with maintaining what is called “Master Data” for products, customers, employees, assets and suppliers in the past few years.  But I am not referring to bad address information for consumers who move around every few years (i.e. customer master data).  I am referring to non-master, transactional data related to a specific order.  The order data originates from large customer accounts as well as contract manufacturers, third party logistics providers, banking institutions and business process outsourcers.

ERP Needs a Firewall to Protect it from Bad Data 

Who cares about bad data in an ERP?  Both line of business managers and IT personnel should be concerned about the consequences of this growing problem.  Bad data pollutes a manufacturer’s ERP system.  The result is a loss of productivity.  But to be more specific, data quality errors result in three negative impacts to a manufacturing organization:

1.       Longer time to process – Time sensitive processes may be delayed while accounting, warehouse and customer service personnel research and resolve data issues.  For example, if an invoice is posted to an accounts payable system without a general ledger number to apply the cost against, then an accounting clerk must phone the supplier or internal buyer to capture the appropriate data.  If a purchase order is pushed to an order management system with an invalid part number or SKU then the sales organization must contact the customer to discuss an appropriate substitution. 

2.       Higher cost to process – Personnel must spend time and effort manually correcting data in the ERP application or fixing problems resulting from the processing of the bad data.  Higher volumes of manual processing unnecessarily inflate costs and erode margins.  For example, in the retail industry studies have determined that over 60% of invoices have data errors.  And each error costs between $40 and $400 to correct.

3.       More mistakes during processing – The probability of an error increases exponentially as soon as manual processing begins.  By comparison, however, human intervention could be relatively inexpensive when compared with scenarios in which bad data goes undetected.  What are the costs of missing a contract commitment with one of your top 5 accounts?  Or of fulfilling an order incorrectly with the wrong parts shipped to the wrong location? Such data quality errors might seem like insignificant problems when viewed at a microscopic level for each individual order.  However, the costs of increased Days Sales Outstanding from invoice processing delays and customer penalties from failed order fulfillment commitments can quickly compound to have a macroeconomic impact on financial performance.

Why Firewall your ERP? 

Why aren’t ERP applications designed to capture these types of business process and data quality errors?   Actually, SAP and Oracle do provide extensive business logic and data integrity checks within their applications.  When an end user keys in data to a graphical interface the native ERP business logic will detect a wide variety of errors.  However, when the data flows through a B2B gateway and is subsequently uploaded into the ERP database there is very little data checking that occurs. What can manufacturers running ERP do to prevent bad data from corrupting their enterprise applications?  One option would be to hire a systems integrator to develop custom code to enforce data integrity standards for B2B imports and exports.  Additionally, a new set of user interfaces would be required to manage exceptions identified by the data checks.  Any customizations to ERP applications come with a significant overhead.   With each new release of the vendor’s software, the customer must perform extensive regression testing and often software updates.  I think a better option is to deploy an application at the edge of the enterprise that inspects incoming and outgoing documents from trading partners for data integrity issues.  Such an application would effectively be acting as an “ERP Firewall” for bad data.  The firewall would inspect the contents of EDI, XML and other files in a Demilitarized Zone for quality of content.  Bad data would be rejected to the sender or held in a queue for exception processing.  Good data would be passed straight through to the ERP for immediate processing. 

Not only is EDI the dominant standard but it is use is growing more accepted, not less.  Microsoft recently added an EDI adaptor to its BizTalk Server 2006 product to make its integration platform more competitive in the B2B segment.  This may seem strange to those who view Microsoft as chief evangelist for XML and Web Services technologies.   

EDI adapted to the Internet  

Rewind the clock 10 years and you will recall that it was not just Microsoft, but countless marketplaces, exchanges and industry standards organizations each proclaiming themselves’ EDI killers.  Few technologies have the survived so many focused attacks as EDI has.  These attempts to replace EDI were not unreasonable theories.  The introduction of the new disruptive technologies that emerged during the Internet era would have been a natural transition period to migrate from EDI to XML.  But while the new XML messaging standards groups were busy plotting to exterminate their predecessor, EDI found a way to adapt to the changing ecosystem by evolving in two new directions:   

• ASX Models – Much of the negative sentiment around EDI in the late 1990s was actually unrelated to the standard itself, but instead focused on the expensive communications and transmissions processes for EDI documents.  With the Internet perceived to be “free,” many questioned why there was continued use of expensive, proprietary 3^rd party VAN networks.  From this vision the ASX (e.g. AS1, AS2, etc.) standards were borne and EDI’s lifespan was extended indefinitely.  EDI documents could be wrapped in a popular Internet protocol such as HTTP or SMTP then transmitted directly between trading partners avoiding the use of VANs.
• Web EDI –Another key limitation of EDI was its complexity.  Many small businesses struggled to find the budget or expertise to deploy a translator.  The user-friendly, universally deployed Internet browser was an obvious choice to simplify B2B e-commerce.  With just an Internet connection and no B2B software, an end-user could access web-based applications to send and receive electronic documents.  The web application converted the user inputs into an electronic document for exchange with business partners.  Of course, EDI, due to its ubiquity, was the default output format for these new web portals.  The result?  A further extension of EDI’s longevity. 

GXS TradeWeb - One of the first Web EDI Platforms

EDI is reborn in Emerging Markets  

Perhaps, XML advocates should try an alternative approach to adoption.  Instead of seeking to replace established EDI programs in Western markets, perhaps they should seek out green field opportunities in emerging markets to institutionalize XML.  While this is another logical theory, the global nature of commerce in today’s market preempts such an approach.  EDI has already embedded itself in the critical value chains of the developing BRIC (Brazil, Russia, India, China) countries.  Western automotive manufacturers such as Volkswagen, Daimler, Ford and GM imported EDI standards to China years ago along with the new plants they constructed.   Similarly, western retailers such as Metro, Kingfisher, Home Depot and Wal-Mart, each of which source billions in merchandise from emerging markets, have driven adoption of EDI amongst manufacturing communities in China, India, Southeast Asia and Eastern Europe.  As a result, every day hundreds of businesses in emerging markets are implementing new B2B platforms based on EDI, because it is the standard their customers wish to communicate with them in.   

Will EDI ever die? 

My guess is “no.”  However, I do think in the next decade we will see a gradual increase in XML-based standards to represent 40-50% of e-commerce transactions.  More thoughts on this in a future post…

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.