In my last post I outlined the five primary forces that I think are fundamentally changing the way corporations approach back office finance functions and their banking partners.  However, one of the dynamics I did not explore is the dependency of the business model changes on technology.  Changes to accounting systems and bank connectivity will be critical factors in the success of corporate transformation efforts.  To realize cost efficiencies, A/P organizations must be able to efficiently route payment instructions to their key banking partners using highly reliable, secure and cost-effective communications channels.  To benefit from a centralized treasury, cash managers must be able to obtain detailed, up-to-date account statements from their financial institutions in order to perform end-of-day investment and borrowing activities. 

I have compiled a list of the top five forces I think are transforming the technical interfaces banks and corporate customers use to communicate electronically.  These five forces are the technology changes complementary to the business model changes outlined in my last post:

1.       ERP Consolidation – More multi-national corporations have a project underway to standardize and consolidate the various ERP applications being utilized within their enterprise.  Standardization enables consistent business practices across divisions and the creation of shared service centers.

2.       SWIFT Connectivity – Several hundred large corporations have registered to participate in SWIFT’s corporate access programs (SCORE).  SWIFT connectivity can reduce the costs and complexity associated with corporate banking communications by replacing the mix of web, fax and host-to-host transmissions with a single connection to banks worldwide.

3.       ISO 20022 XML – Otherwise known as the Universal Financial Industry (UNIFI) standard, ISO 20022 XML is designed to replace the myriad of local file formats (e.g. EDI, NACHA) used for payment processing around the world with a single, global message scheme.  See my blog entry on ISO 20022 for more details.

4.       Multi-Bank Cash Reporting – Multi-bank reporting applications aggregate end-of-day and intra-day balances for all accounts onto a single web portal.  Treasury personnel with visibility to all cash positions at bank accounts worldwide are better equipped to perform cash forecasting, borrowing and investment activities.

5.       Bank Relationship Management Software – Bank connectivity has become such a complex issue for corporations that several ERP vendors have introduced specialized software modules to simplify integration.  For example, SAP recently introduced its “Bank Relationship Management” application.  See my blog entry on SAP BRM for more information.

For those interested, I published a more detailed view of the 10 Forces Transforming Corporate Banking Connectivity on the www.gxs.com web site.

I was not able to post any blog entries in June as it was an unusually busy month for me.  In some respects I expected to be busy as I had planned some vacation time.  However, I also had a few unexpected events that kept me out of the office.  In the early part of the month, I had the pleasure of contracting a fairly nasty stomach illness, which kept me confined to my bedroom (and bathroom) for about 48 hours.  I had just suffered from a stomach virus in late March so my initial assumption that I had caught another strain.  Although the illness was not pleasant, my bigger concern was that I was going to pass on the stomach virus to my 18 month old son and my wife who was six months pregnant.  However, my illness proved not to be contagious as my son and wife never became sick.  As I read the newspapers over the following week it occurred to me that perhaps my illness was not a stomach virus, but salmonella poisoning instead. 

The US has been the victim of a fairly serious outbreak of salmonella in raw tomatoes throughout the past two months.  The latest reports from the Centers for Disease Control have identified 810 salmonella cases in 36 states linked to raw materials.   The tomato salmonella outbreak is the largest fresh produce contamination issue in US history.  In early June, many of the top food service establishments such as McDonalds, Burger King and Chipotle all stopped serving tomatoes for a short period of time.  Grocery retailers suspended sales of tomatoes as well.  One of the unfortunate consequences of food safety issues is that an entire product category is often penalized for problems that may be isolated to a particular SKU.  Regulators, retailers, distributors and manufacturers have learned to be overly cautious in the case of public food safety matters.  No retailer or manufacturer wants their brand name tarnished by a series of public health issues.  Such was the case with tomatoes in the US throughout the early part of June.  For example, Roma tomatoes were identified to be the source of the poisoning.  Cherry, grape and other variants of tomatoes were not affected.  Public health officials were able to isolate the geographic source of the outbreak as well.  Tomatoes harvested in California, Texas, Georgia and many other states were deemed to be safe for consumption.  Nonetheless, grocery and food service retailers were not discriminatory in efforts to remove tomatoes from their product lines.  The National Restaurant Association claims the salmonella outbreak has cost the industry $100 Million to date.

The source of the contamination has still yet to be identified.  Experts state that the root cause may never be determined.  Given the advanced technology and extensive resources in the US, I find it fascinating that after 60 days public health officials have not been able to pinpoint the source of the outbreak.  The Centers for Disease Control (CDC) seems to have the primary responsibility for researching the root causes of food safety issues.  The Wall Street Journal published an article titled “Anger Rises over Salmonella Probe” on the front page of yesterday’s newspaper.  Also on the front page was a story about how the US government is forcing UBS to divulge account holder information for several of its customers.  I thought the point of having a Swiss bank account was to keep the ownership information private!  In any event, I am pleased to see that the government has plenty resources to violate privacy rights and prosecute tax evaders even if they cannot resolve long-standing public health issues…

But let us suppose that the CDC had been able to quickly identify the source of the outbreak amongst the various tomato growers.  How quickly would the agricultural and retail community have been able to respond?  The easy part would be to contact the affected tomato farmers to request suspension of all future shipments.  The more challenging exercise would have been to pinpoint the location of all the contaminated tomatoes already stocked in various warehouses, grocery stores and food service establishments throughout the country.  Which types of supply chain applications and e-commerce technologies could be leveraged to rapidly identify and recall contaminated food products?

The retail industry has developed a set of standards for the traceability of food products.  The efforts have been led by the GS1 organization based in Brussels and its various member organizations throughout the world.  Specific traceability models have been developed for fresh produce products as well as beef, fish, wine and bananas.  More information can be found at www.gs1.org/traceability.  The food traceability processes depend upon a few key e-commerce technologies such as EDI, data synchronization, barcode labels and RFID.  Unfortunately, many of the underlying e-commerce technologies, particularly data synchronization, suffer from a lack of critical adoption by major retailers and agricultural product manufacturers.  As a result, the GS1 traceability models would be relatively ineffective in efforts to accelerate the recall of unsafe food products from the supply chain.

I find the lack of a technology infrastructure to rapidly isolate and recall unsafe food products somewhat disturbing.  What if the tomato salmonella outbreak was much broader in scope, affecting 8,000, 80,000 or perhaps even 800,000 people?   What if there was an intentional effort to sabotage the food supply (i.e. bioterrorism)?  How many lives would be impacted?  What economic impact would occur?  Should the retail industry and government regulators be more aggressive in efforts to promote food traceability technology?  More in a future post…

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.

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.

EDI continues to be the dominant standard in B2B e-commerce.  If you don’t believe me, I would encourage you to take a look at the report titled B2B Integration Trends: Message Formats published last year by Ken Vollmer of Forrester Research.  Forrester estimated that out of all B2B transaction volumes in 2007, 85-90% use EDI.  XML and other file formats, while growing at nearly double the rate of EDI, remain, at best, 15% of transaction volume.  EDI’s dominance is a subject that mystifies many outside the industry.  How does a technology dinosaur such as EDI manage to remain so popular and prevalent through an era that has witnessed the birth of unprecedented levels of disruptive technology?  If Charles Darwin were alive today he might enjoy studying the characteristics that have led to EDI’s survival despite the introduction of genetically-superior species to its ecosystem.   Here is my assessment. 

Charles Darwin

Six Survival Characteristics of EDI   

There are six factors, in my opinion, that lead to the continued prevalence of EDI as the world’s dominant e-commerce standard:

1.       EDI is mature.  It has been in use for over 20 years resulting in a proven, reliable, business critical reputation amongst its widespread users.  If you are selecting a technology to run your business on – would you select a new, emerging framework or a proven, mature standard?

2.       EDI is working.  Why fix what isn’t broken?  EDI is successfully supporting the value chains for many of the world’s largest companies today.  Corporations need a compelling business benefit to migrate to XML.  The business plan must justify the expense to perform a migration, risk of possible business disruption and opportunity cost compared to alternative investments.

3.       EDI is cheap.  The costs of EDI were often cited as its top barrier to adoption throughout the 1990s.  However, the barriers to entry for EDI based technologies have declined significantly in recent years.  As the de facto standard almost all B2B integration software packages and SaaS-based services include out-of-the-box EDI functionality.  XML often requires customization, especially for low end packages.

4.       EDI is ubiquitous.  EDI had the advantage of being the only standard for e-commerce for over a decade.  During that time, EDI became pervasive in a number of industries such as health care, automotive, banking and retail.  As a result, businesses that choose to utilize EDI have a high level of confidence that their trading partners will be able to receive their documents.  By contrast, businesses that try to standardize on XML face significant headwinds as their entire trading partner community must become XML-enabled.

5.       EDI is not industry specific.  EDI’s lack of industry-specific data fields and process models is often listed as a shortcoming.   However, one of the keys to EDI’s ubiquity has been is applicability across multiple industries and geographic regions.  Very few industries in today’s world are truly vertical leading to challenges when partners transact commerce across industries.  For example, some of the fastest growing channels for high tech manufacturers are the aerospace, retail, medical and automotive sectors, none of which use the high tech XML standard - RosettaNet.

6.       EDI is network protocol independent.  It works across value added networks.  It works with legacy dial-up protocols.  It works with newer Internet standards such as AS2.

These six factors are the critical genetic and environmental factors that have led to EDI’s longevity.  In today’s world of multiple, competing e-commerce frameworks, dominance will come from survival of the fittest.

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Last week I spent three days in London conducting a series of meetings with customers, partners, analysts and local media.  These trips are always insightful for me, but last week was a particularly interesting time to be in London.  First, the French President Nicolas Sarkozy and his new wife Carla Bruni Sarkozy were visiting the UK, which generated a lot of attention in the local press.  Second, there was a significant disappointment over the problems at Heathrow’s new Terminal 5.  On the opening day of the new terminal, the baggage handling system failed leaving thousands of passengers without luggage and resulting in the cancellation of dozens of flights.  Fortunately, I was not flying British Airways so I was not impacted.

The third reason I found this trip more interesting than others was the sense of urgency amongst everyone I met with.  Everyone was rushing to finalize activities before the end of first quarter.  This year’s first quarter is an important economic event to be sure.  Not only will it be the first financial period for 2008, but the quarterly earnings will provide insights into how widespread and deep the recession has become.  Of course, every CEO wants to be able to downplay the impact of the recession on their financial results during the upcoming quarterly earnings call.  So there is added pressure on both sales and finance organizations to ensure that they reach their forecasted goals. 

End of Quarter Stress 

End of quarter stress is not unusual for leaders in sales and finance, but it is becoming increasingly challenging for IT operations personnel as well.  I was speaking to a customer in the manufacturing sector last week.  He was explaining how critical their IT infrastructure is for their quarter-end operations.  The last three weeks of the quarter are extremely hectic for these types of manufacturers who are trying to outdo the previous quarter’s revenue results.  Sales, order processing and warehousing operations are often operating 24 hours a day including Saturday and Sundays.  Frequently, it all comes down to the last day of the quarter.   Products that ship as late as one minute before midnight can still qualify for booking in the quarterly sales reports. IT systems must be able to keep pace with the performance requirements of demanding end-users during this stressful period.  And they absolutely cannot have downtime – either scheduled or unscheduled.  Order processing, warehouse management and transportation management are critical for manufacturers.   It is no surprise that ERP applications must deliver 100% uptime to support business operations.  However, I doubt many realize how mission critical B2B (EDI and XML) connectivity is for quarter-end activities.  An interruption in electronic document flow with business partners can bring a company’s supply chain to a halt – much like the failure of a baggage handling system at Heathrow’s Terminal 5.  As supply chains become increasingly digitally integrated more and more buyer-to-supplier communications are being sent electronically.  A loss of connectivity even for a matter of a few hours can jeopardize a company’s ability to meet its quarterly financial targets.  A loss of data, specifically new orders, could be catastrophic.

The Impact of IT Failures 

The root cause of the meltdown at Heathrow was that the baggage handlers IDs were not recognized by computers.  As a result not only were airport personnel not able to log in to the bagging handling system, but they also could not navigate physically around the airport in and out of secured areas.  Eventually the system became overloaded and checking of baggage was suspended.  Delays unloading and loading of baggage postponed and even cancelled some flights.  Spanish owned BAA (British Airports Authority) had invested over £4B and 20 years of planning to construct the new concourse.  And the bagging handlers and computer applications had undergone 18 months of extensive testing, which proves that even the most well designed and planned systems can fail under peak loads.

What would happen if B2B (EDI and XML) connectivity at a multi-billion dollar manufacturer were lost on the last day of the quarter?  Electronic purchase orders from large customers and distributors would not be able to be received.  Even orders placed prior to the outage could not be confirmed electronically.  Third party logistics providers could not be notified of shipments that were ready for pickup.  In effect, the company’s supply chain would be significantly handicapped.  Of course, orders could be taken over the phone and then processed manually.  However, this would likely be a nuisance to high volume buyers accustomed to utilizing highly automated ordering processes in their procurement systems.  Theoretically, electronic documents would not be lost as a result of an interruption to B2B communications.  Most B2B transactions are asynchronous.  As a result, purchase orders, confirmations and shipping instructions would be held in a queue until the connectivity was re-established.  But depending upon the length of outage and the time period it occurred, the backlog may not be recoverable.  Suppose an outage occurred from 1PM to 5PM on March 31^st.  Sales, warehouse and transportation personnel would probably not be able to process the backlog of orders even if they worked until midnight.

I wonder how many companies and vendors will experience an outage in their B2B applications during this quarter’s final day…or how many are expecting to fulfill orders based upon incoming parts shipped via BA’s Cargo service…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Crude oil reached over $100 a barrel this week prompting further discussion about energy prices effect on the economy.   As I was driving into work on Thursday, I was listening to CNBC on the radio.  The Squawk Box crew interviewed T. Boone Pickens on his thoughts about rising oil prices and the need for alternative energy sources.  He was introduced to the theme song from the 1980s TV series – Dallas –a clever set up to the entertaining interview.  The discussion inspired me to revisit the topic of transportation management suites that I commented on in my last blog entry (http://blogs.gxs.com/keifers/2008/02/06/is-your-tms-implementation-costing-you-an-arm-and-a-leg/ ).   Many retailers and manufacturers are implementing TMS applications to optimize their increasingly complex global supply chains.  Rising energy costs are just one of the many drivers for these applications.  However, the ROI from these TMS deployments is often delayed or reduced due to challenges with carrier on-boarding and data quality.  I believe that the emerging SaaS (Software as a Service) model offers a number of advantages for transportation applications that can help to accelerate ROI.  But before we discuss the SaaS model for TMS, allow me to offer some background information to support my argument… 

Shared Vendor Communities 

As industries continue to consolidate through mergers and acquisitions there becomes a greater degree of sharing of common vendors among large buyers. Within a niche industry it is common for many large buyers to share common direct materials suppliers. The grocery sector offers a good example. Large food retailers such as Metro, Tesco, Carrefour, LianHua and Woolworths all source from a common set of global brands such as Kraft, Nestle, Unilever, Henkel, P&G and Coca-Cola.   

Vendor overlap is not limited to large suppliers.  Overlap exists even in niche product categories.  Consider locally grown organic vegetables or patio furniture manufactured offshore.  For these types of products there is usually a small community of vendors who supply all of the major retailers.   

Supplier overlap occurs more frequently with providers of indirect materials and services.  For example, many of the world’s largest manufacturers, whether they produce automotive, electronics, aerospace, furniture and apparel products, are likely to share a common set of financial institutions for their banking and insurance services (e.g. Citigroup, HSBC, Allianz, AXA).  Similarly, this same group of manufacturers will all source their logistics services from a small community of transportation providers.    

The Network Effect of SaaS 

The growing overlap of vendors amongst large buyers offers an opportunity for SaaS application models to offer a tremendous competitive advantage over traditional software.  The advantages stem from a concept called “the network effect.”   Here is how it works.   In the traditional software model, each buying organization must establish a separate connection to each individual trading partner in their value chain.  The result is a spaghetti-like maze of connections between buyers and suppliers.  As a result, the process of trading partner on-boarding often takes years due to the need to connect each community member one-by-one. 

By contrast, when a buyer subscribes to a supply chain application using the SaaS model, they gain immediate access to the existing community of trading partners already using the service.  As more buyers and more suppliers join the community significant economies of scale are generated.  On-boarding times can be significantly reduced using the SaaS model.  Suppose a large buyer decides to subscribe to a SaaS application.  Instead of on-boarding the entire supply chain community, only a subset of the trading partners will need to be ramped.  This is because many suppliers are already utilizing the application with another buyer.  Therefore only the net new vendors must be enrolled. 

SaaS for Transportation and Logistics Applications 

In the case of transportation and logistics applications, the SaaS model offers a compelling “network effect” to all participants.  Once a carrier connects to the hosted transportation management application they can exchange data with all the buyers on the system.  As the community of buyers (and carriers) continues to grow, the value for all participants begins to multiply.  Rather than connecting to each of the hundreds of transportation vendors utilized throughout the world, corporate buyers can connect to the SaaS vendor once.  As new relationships between carriers and customers are formed, technical integration efforts are minimized.  

The chart above illustrates how carrier on-boarding can be accelerated via a SaaS model.   

SaaS is an emerging model that can accelerate the ROI and lower the TCO of many B2B integration initiatives.  TMS is not the only supply chain application that can benefit from a SaaS approach.  In future posts, I will discuss other applications of SaaS such as Vendor Managed Inventory and Supply Chain Finance.  In the meantime, there is a wealth of information the GXS Insights portal (www.gxs.com/insights) about SaaS including a video with AMR analyst, John Fontanella.

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

There is an increasing trend in B2B towards business partners sharing higher volumes of data.  Not only are they sharing new and different types of data, but the information is being packaged into much larger files.  Historically, the e most commonly exchanged transactions have been invoices and purchase orders, which are only a few kilobytes in size.  However, over the past 24 months, there has been a substantial increase in the exchange of larger files – on the order of are megabytes and gigabytes in size.   The phenomenon is occurring in nearly every industry sector. 

Examples include:

·         Check image files in banking

·         Call detail records in telecommunications

·         Satellite images in logistics

·         CAD diagrams in manufacturing

·         Point-of-sale, market basket and loyalty card data in retail

Large File Transfer in C2C 

The trend towards larger file transmission really should not be very surprising given the growth in file sizes that we have seen in the consumer segment.   For over five years now consumers have been downloading and sharing large audio and video files for home entertainment.  With the dramatic decreases in the cost of storage and networking, it is only logical that this trend would extend to business communications as well.  In fact, demand for large file transfer in the workplace has increased steadily in recent years.  Do you give a second thought to sending a 5MB e-mail attachment to a colleague at one of your business partners? 

Technology for Large File Transfer 

So which Internet protocols do B2B practitioners use for large file transfer?  The obvious choice would be AS3 or one of the secure variants of FTP.  While these protocols can facilitate the exchange of very large files they lack critical features such as checkpoint/restart.    Depending upon the size of the file, a transmission could take 15 minutes, 30 minutes or several hours.  What happens if a router hiccups or the server on either end loses connectivity half way through the transmission?  Without a feature like checkpoint/restart, the entire file transfer process may need to be restarted.  The problem is not limited to AS3 and FTP.  Other HTTP, SMTP and open standards protocols lack these large file handling features. 

Managed File Transfer Products 

So what do companies that need to transmit large files do?  Historically, they have been forced into buying a license from a vendor with proprietary “Managed File Transfer” (MFT) software.   Some of the MFT packages are based upon Internet standards, but with customizations designed to support larger file sizes.  Sounds good, but here is the catch. The technology only works if the trading partner you are sending the information to uses the same proprietary software product.  This is a great model for the vendor as it creates a viral effect that leads to high “stickiness” with a community of end-users.   However, it is bad for the customer who is now locked into a vendor’s proprietary software product. Owners of these proprietary software products have little negotiating leverage with the vendor.  If you talk to companies with MFT software they will tell you that their annual maintenance fees are about as painful as an adjustable rate mortgage.  

2008 Predictions 

What will happen with large file transfer in 2008?  I think we will see a continuing surge in large file transfer throughout 2008, which will put pressure on vendors and standards organizations to find better technology solutions.   It is too early to predict exactly what the outcome will be.  But one thing is for sure, with customer demand rising quickly, large file transfer is becoming a mainstream B2B function need rather than a niche technology. 

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

Tomorrow is the release of Season Six of Fox’s 24. And next Tuesday on December 11^th we will see the release of ABC’s LOST Season 3. These are, in my opinion, the two best programs on television today. And I, along with millions of consumers, will be rushing to stores in during the holiday season to buy these new DVDs along with other releases such as Harry Potter and the Order of the Phoenix; Pirates of the Caribbean at World’s End; or Shrek the Third.

Amongst the topics on the minds of me and my fellow DVD shopper’s minds are:

· New Seasons - Will the Screen Writers Guild strike affect the new seasons of 24 and LOST starting after the New Year? Or will we spend this upcoming spring watching the DVDs of last year’s seasons rather than new programs?

· LOST - Will the distress call Jack placed to the nearby ship be answered by friend or foe?

· 24 - Will a city other than Los Angeles actually be the target of attack? Will Kim Bauer finally be written out of the plot?

Covers of the new DVD releases:

But I doubt many, if any, of the shoppers stop to consider:

· Product Availability - How does my retailer know how many of each DVD to have in stock so that when I come into the store I will be able to find the title I want?

Herein lays an interesting challenge unknown to the average consumer. Home entertainment products such as DVDs as well as their peers in the CD and video game categories have some of the more complex supply chains in the retail sector. One of the biggest supply chain challenges is in the area of new product introductions. For DVDs, up to 80% of the sales of a product typically occur in the first few weeks after the product launch. As a result, ensuring that products are always available on retail shelves is critical for both home entertainment brands and the retailers who sell them. Out-of-stock scenarios for DVDs can often result in a lost sale. Each lost sale can represent between $3 and $6 potential profit. Eliminating out-of-stocks is more challenging than one might expect. Each DVD title has its own unique demand characteristics. Retailers and brand owners are challenged to estimate launch time sales as they have no historical demand pattern to build forecast models. The supply chain challenge grows more complex when one considers that for each title, there may be multiple SKUs. Each DVD launch typically includes a widescreen and standard format version as well as HD-DVD or Blu-Ray formats.

So how do retailers replenish their stores with DVDs? The process works as follows. Each night the retailer aggregates point-of-sale data from its stores and transfers the information to the brand owner. The sales consumption data along with last-known store-level inventory positions are utilized to assess stock positions at each individual store. The data is then fed into a replenishment application which can calculate SKU-level stocking needs for each location. The calculated replenishment quantities are used by companies called video duplicators to manufacture the actual physical DVDs. The shrink-wrapped product is then routed by the duplicator or a third party logistics company directly to the retail stores. As a result, consumers can expect to find the title of their choice at their local retailer.

Of course, the key to this whole process is the ability for retailers, brand owners, video duplicators and third party logistics companies to share point-of-sale, inventory and logistics data amongst one another in a timely manner. Sometimes the entire replenishment cycle can be as short as 24 hours, but this is necesary to ensure sales are not lost to out-of-stocks. This is an excellent illustration of how the B2B technology is used to power complex, demand driven supply chains. And those retailers and DVD manufacturers who can master these B2B processes will gain a competitive advantage over their peers by suffering fewer out-of-stocks and maximizing sales of new product introductions. All of this is yet another example of EDInomics at work…

Steve Keifer

© Copyright 2007 GXS, Inc. All Rights Reserved.