Last week Netflix suffered a major disruption to its supply chain last week when its order fulfillment system went offline for several days.  In my opinion, the DVD industry and the broader home entertainment sector consisting of video games and music (CDS) have one of the most complex supply chains of any industry.  The primary challenge surrounds new product introductions.  On average, 80% of the lifetime sales for a new title are sold within the first 2-3 weeks of availability.  To maximize the revenue and profit opportunity entertainment product distributors and retailers must minimize the out-of-stocks for new titles in their retail locations.  They must maintain a high level of inventory precision across thousands of stores without any historical demand data upon which to base their forecasts.  The supply chain issues are further compounded by the proliferation of SKUs for each title.  For example, for each new DVD launch, a retailer must stock widescreen and standard format; the high definition Blu-Ray version and often gift packs or “Special Collector’s Editions.”  See my earlier post for more details on the retail DVD supply chain.

In this post, I will continue the discussion of the DVD supply chain, but focus on the video rental companies such as Netflix rather than the video sales market.  Traditionally, the bulk of video rentals in the US were distributed through national chains such as Blockbuster and Hollywood Video.  Netflix has changed the game in the rental market over its short history.  Netflix’s Internet-based ordering approach and its centralized distribution model are two supply chain advantages I think it has over traditional rental models.

Netflix ships its products from 50 distribution centers located in major metropolitan areas throughout the US.  Netflix claims that 95% of the US population is within close enough proximity to a distribution center to allow for 1-day shipping.   50 distribution centers may sound like a lot, but managing inventory at 50 distribution centers is far less complicated than stocking the 7800 stores Blockbuster operates throughout the country.  Other advantages of the centralized distribution model include:

• Stocking the Long Tail - Netflix has the economies of scale that enable it to stock a much broader range of titles than a traditional retailer.  In aggregate, Netflix maintains an inventory of 69 Million DVDs representing over 90,000 titles.  The deep selection also enables Netflix to offer a personalized merchandising approach in which titles are automatically recommended to subscribers based upon their profile and rental history.
• New Product Introductions – Netflix does not need to concern itself with store-level inventories during the peak sales period following new product launch.  If demand for a particular title exceeds supply there are several options.  Netflix can ship an alternative title to the subscriber based upon what is next in the queue.  Or Netflix can contact one of the local duplicators, which manufacture the DVDs, with a request to burn more copies of the out-of-stock title.

With the growing demand for digital distribution I wonder whether a mail-based replenishment system such as Netflix’ will even exist ten years from now.  More and more consumers are watching video on demand services provided through their cable or satellite subscription.  Others are downloading movies over their broadband Internet connection using services such as Amazon.com’s Unbox.  Netflix has a digital distribution strategy as well.  Subscribers can access a library of 6,000 movies online for viewing on their personal computer.  Additionally, Netflix signed an agreement with LG Electronics to enable subscribers to view movies on their primary television using an Internet connection to the set top box.

The software glitch impacted Netflix shipments on Tuesday, August 13^th and Thursday, August 15^th, but the problems were quickly resolved.  The disruption could not have occurred at a better time for Netflix. Home video rental rates typically decline during mid-August as families take vacation at the beach or other destinations.  And those who were not on vacation were probably watching the Olympics, which is another factor contributing to below average video rentals this month.

Supply chain disruptions are becoming more highly visible, not just to customers, but to investors as well.  I first read about the Netflix issues in the Wall Street Journal.  But there are larger issues than supply chain failures that Internet-based video rental companies need to consider in today’s market.  I think we will witness a significant change in the video rental market in the coming 24 months.  The rapid growth of video kiosks co-located in grocery stores around the US is going to push the supply chain model back towards localized (versus centralized) distribution.  More in a future post…

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

Someone recently asked me - Is the long tail phenomenon in B2B making e-commerce better or worse?  There is no question that the exponential rise in the number of standards over the past decade is making B2B more complicated than ever before.  Considerable effort is required to migrate from traditional EDI to newer XML paradigms.  Even greater challenges exist for companies in different industries (e.g. manufacturing and banking) to perform document exchange as different standards are used.  So for many, the long tail is making B2B e-commerce more challenging, expensive and complex – in order words - worse.  But for others, the long tail is unlocking the potential to collaborate with business partners electronically in ways never before possible. 

Consider the case of Green Coffee XML.  Green Coffee XML is a standard utilized by coffee growers, brokers and buyers to ensure uniformity of contracts, bills of lading and other commercial documents.  There is a surprising degree of variability even within an individual product’s supply chain.  For example, there are nine different types of sales contracts in use within the coffee sector along with five different units of measure commonly applied to weigh the beans.  By developing an XML document set specifically designed for coffee imports and exports, the industry can achieve higher levels of efficiency for their specific business processes.  The Green Coffee organization reports benefits such as lower Days Sales Outstanding, higher perfect order fill rates and lower total landed costs.  In today’s economy with commodity prices rising rapidly, the financial benefits to be gained from optimizing a supply chain will be compelling to every CFO.

So what is the answer?  I would say that for those willing to invest the effort to master the new e-commerce paradigms the long tail phenomenon is making B2B more effective than ever.  Through the long tail standards, companies can gain operational efficiencies that provide a long term competitive differentiation in the marketplace…

Steve Keifer

© Copyright 2008 GXS, Inc.  All Rights Reserved.

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.

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.