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.

Last week I had the privilege of delivering a presentation at the CFO Rising conference in Orlando, Florida on the topic of Supply Chain Finance.  I was fortunate to be presenting jointly with Neal Harm who is the Chief Administrative Officer of BB&T’s Commercial Finance group.  BB&T was a key exhibitor at the show, promoting their new integrated financial supply chain product - Supply Chain 360 (http://www.bbt.com/bbt/business/products/supplychainsolutions/supplychain360.html).  Working with the BB&T team on their product launch activities has been a rewarding experience for me as I have found their Commercial Finance team to have some of the most visionary thinking in the industry.  We were fortunate to draw a crowd of over 40 CFOs and senior level finance executives, who were all very actively interested in this hot topic.

Why such a crowd?  Because, supply chain finance promises to enable radical new efficiencies for managing working capital in the value chain.  Supply Chain Finance is a multi-faceted concept.  Some of these concepts can be leveraged today while others are more visionary at this point.  Without question the most widely embraced aspect of supply chain finance today is the idea of post-export supplier financing.   The term is intimidating to those not familiar with trade finance, but the principles are actually quite simple and familiar to anyone who has used a credit card. 

Comparison to the Credit Card 

We are all familiar with how a credit card model works, but I will recap a few of the more relevant points that help to illustrate the analogy to supplier finance.  Let’s suppose that you are a sports fan that has decided to invest in a high definition plasma television to enhance your viewing experience.  Perhaps, if you are in the US you may wish to buy a new HDTV in time for this month’s NCAA basketball tournament.  So after evaluating the various brands and product options you make a visit to your favorite consumer electronics retailer to purchase the TV.  The easiest way to purchase a high value item such as a TV is probably not to carry cash, but instead to use a credit card.  Using a credit card, you can purchase the HDTV on credit, taking possession immediately without having to present any cash to the merchant (electronics retailer).  The merchant assumes little risk as the bank who issued you the credit card guarantees payment in all but a few scenarios.  And the merchant is paid quickly.   Within just a few days of uploading their point-of-sale transactions to their bank, the merchant is reimbursed for the value of your purchase.  However, you (the consumer) do not have to remit any payment for at least 30 days when your next monthly statement arrives.  At this point you can decide to pay the balance in for your monthly purchases (including the TV) full or defer payment until later.  Or you might pay only a percentage, financing the remainder of the balance. 

The credit card model has become the most popular means of retail payment due the benefits it offers to both consumers and merchants.  Consumers can purchase goods and services on credit, deferring payment until a later date that enables them to optimize their cash flows.   The merchant offers a simple, hassle-free approach for consumers to make payment, but also benefits from the relatively fast inward cash flows that the credit card system offers.  Both the issuing bank and the merchant’s bank also benefit by charging a processing fee to the merchant for facilitating the settlement process.  The issuing bank that provides the consumer the credit card also enjoys significant upside, in that, the consumer may elect to defer payment of the balance.  The issuing bank then enjoys an additional income stream as interest accrues on the consumer’s balance.

Supply Chain Finance – A Credit Card for International Trade 

Supply Chain Finance operates under similar principles as the credit card model except that the transaction is business-to-business rather than business-to-consumer.  Suppose, for example, a large UK-based department store is purchasing a line of apparel products from a third party contract manufacturer in Vietnam.  After reviewing samples and finalizing on a sales forecast, the retailer places a bulk order for the clothing with the manufacturer.  The manufacturer acquires the fabric materials, performs the sewing process and then ships the product to the retailer’s distribution center outside of London.   Concurrently, an invoice is sent from the manufacturer to the retailer’s accounts payable department.   The retailer performs a series of validations and matches on the invoice to ensure consistency with the quantities, colors and sizes specified on the original purchase order.  The invoice is then approved to pay.  In a traditional buyer-supplier relationship, the retailer may withhold payment of the invoice until its maturity which could be another 30 or 60 days after receipt of the goods.  Why?  Because, most buyers prefer to hold onto their cash as long as possible so that they can put it to use in other ways.  However, in the supply chain finance model, a different sequence of events occurs – very similar to the consumer credit card example described earlier. 

In the supply chain finance model the retailer will instead notify the bank of their intention to pay the supplier at term.  The bank will then approach the supplier asking if they would like to be paid immediately.  Most suppliers, especially smaller ones in emerging markets such as Vietnam, are cash constrained.  As a result, the early payment option is appealing to them.  Upon confirmation from the supplier, the bank immediately transfers the appropriate funds to the supplier’s account.  The supplier has now collected its revenues from the products it manufactured.  And the bank has assumed responsibility for collecting the payment from the retailer.  30 or 60 days pass until the date the original invoice is due is reached.  Now the bank will collect the appropriate funds from the retailer.  At this point, the retailer may elect to settle the transaction in full with the bank.  Or they may request to extend the payable to a future date based upon their cash flow situation. 

Let us compare the retailer B2B example to the earlier B2C HDTV purchase example.  In both scenarios, the suppliers (the apparel manufacturer and the electronics retailer) are compensated shortly after delivery of the goods.  In both scenarios, the buyer (the department store chain and the sports enthusiast consumer) has the option to settle their transaction balance within the original purchase terms or to extend terms with an interest-based financing approach.  In both scenarios, the banking system provides short term financing to bridge the time-span between when the buyer takes possession of the goods and the buyer makes payment.  The most important concept is the value created to all three parties in the transaction.  The timing of the supplier’s inbound cash flow is accelerated.  The timing of the buyer’s outbound cash flow is maintained or extended.  The financial institution generates income from the processing and financing of the transaction.

Given the analogy above, you might ask why the credit card companies are not participating in the supply chain finance market today.  The answer is that they plan to.  Facilitating B2B payment transactions and short term financing arrangements are a natural extension of the value proposition and capabilities credit card processing networks offer today.  Of course, the funding sources for the short term financing will be the actual banks.  There is an interesting study in contrasts when one compares the situation in the banking sector to the major credit card brands.  MasterCard and Discover have both enjoyed tremendous success with their IPOs.  The Visa public offering scheduled for this week promises to be one of the largest in history.  By contrast, the banks are struggling to keep afloat as the credit crisis continues to worsen.  With the collapse of Bear Stearns over the weekend and the recent turmoil in the financial markets, one might question whether adequate liquidity and credit facilities will exist to support supply chain finance…

Steve Keifer 

© Copyright 2007 GXS, Inc.  All Rights Reserved.

One of the industry associations GXS has been working with recently is the Global Supply Chain Forum sponsored by Stanford University.  The forum is comprised of representatives from many of the world’s largest manufacturing companies as well as some of Stanford’s leading faculty such as supply chain thought leader Dr. Hau Lee.  Dr. Lee has introduced a number of revolutionary ideas over the past few years, but there is one particular insight that stands out in my mind:

“Instead of company to company competition, we are now in an era of supply chain to supply chain competition.”

This is a concept that I think becomes more and more critical every day that goes by.  To illustrate my point, let us examine the high tech industry as an example.   More specifically, consider the sub-sector of high tech that manufactures computers and related peripherals.  This is a relatively young sector that was first started back in the 1960s and 1970s.  However, during its short history the supply chain model has undergone a radical transformation. 

Mainframe Value Chain 

When the first mainframes were introduced a single vendor often functioned as the sole source for all computing needs.  OEMs such as IBM and Honeywell manufactured not only the finished mainframe product, but most of the components as well including the memory, storage (DASD) and processors.  The operating system, database and even some applications were developed by the same vendor who manufactured the hardware.  If the mainframe broke or needed an upgrade, the hardware OEM provided the repair and service. 

2008 PC Value Chain 

Contrast the mainframe model to the complex, multi-tiered value chain in today’s computer industry.  I work on an “IBM Thinkpad.”  However, while the logo on my laptop says IBM, the manufacturer of the machine is actually a Chinese company – Lenovo.  Although Lenovo is the OEM, it only contributes a small fraction of the content of the laptop.  The components inside the laptop are sourced from third party suppliers (Kingston for memory; Seagate for storage; Intel for microprocessors).  Also noteworthy is the fact that Lenovo does not typically sell the machine directly to end users.  My laptop was purchased through our company’s preferred distributor – CDW.  The software on the machine is made by another group of specialized companies.  Microsoft publishes the Windows operating system and Office application suite.  Other software vendors such as Adobe, Symantec and Apple provide other applications such as document viewing, desktop security and digital music.  And when my laptop breaks, who do I call?  Not Lenovo, but a 3^rd party such as a high tech distributor, 3^rd party logistics provider or a contract manufacturer for warranty support and repair. 

The point here is that the computer industry has migrated from a vertically integrated model to a highly specialized, heavily outsourced model.  This type of highly outsourced model in which OEMs outsource much of the manufacturing and supply chain management to suppliers is growing more common in all discrete manufacturing sectors.  Examples can be found not only in high tech, but also aerospace, automotive, consumer products and industrial equipment.

Supply Chain versus Supply Chain 

The key take-away from the discussion above is that OEM manufacturers are increasingly dependent upon a community of outsourcing partners to achieve success.  Factors that can go wrong (and do go wrong) are, in many cases, completely out of the control of the OEM.  In these new value chain models, companies are actually not competing with other companies, but instead their supply chains are competing with other supply chains.  This crucial concept, first introduced by Dr. Lee, is critical for channel masters in today’s supply chain to understand.  However, while it may seem obvious, the majority of today’s leading retailers and manufacturers continue to structure models that prioritize the near-term financial performance of their own company above the overall long-term competitiveness of their supply chains.  The term “partner” continues to be utilized ever more frequently to describe suppliers in a value chain.  However, the approach of most channel masters remains more adversarial than collaborative.   The largest exception is, of course, the Japanese manufacturing community which has structured itself around kereitsu relationships between OEMs and key suppliers. 

Consider the following “company centric” paradigms that are becoming more commonplace in today’s supply chains.

• Performance Scorecards and Penalties – Retailers and manufacturing OEMs have instituted elaborate chargeback mechanisms that penalize suppliers for problems arising during routine order fulfillment.   Not only are these penalties designed with the goal of optimizing the buyer’s business processes, but each retailer and manufacturer has different measurement criteria.  As a result, suppliers are forced to comply with terms such as delivering during tightly monitored 2-hour receiving windows and labeling of pallets with customer-specific serialized barcodes and text.  While these processes simplify receiving for the buyer, they add cost and complexity for the supplier and friction to the overall relationship.
• Open Account – Large buyers are moving from their traditional letter of credit processes with overseas suppliers towards open account models.  The goal of the migration is to reduce banking fees for the buyer, but in many cases the side-effects to suppliers are significant.  Without a bank-guaranteed letter of credit to use as collateral for short term financing, suppliers struggle to fund raw materials purchases, manufacturing plant payrolls and other operating expenses.
• Extended Payment Terms - In an effort to hold on to cash longer, buyers are extending payment terms with suppliers to periods of 60 or 90 days.   Extended terms create a cash flow issue for suppliers who must now seek out short term loans to fund their operations.  For smaller suppliers with lower credit ratings, these expensive short term loans compromise profit margins and increase the overall cost of goods sold.
• Vendor Managed Inventory – More and more customers are looking for their suppliers (or a 3^rd party) to hold title for inventory until the point of consumption or sale to the end-customer.    Buyers prefer these types of models as they shift the inventory carrying costs to the supplier’s balance sheet along with the risk of product obsolescence and retail shrinkage.  For high volume channels, large suppliers can benefit from the added demand visibility and end-customer insights available through a VMI program.  However, for many buyer-supplier relationships the risks and costs are heavily unbalanced in favor of the customer.

What do suppliers as valued partners in the relationship receive in exchange for these terms?  Buyers will offer appealing terms to suppliers willing to engage in customer centric business processes:

• Greater share of a customer’s wallet as the supplier becomes the preferred vendor for a particular product line
  Broader scope of services that may include many value added services that increase the average revenue per unit sold

Suppliers must weigh the pros and cons of such arrangements to determine their best strategy.  Often the tradeoff is a choice between revenues and profitability. 

What are the EDInomics of supply chain to supply chain competition?   B2B integration technology can be the key to unlocking the potential of collaborative relationships in a value chain.  B2B can be used to enable a variety of strategies such as multi-echelon demand visibility, collaborative product development and third party supply chain finance.   But the technology is rendered ineffective unless the channel master in a relationship has a long-term, supply-chain wide perspective on their activities.   Unhealthy suppliers introduce performance drag, cost overhead and higher risks to the overall supply chain.  While these factors may not be visible in the buyer’s next quarterly income statement, they will most certainly define the long term success of the buyer.  After all, as Dr. Lee states “The weakest link in the supply chain defines the supply chain.”

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.

It’s Sunday morning at the annual National Retail Federation Big Show in New York City and there is a mix of excitement, intensity and competitiveness is in the air…. 

Some of you may wonder what I was doing at a tradeshow on Sunday.  Well, I don’t usually spend my Sundays going to tradeshows.  However, I felt compelled to get to the NRF show for its opening day.   Unfortunately, it always seems to me like the best sessions at NRF are held on Sunday – especially in the morning.  However, one good thing about this year’s show is that it is one week earlier.  Normally, the show is held on the week of the Martin Luther King holiday, which means that to attend the conference you may have to forgo not only a Sunday, but a holiday Monday as well.  However there are a number of benefits to being at NRF on Sunday morning.  In my opinion it is really the best time to be there - not just because there are great speakers and content, but because of the atmosphere.   

The first session I attended was a presentation by Dr. Ira Kalish of Deloitte’s research group.  Every year at the NRF show, STORES Magazine and Deloitte release their annual “Global Powers of Retailing” report.  This is one of two retail industry studies that I look forward to each year.   The other is AT Kearney’s Global Retail Development Index - http://www.atkearney.com/shared_res/pdf/GRDI_2007.pdf.   I often carry a hard copy of the Deloitte study with me in my briefcase because it proves to be a useful reference throughout the year.   This year’s version does not appear to be online yet, but the 2007 report is posted at www.deloitte.com/dtt/cda/doc/content/Global%20Powers%20of%20Retailing_07(3).pdf if you are interested.    

I will share a few of the results from the 2008 study.  The top 10 global retailers were listed as:

1. Wal-Mart
2. Carrefour
3. Home Depot
4. Tesco
5. Metro
6. Kroger
7. Target
8. Costco
9. Sears Holdings
10. Schwarz 

A few other interesting insights from the 2008 study: 

• US Leadership – 37% of the Top 250 global retailers were based in the US.  45.5% of sales from the Top 250 were from the US market.  Most of the US leaders are non-grocery retailers and most only sell in the US.  Apparel is particularly strong with the US claiming the top 5 global chains worldwide.
• Emerging Markets - Chinese retailers are growing quickly with 6 retailers in the Top 250 and 3 of the Top 10 fastest growing chains (GOME, Suning Appliance and AS Watson).  There are no Indian retailers in the Top 250.  However, Russia and Eastern Europe are well represented.  In fact, Russia’s electronics retailer Euroset Group is the world’s fastest growing chain as measured by 2001-2006 sales.
• Sector Analysis – Hardlines, which as defined by Deloitte includes consumer electronics, office supplies and toy retailers, was the most globalized sector with leaders such as IKEA (37 countries), PPR (45 countries) and Toys “R” Us (35 countries) represented on several continents.   Hardlines enjoyed 14.5% CAGR from 2001 to 2006 – largely driven by the housing bubble in markets such as the US and UK. 

These are a few of the highlights from the study, but they don’t do justice to the outstanding presentation delivered by Dr. Kalish.  He provided what I think is the most succinct and easy-to-understand explanation of the root causes of the global credit crunch and its relationship to the US trade deficit and mortgage crisis that I have heard from anyone.  He then went on to reveal some fascinating insights about the retail market in 2007 and some intriguing predictions about what we can expect in the years to come.  While, Dr. Kalish’s presentation was without question the best session I attended all day, I could not help being somewhat distracted by my peers in the audience.   One of the most interesting aspects of the Sunday morning sessions at NRF is the attendee demographics and behaviors you observe.  On Sunday most of the attendees are not actually from the US, but instead from overseas.  There is a particularly large contingent from Europe and Latin America.  The Asian and the Middle Eastern countries are also represented, but with significantly fewer attendees.  These attendees are all hard-core retail types.   Many of them have traveled more than 3,000 miles to hear from the leading US strategists on innovations in consumer marketing, real estate and store design.   Although it is a Sunday most of this group is dressed in business attire.  And many are carrying digital cameras which they use to take snapshots of important slides presented during the conference.  By the way, these are not the disposable cameras you buy from a street merchant in Times Square or even the standard consumer digital cameras you use to take pictures of your family.  These are high end digital SLRs, which reflects both the passion and intensity of the audience.

Another excellent session I attended was titled “How America Shops” by a firm called WSL Strategic Retail.  I had not heard for WSL (www.wslstrategicretail.com) prior to this show, but I was very impressed by the presentation given by Wendy Liebmann, their Founder and Chief Shopper.  This session was attended by another capacity crowd eager to learn from WSL’s findings about consumer preferences and shopping behaviors. The theme of the presentation was “It’s Anarchy,” referring to the erratic buying behaviors exhibited by US consumers.  However, the theme proved to also be excellent foreshadowing for the end of the session.  WSL had produced about 100 color copies of the presentation handouts.  However, the room must have had at least 400 attendees.  As the session broke there was a mad rush by the crowd of to get a hard copy of the presentation.  People were literally pushing, shoving and kicking each other to make their way to the table to grab a copy.  It reminded me of being stuck in a mosh pit.  It is hard to believe that one would observe this type of behavior on a Sunday morning at a retail tradeshow, but as I stated above – these folks are hard core.  I did manage to get a copy of the handout, which I am considering auctioning on eBay…

Steve Keifer

© Copyright 2007 GXS, Inc.  All Rights Reserved.