How Will the Internet Change B2B Supply Chains?

McCartney: Michael, what is your view of how the Internet is affecting B2B activities generally?

Schmitt: The Internet is reinventing B2B activity. Historically B2B activity, at least from the standpoint of technology and applications software, was very inward focused. People entered transactions on a screen, and a lot of work was done over the telephone or the fax. The Internet allows an outward focus. Rather than people talking to people one-on-one, we have computers talking to computers. We have customers who electronically read data, move it up the software observation engine, and use it to improve their ability to do business.

This transformation is slashing inventory as well as the number of people required to interact in a transaction. It is also shrinking time cycles. The other trend we see today is brand new business models, such as trading communities. These are based on brand new business processes, which are based on new technologies.

McCartney: You obviously hold the view that B2B is an area where the Internet is going to excel. How do you see the relationship between established players like J.D. Edwards and new companies that may emerge in the feeding frenzy that seems to be going on right now?

Schmitt: Brand new players have a crucial advantage: They don’t have an old release of software designed for internal processes to drag along. The existing players, however, have customers and infrastructures.

The huge difference in this new economy will be for vendors that have new technology to support new business processes that support new business models. To that end, J.D. Edwards did a complete rewrite of its One World software suite to offer fulfillment processes based on new technology. In June 1999, the company also acquired Numetrix (a Toronto-based provider of Internet-based supply chain planning software), and did a complete rewrite of DOMA, or distributed object messaging architecture, for supply-chain collaboration.

The combination of Active Supply Chain, our software for supply-chain collaboration, with our enterprise resource planning (ERP) system offers new technology for new business processes for new business models. This is creating new technology for the new economy. You have to have outward-looking community-based capability, so that your technology solves problems that occur in the outward interactions with customers. That’s what the marketplace is looking for.

McCartney: What do you see as the principal hurdles to the development of B2B e-commerce?

Schmitt: We think that in digital marketplaces in the B2B area, for companies to interact, collaboration is the key. The three barriers to collaboration in Internet-based supply chains are trust, adoption and reasoning.

Let’s first talk about trust. Three parties are involved in a transaction: the market-maker in the middle, the buyer, and the seller. How do you make them work together and trust one another? A B2B transaction is not like buying a book from Amazon. When you buy industrial supplies or steel or hydrocholoric acid, you deal with complicated variables like FDA requirements, and so on. These are complex transactions. The business you do with somebody will depend on the data you can see, the penalties you face if you do not deliver, the warranties you are offered, and so on. All these make up what we call a profile of trust. This is a unique data model for interactions you have within a trading community. The data model is what makes companies trust each other. The trust arises not from a handshake but from an Internet business perspective.

The next barrier we see is adoption. If you want 20 people to participate in your supply chain, and you ask them all to buy the same ERP system that you use, so that they have to buy hardware and software and send people to a six-month training class, that is enormously intrusive. Our view is, if everyone uses web browsers and profiles of trust that they all agree with, that solves the problem. Then the adoption rate goes up because the solution is non-intrusive.

The last barrier is reasoning. Say you have 20 people collaborating in a supply chain, and they can all see the data they need to see, they can be alerted in real time when conditions occur that are out of sync. We believe in linking supply-chain collaboration with market making software, which allows execution to occur in real time. So if you find out that a truck from one of your suppliers has gone off the road, you can airship things in, know the penalty cost, and take corrective action. That’s the key to B2B. These are new business models and new business processes, so they need new technology.

McCartney: ERP has built a strong reputation for its focus on financial control and manufacturing planning. I am quite intrigued to hear your emphasis on supply-chain planning and flexible execution. Does it concern you that ERP as an industry group brings a heritage and a reputation for being focused on production rather than on customer issues?

Schmitt: ERP has its reputation, and I can’t change its reputation or image. J.D. Edwards is a major ERP player. But one thing our company has in its favor is that it has always been known as a leader in distribution software technology. It has robust modules which handle customer service, integrated warehouse management, integrated transportation management, and an ERP planning module. Our acquisition and merger with Numetrix has brought us enterprise planning for strategic supply-chain design, demand planning in a collaborative manner, production and distribution planning in a collaborative manner, production scheduling and do on. So from the top, design, down to execution, we have a very full stack. So whether you call it ERP, MRP or schmee-RP, we solve complex business problems that are internal and now—more important than ever—that are external to the enterprise.

McCartney: How do you see things rolling out in the future both within your industry group, as well as more broadly as the Internet becomes the pervasive technology that everybody thinks it will?

Schmitt: I like to look at business models and supply-chain design. People want value. Forget the marketing hype. If companies want to make the transformation to new business models, they need vendors who can help them to do it, and stand by them as they implement the new technology. We see a lot of the ERP players falling out because they haven’t addressed these issues.

When you do trading on the Internet, your volume goes way up because you’re going to reach new markets that you never thought about. Your complexity also goes up because generally you are sharing fulfillment. So how you deal with contract manufacturers, third-party logistics and trading partners is key. Optimization helps solve complex problems in high volume. Supply-chain software companies that solve that problem will win in the new economy. Those that do not will fail.