News

Source: Industrial Distribution, May 2001

By Ken Brack, Web Manager, Industrial Distribution

Lee Eagan never bought into the e-commerce hype.

Eagan, CEO of Oliver Van Horn Co., Inc. in New Orleans, noticed almost two years ago that his company was not fully benefiting from doing Electronic Data Interchange transactions with its suppliers. Internet sales weren't worth the expenses either.

Oliver Van Horn is one of a few abrasives distributors that exchange purchase orders and invoices via EDI with 3M, for example. But the charges to order standard items and products that 3M stocks but Oliver Van Horn does not via a private, value added network are high, sometimes reaching $1,000 a month. In addition, Eagan cites the time spent making multiple phone calls to locate special items that neither his company nor one of his suppliers such as 3M stocked.

Eagan is not giving up on digital business tools, however. Early this year his company began using a Web-based network that he says saves time and cuts costs to locate products and transact orders with 3M.

The trading exchange also addresses a major drag on distributors' earnings - dead inventory - as it allows select business partners to access and sell each other's non-moving items.

Called Trading Partner Connect, the network was created by distribution software provider Prophet 21. Several distributors and manufacturers that are either testing it or, as in Oliver Van Horn's case, are doing actual transactions believe the hub has three main things going for it. It reduces distributors' order transaction costs, helps them sell dead inventory through a buddy system, and has the potential to provide manufacturers better point-of-sale information.

"People spend too much time on the sizzle rather then the steak," Eagan says, commenting on some of the e-commerce "solutions" that have fizzled recently. "I love what [Prophet 21] is trying to do to make our business more profitable."

One day in February, Eagan went on his computer system and used the Trading Partner Connect module to look into 3M's inventory for abrasives that he doesn't stock. He then sent a purchase order for seven-inch, 80-grit discs. The order, shipment and invoice to Oliver Van Horn were processed in the same day, with no mistakes, Eagan says. During the first quarter Oliver Van Horn sent nearly 300 purchase orders to 3M via the network.

Eagan compares that to using 3M's extranet to locate a special disc. While Oliver Van Horn continues to use the extranet to check the accuracy of Universal Product Codes (the 12-digit product identifiers), it takes three to four minutes to retrieve pricing and availability that way - versus about 12 seconds on Trading Partner Connect.

"That transaction doesn't improve margins," says Eagan. "What it does is [give] the ability to have that type of customer service so I'm able to have a reputation in the marketplace of shipping faster than my competitor."

Streamlined orders, few errors

Several firms trying out the trading hub point first to the streamlined exchange of purchase orders, invoices and shipping notices between distributors and suppliers. Jim Hunt, 3M's e-business manager, estimates that sending those documents real-time through the network rather than a VAN will save distributors like Oliver Van Horn about half of their VAN charges. He says the P21 network makes "a much easier connection for those EDI transactions."

Hunt compares that with other manufacturers' extranets. Many of those give distributors a look at inventory but typically are not integrated with the distributors' ordering system, which means someone has to key in the information a second time.

The system should also help customers make procurement decisions, Eagan says, because it solves the trouble matching and searching suppliers and distributors' product numbers.

"This allows [distributors] to order it and it's part of their system," says Hunt. "The real issue is there's a customer on the phone and if they can say, 'Yes, we've got it,' that's a real benefit."

Hunt says 3M also benefits because the EDI purchase orders it receives through the hub have fewer errors than those through its extranet and require few if any customer service contact from 3M back to its distributors.

Doug Lescarbeau, director of e-commerce at Henkel Loctite, another manufacturer that is trying out the hub, says Henkel Loctite receives 1,000 calls daily to customer service about pricing and availability. "This will answer straightforward questions from distributors, reduce errors and improve accuracy," he says.

Tackling dead inventory

Several distributors are excited about the trading hub's potential to tackle their dead inventory woes. While several online exchanges exist for surplus MRO inventory, and end users can also bid for items on auction sites, observers suggest none of those make it as easy for distributors to source and conduct orders from one another.

Prophet 21 estimates that for a small distributor with about $10 million in sales, between 20 to 40 percent of its inventory is either slow moving or dead. Bill Derville, president of General Tool & Supply Co., of Portland, Oreg., another distributor that is testing the network, physically counted his firm's dead inventory last year and says it accounts for about one-third of the total.

By standardizing distributors' and manufacturers' parts numbers, the trading hub claims to make it easy for distributors to source products they don't stock from a trading partner with one stroke, sorted by best price if they want. In addition, the hub "rationalizes" varied descriptions that different distributors use for the same product so it can be easily located from different sources. Distributors maintain control over who they trade with.

Fees for the hub are transaction based. A manufacturer like Henkel Loctite pays fees when a distributor orders products, or Eagan's distributorship pays if it sources products and receives them from another distributor, for example.

Some obstacles remain, such as how distributors should identify slow moving items - whether by price or by last shipped dates, for example. Terry Conder, purchasing manager and legacy systems administrator at Midwest Industrial Tools in Omaha, Nebr., another distributor that is trying out Trading Partner Connect, believes those technical issues will soon be worked out.

"For us, a key to the network is moving slow inventory," says Conder. "I've heard from manufacturers, [who see] a value to identify some levels of stock throughout the country. Maybe we're all carrying too much inventory. Maybe we can scale back and increase turns."

"We see a lot of things that will improve our efficiencies and decrease overhead," he says.

Eagan, for example, envisions trading slow-moving stock with at least 10 "buddies" like Midwest Industrial Tools and another 40 or so distributors. "We as business people have not grappled with this inventory issue," he says. "If you have to borrow money as a distributor, regardless of what Grainger does, you're dead. Get out of debt."

Building critical mass

Looking ahead, 3M's Hunt and others believe the hub will provide broader benefits for supply chain partners. Hunt expects that perhaps later this year, suppliers' price adjustments will be moved to and loaded into distributors' networks within a day, rather than in the several weeks it often takes. Similarly, new products fliers and training modules can be moved electronically.

Hunt also sees value in receiving point-of -sale data, when distributors agree to provide it. Eventually, he believes most distributors will provide weekly or bi-weekly data, which will help manufacturers set smoother production schedules. 3M, for example, would know what Oliver Van Horn sold to a shipyard in one day, versus when it ordered 12 cases of abrasives, for example.

Prophet 21 hopes to quickly build a critical mass of trading partners. In April 12 companies were live - two suppliers and 10 distributors -- and the firm expected to have 60 distributors connected by June, and eight manufacturers. In mid March the entire 3M Industrial Markets Division signed on.

"It's not a short-term ROI," says Midwest Industrial Tool's Conder. "It's getting rid of slow moving items and reducing transaction costs."

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