Keep the focus on business, not technology.  Only after the specific goals are laid out should you consider the tools required to achieve them. The technologies of "E- business" are a set of tools, not a strategy.  When investing in your own technology, insist on incremental payback.  The pace of changing technology means that you can't afford to wait long for a project to pay for itself.

E-Market Mania

At the beginning of this year, there was still much uncertainty as to how internet-based marketplaces would affect traditional sales channels. Would the public or private marketplace model triumph? Would E- markets accelerate the trend toward disintermediation by allowing steel producers to get closer to the end- user? Would service centers become mere logistics providers rather than full sales channels?

These questions have yet to be definitively answered, but we do know that most of the revolutionary claims for electronic marketplaces have proven wide of the mark. Although World Steel Dynamics predicted a B2B E- Commerce market of $44 billion by 2004 and $200 billion by 2010, many of the E-Commerce pioneers in the steel industry have crashed and burned. Even many of the current survivors continue to participate at a minimum level of transactions as compared to what is needed to attain profitability. The E-market mania that existed in 2000 has been dramatically tarnished by a chilling lack of funding and lost confidence. Ventures such as Metalsite and Metaljunction just haven't lived up to expectations. Metaljunction announced start up for April, then July, and it's still not operational. However, through these clouds of confusion and hype, the outlines of the future may be starting to take shape. With the benefit of 20/20 hindsight, let's compare last year's conventional wisdom with current thinking.

What we thought then…
Only price will matter. By opening up the sales channel to a much broader supplier base and improving transparency, E-Markets were predicted to give customers extraordinary pricing power.

What we know now…
Buying direct goods isn't so easy. With a few exceptions, E-markets are only a significant buying channel for indirect products (i.e., items like office supplies and maintenance products that are not directly sold to customers). We have found that the purchase cost of direct materials is only a small part of their overall value contribution, especially in the area of secondary flat rolled products. Tight supply chain integration offers better value because it attacks more expensive aspects of purchasing like inventory carrying cost, quality assurance and transaction execution. To some extent, free-for-all E- markets are in opposition to the trend toward tighter integration with fewer strategic suppliers. In the case of the flat rolled E-business evolution, the ability to leverage secondary availability becomes an issue.

What we thought then…
Public exchanges will win because they're "channel neutral." Conventional wisdom said that buyers wouldn't want to be restricted in their supplier base and sellers would want to reach the broadest possible market. Since each side would be suspicious of the other, only a neutral third party could offer a solution acceptable to all participants.

What we know now…
Volume makes markets. Buyers and sellers can only afford to play in a few electronic marketplaces, so they tend to limit themselves to the largest. More often than not, the behemoths of the "old economy" have been the ones able to command the broadest participation and quickly gain "traction" for their marketplaces. Other market participants may complain about domination, but they have been forced to follow the money. In reality, the metals industry just hasn't really found the right model to make it pay.

What we thought then…
You must play or perish. The tidal wave of E-business was supposed to wipe out those stodgy old companies that were too slow to adapt. "Road kill on the information highway" became an overused metaphor. The business benefits of electronic commerce were seen as so compelling that they outweighed all of the established relationships, behaviors and processes developed over the years in the steel market.

What we know now…
Buying behaviors don't change overnight. E-business evangelists failed to remember that all sales begin and end with people. Even if the technology met its promised efficiency (which it demonstrably did not: just compare placing an order on one of the typical E- trade websites with calling your local inside sales rep), the humans involved in the market are simply not willing to discard their familiar ways of doing business until they are convinced of the benefits and comfortable with the change. It's typical human behavior. People still prefer the personal contact. E-Commerce isn't the panacea many financial gurus thought it would be and now the "Honeymoon" may be over.

What we thought then…
Have your system call my system and we'll do lunch. Web technologies would provide inexpensive transaction automation for all participants up and down the supply chain. We'd finally achieve the promise of the paperless office. The cost and error rates of clerical data entry would be all but eliminated and we'd enjoy instant, seamless communication with our business partners.

What we know now…
Technology is not the issue. It's relatively easy to buy fancy new software but extremely difficult to integrate it into your business. Although e-Steel, a technology provider, has demonstrated significant success in the automotive industry, that same level of success may not be transferable to the metals industry. Success in automating business processes requires standardized procedures and "clean" data, both of which may be a challenge in many organizations within the metals industry. Even more important are the issues surrounding privacy, security and trust: how much internal information are you willing to "expose" to your business partners and competitors?

What we thought then…
Mobile commerce is the next wave. A year ago it was easy to envision a wireless world: our customers and sales team would be able to interact anytime from anywhere. By now the "3G" mobile phone standard was to have allowed a telephone to access the web as easily as a wired PC.

What we know now…
Wireless communication is different. The severe disappointment of wireless access protocol (WAP) phones has shown the current limits of this technology. Excruciatingly slow access times, dropped connections and tiny screens discouraged even the most techie users. Just as early pioneers considered the telephone to be merely an extension of the telegraph, wireless enthusiasts have not recognized the fundamental differences between these devices and PCs. Wireless services must be tailored to their medium and not just stripped down versions of their wired counterparts.

Lessons for the Future

What, if anything, do these past lessons tell us about the future? Having experienced several "booms" and "busts," both economic and technological, we offer this advice.

• Keep the focus on business, not technology. When planning any business initiative always start with the fundamentals: markets and competitors, channel strategy, financial goals and organizational effectiveness. These define what you want to accomplish. Only after the goals are laid out should you consider the specific tools required to achieve them. The technologies of "E- business" are a set of tools, not a strategy. Tools will change but business fundamentals will not. The threat of E-commerce to the service center industry is not as huge as some may have surmised. Look at the rapid closures of web sites this year alone. Many existing sites continue to operate with negative cash flow. Consolidation is always mentioned as a potential savior, but two losers don't make a winner. Michael Levin, Chairman, CEO and Founder of e- Steel put it simply: "It's difficult to convince yourself why you would want to buy a burn rate."

• When investing in your own technology, insist on incremental payback from your investment. The pace of changing technology means that you can't afford to wait years or even months for a project to pay for itself. Although it may be extremely difficult, you must insist that lag between investment and benefit is always less than 6 months. This doesn't mean that longer projects aren't allowed. Rather, it forces such projects to produce some benefit before they are fully implemented. This discipline is the only way we know to avoid building a technological road to nowhere.

This article was co-written by Rick Johnson.

Copyright 2001 American Metal Market LLC, a division of Metal Bulletin plc. Reprinted with permission.

Steve Deist ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) is responsible for the Operations Practice at Indian River. IRCG is an experienced based firm specializing in Distribution. Started in 1987 by J. Michael Marks, IRCG's specialists consult with distributors and suppliers to make the changes necessary to maintain competitive advantage. You can contact them by calling 321-956-8617, or visit www.ircg.com for more information.

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