Log on or lag back

Unless companies catch up with the growth of internet commerce, they will be left behind, warns Diane Palframan

The internet promises to transform the way manufacturing companies work, if for no other reason than it provides a faster, cheaper and more efficient way of doing business with customers and suppliers. Dire warnings are already being issued to those who remain unconvinced about the potential of electronic business.

`In the next five years, all companies will be internet companies,’ Craig Barrett, Intel’s president and chief executive officer recently told The Wall Street Journal’s Sixth Annual CEO Summit. Otherwise, he said, they will not survive.

To illustrate the internet’s impact, he cited the growth in Intel’s e-business transactions from zero in 1997 to an estimated $15bn (£9.5bn) this year – about half the company’s revenue. In another two years, he predicts all the company’s sales will be via the internet.

Other high-tech companies tell a similar story. IBM says this year it will buy $12bn worth of goods over the internet, while Dell forecasts that next year half its revenue will be generated via the net.

Dell also says that in the next two years all of its suppliers will be on-line, up from 30% now, making it easier to exchange information. For example, suppliers will be able to see the level of Dell’s inventory and incoming sales and be able to supply them with information about when components have been shipped and new product developments.

One of the main reasons for the rapid growth in electronic trade is that it is reckoned to be less expensive than traditional approaches. According to Sharad Gandhi – Intel’s European marketing manager, electronic business solutions – the cost of raising a paper purchase order is about $100. Carrying out the same transaction electronically over the internet costs about $1.

`The net is a much better way to handle information and it’s interactive,’ he says. `Almost any company could benefit.’

But at what cost? Companies that talk about how much business they are doing over the internet rarely divulge details of how much they have spent on consultants, web development, new hardware, software and training.

`It’s not the cost of doing it but the cost of not doing it,’ argues John Timson, manufacturing specialist at enterprise resource planning software vendor JD Edwards.

Over the past year, JD Edwards has worked with many customers who see the internet as a means of reducing the cost of transactions with suppliers and customers, and improving demand forecasting.

`Using the internet is an extension of these companies’ supply chain projects. It’s not a new paradigm, rather it’s a means of providing better service,’ insists Timson. `There are no big hurdles to overcome; certainly the technology is not a restriction.’

Not everyone agrees that the transition to electronic business will be as smooth as Timson believes. Some manufacturers are content with the their way of working, even if it is not as forward-looking as that of their competitors.

Research carried out by IBM and the London Business School shows that 40% of UK manufacturers are not world-class contenders or even promising. In Germany, The Netherlands and Switzerland the proportion of laggards is less than 30%.

These are companies that often operate in protected markets, compete on product function and believe they are much better than they really are, according to Phil Hanson, principal of IBM’s management consulting practice in the manufacturing sector. Some companies have yet to consider good practices like total quality management or customer service, let alone electronic business.