InformationWeek

October 19, 1998

Middlemen's Role In E-Supply Chain

Distributors must add value and provide customer service to avoid extinction

By Edward Cone

t's no secret that electronic commerce is radically changing the way goods and services are sold. From books to microchips to airline tickets to car loans, the ability to purvey wares--and fulfill transactions--on the Internet is having a major impact on virtually every line of business.

Now that it's easier for manufacturers to sell directly to customers, the role of middlemen in the supply chain is being questioned. Some middlemen are re-asserting themselves by providing a host of value-added services. Is "re-intermediation" the wave of the future, or will middlemen go the way of the dinosaur? To find out, InformationWeek asked a number of key players and experts in E-commerce to share their thoughts in a recent online discussion moderated by contributor Scott Leibs.

DISCUSSION PANEL

John Calhoun
Partner in the Toronto office of the McKenna Group, a marketing and new-business assessment firm

Pehong Chen
CEO, president, and chairman of the board of BroadVision Inc., a Redwood City, Calif., vendor of E-commerce software

Christy Jones
CEO of pcOrder in Austin, Texas, a re-intermediary in online PC sales

Tim Minahan
Senior analyst at the Aberdeen Group, an IT consulting firm

Robert Olson
CEO of Virtual Vineyards in Palo Alto, Calif., a direct marketer (via the Internet) of wines and foods

Rob Rodin
CEO of Marshall Industries in El Monte, Calif., an online distributor of electronic components

Clinton Wilder
Senior writer for InformationWeek, covering Internet commerce and online services

InformationWeek: What role are middlemen playing in the supply chain today?

Olson: Virtual Vineyards provides several important benefits to wine producers and consumers. We offer logistics support for suppliers that can't afford to invest in sophisticated fulfillment systems. Most of our suppliers are more interested in driving their tractors or balancing the acidity of their wines than maintaining a Web site or taking calls from customers. Part of our job is to make our channel attractive for producers, so they direct customers to our online store instead of setting up their own. Our site draws lots of customers because they trust our endorsements and appreciate our expertise, breadth of selection, and fast service.

Calhoun: The online mortgage brokers are meeting the needs of customers by offering many choices for home loans in one place, making the application process easy, and providing plenty of information. But because these intermediaries all offer similar services, there may be only one or two successful players.

InformationWeek: Simple economics argues in favor of having as few layers as possible between maker and buyer. What else can distributors and other third-parties do for customers that manufacturers can't?

Rodin: Technology can link buyer to manufacturer, but that's not enough. Time is a precious resource. Middlemen have the opportunity to provide superior customer service, because it's their sole focus. They can also create an atmosphere of trust, which is a critical part of the sales process.

Minahan: The middlemen who have survived the disintermediation threat have learned to leverage the Internet and its electronic-commerce capabilities to provide value-added services that most manufacturers don't have the time or inclination to offer. These typically fall into three categories: logistics, information, and service.

Distributors and other intermediate parties that deal with multiple manufacturers can respond to customer requests to deliver a variety of products in a single shipment. Many distributors, particularly those providing computer equipment or electronics, will merge or even configure products from various manufacturers into a single shipment that meets the customer's needs.

Calhoun: If middlemen primarily provide access to markets, the risk of disintermediation is high. They must also provide information. For instance, companies in the PC business, such as pcOrder, add value by enabling buyers--retailers, distributors, or others--to specify volumes, time frame, configurations, etc. Then they determine which manufacturers can fulfill the order and at what price level. Users don't have to sort through catalogs or deal with individual forms that use lots of arcane product codes; they just tell the intermediary what they want and let them worry about how to translate it for each manufacturer.

Chen: Some of our clients use information to create a competitive advantage. For example, a Paris cosmetics company that sells through beauty shops and other retailers didn't want to antagonize this channel by selling direct to consumers over the Web. However, it did want to establish a direct relationship with its customers. The company created a site where consumers can get lots of beauty advice, but they must go to the retailers to buy the products. The manufacturer gets to learn more about its customers through interaction at a Web site, and it keeps its retail chain happy by not competing with it.

Jones: Many major computer companies put up Web sites, but they found that in a crowded channel with an exploding number of products and incompatible systems, streamlining business on the Web was very complex. pcOrder facilitates the sale of IT products and services by providing a broad selection and brokering information. For example, customers can go to our Hewlett-Packard Commerce Center site and identify the computer they want. Then we'll refer them to a reseller in their area. Helping partners and customers communicate with each other is important to us.

InformationWeek: Is the future of middlemen bright?

Minahan: Yes--if, like the online mortgage brokers, they develop new ways of doing business instead of simply automating traditional business procedures. E-Loan Inc., for example, took the intimidating and lengthy process of applying for a home loan and turned it into a simple task that can be completed quickly over the Net. The company also uses decision software to add value to the process, by providing an automated service that matches a customer profile with the best available loan.

We can also expect to see more industries develop business-to-business marketplaces or communities online. Just as Internet chat rooms provide a venue for people with common interests, Internet marketplaces are being developed to support businesses with common supply chains.

Chen: Middlemen will always have opportunities if they understand the market. Retailers such as grocers, for example, can't simply replicate their businesses on the Web, because their entire infrastructure is about shelf space and moving large volumes of merchandise. But a good middleman could tailor a site that can satisfy the needs of a consumer who only wants a few groceries, some health-care items, and some film or a video rental, by combining products and services from many suppliers.

Wilder: When we're talking about re-intermediation, keep in mind that the issue is about more than new middlemen seizing opportunities; it's also about different ways to do business. Many manufacturers aren't equipped to sell direct over the Web, but they can use the Web to provide new functionality to the supply chain. Fruit of the Loom, for example, uses its ActiveWear Online system to allow wholesalers to get easy browser access to its inventory system, so they can do a better job of supplying products to consumers. Rather than disintermediate their wholesalers by selling directly, you could say they're re-intermediating a certain task to improve logistics.

Another example is MetalExchange, a Web marketplace recently launched by Weirton Steel, LTV, and Steel Dynamics, to match buyers and sellers of surplus inventory steel. This manufacturing consortium is seizing a re-intermediation opportunity for itself, rather than allowing someone else to do so.