A Neanderthal Industry Smartens Up
John E. Haluska is a bear of a man whose gray beard makes him look more like Santa Claus than an Internet visionary. But three years ago, while the chief information officer for $2.2 billion electrical-parts maker Thomas & Betts Corp. was visiting a distributor, he passed the accounts payable office and noticed a large stack of documents with his company's name on them. When he asked about the papers, he was told: "It's T&B day." On such days, eight hours are spent crawling through the paperwork, addressing snafus between the distributor and Thomas & Betts--missed shipment dates, damaged goods, and, mostly, price discrepancies. Haluska estimates that it costs his company about $300 to straighten out each gnarly inconsistency. After learning others had the same nasty problem, "That got me thinking," he says.
Good thing. There's bedlam in the $90 billion electrical-parts industry. According to industry executives, upwards of 70% of administrative costs go into correcting order errors. Even highly automated organizations like Haluska's are struggling. In Thomas & Betts's distribution center 35 miles southeast of Memphis, 70,000 different parts--from pipe connectors to light-bulb fittings--are sorted by a mass of conveyor belts and shipped to distributors across the country. It's an efficient operation, but there's one problem: There are scores of distributors like the one Haluska visited that day, lacking the ability to quickly match items they need with the ones T&B ships. So workers instead spend time reshipping wrong orders or chasing down lost ones. The industry has "not had the good sense to back up and understand how to use technology to store and track all of our parts," explains Clyde R. Moore, Thomas & Betts CEO.
All that is about to change. Thomas & Betts and some 225 other companies are shaking their antiquated ways and working furiously to enter the Internet era. In September, the industry launched IDxchange, a cutting-edge private network linked to a massive database that catalogs parts and carries orders between manufacturers and distributors in a snap. While the new system isn't designed to enable such market-transforming innovations as real-time auctions or comparison shopping, doing business via IDxchange is expected to cut labor and telecommunications costs by some 50% a year. "We're an industry that is certainly a bit Neanderthal," says Malcolm O'Hagan, president of the National Electrical Manufacturers Assn. "But we're taking a quantum leap from the back of the pack to the front of the pack."
The custom network puts the industry light years ahead of its traditional way of doing business. For eons, electrical parts makers and distributors have zapped important sales data to one another using a system called electronic data interchange or EDI. Information on an invoice or sales order was coded based on arcane EDI definitions, then converted to bits and transported through a maze of electronic networks. While each part or category was standardized, the actual way of conveying the categories was not. One company might identify the shipment date with dashes and another with slashes.
That led to a raft of manual errors--nearly 20% of orders had typos or other goof-ups that required at least a phone call to clear up. For example, when a worker at Crum Electric Supply Co. in Casper, Wyo., typed in the wrong part number, the distributor mistakenly ordered a $100,000 motor instead of a set of $2,200 light fixtures. Crum had to ship the motor back and was charged a 25% restocking fee. "It just killed us," says owner David Crum.
Haluska was feeling the same pain. The CIO cringed at EDI costs that hit more than $10,000 a month. Those were the charges for sending data to a kind of electronic post office that forwarded it to designated distributors and vice versa. Many others in the industry had similar, if not higher, costs. "Small players couldn't even play," Haluska says. Add to that this stinger: There was nothing real-time about the old EDI system. Electronic orders didn't automatically pop up in a virtual inbox like they do today. Instead, the EDI system required companies to dial up and fetch data out of their mailbox. That meant most transactions were sent or received at the end of the day, making same-day shipments a rarity.
Haluska dreamed of a network that would bypass the expensive proprietary EDI system and simply speed data along a network using open Internet standards. With cheaper Net gear, costs could be slashed significantly. Indeed, using the new network, T&B now pays a fixed connection and usage fee of up to $2,900 a month.
Haluska's brainstorming paralleled the visions of Crum, the owner of Crum Electric. Crum had been watching enviously as retailers such as Wal-Mart Stores Inc. automated their check-out and distribution processes, while electrical wholesalers were stuck in the "dead tree" world of paper. Crum, along with Haluska, pushed members of the National Association of Electrical Distributors to meet with representatives of the National Electrical Manufacturers Assn. The goal was to synchronize the manufacturers' data with the distributors' so that errors in price and product identification would be wiped out. "We recognized the lack of technology in our business relationships," Crum says.
In March, 1998, the industry's top executives met in Arlington, Va., and pledged about $5 million to construct IDxchange. They commissioned Triad Systems Corp. in Livermore, Calif., to build a database that would store information on hundreds of thousands of parts. With IDxchange, companies like Crum's will be hooked into the database and a point-and-click ordering system, eliminating the time-consuming task of typing in parts numbers. Today, for example, a light bulb has a single part number that identifies it consistently, not by whatever method each company prefers. "Until we talk apples to apples, electronic commerce can't take off," Haluska says.
Now it can. MCIWorldcom Inc. has built the network component of IDxchange. Companies connect using Internet access gear, ranging from sluggish 54Kb modems to speedy T1 lines. The member companies pay a flat monthly fee, from $800 to $2,900, depending on the size of the company and the speed of its connection.
The new system has persuaded some companies to abandon paper forever. Moeller Electric Corp., for example, had been sending invoices and packing slips via snail mail. George Leonard, the company's manager of information systems and logistics, avoided moving documents electronically because the EDI system was too expensive. Now he figures the $840 a month he'll spend on IDxchange will beat paying someone to print an invoice, stuff the envelope, and lug bags of mail to the post office. "There's got to be money saved in that," Leonard says.
With their own private Internet, electrical manufacturers and distributors suddenly have the capability to operate at Net speed. The new network bypasses the clunky EDI network and allows companies to complete transactions in minutes. Connected via IDxchange, a distributor can now send an order at 9 a.m. and have it received by 9:03 a.m. Then, the order can be packed, shipped, and delivered the same day. "That was an impossibility before," says Jeff Kernan, vice-president for information and technology at Lithonia Lighting in Conyers, Ga.
To add even more convenience, several distributors are building Web sites that let them give customers--contractors or utilities--a much higher level of service. In the past, if a plumbing contractor came to a distributor's office to ask about a pipe fitting, the distributor either logged on to a pipemaker's Web site and browsed for a part or, if that took too long, he would pick up the phone. "When you call, the person on the other end is in the bathroom," Crum huffs. IDxchange will eliminate all that. At the touch of a key, the computer will confirm a part's availability.
NOT FAR ENOUGH? Despite the advantages, IDxchange still has its skeptics. Small shops, especially, have fretted over having to adjust to new equipment and ways of doing business. Joseph G. Schneider, president of Madison Electric Co. in Warren, Mich., supports the industry effort, but he's not convinced that it will save his company money. Madison spends about $4,000 a month for phone and data lines that link his branch offices. Schneider worries that expense might not be eliminated, even if he shells out some $2,900 a month for IDxchange. So he's cautious about signing up for the service. "I don't think you go running through the door," he says. "You peek around the corner."
Or do you? For all its merits, there are some who say that IDxchange doesn't go far enough. For starters, it's not set up for buyers and sellers to haggle fast and furiously. That bartering is still going on, but it remains the province of the phone call. Too bad, say Net futurists. John J. Sviokla, a digital strategist at Diamond Technology Partners Inc. in Chicago, says if the IDxchange remains a kind of megacatalog and ordering system, "that's a big thing, but not anything like an electronic market."
For now, the leaders of IDxchange are content to e-engineer their old-line industry this far. After all, IDxchange does catapult them well beyond paper and postage stamps--and past the frustrations of yesterday's poky old technologies.