Growth in e-Business challenged on several fronts

If you build it, they will come. At least that was the idea a few years ago, when pundits widely predicted that electronic connectivity, XML, and public and private exchanges would revolutionize supply chains.

Today, Boston-based AMR Research says the trade exchange market in 2003 is a paltry $798 million of a total enterprise applications market of nearly $47 billion.

The idea of the trade exchange still lives, but things haven't unfolded as planned. "Predictions were pretty optimistic," says Bob Mick, vice president of emerging technologies with Dedham, Mass.-based ARC Advisory Group. "It gets whitewashed a little and then reality sets in."

The reality is that would-be vendors pushed ahead, ignoring looming business and technology challenges. Sellers of goods were not interested in having public exchanges come between them and their customers. Even at the time, many recognized that buying and selling are more often based on long-term relationships than on best-price considerations only.

Finally, it was at best naïve for vendors to think that XML would serve as a universal panacea for back-end integration with enterprise systems.

"These legacy systems were implemented prior to the Internet," says Chris Smith, executive VP with RiverOne, a supply chain solutions vendor. "Enterprise systems are by their nature inward-facing, and getting information hooks into them can be difficult."

In 1999, the Internet or EDI transactions accounted for 12 percent of manufacturing shipments, translated into $486 billion in shipments, according to the Department of Commerce's report, Digital Economy 2002.

But as the report points out, most online transactions are conducted on proprietary networks amongst parties that have established relationships. In fact, EDI accounts for the majority of the dollar value of shipments—67 percent of the dollar value of orders accepted online and 65 percent of the value of orders placed online (see graph).

This, concludes the report, is consistent with the notion of well-established, high dollar-volume EDI relationships, particularly among larger plants.

But if technology, economic, and business practice challenges weren't enough, the nature of manufacturing itself also is changing. "Over the last four years," says Smith, "there has been a massive move toward outsourced manufacturing and vendor managed inventory. This creates a huge state of flux. It's difficult to get the business processes set when everything is unstable."