Asif Zahir
CS
99i: Gio Wiederhold
Business on the
Internet
B2B E-commerce in the
Apparel industry- From EDI To XML
Business on the Internet:
Although the internet has been around for ages, is was as recently as the year 1994 that business began to stake out its claim to virtual real estate. Since then, the Internet has been dominated by business activity, with companies selling everything from pizzas to real estate in the “information superhighway”. Indeed, the Internet has had a pervasive effect on our culture, and every advertisement, billboard, and soda label carries a URL; most of us shop and bank online, and communicate with each other through the Internet. The Internet is perhaps as great a development in human history as electricity itself.
Business on the Internet certainly started out with business-to-consumer (B2C) companies grabbing all the attention. Consumer oriented companies such as Amazon.com, America Online and Yahoo! essentially personified the “New Economy”. There have also arisen consumer-to-consumer (C2C) companies such as e-Bay (where consumers exchange goods between themselves), and consumer-to-business (C2B) companies such as Priceline.com (where consumers rather than the business indicate the price).
However, many highly credible industry analysts have forecasted that the impact of business-to-business (B2B) Internet companies will be many times larger than that of business-to-consumer. The Gartner Group estimates that there were $90 billion in Internet B2B transactions in 1999, in comparison with only $16.7 billion in Internet business- to- consumer transactions. The potential size of B2B e-commerce in the economy is vast; Jupiter Communications (2000) estimates that overall transactions of goods (excluding services) between businesses in the United States amounted to $11.5 trillion in 2000, of which $336 billion are conducted electronically. By 2005, they expect the online component to represent $6.3 trillion out of a total of $15.1 trillion.
So what is business-to-business e-commerce, or as it is popularly know, B2B? Simply defined, B2B e-commerce is the sale of goods and services between companies over date networks. B2B essentially signifies a broad range of transactions between businesses, including wholesale trade, and company purchases of services, resources, technology, manufactured parts and components, and capital equipment. It also includes some types of financial transactions between companies, such as insurance, commercial credit, bonds, securities and other financial assets. Indeed, many companies engaged in B2B e-commerce are intermediaries between other companies that buy and sell goods and services.
B2B - The Fundamentals:
Business-to-Business e-commerce centers around “Net Markets” or “B2B Exchanges”; simply defined, exchanges are on-line marketplaces where buyers and sellers congregate to exchange goods and services for money. B2B exchanges can be set up either horizontally or vertically.
Horizontal markets are set up to serve companies from many industries and typically provides a common service, such as financial services, benefits management, and MRO (maintenance, repair and operating). Popular examples are “Ariba Network”, and Commerce One's “MarketSite.net.”
Vertical markets concentrate on one specific industry such as apparels, agriculture and chemicals and seek to provide all of the services needed by that industry. Popular examples are VerticalNet, Chemconnect and Covisint. Vertical markets can in turn be divided into several categories:
[1]
Buy – Centric Markets: Also known as a buy-side market or procurement hub,
these exchanges feature a few big buyers
who join forces to build a marketplace where small fragmented sellers can sell
their goods. This is great for buyers since it permits quick and easy price
comparison-shopping. It also clearly favors the buyers, especially if there are
multiple sellers able to offer items that come close to meeting the buyer’s
requirements. Buy centric markets are often used by large companies for
fulfillment and procurement of supplies, and often goods are sold in
reverse-auctions, where the price goes down as sellers bid downwards. The large
companies themselves usually own such buy-centric markets. Popular examples of
such markets are - Kmart's Retail
Link, FreeMarkets.com and Covisint
[2]
Sell – Centric Markets: This type of a market occurs when there is a single
or very few sellers, and buyers compete against each other by bidding up the
price. This system is clearly favorable to the seller, and is also known as
lead-generation and sell-side auctions. These markets are not necessarily owned
by the big sellers, but rather by individual companies, and the revenues are
derived from ads or commissions on sales.
Popular examples of such markets are Grainger.com,
GE Global Exchange, DoveBid, GoFish.com, GlobalFoodExchange.com, E2Open.com,
and TradeOut.com
[3] Neutral Exchanges: appear where both the sellers and buyers are
fragmented. In this environment, a third party creates a neutral exchange and
performs the transactions through a biding system. This is an example of
"disintermediation" for which these “middlemen” companies receive a
commission or transaction fee for each deal. Popular examples of such markets
are NASDAQ, Altra, Paper Exchange, Arbinet
B2B in the Apparels
Industry:
The U.S. apparel industry comprises about 18,000
firms, most of them small. Just over 60 percent of these companies have fewer
than 20 workers; only 10 percent employ 100 or more. Thus in truth, the Apparel
Industry is dominated by big firms, such as Levis Strauss and VF Corp. (Lee,
Wrangler, Rustler, and Britannia brands) in jeans; Sara Lee Corp and Fruit of
the Loom in underwear; Calvin
Klein, Tommy Hilfiger, Nautica, and Chaps Ralph Lauren in designer ware; Nike,
Reebok and Adidas in footwear. All of these companies resell most of their
products to big clothing retailers such as Sears, Gap, Macy’s and JC Penny.
These clothing retailers themselves are big producers of apparels themselves.
The production of most garments
remains labor-intensive, largely because of the difficulty in automating most
sewing functions. Thus instead of mass-producing apparels within the US, most
of these big companies listed above have been outsourcing their manufacturing
to third world countries where labor and capital is relatively cheap. The U.S. apparel trade deficit widened by $11
billion during 1993-97 to $40 billion, as the growth in imports of $14.6
billion (43 percent), to $48.5 billion, outpaced the gain in exports of $3.6 billion
(74 percent), to $8.4 billion. Mexico and the Caribbean countries were the
fastest-growing major suppliers of U.S. apparel imports, although Asia remained
the largest supplier.
Thus in today’s Apparel industry, the skill- and capital-intensive operations such as product design, marketing, and distribution is still performed in the United States, while the production of fabric and stitching is performed by thousands of small industries spread across the world, but located mainly around East Asia. Thus once the initial designs are finalized in the USA, the production process of a T-shirt found in a Gap Store begins halfway across the world – probably in a textile mill in China. The fabric is first knitted from cotton grown in fields, and dyed as per specifications of the buyer. The sewing thread is produced in a similar process. Somewhere in Philippines, manufacturers produce accessories such as the button, zips, hangers, labels, and plastic bags. A central office in Hong Kong, owned by or working under the supervision of Gap Inc, procures all these parts, in the lowest possible prices, and arranges them to be shipped to an apparel manufacturer in a third country, say Bangladesh. Factories in Bangladesh would then cut and stitch the fabric, have it washed and packed into cartons purchased locally and finally ship it to the United States.
Thus, the production of any apparel involves a large amount of coordination between the retailer and the manufacturers, usually spread across several countries. In effect, the global apparel industry, and especially that of the United States, is vertically integrated and usually buyer centric with a small amount of buyers and many sellers. To achieve quick production and turn around times which are necessary in the apparel and fashion industry, retailers need a comprehensive system of supply chain management to keep track of production.
Supply
chain management (SCM) and EDI:
Supply chain management (SCM) can usually be defined as a process of managing the flow of product and information from raw materials suppliers to the end consumer. In the apparel industry, SCM includes business processes such as planning, design, and product development in the initial stage, then sourcing and production – both of which can be divided into several subcategories as described in the previous section - and finally, distribution.
Thus, effective supply chain management requires integration of business processes and efficient information exchanges between companies. Traditionally, communication in the apparels sector has been achieved by technologies such as telephone, fax and email, as well as personal visits and meetings between buyers and sellers. Although all of these have speeded up the procurement and distribution processes, they all require manual interpretation, thus increasing the chances of human errors and the production time due to repetitive manual handling of information. In this Information Technology era, effective electronic communication is a very important practice in supply chain management.
So far, retailers and manufacturers in the apparel industry have been communicating through Electronic Data Interchange (EDI) systems, which used to be the principle means of B2B communication before the Internet came along. EDI is an electronic message system with a consistent interface and infrastructure for high-volume messaging. EDI is based on standards between two trading partners that predefine the message format – a lot like filling out a form and sending the data electronically over a proprietary or third party network infrastructure called a value-added network (VAN) (although nowadays the internet is also used). In a typical transaction, for example, the buyer’s EDI software translates a purchase order into the appropriate transaction set and transmits this electronically to the vendors through a VAN. At the other end, the vendors system retrieves the document, translates it into its own internal format and fills out the order. With the advent of EFT (electronic fund transfer), EDI systems could also process payment transactions.
However, different EDI standards within the apparels industry have led to complexity and high investment for implementation of EDI systems between each of the retailers. This is a problem especially experienced by Asian manufacturers, particularly small and medium-size enterprises (SMEs), who generally lack the EDI knowledge and information technology implementation capability. Even if these SMEs could implement an EDI system, they would be reluctant to choose any one standard since they have to work with several retailers in different times. Thus, although there is an electronic supply chain within the businesses of the large retailers, it does not extend all the way down to individual manufacturers and suppliers in third world countries. To resolve the situation, a common industry-wide global standard is essential to serve as the communication backbone.
From
EDI to XML:
A business-to-business integration
in the electronic supply chain is possible only when those systems share a
common method for presenting and understanding information. EDI achieved this
by arranging the format of the data in a strict predefined structure; by
knowing the structure, the receiving system can interpret the context of
the data, and apply the information according to its category. However, since
any aberration from this structure would make the message useless, EDI is
unsuited to the supply chain integration, where complex messages, often
changing with the needs of today’s businesses, can take on a wide variety of
structures and functions. Added to the complexity of the different standards
already present in the Apparel industry, EDI has become relatively ineffective.
However, what if there was a way to bury the structure in the message itself?
What if the message could contain a description of its structure so that the
receiving system could understand both the context and the meaning of the data?
If the message is self explanatory, then there would be no longer the need for
the predefined structure. As long as everyone knows how the message expresses
itself, it should be easy to share data of all kinds without difficulty. This
is the concept behind Extensible Mark-up Language (XML).
EDI
XML
Source: Gartner Group |
XML is similar to hypertext mark-up language (HTML) in the fact that both uses tags – special text, invisible to the user, used to describe the normal text and explain to the browser how it should handle and display that text. While the HTML tags are primarily used to indicate formatting details to the browser, XML uses Data Type Definition (DTD) tags to describe the meaning and context of the text specific to the business it is being used for. For example, a <b> …text... </b> tag in HTML tells the browser that the text should be bold-face, while a <quantity>…text… </quantity> DTD tag in XML might be set up to tell the browser that the text describes the quantity of a certain product being sold. Other simple examples of XML tags may be <product_color> …text…</product_color> to describe the color of a product, or <payment mode>…text…</payment mode> to describe how the payment is being made. Thus XML allows the sending system to give meaning to the text by embedding it inside tags, so that the receiving system can extract from the message the essential information it needs to complete a transaction or order. This extraction is done by specialized software called an XML parser that interprets the tags according to the schema indicated in the message header. The schema is nothing but a kind of XML vocabulary, agreed on between the sender and receiver, that defines what the DTD tags mean and how they are to be read.
The main advantage of XML is of course that the tags do not have to be arranged in any predefined structure, and the information can appear in whatever order or length the sender desires. Thus if the message mistakenly has the quantity of a product before its name, the parser can still make sense out of the message. Expanding the schema can also broaden the scope of the XML document to include new and complex tags that better describe emerging business processes. Thus XML has often been called “an enormously flexible description language”. Other advantages of XML are that it can be used over the Internet and displayed using ordinary web browsers, and can be easily integrated with existing electronic systems within business.
XML
in the Apparel Industry:
The flexibility to create business specific tags in XML can lead to problems if each industry and businesses make their own schemas that do not relate to others. Without common tags and schemas, XML may end up being as ineffective in creating a complete and integrated supply chain, as was EDI. As a result, the Global Commerce Initiative (GCI) was formed in 1999 to create a basic XML schema useful for most B2B processes. It comprised senior executives of multinational retailers and manufacturers of consumer goods industry located on different continents such as Kraft, Federated Department Stores, Target Corporation, Marks & Spencer, Unilever, Procter & Gamble, Ahold, Home Depot, Tesco, Johnson & Johnson, Philips, Wal-Mart, etc. The GCI seeks to create an international agreement in supply chain standards. Although much progress has been made locally within Europe, the United States and parts of Asia, there remain substantial process barriers between continents.
As a subset of the GCI, the apparel industry launched the GCI Global Apparel Supply Chain Initiative to define common processes and standards in the international apparels sector. It will try to layout common XML schemas so that the entire apparels supply chain, comprising of not only retailers in the USA and Europe, but also manufacturers in Asia and Africa, can communicate and exchange goods electronically. Since it encompasses the entire industry, the common standards must be easy enough for the SME’s to implement both technically and financially. Another aim for the global electronic apparels supply chain is that it should be able to align with other consumer goods supply chains such as raw material/semi finished goods suppliers, logistics and transportation service providers, and customs and financial service industries. It should also be backward compatible with current EDI systems to accommodate the needs of existing users.
With one global standard across the apparel supply chain, retailers can better implement their supply chain, which will enable them to cope with increasingly competitive retail markets. Retailers can enjoy quicker lead-time as a result of faster and more effective communications with their suppliers. This may be crucial to the fashion industry where products are needed to be manufactured within a very short time. Operating costs are bound to be reduced with the implementation of automotive business systems that reduce manual interpretation of information and human errors. The common standards will also eliminate language barriers and enforce common processes across the industry. The transparency of information will ensure that quality is maintained across the production process; for example, designers can actually transmit their design electronically to the manufacturers, instead of just sending measurements, and therefore improve quality. Retailers can also set up effective online buying markets to procure accessories and supplies. By tracking production from the fabric stage to when the completed goods are finally shipped, the retailer can better manage supplies and inventory, and react effectively to market conditions.
The benefits of an XML driven supply chain are expected to be even greater for the suppliers. With one standard interface, suppliers can communicate with different customers in a standard electronic format, minimizing investments while providing value added services to their customers and improving their own operational efficiency. SME’s would also hugely benefit from XML, since they usually lack the knowledge and capability to implement the EDI infrastructure or information technology services in general. XML applications can be viewed with simple browser interfaces, and can greatly reduce the technical implementation and investment required for a computerized business model.