by Bob Andelman

Forget about the cutting edge, the raw edge or the bleeding edge. Does a company's technology do the job it's supposed to do?

Some industries don't know if they should be in touch with their consumers via the Internet or the computer. From a business standpoint, those who are connected generally find cost-savings by direct sourcing via the computer with suppliers or buying supplies or tracking merchandise out.

Delivering merchandise to stores, re-ordering and managing inventory levels is getting faster thanks to computers, satellites, hand-held inventory scanners and the like. Nimble businesses are reducing costs based on better inventory management, better management of the product on the shelves, and better management of cost of the input into the product.

Tech Data and the
e-Demand Chain Solution

As a distributor of computer hardware and software, Tech Data was between a non-profit box and a cash-pumping virtual place.

Selling PCs isn't a business; it's a slim-margined means to an end. All the profits are downstream in peripherals and software. But squeezing cash from sales is an art at Tech Data, a Clearwater, Fla. company which boasts of spending less on sales and general administration than any of its competitors. And while the nature of doing business is changing, Tech Data is racing ahead of the curve.

Electronic commerce is the wholesaler's new game. Instead of taking orders from its value-added reseller customers (VARs) the old-fashioned ways ­ by voice, over the phone, by fax or even newer modes such as dedicated lease lines for computer transactions ­ Tech Data flipped the switch six years ago on a system that accepts and tracks orders via the Internet.

It is an incredible, revolutionary way of doing business. The Internet is so cheap. It costs a lot less than doing business the old way.

Six years ago, less than 15 percent of Tech Data's business came in electronically via a direct dial-up service. Today, a whopping 60 percent of its order lines are received electronically ­ $5.4 billion on an annualized basis for the fiscal year ending January 31, 2000. The company's sales for the period surpassed $20 billion. Apparently, the system works.

That means it will either get orders it couldn't get before because it didn't have enough people to answers the phones quickly enough, or it will avoid hiring another 500 people.

What's even more significant from a quality and processing perspective is that electronic orders don't require much work.

While retailers fumble about looking for ways to sell product online to the general public, Tech Data discovered that VARs not only are at ease with electronic commerce, they prefer it.

Electronic commerce is an increasing requirement of doing business. Tech Data's customers and vendors want to do business with it electronically. For the routine, mundane chores of placing orders and checking stock, they prefer to change the format. So if Tech Data doesn't have good electronic commerce tools for its customers, they will shop elsewhere. That's the reality of the marketplace.

In 1995, a Tech Data survey showed its customers were already spending two hours per day online. If that's where the eyeballs are, that's where business must be.

In the last decade, Tech Data reduced its cost of doing business from 14 percent to less than four percent, the lowest in its industry. And with its electronic commerce advances, the company expects to drive selling, general and administrative expenses (SG&A) even lower. The company thinks electronic commerce can shave another point off overhead and, at the same time, drive down prices. The way margins are, it can't continue recruiting armies of sales people. It must make the people it already has more efficient.

Tech Data stumbled onto this brilliance. The first time it put product and ordering information on a CD-ROM ­ an electronic catalog, technical specs, marketing information ­ the company mailed it out to 15,000 customers and they found it useful. Lo and behold, while business climbed, in-bound '800' line telephone calls declined. Suddenly business was going up and cost was leveling off. The CD-ROM experience told the company that customers wanted information at hand. And it learned that they didn't call all the time because they loved Tech Data. They needed it.

CD-ROM became an interim technology for the distributor, but one that caused it to rethink its entire concept of its relationship with customers and, downstream, the VARs' relationships with end-users. A new version of the quarterly CD-ROM contained proposal tools so paperwork that once took days could now be accomplished in hours. And because the forms were standardized, everybody in the channel achieved efficiencies.

Of course, CD-ROMs have drawbacks. In Tech Data's business, products change every day and a three-month-old disk is liable to be quite dated. And the disks can only contain a finite amount of information. So now Tech Data knew it needed a broader, more efficient line of communication with customers, one that could be tailored to the distributor's needs.

Something such as the Internet.

But there's a difference between putting up a promotional Web site and installing a secure operating environment. Fortunately, Tech Data's VARs were already inclined to do business electronically; in fact, following the success of the CD-ROMs, they were demanding it.

Tech Data's approach:

o Give customers real time access to warehouse inventory and every technical product document ­ more than 300,000 in all. Tech Data offers about 100,000 different products.

Customers can see every product Tech Data has, in every facility, in real time. Once they see the product they want, if they can push the button faster than a salesman, they can have it. And if its customers see that Tech Data keeps running out of product, It's pretty obvious it's not stocking very well.

o Do it for free.

o Build the system so that Tech Data's customers can replace Tech Data's name and replace it with their own for showing product to end-users. Recently the company introduced a comprehensive e-procurement solution its customers can place on end-user desktops, enabling seamless ordering while ensuring the reseller remains the primary account

o Offer more than just product specifications and catalog entries.

o Tie Tech Data's order entry system with that of its key shipping agents, UPS and FedEx, so VARs always know what is in the shipping box and where their order is. The company is providing the same capabilities to VARs as it extends e-procurement services to their customers.

In addition to encouraging VARs to mint an online version of Tech Data's online system with their own name on it, the distributor will also put the VAR's logo on boxes for direct shipping, minimizing their overhead investment.

Tech Data is searching for more supply channel tasks it can outsource from its partner for its VARs and system integrators, including providing a service desk for the VAR and its end-users configuration and assembly services. And the more automated the process, the less there is room for error. The company significantly expanded these capabilities in recent years while adding online tracking options so customers can know the status of such projects at any given time.

Navigating the site ­ which is accessible only to VARs and other customers beyond the first few screens ­ means choosing from an ever-thinning screen of menu selections. Selections narrow and funnel until customers find the product they need. The process relies on selection of product type, manufacturer, a key word or price range. Customers see not only what's in stock ­ and as many as 125 product attributes ­ but which Tech Data warehouse has it.

As Tech Data pushes into new overseas markets, its electronic commerce program will only help the company in places where it has a physical presence. Customs, freight, value-added taxes and import duties still make it impractical for a Japanese-based VAR, for example, to purchase product from Tech Data in Swedesboro, N.J. With external factors, prices lose their competitive edge when shipped from out of country. That's why Tech Data will continue acquiring and building in-country and/or regional distributors operations around the world­and concurrently establish or strengthen e-business services at every corner. Asia is one of the last major markets in which Tech Data does not yet have a physical presence. But once established, the company will extend electronic commerce programs to those countries.

Connecting with Customers

Most food, beverage and consumer product companies host Web sites that invite consumers to download menus and screensavers, play trivia and Shockwave animated games, watch beloved commercials or collect points from product boxes and shop online.

On its "Try and Buy" page, Procter & Gamble gets consumers to pay it for testing unfamiliar products, using the Web to introduce exclusive online products such as Pampers Bibsters ($3.99) and Crest Whitestrips Dental Whitening System (44.00). P&G is trying to figure out what the online consumer wants and how it can stay in touch with the consumer.

On P&G's "Innovation Location" page, a come-on reads, "This is where we feature our most cutting-edge products, before they are available in your local store. Often, these products are so new and different they require extra explanation and instruction, so we've given them their own special place." Among the items to be sampled: Crisco CookSmart ($3.99) and Thermacare Therapeutic HeatWraps ($7.99).

There are free samples, of course, such as Olay Daily Facials and VS Sassoon Balanced Hair Wash and Daily Therapy. And the site offers free product newsletters such as "Home Made Simple" and product-specific e-mail updates.

Sign up as a member of the Coca-Colastore.com and you can buy everything from discounted COCA-COLA Script Trademark Basic Cap ($9.50) and Porcelain COCA-COLA Polar Bear Hinged Box with Six Pack ($28.49) to Bushwacker Golf Bag ($280.25) and bobbing head figurines of Coke-sponsored NASCAR drives Bobby Labonte, Dale Jarrett and Tony Stewart ($37.99 each). There are also holiday items, home furnishings and kids' pens in miniature Coca-Cola vending machine tins ($4.74).

The Internet allows interaction at all hours of the day and night without interference from customer service reps and without the potential messiness of literally touching the customer in person or by telephone.

"Speaking for myself," says Ann Gurkin, a packaged food, beverage and tobacco industries analyst and vice president of Davenport & Co. LLC in Richmond, Va., "the Internet is becoming a bigger part of my life, and I will look for companies on the Internet and do business with them. If I want to have chicken tonight, I know I can go on Kraft's web site, and it will probably have a dozen chicken recipes. They all incorporate Kraft products, but it is a source of information. Or, if I have cheese and some noodles at home, what can I do? I can go on their Web site and probably pull down some kind of recipe."

Kellogg's reaches out to the youngest Web surfers with its Eet and Ern site. Children earn points for eating Kellogg's cereals such as Fruit Loops and Apple Jacks, entering them into their online account and redeeming them for toys. Mom and dad can also designate their child's school to receive additional benefits from the program.

Today, we need to see that a company has thought through the connectivity issue. In retail, Wal-Mart, The Home Depot, Lowe's, Radio Shack and Circuit City are often cited as examples of businesses getting added value from technology installations.

E-Commerce Myths and Misses

Here is a new technology, the Internet, that disturbs the equilibrium. It is also a disruptive technology. By 1999, many people said, "In the near future, everybody will buy just by clicking a button. If you are not doing e-commerce, you will be in the e-dustbin."

That forecast may have been slightly on the overblown side.

The Home Depot was about to join the e-rush in the fall of 1999 with initial plans for selling 1,500 SKUs through an e-commerce site. Two months before the scheduled launch ­ and almost a year before the dot-com market collapsed ­ Depot got cold feet and pulled back. It said that without integrating e-commerce with a customer's store experience, Web site sales didn't make sense. Depot's message was, "We think this technology has some use, but the real use of a technology is to give our customer the option of where they want to buy and how they want to buy."

The retailer no doubt took some lumps for backtracking at a time when going "e-" was so in vogue, but it was the right decision for The Home Depot. It went back to what is its core business: taking care of the customer.

Bob Tillman at Lowe's said much the same thing.

"I remember sitting with him in a boardroom in North Carolina," says analyst Budd Bugatch, a senior vice president at Raymond James & Associates in St. Petersburg, Fla., "and he said, 'I will bet you in five years that all of the e-commerce guys are bricks and mortars guys.' And it didn't take five years."

It is still unclear yet whether e-survivors such as Amazon.com can generate enough profit on doing what they do online alone without establishing other points of contact with the customer.

Long before eToys bellyflopped in the e-pool, arch-competitor Toys 'R' Us conceded it wasn't overwhelming anyone with its e-commerce experience or know-how. It turned its business over to Amazon.com. That decision no doubt looked even smarter when eToys closed its doors.

e-Ka-ching!

Banks spend more than $21 billion a year on technology by one estimate, which means that the banking industry probably spent more money on technology than any other industry in the world which was not a technology-specific industry. They also employ the most advanced technology in the world.

"There are no companies anywhere which have technology that is more advanced than in the banking system," according to Richard X. Bove, director of financial institutions research at Raymond James & Associates in St. Petersburg, Fla.

Think about it: If you want $200 right this minute, you can walk up to an ATM machine and get it in eight seconds. How the heck can that happen? Think about the technology putting that in place for you.

Another example: You're at a new car dealership. You pick out a car, and by the time you do, the salesperson already knows exactly how much he can loan you and at what rate. How did that happen? It happened because banking technology is the most sophisticated in the world.

First Union has more than 15 million customers on one integrated computer system. A banker can walk into work tomorrow morning and say, "Let's pitch savings accounts to people who have teen-agers." Within a matter of moments, he can be studying a list of 200,000 names of people who have kids ages 12 to 17. Within a few more minutes he can send those names to 2,200 branches and the customer service reps can follow it up with a personal letter printed at First Union headquarters in Charlotte. That letter will be in your mailbox tomorrow. Technology in banking is phenomenally good.

You can't run a bank any longer without using technology because banks are where all the paper is, and they are always moving that paper. Banks are where all the people are, which means they must account for those customers. The banking industry pumps out more loans today on a smaller base of people because of the use of technology.

A bank needs superior technology and connectivity. If it doesn't possess those tools, it will be swallowed up by one that does.

The e-Generation Gap

"I would not hire anybody in an IT group that is over 30 years old," says C. Don Burnett, a retired partner from PricewaterhouseCoopers in New York City. "I think that IT is changing so much today that if you are 40, I wouldn't hire you to run an IT group because you are out of date already. I watch my kids, and I don't have any idea what they are doing because they are IT people."

New technology is a self-fulfilling prophecy in that once a company owns it and philosophically buys into it, it is committed to living in fear of the day it becomes outdated.

It is tough to take an old legacy system and say, "We are not going to do use it anymore." In a fair sized company, technology may represent a multi-million-dollar investment in hardware, software and training.

When two companies get together, there are lots of reasons they fail. Number one is culture, but right up there at number two or three is static caused by putting two alien IT teams together. Sometimes management builds bridges between one system and the other; sometimes system B gets the boot and the merged company adopts system A. It is time-consuming, expensive, and easily screwed up.

Year 2000 (Y2K) compatibility issues, while apparently overblown in importance, forced many businesses to upgrade their technology sooner than they might have independently chosen to do so. But the legacy systems are still lurking out there, tripping up computer-illiterate, retro executives and managers.

A Customer's Heart Wants
What It Wants

The value of connectivity in a given business goes back to the customer. The customer may want the opportunity to shop a store online, either to make a purchase or to learn more about products and selection. If they do, a company should offer it to them.

Is it really that important for a retail customer to access Home Depot on the Internet? For product specs, project ideas and the like, the answer is probably yes. A weekend warrior can save time and energy evaluating product options in the privacy of his own home or office before braving the wild orange aisles. But it is also a good store to physically shop in. That experience can't be duplicated in cyberspace. And Home Depot wants us in the store, because once on-site, we will buy other stuff. It has an ulterior motive.

We could surf a Circuit City or Best Buy Web site and gain a better understanding of the difference between this wide-screen TV and that one, this DVD player and that one, without talking to a salesperson. But we still want to see it, feel it and touch it before buying it. Dealing with companies that are online and bricks and mortar gives us that option. Toys 'R' Us ­ protecting its base from eToys and KBKids.com ­ (and Barnes and Noble, sensing encroachment from Amazon.com) built its online ventures as a defensive move. It probably overspent, but saw no choice because the runaway fever of the market dictated what they did. It also was smart in allowing consumers to return online purchases at the Toys 'R' Us physical locations. While exchanging a defective kid's "Poo-Chi Interactive Puppy" ($19.99), Dad might see the "Caddyshack Dancing Gopher" ($19.99) from the cult movie featuring Bill Murray, Chevy Chase and Rodney Dangerfield. Wouldn't that (impulse purchase alert!) look great on his desk at the office? e-Ka-ching!

"Wal-Mart has been pretty smart," says Gary Balter, a retail analyst and managing director at Credit Suisse First Boston in New York City. "It put a toe in the Internet, tested it and decided it would never produce returns. Management said, 'Let's pretend we're in e-commerce so Wall Street is happy. We will be a factor just in our name, but we will not over-invest in an area that has dubious returns.'"

The e-Sniff Test

Every company wants us to believe it has state-of-the-art systems; nobody will announce it still uses backward systems. How can you tell if a store is putting technology to the task?

Sometimes you see it by the out-of-stocks, as in a store can't keep standard items in stock. Let's say that every time you visit Kmart, it is out of stock on items that it should always have in plentiful supply such as ladies underwear or shampoo or tissue paper. It should be automatically replenishing depleted stocks. What is going on?

The issue goes beyond stock replenishment. Labor scheduling is another technology issue. It's one thing if the mom and pop store on the corner, which employs four part-timers to give mom and pop a little time off, is short-handed. But if Circuit City has only one cashier working the night shift during the Christmas shopping season, you have to wonder why.

Analysts mention Kmart, PETsMART, Best Buy and Office Max as large retailers who have struggled in recent years to better harness technology.

Technology is a tool, just like getting the right people in the right positions can make a difference. E-business can help in terms of enabling process efficiency, it can help in terms of new business ideas. It can enable business to get things done faster, quicker, at a lower cost. It is an enabler; it doesn't do it by itself.

Wal-Mart is a leader in using satellite technology to move information back and forth between stores and company headquarters in Bentonville, Arkansas. If a company was coming up and considering a challenge to Wal-Mart, it had better employ even smarter ways of using technology.

The Gold Standard

Who do companies benchmark against with respect to technology and supply chain management and distribution logistics? Wal-Mart is recognized as a gold standard in embracing technology, one of the first to use satellites for sending information back to the mother ship.

The Home Depot and Wal-Mart IT people go to the same technology conferences. They have some idea of what the other does and how everybody is benchmarked against each other. But several analysts believe that major changes in supply chain management and logistics are in store at Home Depot. "Because as good as they are," says one analyst, "they are nowhere near what their potential is."

Sometimes growth hides many things that need to be taken care of. Once the top line begins to slow, that's when some companies will start addressing issues such as, "How do we drive profit growth if the top line is going to grow slower? Let's look at inventory. Let's look at the way we stage merchandise at the back of stores."

Target did a good job in adopting technology. Kmart still needs some help in logistics and supply chain management. It doesn't matter what your prices are or how great your store looks; if you are out of stock, it is irrelevant. Consumers have little loyalty beyond price and service; they will not tap dance in place until a store gets the product they need back in stock.

Wal-Mart and Target are leaders in their use of technology. On the other spectrum, the Dollar Stores need to use more technology, but it is adopting it. It couldn't afford advanced systems before because it wasn't doing the volume in the stores that would justify that investment. But it is now. Technology will better manage its inventory, let it be in stock more often than not. Those are the two biggest issues. And if Dollar better manages its inventory, improved sales will likely be the result.

Wonder Boys

Citicorp strives to be at the technological forefront. It has a reputation for wanting to be on the bleeding edge, therefore leading its industry.

The goal of technology spending in any industry is primarily to reduce expenses. If you read about a company spending X millions on technology but see profit margins not rising as a result, a red flag should go up. Has the money been spent wisely? If you see a company spend lots of money on technology, followed by constantly improving profit margins or you see SG & A as a percent of revenues continuing to drop, it is using technology to improve the bottom line.

There are myriad inventory management and distribution software applications available. It's important that a business use the right tool. It doesn't need a sledgehammer for a job that calls for a ballpeen hammer.

Do we always want the leading edge company? The answer is probably no. Do we want a company that is prudent about its use of technology? The answer is probably yes. We certainly don't want a perpetual laggard. Laggards run the risk of being left behind and playing catch-up all the time. Some banks that found themselves in that position discovered that they couldn't afford the big technological investment needed to stay current. They sold out, which may or may not have been good for the shareholders, but the interim was unpleasant.

Charles Schwab belongs on any list of companies admired for its technological prowess and connectivity. Think of what Schwab did for the rest of the brokerage industry in terms of moving it to an Internet-centric business.

Schwab may not be more technologically advanced than Ameritrade or E*TRADE. But it accomplished what it did with such scale and size that every brokerage company in the world took notice. Schwab took the telephone and moved it to the Internet, not seamlessly but gradually and successfully.

Paychex tends to be on the trailing edge, not leading edge. If your paycheck gets done, you don't care how it gets done as long as it is right. The cost for processing payroll goes down every year because the technology gets cheaper and more powerful every year. Once it put in place a system that works, it need not mess with it.

Northern Trust and MBNA have commendable back office systems, and they would not be as successful as they are without it. Great systems alone don't necessarily mean great investments. But bad systems often do lead to problems for companies.

Management can't control and monitor its operations and execute without great systems, but great systems do not ensure great execution.

The cost of technology has come down so much that it makes it more affordable for second- and third-tier companies to buy off-the-shelf, proven technology as opposed to having to build it and see if it works for them. That should mean good things for all industries.

Management should not let technology run its business, but it should be an important tool in the executive toolbox.

Disconnectivity

Big companies that take big gambles on technology sometimes roll snake eyes. McDonalds' much-hyped new cooking system was supposed to speed up orders. Instead, the company admitted in 2000 that it was actually taking longer to get food into customers' hands.

Sometimes the problem lies with the implementation of the system and there are bugs that must be worked out. In McDonald's case, it can't seem to do anything quietly. So when it rolls out a new sandwich or multi-million-dollar cooking system and it flops, the whole world can see Ronald McDonald's white face turn red.

Companies need to adopt technology, but it isn't necessarily the Holy Grail to survival.

No one wants a company committing billions of dollars to every new technology. Because while we may put five gee-whiz new gadgets on our desks today, we know full well that in three years, they will all be obsolete. We want a company that will put in place the technology necessary to get it to the next level, even if there are rapid changes in competitive systems or if it acquires other companies that aren't compatible.

A company needs discipline over its technology (and its technologists) because the expenses can be extraordinary, eating away the company's whole return, and the technologies are forever changing. Adaptability is the key. A company doesn't have to immediately change the whole computer system of something it acquires because it isn't an exact fit. Instead, it could update both its own existing system and the acquisition's at a later date.

For procurement, sales and costs, we want companies that are not behind the eight ball. We don't want the CEO being sold on the whole new systems concept to the tune of a billion dollars and then find out nine months later it doesn't work, can't start up and has never been tested in a like company.

We want management taking information technology and e-commerce to the next level, but exercising prudence all along the watchtower.