How E-Business Is Changing Manufacturing
By Jerry J. Jasinowski, President, National Association of Manufacturers

Over the past century, the changes in the way industry functions have been so profound and so numerous that they defy ready description. But I'm convinced we're witnessing only the beginning of some very dramatic changes in the way we live and work as individuals and as a society.

Of course, naysayers have long been with us. In 1899, just a few years after the NAM was founded, U.S. Patent Office Director Charles Duell urged the closing of the office he superintended. In his words, "Everything that can be invented has been invented."

The innovations of our era are so pronounced that some of us are prone to fall into the same intellectual trap as Mr. Duell, believing that we've reached the apex of technological know-how. To the contrary: At the dawn of a new century, it's safe to say we're just beginning to understand the implications of the information age.

These implications are not limited to our own domestic economy. Recently, longtime political journalist Donald Lambro wrote that at a time when even someone in rural China can use the Internet to become linked to the rest of the world, we kid ourselves in thinking that the information revolution can be regulated or managed by government planners.

In manufacturing, the influence of high technology has transformed the modern manufacturing corporation. As of 1998, 84 percent of manufacturers nationwide were using computer-aided design and roughly 60 percent were using local area networks and "Just-In-Time" delivery processes.

The results of these changes are as clear as they are significant. Manufacturing contributes about one-third to America's long-term economic growth. About 65 percent of this comes from advances in technology. Manufacturing performs nearly three-fifths of the nation's research and development. So it shouldn't be surprising that manufacturing productivity grew by 4.6 percent annually from 1994 through 1999, double the rest of the business sector.

This surge in productivity is attributable to technological advance. Put simply, manufacturing has entered a fundamentally new era as technology has transformed the factory floor. Nowhere is the promise of technology more evident than in electronic commerce.

E-business is driving a new round of changes in the way companies interact and the way products are made and sold. Contrary to popular perception, Internet commerce is about much more than buying books online, searching family genealogies or using a community mapping service to get directions. While the Internet provides consumers with ever-greater access to the

goods and services they want, consumer Internet purchases in dollar amounts pale by comparison to the value of business-to-business (B2B) Internet commerce.

B2B Internet commerce is generally defined as company-to-company communications and transactions - marketing; product refinement based on electronic data sharing; employee training and education; and the online purchase of goods and services. This is the heart of the real story of Internet commerce: The transformation of companies as they work with one another on-line.

What is most striking is how extraordinarily fast e-commerce is growing. According to a recent report by PriceWaterhouseCoopers, B2B trade over the Internet is doubling every three to four months. Forrester Research, Inc. notes that while last year consumers spent nearly $8 billion on Internet purchases, B2B Internet commerce generated $43 billion of transaction value. And Forrester calculates that by 2003, while consumer Internet sales will rise to $108 billion, B2B sales will soar to $1 trillion.

Why are businesses accessing the Web so eagerly? Use of the Internet transforms the nature of corporate commerce - how companies communicate with and buy and sell to one another in a seamless, uninterrupted manner. E-commerce is vastly more efficient in terms of time, money and labor use than traditional models of commerce. As a result, as IBM chair Lewis V. Gerstner, Jr. puts it, the Internet is "the ultimate medium for business." To underscore his point, Gerstner estimates that 25 percent of IBM's revenue is being generated by electronic-related commerce.

The Internet allows vendor companies to find out about their customers' needs, thereby enabling them to better serve their clients. Recently The Wall Street Journal noted that the Dana Company, which has annual revenues of $12.5 billion, uses the Internet to review the quality of its products as they are actually used by companies like DaimlerChrysler. The benefits are clear: product improvement and a healthy supplier-to-customer relationship - all due to electronic commerce.

Similarly, new Internet innovations will continue to improve corporate and support processes. In a recent survey conducted by the Deloitte Consulting firm, 41 percent of U.S.-focused companies responding to the survey said they have instituted electronic-based procurement. Almost 70 percent of the survey's respondents said that their "key suppliers" are ready to work with them via the Internet.

In a recent speech, Lotus CEO and President Jeff Papows said that his company might soon be issuing a new software product that would offer corporate Internet users a real-time look at the workflow process, thus helping them work with their business customers to problem-solve as difficulties arise. Of course, this kind of quality control also helps reduce manufacturing cycle times.

Internet commerce also saves money for firms in a host of ways, providing substantial internal efficiencies. Electronic information transfers save companies from having to rely on paper

communications, thereby reducing costs significantly. In global terms, the Giga Information Group estimates that Internet commerce will save companies $1.25 trillion by 2002, with the United States accounting for half of this amount. Giga calculates that within three years, American firms will gain a profit increase of between $360 billion to $480 billion due to savings accrued through e-commerce. Giga also says that annual cost savings for U.S. firms will be more than $600 billion every year by 2002.

One such firm is the Ford Motor Company. According to The Wall Street Journal, Ford estimates that it will enjoy a 30 percent reduction in transaction expenses and the cost of processing orders by making supplier purchases online. Recently Don Peterson, CFO of the Lucent Corporation, reported that electronic invoicing will cut Lucent's per-transaction cost from $5 to $1.50. Ultimately, in an ultra-competitive marketplace, many of these kinds of savings will be passed along to consumers.

At Eastman Chemical Company in Kingsport, Tenn., the move to Internet sales has freed up personnel from taking orders manually - a labor-intensive, time consuming effort - and enabled the firm to place these employees in more productive jobs. This means that the supply chain runs more smoothly. As the company put it in a recent news release, "customers benefit by gaining immediate access to account information … seven days a week, 24 hours a day."

As the Eastman Chemical example illustrates, internal e-commerce is changing the nature of the business organization - the way a company functions internally. Such reorganization promises significant new opportunities for many people within firms of all types.

Companies concerned with investing in Internet-based commerce should look to those that have done so successfully. Cisco Systems is another case study in how the Internet helps firms cut costs and increase profits. Early in this decade Cisco, then a fledgling high-tech firm, made a strategic decision that radically altered the company's growth potential. Cisco chose to place all the networking-support information it could online. This made it easy for customers to get answers without spending time working through basic problems with Cisco engineers. It also freed-up Cisco engineers to do what they do best - design and develop great networking products. The result? According to Larry Carter, Cisco's CFO, use of the Web is saving Cisco more than $500 million annually. Since 1997, Cisco has seen its e-commerce revenues rise from less than $1 billion to what likely will be nearly $10 billion this year.

To continue the Internet revolution, companies of all sizes need to embrace the on-line revolution. When integrated with existing sales channels, the Web can be a cost-effective and time-efficient way to reach customers, purchase supplies, develop products and monitor client satisfaction.

The NAM has recently issued a major high-tech agenda that we believe captures the most significant issues facing both industry and policy-makers. Our agenda is based on a single premise: federal policy also needs to keep up with the Internet revolution. That means making the R&D tax credit permanent. Recent enactment of a historic five-year extension of the credit -

the longest extension in its history - is a major step toward this goal. Making the credit permanent will resolve the problem of having to fight for its reauthorization every few years.

In addition, repealing the century-old federal phone excise tax, which now stands at 3 percent, would increase Internet access and, thereby, e-commerce. Updating the patent system, ensuring Internet copyright and other intellectual property-rights protection and making electronic signatures legal nationwide will help enhance the ability of companies to keep making high-tech changes.

We also need to advance open trade with China. Making normal trade relations with China permanent would enable American firms to trade more extensively and more consistently with one of the world's largest emerging markets. Modernizing export control laws and increasing the federal commitment to civilian R&D are additional priorities (for the full text of the NAM's new high-tech agenda, visit our Web site at www.nam.org).

Sustaining America's remarkable global leadership in growth, productivity and technology must be a national priority. Manufacturers have a huge stake in American's technological success. Technology is the single biggest contributor to U.S. economic growth and manufacturing is the single biggest contributor to technology.

Shortly after Charles Duell urged the closure of the Patent Office, innovations like the internal combustion engine and powered airflight changed the way America, and the world at large, functioned. In the same way, the Internet may well be introducing a new, more productive and profoundly more dynamic era in American commerce. Policy-makers and business leaders need to work together to help this era thrive. There are few more important challenges facing American manufacturing, and American society as a whole, as we enter a new century.

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