The electrical industry's grand scheme to delete transaction costs from the distribution channel and secure a share of the e-commerce future holds lessons for all distributors.

For all the talk in recent years about "partnering" and "win-win" solutions, the sight of a real breakthrough in getting people of divergent interests to work together is still refreshing. Take all the recent activity over on the electrical side of the distribution business, for example. Electrical distributors recently lifted the veil on a new industrywide information system that gives them access to updated product data from just about any manufacturer in the industry over a secure, high-speed, members-only network.

The Industry Data Warehouse and IDXchange extranet are the first products of a new association that brings together electrical manufacturers, distributors and associated business partners to develop the electrical industry's electronic commerce infrastructure. The system this group has created may prove to be a useful model for other distribution channels. The story of how the electrical industry put it together certainly offers a few lessons in building an industrywide solution to common problems.

"Over the next decade, the major differentiating factor among companies will be how well they play the electronic game," says John Haluska, chief information officer for electrical manufacturer Thomas & Betts Corp. "The Industry Data Warehouse will drive millions of dollars of cost out of the supply chain and make everybody more competitive."

A radical IDEA

The Industry Data Exchange Association was born two years ago out of competitive necessity. It was conceived at a time when new, efficiency-crazed competitors seemed to be coming out of every shadow, crevice and ditch, eyeing electrical distributors' core markets. Home centers were brutalizing many local markets and luring away small contractors with loss-leader pricing; catalog houses and integrated suppliers were taking a growing share of the market for industrial MRO products. Then along came the Internet and the World Wide Web, which seemed like a double-edged sword that could help distributors take care of their customers more efficiently and could also help manufacturers to sell direct.

A few forward-thinking distributors and manufacturers saw that something radical needed to happen if the electrical distributor hoped to keep his place as the primary route to market for electrical product manufacturers. They saw that the traditional distribution channel would have to embrace electronic commerce and become far more efficient so that distributors could remain the lowest-total-cost provider. Sometimes there's nothing like the threat of extinction to inspire a little evolution.

It didn't take much investigation to reveal that one of the largest obstacles to efficient e-commerce in the electrical industry was the flow of data through the distribution channel. By some estimates, 70% of the industry's administrative costs go into correcting order entries and resolving problems such as missed shipment dates, damaged goods and price discrepancies arising from data errors. As much as 20% of the orders processed in the industry contain inaccuracies that require at least a follow-up phone call and often weeks of back-and-forth communications to resolve.

Of course, the cost of data errors had not really gone unrecognized up to this point; it's just that the industry's efforts thus far hadn't made much of a dent in the problem. For years manufacturers and distributors had worked to develop standards for electronic data interchange as a way to automate standard communications and reduce errors. Many large distributors and manufacturers had invested heavily in the technology to send and receive purchase orders, ship notices, invoices and such by EDI, and some had taken the technology further into practices such as vendor-managed inventory. Yet using EDI required a different setup for each business partner, which put a cap on the number of EDI relationships a distributor or manufacturer could economically support. EDI standards development sessions and other joint-industry efforts such as bar-code standard development also had shown the industry how quickly hopeful efforts can turn sour when distributors and manufacturers find themselves on differing sides in standards debates.

In 1996 the National Electrical Manufacturers Association formed a committee of about 20 manufacturers to develop a product descriptor database, or PDD, that would develop standards documentation describing all the kinds of information that pass between manufacturers and distributors. By standardizing this data, the PDD made it possible to have all manufacturers' product data formatted in the same way, which would cut the cost of multiple EDI relationships. Taking this thought a step further, a central data warehouse, where manufacturers could transmit the data one time for all their distributors and the distributors could download all their manufacturers' product data in one take, would slash costs and reduce the chances for errors even further.

NEMA and the National Association of Electrical Distributors then assigned a joint working committee to investigate the feasibility of creating such a data warehouse. On that committee's recommendation, the associations decided to go forward with the project under the control of a new association whose leadership would be divided between distributors and manufacturers. This was the IDEA.

No price-shopping

The IDEA's top officers were recognized crusaders for e-commerce. Chairman Dave Crum, president and chief executive officer of Crum Electric Supply, a distributor in Casper, Wyo., had led the creation of several e-commerce initiatives during his term as chairman of NAED. Vice Chairman Clyde Moore, president and CEO of Thomas & Betts, had very visibly spearheaded his company's many forays into transaction-cost reduction programs with distributors.

The IDEA hit the ground running on two fronts. The Business Advisory Committee quickly rallied the support of top executives at the industry's major distributors and manufacturers, securing enough financial commitments to go forward with the IDW project. Meanwhile, the Technical Advisory Committee began work on the details of the database at the core of the Industry Data Warehouse and the protocols to be used for communication. Building from the PDD developed at NEMA, the technical committee met two or three days a week, every week, for more than two years resolving technical questions and planning the structure of the database and the flow of data.

The system they designed has fields for every kind of product-related information being passed between manufacturer and distributor. Not only does it include UPC numbers, product names, common names, descriptions, part numbers and prices, it also includes fields for package weights and dimensions, bar codes for each packaging option, minimum order quantities, MSDS sheets, lists of associated items, shipping restrictions, images, Web site addresses, technical and sales support contact numbers and full specification sheets.

Manufacturers upload their data directly to the IDW, or they can have an IDW warehouse computer installed on their premises. Either way, the manufacturer maintains direct control and responsibility for the data and must upload updates daily. The only alternative is to contract with Trade Service Corp. to handle the conversion to IDW format and upload the data on the manufacturer's behalf.

When the data files are uploaded they pass through a "data scrubbing" routine that checks for and flags apparent errors such as a 6,000% price increase. Possible errors are kicked back to the manufacturer, who must correct it and return it -- the IDW doesn't alter the data.

Distributors contact the IDW daily through a request-control computer, which allows manufacturers to control access to their data. There is no browser function that would allow distributors to price-shop on the IDW. They can only retrieve the data in a blind dump. The data then flow into the distributor's business system and update records in real time, eliminating the need for keying price changes.

Software vendors on board

One connection that was critical to the success of the project was the contact with vendors of distribution enterprise software.

"The software providers are really the vital link in this chain because so many distributors are depending on them," Crum says.

If the software vendors didn't have their systems ready to receive, store and integrate the IDW data into their customers' business data, none of the rest of the work would matter, because most distributors would be unable to retrieve the data. Software vendors participated on advisory boards from the beginning.

"Trying to get manufacturers and distributors together with common knowledge bases is a great concept," says Scott Deutsch, Prophet 21's vice president/marketing.

Rusty Bond, NxTrend Technology's director/electrical industry sales, adds: "It's critically important that the distributors be able to have huge amounts of data that's updated regularly and accurately from their vendors. Otherwise, when their customers start trying to enter orders in real time and check the status of orders, the whole e-commerce initiative stands to suffer greatly."

With the basic protocol and structure of the system worked out, IDEA selected Triad Systems Corp. from a field of three finalists as the company that would build and maintain the system and provide implementation, testing and technical support. The IDW system itself is a Sun Microsystems E5500 enterprise-class server running an Oracle database.

How distributors and manufacturers connect to the IDW is an issue IDEA left open until the configuration of the IDW system itself was settled and preparations to use it were underway. It was clear from the beginning that all the transmissions would be made using NEMA/EDIPro EDI standards, but how those signals would get to and from the IDW was left undecided.

Initially the technical committee looked at access via the Internet as the most cost-effective, but that solution had several downsides. Security and reliability issues on the Internet were outside their control. Companies wanting to connect at high speeds would have to lease a T-1 line and foot the bill to build their own firewall to prevent hacking from the public Net. Users content with a slower connection could use a dial-up 56K modem connection, or a standard EDI value-added network provider, but IDEA held off discussing the matter in any detail until it could announce its second major project to improve the efficiency and cut costs of information exchange in the distribution channel.

Early in 1999, the technical committee began work on its second act, the creation of a high-speed, members-only private industry extranet, which they named IDXchange.

The IDXchange is a managed private network that operates at T-1 speeds on frame-relay and Internet protocol standards. IDEA contracted with MCI WorldCom to build and manage the network. IDXchange went live last October. Most of the hardware involved in the extranet resides at MCI WorldCom's data center in Raleigh, N.C.

The value of information

The primary purpose of the extranet is to provide a vehicle for sending and receiving data to the IDW, and to facilitate EDI transactions among distributors and manufacturers in the electrical industry.

One of the system's key benefits is its monthly flat-rate pricing structure. In traditional EDI the value-added network providers typically charge users based on the volume of data handled. That gives a distributor or manufacturer a strong incentive to keep transmissions brief, and in tight budgetary times it would be tempting to cut out unneeded information from its downloads from the IDW and communications with manufacturers. Cutting corners, however, would undermine the value of the data to the user.

Users of the IDXchange have a router installed on their premises by MCI WorldCom and pay a fee of $850 to $2,900 per month, depending on connection speed. Heavy EDI users have found that the system pays for itself in avoided kilo-character VAN charge. Furthermore, these users agree, having the flat-rate system makes it easier to enter into new EDI relationships with new manufacturer partners.

IDXchange is isolated from the Internet but has a single firewall-protected gateway to the Internet for communication with companies outside the IDEA system. In its initial stages, the network is designed just to handle batch EDI transmissions, but as the system gets up and running, it could support more Internet-like services such as company Web server access and online training.

Now, however, the bulk of the work of the IDEA must concentrate on recruiting new members. As of early January, IDEA had 140 distributor members, 60 manufacturer members and nine software providers registered.

IDEA's proponents believe the IDW and IDXchange can tear millions of dollars in costs out of the annual business dealings of the electrical industry, and for that matter, any industry that functions along the same lines.

"IDEA's vision is to be the facilitator that would allow electronic commerce to move forward in the electrical industry," Dave Crum says. "Right now it's just electrical data because we wanted to start small. But as we begin to understand the needs of the market, we'll be able to expand in other directions."