At least that's the lesson in the plastics industry, where powerful customers, such as Dell Computer Corp. and Hewlett-Packard Co., are driving the adoption of electronic-business practices by their suppliers. The effect will likely be the same in other highly fragmented industries, such as packaging and metal fabricating.
"It's all a trickle-down effect," says John Millis, director of marketing for San Jose, Calif.-based Trend Technologies, which molds the plastic boxes that house personal computers. Trend is installing a multimillion-dollar enterprise resource planning, or ERP, system to allow customers to view the company's inventory on the Internet.
"It's very expensive, very time consuming, very scary," Chuck Villa Jr., Trend's exec VP-business development, said of the ERP installation while he attended last month's Plastics News Executive Forum 2000 in Lake Buena Vista, Fla.
For Trend, installing the ERP system is essentially a marketing decision, a big step toward genuine electronic commerce complete with online transactions. The company made the decision for the same reason it built an injection-molding plant in Round Rock, Texas, near Dell headquarters: The company wants to keep Dell's business, which accounts for about one-third of the molder's revenue.
Trend is not alone in investing in expensive Internet software. Suppliers throughout the plastics industry are installing expensive e-commerce and related software. The reason is simple: It's the cost of doing business.
"Companies like HP, Dell and Cisco are driving this," Mr. Villa says. He shrugs his shoulders and adds, "The electronics marketplace is a bullet train, and we're trying to keep up with it."
How the industry works
The plastics industry, which has about $274 billion in annual shipments, according to the Society of the Plastics Industry, has three main tiers. The first includes resin suppliers, such as Pittsfield, Mass.-based GE Plastics, which provide the raw materials. Second are parts processors, such as injection molders, which shape the resin into parts. And third are the original equipment manufacturers, or OEMs, which use the components in their finished products, ranging from cars to computers.
Complicating this schematic is the emergence of contract manufacturers in electronics and other industries, which actually assemble products for OEMs. Additionally, a host of suppliers provide machinery and other equipment to the molders.
Powerful resin supplier GE Plastics uses the Web to conduct business with its own supplier base. All of General Electric Co. began using the Internet on the supply side in 1994, says Orville Bailey, who worked for General Electric Information Systems and is now president-CEO of e-business consulting company B2E Markets in Silver Spring, Md.
"The ROI potential is just so great on the procurement side, it's a no-brainer," says Mr. Bailey, who explains that by buying over the Web from its suppliers, GE has reduced cycle times, while leveraging the buying power of the company.
Leveraging the Internet with suppliers is ongoing at GE. Earlier this year, GE Chairman Jack Welch told Fortune, "Within 18 months, all our suppliers will supply us on the Internet or they won't do business with us."
Trickle down? That sounds like a waterfall.
But Gerry Podesta, GE Plastics' general manager of e-business, says suppliers will benefit from moving to the Internet. Speed and efficiency are the primary advantages for GE and its suppliers, he says.
At Hewlett-Packard Co., Tom Connors, procurement manager-worldwide plastic resins, says the company is installing software that will make HP more transparent to suppliers. Through a few clicks on an extranet, contract manufacturers, injection molders and resin suppliers will be able to tell how much plastic HP will need to manufacture its products.
Ideally, for Mr. Connors and HP, the company's suppliers will also join the e-revolution by investing in two-way communication software, allowing HP, for example, to view the inventory at its injection molders.
Soon, injection molders and other plastics processors will also be feeling pressure from the supply side to adopt e-business practices. After focusing on getting its suppliers on the Web, GE Plastics now plans to ramp up its efforts to conduct genuine e-commerce, selling polycarbonate and other thermoplastics to molders over the Internet.
GE Plastics will borrow the Web sales interface from its distribution subsidiary Polymerland, which conducts $4 million a week in e-commerce, Mr. Podesta says.
"In the plastics industry, at the top of the food chain you've got large companies, and at the bottom of the food chain you've got large companies," Mr. Bailey says. "The small companies in the middle are being squeezed both ways."
As a result of all this, a big decision looms for the suppliers in the middle of the plastics industry: How should they enter into e-commerce?
Companies such as GE, Dell and HP can afford to sink millions into e-business software. So, for that matter, can Trend Technologies, which has $100 million in annual revenue.
Mr. Podesta says that across GE, investment in the Internet has totaled hundreds of millions of dollars.
Still, when it comes to reaching customers, as opposed to suppliers, he says it's not yet possible to determine the return on investment.
"For now we're moving on faith that the Internet is the right thing to do, and we're spending money commensurate with that feeling," Mr. Podesta says.
But midmarket companies can't invest money so easily. "In a real sense, you're betting the company in some of these smaller companies," Mr. Bailey says about a six-figure ERP investment.
HP's Mr. Connors also feels the small suppliers' pain: "I've got EDI, ERP, e-commerce. If I keep spending money like this, I'm going to be e-liminated," he joked at the Plastics News Executive Forum 2000, which was put on by Plastics News, a sister publication of Business Marketing.
Alternatives help costs
Alternatives have appeared that can help smaller suppliers avoid large, up-front costs. USinternetworking is one of several companies offering "apps on tap," software applications over the Web delivered for a fee.
Specifically in the plastics industry, sites such as Chicago-based PlasticsNet.com allow e-commerce over the Web. PlasticsNet.com has built an online network of plastics processors and their suppliers and is moving into hosting ERP integration systems to more completely link buyers and sellers.
Through PlasticsNet.com, it's possible for a small plastics supplier to connect with its customers on the Internet without a huge up-front investment.
"We want to act as a hub," says Tim Stojka, president of Plastics-Net.com. "Once an ERP system is connected into our system, we can then link it into a customer's ERP system."
Mr. Stojka has so much confidence in this model that Plastics-Net.com's parent company, Commerx, plans to roll out hubs in other industries, such as food processing and packaging. The advantage of this model for suppliers is that a hub such as PlasticsNet.com will keep pace with technology as e-commerce evolves. The drawback is buyers must be a part of the hub for sellers to reach them.
Mr. Podesta sees another drawback to PlasticsNet.com. Because the site acts as an intermediary, it puts some separation between the customer and the supplier. "You don't get that customer intimacy, which is the advantage of the Web," he says.