17,000 devoted fans, family members and fellow entertainers congregated at the Staples Center in Los Angeles today to say goodbye to the King of Pop, Michael Jackson.  The event was staffed with over 3200 police officers at a cost of $3.5 million to the city of Los Angeles.  Those attending today’s services were just a few of the 1.6 million fans who entered the lottery for tickets to the event.  And those who entered the lottery are just a small fraction of the population around the world paying tribute to Michael on the Internet.  There are countless blogs, tweets and web sites dedicated to what many consider the greatest entertainer of all time.  The number of people who have “friended” Michael Jackson on Facebook has skyrocketed from just 80,000 before his death to over 6.4 million.  Sales of Michael Jackson merchandise have skyrocketed as well.  In a matter minutes following his death related merchandise went from stable, slow-moving items to the most volatile, high demand SKUs in the market.

Demand for the Merchandise – You can’t Beat It!

Much of the demand for Michael’s music has been fulfilled by digital downloads.  Tonight Apple’s iTunes site is reporting that Jackson holds 8 of the top 10 music videos; 3 of the top 10 albums and 3 of the top 10 ringtones.  But the record-breaking demand is not limited to digital content.  Sales of physical product have enjoyed tremendous success as well.  Amazon.com is reporting tonight that Jackson holds 5 of the top 10 DVDs; 5 of the top 10 apparel items and all 10 of the top CDs.  In fact, Amazon reported that all of Michael’s solo CDs and those of the Jackson 5 sold out within minutes of the news of his death.  Demand for Jackson’s music titles is breaking new records in countries around the world ranging from Poland to New Zealand and from Japan to the UK.  Even the post-death sales of albums from Elvis and John Lennon who both experienced unexpected deaths can’t Beat It. 

Of course, what intrigues me about these types of celebrity life events are the supply chain challenges.  Products which have historically stable sales patterns experience a near instantaneous surge in demand catapulting them to the top of the charts.  For retailers and entertainment labels the death of a popular celebrities can represent a tremendous sales opportunity.  But developing a plan to respond to these types of market opportunities can be quite complex.  Even the Paparazzi would be challenged to provide accurate sales forecasts for CDs, DVDs, books, apparel and related merchandise in advance of unexpected celebrity deaths.  It is almost as if sales patterns for Michael Jackson’s music were sent back in time to the period just after the albums were released, forcing manufacturers and retailers to do a Moonwalk back to earlier inventory levels.

Inventory Levels – Don’t Stop ‘Til You Get Enough

No one can plan for unexpected events such a celebrity’s death nor do I propose they should.  But retailers and manufacturers should develop agile supply networks that can respond to the types of rapidly changing demand patterns that result from the aftermath of such an event.  Of course, the ability to share information between all parties in the entertainment value chain is a critical success factor in the execution of such a demand-driven supply network.  Retailers, duplicators, 4PLs and brand owners must all be able to share up-to-date sales, inventory and logistics data with one another in near real time.  With such a model suppliers can respond rapidly to changing demand patterns ensuring that out-of-stocks are avoided and excess inventory is not perpetuated.  

In the entertainment industry it is common to use a Vendor Managed Inventory (VMI) model in which the supplier (or a designated 3PL) stocks the inventory in the stores.  The process works as follows.  Each night after the stores close, all the retailer’s point-of-sale transactions are consolidated and sent in batch files to the key suppliers.  Suppliers compare the day’s sales to previous estimates of inventory on-hand at each location to determine which SKUs require replenishment.  An order is then sent by the supplier to a CD duplicator which burns the appropriate number of each title, packages the media into a jewel case and ships it to the appropriate store.  The process minimizes inventory while also mitigating the risk of out-of-stocks.

Forecasting Sales - It’s Close to Midnight…

B2B e-commerce is one of the critical technologies that enable demand-driven supply networks to respond to rapidly changing sales patterns.  Point-of-sale data, inventory, order and logistics data is transmitted between parties using EDI, XML and Managed File Transfer (MFT) technologies.  One of the key challenges is the very large file sizes associated with sales transaction data, which can often paralyze even the most robust of B2B infrastructures.

The following is a lyrical description of the VMI process I composed to the tune of Thriller:

It’s close to midnight and all the stores are getting pretty dark
Under the moonlight, you get the POS file transfer ready to start
You try to stream, but the file’s so large it starts to choke your router
Screen starts to freeze as horror looks you right between the eyes
File’s paralyzed

‘Cause this the thriller, thriller night
And no one’s going to save you from potential out-of-stocks.

I know it was Bad, but entertaining hopefully…

In my last post I discussed the analysis SWIFT performed to correlate milestones in the global financial crisis with traffic patterns on its B2B network.  With the rich data for the financial services sector available from SWIFT, the natural question for me is - Why is similar data is not available for other high volume B2B segments such as supply chain?  The traditional EDI network vendors would be a good source for such data.  However, I have never seen any formalized statistics published by any of the leading vendors (including GXS).  I have found that the market research analysts (IDC, Gartner, AMR & Forrester) are not tracking B2B transaction volumes either.   I remember the last time I asked one of the industry analysts for detailed market data on B2B integration…the response I got was a $100K custom research study proposal.

So I spent a few hours analyzing a statistically meaningful sample of GXS transaction volume over the past 12 months for some insights into how the macroeconomic situation impacted B2B activity.  Below is a chart which shows general transaction volume trends.  In the qualitative discussion that follows I have included some hypothesis about the economic drivers behind the B2B trends.  I was not able to directly identify the root cause of increases and decreases in B2B activity in all cases so some of my assertions are purely speculative.

June 2008 - Rising oil prices encourage businesses to consider near-shore sourcing strategies that avoid the high costs of transporting freight from Asia.  For the first time in five years, B2B transactions between China and the US and China and Europe decline month-to-month.  Nonetheless, B2B volumes are high, reaching a year-to-date peak for 2008.   Salmonella poisoning spreads in tomatoes throughout the US, but there is no increase in reverse logistics transactions due to return shipments from grocers. 

July 2008 - Oil prices peaked at approximately $150/barrel.  Retailers and manufacturers begin to consolidate purchase orders into fewer, larger shipments to reduce the cost of transportation.  EDI documents from air cargo carriers and LTL/TL/Parcel carriers decline noticeably.  Rail carriers, which benefit from high oil prices due to their more cost-competitive freight pricing, experience an increase in B2B transaction volumes.  Apple’s 3G iPhone disrupts the mobile phone market, but is not enough to overcome the downward B2B inertia as July transaction volumes suffer steep declines.

August 2008 - Beijing hosts the 2008 Summer Olympic Games.  Most newsworthy is American swimmer Michael Phelps accomplishment with eight gold medals.  But B2B transaction volumes are the ones taking a dive this month.  August volumes are traditionally lower than other months due to the large number of people on holiday.  However, 2008 volumes are lower than usual due to manufacturing plant shutdowns in China related to the Olympic Games and below average retail sales during the back-to-school season.

September 2008 - The US orchestrates a bailout and purchase of government sponsored entities Freddie Mac and Fannie Mae.  The nationalization of these two home lenders is a sign of the times as the subprime mortgage crisis continues to weaken the real estate market.  DIY and home improvement retailers continue to struggle with significantly weaker sales.  B2B volumes in construction and hardlines segments experience record lows. 

October 2008 - In the aftermath of the Lehman Brothers failure and AIG bailouts the financial crisis reaches its peak across the globe.  Overall transaction volumes decline for the fourth consecutive month in October.  Businesses concerned about the stability of the economy defer purchases and reduce inventories. Retailers revise their holiday merchandise purchasing plans in anticipation of a weak upcoming Christmas season.

November 2008 - Obama wins the US presidential election.  B2B transaction volumes begin their expected seasonal ascent as holiday merchandise begins to ship.  Forecasting challenges are complicated not only by lower consumer demand, but also by dampened competition as US department store and apparel sector retailers struggle for survival.   With retailers such as Linens n Things, Mervyns and Steve & Barrys filing bankruptcy there are fewer retailers subscribing to EDI product catalog updates from their suppliers.

December 2008 - Illinois Governor Blagojevich is arrested on corruption charges and B2B transaction volumes peak for the year (although there is no evidence of a direct correlation).  Shipment status messages along with purchase order changes, inventory positions and point-of-sale transactions volumes remain strong throughout the holiday season. Automotive plants take their annual December shutdowns which results in an anticipated decrease in VMI, ASN and remittance advice transactions between OEMs and their parts suppliers.

January 2009 - Further bankruptcies challenge the department store and apparel sector as Gottschalks and Goodys both file.  EDI product catalog volumes continue to decline.  Circuit City announces plans to liquidate its nationwide footprint of consumer electronics sales.  High tech OEMs and Retailers stuck with an abundance of inventory due to lower than expected holiday sales, decrease trading volumes.  The result is a precipitous drop in overall B2B transactions in January as compared to December.

February 2009 - Pittsburgh wins the SuperBowl resulting in a surge in Steelers’ merchandise sales, but the big news in B2B is in Redskin territory.  Obama issues the deployment of 17,000 troops to Afghanistan resulting in a surge in B2B related to military purchasing and supply chain activity.  In the grocery sector, Salmonella contamination in peanut butter products results in significant food product recalls.  B2B transactions related to reverse logistics are slightly higher than average. 

March 2009 - Amazon’s Kindle 2.0 is released to the market, but since it does not support EDI there is no impact to B2B transaction volumes.  Meanwhile the stock market bottoms out with the Dow Jones Industrial Average falling into the mid-6000s.  Nonetheless, B2B transaction volumes experience a modest gain as compared to February.  The Easter holiday falls in April this year.  The typical holiday lift enjoyed in retail sales during March is postponed leading to lower than average grocery transaction volumes. 

April 2009 - Swine Flu outbreak spreads across the Northern Hemisphere.  Panicking consumers rush to the stores to purchase Orange Juice, tissue paper and hand sanitizer.  Chain drug and grocery stores experience a lift in B2B volumes.  Cancellations of A380 and B787 orders occur from major customers of Airbus and Boeing.  The declining trade volumes in the aerospace sector result in a corresponding slowdown in B2B transactions.

May 2009 - Star Trek: The Movie premieres at theatres across the US, but the general public is focused on what increasingly appears to be a Kobayashi Maru scenario for GM and Chrysler.  Surprisingly, B2B transaction volumes in the US automotive sector actually rise due to higher shipping volumes by OEMs such as Toyota and Honda.  These OEMs launched an atypical strategy of stockpiling inventories fearing potential supply chain interruptions from the forthcoming GM and Chrysler bankruptcies.

June 2009 - June has already proved to be an interesting month with GM filing for bankruptcy and United Airlines announcing plans to purchase up to 150 new jets.  B2B volumes surged on the first day of the month.   With the stock market continuing to push upwards, I suspect this may be the sign of an overall positive trend.

Last month SWIFT released its Annual Report for 2008. Most people don’t get excited about reading an annual report, but I am always eager to get a copy of SWIFT’s.   Why?  Because there is lots of cool data in it about B2B transaction volumes in the financial services sector.   I found the 2008 report particularly interesting because SWIFT was able to link activity on its network with the major macroeconomic events occurring around the world.  This is an excellent illustration of EDInomics and further proof of how B2B integration technology provides a critical underpinning to the world economy.

SWIFT has the Best Available Data on B2B in Financial Services

The SWIFT network carries a variety of transaction types related to foreign exchange, trade finance, securities and payments.  With the dramatic decline the stock market during 2008, I found the data on securities transactions to be the most interesting.  Securities transactions represented about 42% of overall FIN transaction volume in 2008.  Payments were the largest category of transactions representing approximately 50% of 2008 volume.  Many of the payment instructions exchanged on SWIFT are related to buyers paying invoices to suppliers in foreign countries.  However, a significant percentage of the payment transactions are related to securities settlement.   By my estimates, over 60% of the 3.8B FIN messages exchanged on SWIFTNet in 2008 were securities related.  With such a large sample size, I would contend that SWIFT’s transaction trends are the best available indicator of capital markets activity for B2B.

SWIFT FIN Messages by Category

Source: SWIFT Annual Report 2008

People often ask me how the credit crisis and stock market collapse has impacted B2B transaction activity in the financial services sector.  They are typically surprised to learn that B2B transaction volumes are at an all time high.  This is because transaction volumes in the securities and payment segments are typically counter-cyclical.  During a stock market crash, the volume of trading activity increases substantially.  Consequently, B2B financial transaction volumes increase significantly on the days of heaviest trading and highest market volatility.   Associated with each securities trade are multiple messages that are exchanged at different points in the lifecycle.  For example there are messages to execute the order; confirm/affirm the trade; allocate positions for individual accounts and finally funds transfer for the actual settlement. 

Correlating Financial Market Activity with Transaction Volumes

The section of SWIFT’s annual report that I found most interesting was a section labeled “2008 in Context” in which the volume of FIN messages is trended graphically by month.  On top of the volumes, SWIFT plotted the major events leading up to the financial crisis and the subsequent government bailout activities.  Additionally, SWIFT offers its interpretation of how message volumes rose or declined based upon activity in the financial markets. 

SWIFT Transaction Volumes and Context July-December 2008

Source: SWIFT Annual Report 2008

There is one chart in which SWIFT plots FIN transaction volumes against actual trading activity on the NYSE.  Both charts show very similar trends with the SWIFT transactions lagging the NYSE trends by a few days.   The lag is expected because the clearing and settlement processes facilitated by messages exchanged on SWIFT typically occur 1-5 days after a trade.

SWIFT Transaction Volumes compared to NYSE Trade Activity

Source: SWIFT Annual Report 2008

There is also a clear correlation between the days that the stock market plummeted and transaction volume on SWIFTNet.  For example, SWIFT witnessed two peak transaction days in early January 2008, correlated with the heavy downward trading that occurred January 21st.  Throughout September 2008, there was a high degree of market volatility following the collapse of Lehman Brothers and the AIG government bailout.  Not surprisingly, two of SWIFT’s top 5 peak days were September 19th and September 30th.  The situation got more interesting in October as the capital markets continued to decline.  SWIFT experienced record-breaking transaction volumes in two back-to-back days October 14th and 15th, each with over 17M messages per day.

Other Significant Events Impacting B2B Volumes

Beyond the credit crisis, there were a number of other events occurring in the financial services industry during 2008 that could have impacted transaction volumes:

• SEPA – Major milestones in Single European Payments Area (SEPA) were plotted against FIN message volume.  There appeared to be no direct impact to SWIFT volumes from the introduction of the SEPA Credit Transfer in January or the phased migrations of clearing systems onto TARGET2.  The first group of Western European countries including France, Spain and the Netherlands was migrated to TARGET2 in February followed by a secondary group from Estonia, Poland and Italy migrating in May.  Neither resulted in a noticeable change in traffic patterns.
• Seasonal activity – Some of the traffic peaks and troughs experienced on SWIFT are expected to occur every year due to seasonal holidays.  For example, there is typically a drop in financial transaction activity during the month of August when many people are on holiday.  Conversely, there is a year-end rise in financial transaction activity in December as many people are making trades to satisfy tax planning goals or to achieve annual return objectives.

SWIFT Transaction Volumes and Context July-December 2008

Source: SWIFT Annual Report 2008

The SWIFT data also provides insights into how B2B transaction volumes are growing year-over-year in the financial services sector.  Payments message volumes grew 4.2% in 2008, which is significantly lower than the 16.1% growth in 2007.  Despite the higher overall transaction numbers, growth slowed in securities as well from 32.2% to 17.3%.  Trade messages typically used to process letters of credit between banks, were the only category experiencing a decline (-4.5%) in 2008.

There only four more days until June, which means we are nearing the peak of the annual spring wedding season.   Last weekend, my wife and I were reviewing the list of upcoming weddings and discussing who we needed to purchase gifts for.   My favorite gifts to give are practical items such as cleaning supplies (e.g. a mop) for the bride or lawn tools (e.g. a shovel) for the groom.  Unfortunately, my ideas are usually rejected in favor of something on the actual gift registry.  The use of wedding registries, particularly online, has skyrocketed in the past decade.  Retailers such as Macy’s, Target, Amazon.com, Bed Bath and Beyond, Crate & Barrel and Williams Sonoma have enjoyed success with gift registries not only because of their merchandise selection, but because they have made the process very simple for buyers.  With just a few mouse clicks you can find a beneficiary’s name online, select a gift, have it wrapped and shipped to their front door.

These days we take such conveniences for granted as the Internet has become increasingly mainstream in the past ten years.  Most people can quickly cite four or five examples of how B2C e-Commerce and on-line shopping have made dramatic improvements in their life.  However, few people could say the same for B2B e-Commerce.  But as I have written in blogs earlier this month, most of the everyday activities in your life are no more than six degrees of separation from B2B e-Commerce.  In the gift registry example above, B2B is just as critical as B2C to ensuring that the appropriate wedding or baby present arrived in time for the special event. 

The majority of the products purchased from a retailer are not manufactured by the store owner.  Instead these products are designed, manufactured and distributed by third party suppliers.  In some cases, the supplier is an independent entity which distributes its brand name products through multiple retailers.  In other cases, the supplier is contracted by the retailer to manufacture private label goods exclusively for their stores.  But in both scenarios B2B e-Commerce needs to occur between the retailer and its supplier for any sales to take place.  In the case of on-line purchases B2B has become more important than in the traditional offline, bricks and mortar shopping experience.

Product Attributes

Before selecting a gift from the registry for purchase, you probably compared a few items (or combinations thereof) on the retailer’s web site.  Most online shopping sites offer a wealth of information about their merchandise for prospective buyers.  Pictures of multiple sizes and from multiple perspectives are critical.  In addition to imagery, online shopping sites contain a brief description of the product and a list of features or attributes.  For apparel this feature data might consistent of the various colors, sizes and styles available for a selected garment.  For electronics these attributes might consistent of technical specifications, weight and dimensions.  For home décor these attributes might include country-of-origin, materials composition and cleaning instructions.  The most efficient method for the retailer to obtain all of the information about the products they list on their catalogs is from the suppliers themselves.  Manufacturers publish electronic catalogs which contain all of the attribute data for each individual SKU.  In the Department Store and Apparel sector these catalogs are typically exchanged in EDI format via a closed network service from a B2B vendor.  In the hardlines, electronics and mass merchandise sectors, the product attribute data is published from supplier to buyer using a process called data synchronization.   XML is used to encapsulate the attribute data and specialized data pool providers synchronize the information between supplier and retailer.  So the next time you purchase a product online and the image is poor or the description is lacking, you can know that it is more likely the manufacturer’s fault than the retailers.

If you see these guys at your wedding don't expect a gift

Order Fulfillment

You may be surprised to learn that many of the products you buy online are never actually held in inventory by the retailer.  Instead, when you checkout from the online shopping cart, the retailer simply forwards the order onto the supplier for direct fulfillment.  The manufacturer then “drop ships” the package directly to the consumer straight from their warehouse.  Some retailers even provide the manufacturer with custom-branded packaging materials to create the appearance that the package shipped directly from the retailer.  Drop ship is especially effective for:

• Infrequently ordered products which would not be cost-effective for a retailer to stock
• Expensive products which may be costly to stock in any significant volume
• High turnover products which may be challenging to keep in stock
• Time sensitive products which need to be transported as quickly as possible

The drop ship process is a strong positive for consumers and retailers.  By shipping direct from the manufacturer’s warehouse the package arrives faster and the price is lower.  If the shipment were routed through the retailer’s distribution center first and then forwarded onto the consumer, several additional days would be required.  Furthermore the shipping costs would be higher due to the use of multiple trucking companies and the need to involve more warehouse personnel.  The drop ship process is efficient for the retailer as well.  Using drop ship, the retailer does not have to hold as much inventory in their distribution center. 

A great practical wedding gift

Drop ship would not be practical without B2B e-Commerce.  The contents of an online shopping cart are converted by the retailer into an EDI purchase order.  The electronic PO is then sent to the supplier.  If you order multiple products manufactured by different suppliers then multiple EDI purchase orders will need to be created and sent.  The supplier will acknowledge the order, pick the items from its warehouse inventory, pack them into the retailer’s branded boxes and ship the parcel via freight carrier to the consumer’s address.  Once the shipment has been released, the supplier will send an Advanced Shipment Notice (ASN) to the retailer informing them of the fulfillment activity.  The use of an ASN is important for several reasons.  First, many retailers agree not to charge the consumers credit card until the goods have shipped.  Without an ASN they would not have the event trigger necessary for billing.  Second, in a small number of cases, the goods are not delivered on time or to the correct location.  When the consumer contacts the retailer’s to inquire about the status of their order, the customer service representative must be able to track the location of the package.

Many people think the hardest part of wedding planning is the seating chart, the invitation list or the dinner menu.   Now you know that home delivery of gifts from your wedding registry is just as complex!

Have you flown on an airplane, used prescription drugs or made a purchase with a credit card recently?  If so, then chances are high that you were fewer than six degrees of separation from B2B e-Commerce technologies which helped protect your safety, health or identify.  Review the questions below about your recent experiences.  If you answered “Yes” to any of the questions, then you can read how B2B e-Commerce may have made your life safer.

Protecting You on the Road

Most US states have legislation requiring drivers to purchase a minimum amount of liability insurance.  The laws ensure that drivers can cover the costs of damages to people or property resulting from an automobile accident.  Insurance carriers are required to file reports of their policyholder’s liability coverage with the state’s Department of Motor Vehicles (DMV).  The insurer’s reports can be correlated against driver’s license records to identify individuals with inadequate coverage.  States can then pursue action to penalize the uninsured and enforce the legal requirements.  The result is that all drivers have a reduced risk of being financially burdened with the costs of repairs or medical treatment related to an accident they did not cause.  B2B integration technologies are utilized to exchange Auto Liability Insurance Reporting (ALIR) between each state’s DMV and the leading property and casualty insurers.  In fact, specialized B2B networks such as IVANS and AAMVAnet are frequently used for these communications.

Protecting Your Personal Health Information

Selected B2B transactions in the health care industry contain Protected Health Information (PHI).  These transactions might relate to lab work, prescription requests, insurance claims or payments associated with your health care activities.  All companies which transmit PHI electronically are required to comply with strict security and privacy regulations as defined by the US HIPAA legislation.  The result is that health care insurers, hospitals, laboratories, physician’s offices and retail pharmacies must implement technologies such as firewalls, encryption, anti-virus and intrusion detection technologies to safeguard your personal health records.  With such safeguards in place, public disclosures of PHI that might result in embarrassment, loss of employment, loss of insurance or identity theft are significantly reduced.

Protecting You from Fraud and Identity Theft

When you use a personal or commercial credit card to make a purchase, a series of B2B transactions between the merchant, the merchant’s bank, the card processing network (Visa, Mastercard) and the card issuing bank occurs.  Part of the transaction, the authorization, occurs in real-time at the point of sale.  Other parts of the transactions such as clearing, settlement and reporting occur in batch mode shortly after your purchase.  The B2B transactions between various entities can include Payment Card Information (PCI) such as your credit card account number, expiration data or the verification code.  All merchants and financial institutions which manage payment card data are required to comply with the PCI regulations developed by the card industry.  Consequently, retailers, on-line merchants, issuing banks, merchant acquirers, third party processors and card brands must implement technologies such as firewalls, encryption, anti-virus and intrusion detection technologies to protect payment card data.  With such safeguards in place for external B2B data flows, the probability that your payment card information will be used for identity theft or fraudulent activity is significantly lower.

Protecting You from Counterfeit Drugs

Studies indicate that 10% of all pharmaceuticals worldwide are counterfeit.  The most significant challenges with counterfeit drugs are in emerging markets.  However, there have been several noteworthy cases of health risks posed by these products in the US as well.   For example, there have been cases in which schizophrenia drugs were imprinted with “Aspirin” on the pills.   A new technology called electronic pedigree would help to reduce the amount of counterfeiting in the pharmaceutical supply chain.  E-pedigree would track the chain of custody for medicines as they travel from the original manufacturer to regional and national distributors and finally to retailers.  E-Pedigree is enabled by a combination of RFID and B2B integration technologies.  Pedigree legislation has been enacted in over 30 states.  However, only a few such as California have formalized requirements for electronic tracking.   As RFID technologies mature and price points fall, the use of e-pedigree will grow thereby helping to ensure a safer supply chain for all of us.

Protecting You against Terrorist Hijackings

Following the September 11th terrorist attacks, the US Department of Homeland Security (DHS) and equivalent ministries/agencies in other countries have been more aggressively managing commercial air travel in efforts to prevent future attacks.  International flights are subject to more rigorous government inspection as there is not only a threat of terrorism during airtime, but also the possibility that persons on known watch lists might be crossing into the US.  Airline operators are required to send advanced copies of passenger manifests to DHS for all inbound international flights.  The manifests are compared against suspect databases for possible matches.  Once the screening is completed, DHS will respond with any flight restrictions required for suspicious passengers.  The security screening process must be completed before an aircraft is given clearance for departure.  B2B integration technologies such as EDI are utilized to transmit the information between the airline operators and government agencies.  This is just one of many ways that B2B helps to keep you safe.

Protecting You against Dirty Bombs
 
Since the September 11th terrorist attacks, the US Department of Homeland Security (DHS) has instituted numerous regulations to improve security related to ocean, ground and rail freight entering the country.  For example, the Advanced Manifest Rule specifies that an ocean container can be allowed into US only if detailed information about the contents is provided electronically in advance.  Similar procedures have been enacted for all trucks entering the US from Canada or Mexico.  Ground freight carriers must submit an electronic manifest prior to arrival at the border.   Recently, the regulations have become more formalized with an initiative called 10+2 that specifies 12 pieces of information that must be submitted to Customs and Border Patrol from an ocean vessel destined for the US prior to the ship’s departure from the foreign port.  The 10 and the 2 refer to the number of data elements required from the importer and transportation carrier respectively.  E-commerce technologies such as EDI are the primary means by which transportation carriers, third party logistics providers, US importers and foreign exporters can submit cargo manifests and customs declarations to DHS.

I was watching the movie I am Legend on HBO Sunday evening.  I’m not sure if there is any correlation between HBO’s decision to broadcast of the film in May and the outbreak of the H1N1 Swine Flu.  However, it did start me thinking about pandemics and what could be done to better contain these outbreaks before they turn all of Manhattan into nocturnal, cannibalistic zombies.  The widespread outbreaks of H1N1 in Mexico and the US have made this subject top of mind for everyone from politicians to economists.  Of course, pandemics are yet another area in which B2B interoperability and integration technologies could play a significant role.

The Center for Information Technology Leadership published a comprehensive report on how B2B interoperability in the US health care community could not only reduce costs but improve the quality of care.   Much of the data cited in this post is sourced from the 2004 report entitled The Value of Healthcare Information Exchange and Interoperability.   See my January post on how the Obama administration could save $75B annually from B2B interoperability in health care for more background information.

Tracking Pandemics at the State, Local and Federal Level

State laws require providers and laboratories to report cases of certain diseases to local and state public health departments.  Nationally “notifiable” diseases are forwarded by the state agencies onto the Centers for Disease Control and Prevention (CDC).  Connections between the states and the CDC are electronic and highly automated.  However, the first mile between the providers and the local and state agencies is highly manual.   Providers typically submit data via phone, fax, hard copy forms or very basic B2B communications methods such as a web portal.  For larger provider groups operating in multiple regions, notifications to state health agencies become even more cumbersome.  The 50 US states maintain more than 100 different systems to collect data each with its own communications mode. 

The most closely monitored “notifiable” diseases are frequently under-reported in the US.  Various studies conducted between 1970 and 1999 showed that only 79% of all STD, tuberculosis and AIDS cases were reported to public health agencies.  Reporting rates for other diseases was much lower at 49%.  There are several reasons for the reporting challenges.  But certainly one of the key issues is the ease with which the information can be transmitted to health authorities.  There is no question that the primitive communications methods used to collect provider data is a critical barrier to success.  However, even more problematic is the dependency upon overworked and understaffed provider personnel to take the time to consistently file the reports.

Electronic Health Records – Public Health Benefits

A better methodology for reporting on “notifiable” diseases would be to eliminate the need for human initiation altogether.  The process could be completely automated by connecting health care provider’s Health Information Systems and Practice Management Systems which contain the patient data to Public Health and Safety tracking systems.  However, connecting the tens of thousands of medical practices to the hundreds of different public health systems could prove quite an ambitious integration project.  A less complex and costly alternative would leverage the concept of Electronic Health Records (EHR).  The EHR would significantly simplify tracking of public health epidemics without the need for bespoke integration between various state agencies and each different medical provider.

The EHR provides a comprehensive set of information about each patient including demographics, medications, immunizations, allergies, physician notes, laboratory data, radiology reports and past medical history.  EHR information could be stored in a series of centralized repository deployed around the country.  Each repository could contain the full medical records or just pointers to the locations of the records.   Triggers could be set up to automatically identify trends in data sets that might not be otherwise noticed, helping to provide an early warning system for potential disease outbreaks.  In the event of a pandemic or bioterrorist event, public health officials could easily access de-identified EHR data such as physician’s notes, patient demographics and medical history.  Without the dependency upon manual data entry, the latency of information flow could be reduced and the quality of information collected could be improved.  Administrative costs would be reduced considerably.  Average cost to send a report manually is $14 as compared to only $0.03 electronically.  CITL estimated that the use of electronic data flow from providers and laboratories to public health agencies would reduce administrative costs by $195M annually.  CITL did not quantify the potential economic savings from early identification of pandemics and bioterrorist events, but there is no question that these could be in the billions of dollars.

B2B Interoperability and EHR

Of course, a key technology enabler for EHR is interoperability between the various health care providers and the corresponding state, local and federal agencies.  Medical data is transmitted between providers, payers and public agencies using a variety of B2B standards including DICOM, HL7, NCPDP, and HIPAA-compliant EDI transactions.  EHRs could aggregate the available data related to prescriptions, claims, lab reports and radiology images into an electronic record.  Additional services could be layered onto the B2B integration framework such as data quality could be used to ensure the completeness of records and business activity monitoring to identify behavioral trends.

Another concept evangelized in the CITL report is the idea of a National Electronic Disease Surveillance System (NEDSS).  The NEDSS would collect data from a number of relevant sources outside of the health care system which could be useful for monitoring   Examples might include 911 call analysis; veterinary clinic activity; OTC pharmacy sales; school absenteeism; health web-site traffic and retail sales of facial tissue, Orange Juice.   Such practices have been deployed by the US Department of Defense and the Utah Department of Health during the Salt Lake City Olympics in 2002.  Such an effort would require integrating additional state and local agencies, educational institutions and retail chains electronically using B2B.

This week is the premier of the new Star Trek movie.  Star Trek has now joined X-Men, Star Wars and other films in the strategy of using prequels to reinvigorate a motion picture series.   The newest Star Trek movie shows the early history of James T. Kirk during his period before, during and after enlisting at Starfleet Academy.  The film also shows how Kirk first meets Spock, who is played by the evil villain Sylar from NBC’s Heroes.  I was thinking about Star Trek today in the context of B2B e-commerce and it drew me to think about the ASX series of B2B communications protocols.

AS1-AS4

By ASX, I am referring to the Applicability Statements 1-4, which are standards for exchanging electronic documents between business partners.  The ASX standards have been a truly disruptive technology in the world of B2B e-commerce.  They have replaced traditionally expensive, proprietary network connections between business partners, with low-cost, Internet communications using open standards.  Each of ASX standards have been modeled off a popular Internet protocol.  

• AS1 - First, there was AS1 based on SMTP.  SMTP, of course, is the standard utilized for e-mail exchanges.  EDI documents were embedded in an SMTP. 

• AS2 – Next AS2 was introduced based on HTTP.  AS2 emulated the interactions between a web browser and a web server in order to exchange EDI documents.
• AS3 – The third in the series was AS3.  AS3 was based upon FTP, file transfer protocol, which is a popular standard for exchanging messages between
• AS4 – The most recently released standard is AS4.  AS4 is based upon SOAP and the web services model.

AS2 and the Wrath of Khan

There were six original Star Trek movies starring William Shatner and Leonard Nimoy.  Most would agree that the second film was the best.  None of the four subsequent films ever gained the popularity of Wrath of Kahn.  The more successful you are with early releases in a sequence, the more challenging it becomes to outdo your previous efforts.   The ASX series of B2B communications offers a good example.  AS2 was great, but the others have been largely a disappointment.

Much like Star Trek: The Motion Picture, the first ASX standard AS1, enjoyed a small but loyal following.  While few companies deployed AS1 for Internet-based e-Commerce, almost all agreed that this was the start of something big.  AS2 proved to be the game changer.  In 2002, Wal-Mart mandated that all of its suppliers use of AS2 for B2B communications to reduce VAN charges.  AS2 enjoyed widespread success not only in the Wal-Mart community but with retailers and manufacturers around the globe.  AS2 has become one of the most popular B2B e-Commerce protocols, second only to FTP.  AS3, however, has been a dismal failure.  Much like Star Trek III – The Search for Spock was a terrible disappointment compared to Star Trek II – The Wrath of Kahn, AS3 has failed to gain any meaningful adoption.  AS4 was announced almost a year ago.  Although a web services based ASX standard sounds appealing there has been little market interest to date.  Star Trek IV – The Voyage Home involved a trip back in time to rescue some whales.  The idea of time travel sounded promising before the film’s debut, but in the end the movie was no comparison to the Wrath of Kahn.  There were two additional movies in the original Star Trek movie series.  Although I saw both The Final Frontier and The Undiscovered Country neither were very memorable.  The ASX series seems doomed to follow the path of the original Star Trek movies, peaking at 2 then following up with a series of disappointing subsequent releases.

AS0 – A Prequel

Perhaps, instead of releasing a follow-on AS5, we should go the other direction and introduce a prequel.   We could call it AS0. Logical candidates for AS0 would be some of the early Internet protocol standards such as NNTP, Gopher and Telnet.  And even bolder strategy would be to revert to pre-Internet protocols such as async, bisync, SNA, X.25 or LU6.2.

Rarely do you read about supply chain scenarios in which companies stockpile excess inventory as a deliberate business strategy.  Perhaps the only example I can think of is the forward-buying techniques sometimes executed in the retail and pharmaceutical industries to take advantage of promotional prices from suppliers.  In this economy, however even the biggest risk takers might be reluctant to pursue such a price arbitrage strategy.  Inventory levels in the automotive, consumer electronics, apparel and luxury good segments have been at record levels for most the past several months.  In fact, economists have been monitoring finished goods inventory levels throughout the recession hoping they would be depleted to the point that buyers would place orders again.  Economic planners are hoping that such as buying cycle might be the catalyst for the start of a growth period.  There have been few signs of such a recovery yet, however, as most companies continue to take extraordinary measures to move assets and inventory off their books.   Nonetheless, there are scenarios in this economy in which supply chain planners are actually bulking up on inventory.  In fact, just this past week two of the world’s largest buying organizations are exploring programs to purposefully expand their safety stocks of inventory.

Toyota Stockpiles Parts

Rarely do you read about supply chain challenges at the world's largest automaker, Toyota.  In fact, Toyota is often studied by students and supply chain experts as the example of best-in-class manufacturing techniques.  However, even Toyota is not immune to the North American automotive crisis and the domino effect that could result from the Chrysler bankruptcy filing on Thursday or the potential GM bankruptcy in the next 30 days.  In recent years, Toyota has migrated much of the production for its US sales to North America.  Parts and materials are sourced both from established Japanese kereitsu partners as well as North American suppliers.  For example, approximately half of Toyota's 500 US parts suppliers are shared by GM.  It should be no surprise then that Toyota has established a war room to monitor the health of its North American supplier community.   In fact, the automaker has gone so far as to begin stockpiling parts in warehouses to prevent the disruption in manufacturing processes that might be caused by the failure of key suppliers. 

Toyota is not the only OEM concerned about supplier failure.  Ford Motor Company is perhaps at greatest risk due to the high degree of overlap between its vendor community and the suppliers utilized by Chrysler and GM.  Following Chrysler’s bankruptcy filing last week, Ford initiated an outreach program to its suppliers in order to assess any potential domino effect that might have resulted.  In fact, someone forwarded me one of the e-mail communications that Ford distributed to its suppliers through its marketplace/exchange partner Covisint.   As a supply chain professional, one cannot help but marvel at what is truly a peculiar set of circumstances which have evolved in the automotive industry.  At one end of the supply chain dealers are struggling with record-high, 100+ day inventory levels while at the other end of the supply chain, OEMs such as Toyota are deviating from established JIT processes to build up safety stocks.  Despite the intrigue posed by such anomalies to those of us who study supply chains, I think most would agree this is a situation that we would just assume not repeat ever again.

US Government Contemplates Vaccine Inventories

With the outbreak of the Swine Flu throughout North America, Western Europe and most recently Hong Kong, governments are focusing their attention towards pandemic preparedness.    Last week I read an interesting article in the Wall Street Journal about the inventory levels of flu vaccines being maintained by governments around the world.   Much like the Titanic oceanliner had less than half the necessary lifeboats to accommodate its passengers and crew, most government agencies have significantly less flu vaccine inventory on hand than would be required to respond to a widespread pandemic.   The UK and France appear most prepared with adequate vaccine supplies to treat 54% of the populations.  Japan could treat almost 30% of its population with its reserves.  The US, of course, has a much lower supply, which could only be utilized to treat 50 million people or 16% of its population.  Emerging markets such as India and Africa have very low inventories.  However, in the case of Swine Flu, most of these countries have not experienced an outbreak of the disease yet.

Swine Flu Outbreak as of May 3rd, 2009 - Source: Wikipedia

Pandemics are one of the rare situations in which the supply chain would benefit from having a massive safety stock of inventory on-hand.  And in the best case scenario, the inventory of vaccines such as Tamiflu would expire and need to be destroyed before it ever has to be used.  Vaccine inventories are expensive to maintain which is why many countries have under-stocked their reserves.  A better model would be to develop a model for rapidly producing high volumes of vaccines in order to respond just-in-time to pandemic outbreaks.  However, from my research the production of mass quantities of a vaccine is not possible in the timeframes necessary to respond to a public health crisis.  CDC officials have stated that even if all resources were focused on developing a Swine Flu vaccine today, the first output would not be available until September.  Furthermore, the manufacturing facilities used to produce a pandemic flu vaccine are the same as those used to produce seasonal flu remedies.  As a result, world health leaders would be forced to lower the output of vaccinations for the 2010 season in order to proactively respond to the current H1N1 crisis.  Again I find it interesting how different parts of the supply chain are experiencing such extremes.   In one supply chain, automotive, we are expecting massive plant idling and work stoppages while in another manufacturing sector, pharmaceuticals, there is a critical shortage of capacity.  If only it were possible to quickly reconfigure an automotive plant to produce flu vaccines, all of our problems would be solved…

Remains of RMS Titanic

Do you get direct deposit at work?  Do you own mutual funds in an investment account?  Have you purchased a stock lately?  Is your home or car insured?  If so, then chances are high that you were fewer than six degrees of separation from B2B e-Commerce.  Review the questions below about your personal finances.  If you answered “Yes” to any of the questions, then you can read how B2B e-Commerce may have impacted your life.

Does your employer use direct deposit for your paychecks?

Most businesses use direct deposit for employee payroll disbursements due to the extensive savings that can be generated.  Direct deposit uses Electronic Funds Transfer (EFT) to deposit money from your employer’s bank account into your own checking or savings account.  The cost of printing, mailing and processing a check is typically 10 times more expensive than EFT.  The direct deposit and electronic funds transfer processes are enabled by B2B integration technologies.  Some employers manage their own payroll while others outsource this business process to a specialized firm.  A few days prior to the end of each pay period, each employer determines their payroll based upon the hours worked, annual salary and benefit elections for each employee.  Employers then send a file containing the results of payroll processing to its bank in a format such as EDI or NACHA.   The payroll file contains the amounts that should be credited to each employee’s account as well as the routing and bank account numbers for each worker.  The bank then forwards the EFT request onto Automated Clearing House (ACH), which transfers the funds electronically.

Do you own a mutual fund?

Mutual funds retain the services of professional money managers to monitor market trends.  The fund managers make decisions about which securities to buy and sell based upon their opinion of a stock’s future potential.  But the actual holding of the securities is performed by a third-party firm, typically a custodial bank.  The custodian acts provides safekeeping and recordkeeping of the fund’s assets to prevent potential fraud by the fund manager.  The fund manager’s records can quickly become out of sync with the custodian’s actual holdings, requiring the need for a daily reconciliation.   As a result, mutual funds receive daily reporting from their custodians on exactly which securities they own.  This reporting between custodians and investment managers is transmitted using B2B integration technologies such as SWIFT.  Without an automated exchange of data, a very laborious process would be required to determine the holdings of each investment manager.  B2B technologies enable the mutual fund manager to determine the value of each individual share in the fund. These valuations are the basis for the price you see listed next to a mutual fund in the newspaper and in the monthly statement you receive from the fund.

Have you made a stock trade lately?

To perform a stock trade you may have used an online trading service or you may have called your broker.   In either case, your stock trade instructions typically are converted into an order message based upon a B2B integration standard called FIX.  For stocks traded on exchanges such as NYSE or NASDAQ the FIX messages are then relayed directly to the market for execution.  For other stocks which trade Over-the-Counter (OTC), the FIX message might be routed to another broker or to a different electronic marketplace for execution.  Following a trade execution there is an additional series of B2B messages, typically in FIX format, exchanged between the brokerage firms involved and other parties such as the clearing systems and the custodial banks.  These post-trade messages are used to confirm that the trade occurred and affirm that the trade is correct.  Once all parties have agreed upon the trade, clearing and settlement occurs.  Stock ownership records are updated and the actual funds are transferred between buyers and sellers.

Did you purchase auto, home or property insurance through an agent?

Online purchasing of auto, home and property policies over the web has become more common in the property and casualty insurance market.  However, many consumers still purchase policies through specialized insurance sales representatives called agents.   Agents typically are not actually employees of the companies that underwrite your insurance policy.   Instead, most agents are independent entities that sell exclusively on behalf of one insurer or sell policies for multiple carriers.  Each insurance company might have thousands of agents nationwide selling and servicing their policyholders.  Consequently, there is a need to automate, high volume transactions between the agent and the insurance company.  B2B integration technologies such as ACORD and EDI are used to digitize these agent-to-carrier transactions.   When you first apply for a new policy, the agent gathers your personal information, policy preferences and property details, which it transmits to the insurance company using B2B.  If you are involved in a car accident then your agent will use B2B integration technology to submit the claim to the insurance company.  If your car requires repair or you require medical services, then the insurance company will use B2B integration technologies to manage the auto repair companies and health care providers which may be used to resolve the claim.

Have you purchased a new car recently?  If so then chances are high that you were fewer than six degrees of separation from B2B e-Commerce technologies.   Review the questions below about the car buying process.  If you answered “Yes” to any of the questions, then you can read how B2B e-Commerce may have impacted your life.

Did you purchase a car manufactured in North America, Western Europe or Japan?

Automobile companies depend upon an extensive network of suppliers to provide most of the parts needed to build an automobile.  Automakers source raw materials such as steel, rubber, plastic and glass as well as entire subsystems such as safety, exhaust, entertainment and heating/air conditioning systems from third party suppliers.  To keep costs low and quality standards high, automobile manufacturers in North America, Western Europe and Japan automate as many of the routine interactions with their suppliers as possible.  Buyers and suppliers of automotive parts use B2B integration technologies such as EDI and XML to exchange manufacturing forecasts, inventory positions, transportation activities and payment transactions.

Did you research your vehicle online before purchasing it?

Increasingly, consumers are researching car purchases online before actually visiting any dealerships.  If you have conducted research online before, you know that there is wealth of data available to consumers including dealer invoice prices, expert buyer reviews and vehicle comparison charts.   But you may not know that the car dealerships, automobile manufacturers and parts suppliers get just as much insight from your online research activities as you do.  Web site activity can be tracked and analyzed to help better forecast, which makes and models of vehicles consumers will purchase in the next 60 days.  Auto manufacturers need to know whether to build cars with four or six cylinder engines; weather to install leather or cloth seats; and whether to include navigation systems or just the standard entertainment package.  Dealers, manufacturers and suppliers use B2B integration technologies to exchange of web site log data between one another for these demand forecasting processes.

Did you test drive the vehicle before purchasing?

Most car dealers try to stock an extensive selection of different models on their lots to increase the odds that a consumer will be able to find the car of their choice within the available inventory.  During the purchasing process you probably did not give much thought as to how your dealership is able to afford to purchase and hold tens of millions of dollars worth of vehicle inventory.  Commercial banks offer a service called dealer floorplan financing to provide the short-term lending dealers need for inventory.   With millions of vehicles being purchased, financed and sold each month, automation is a critical factor in the dealer floorplan process.  B2B integration technologies are utilized to exchange information between the automobile manufacturers, the car dealerships and the commercial banks which provide the financing.  Dealer invoicing, inventory reporting, financing requests and payoff instructions data is exchanged using standards such as STAR and EDI.

Did you finance your new vehicle at the dealership?

One of the most popular options for financing new vehicle purchases is through the automaker’s captive financing division.  Dealerships utilize B2B integration technologies such as STAR to exchange credit applications, decisions and contracts with lenders such as Toyota Financial Services or GMAC.

Did you register your new vehicle at the dealership?

AAMVAnet is a B2B integration service designed specifically to enable businesses such as lenders and dealerships to communicate electronically with your state’s Motor Vehicle Association.  Dealers can register the vehicle and apply for tags online.  And once you have paid off the loan, the title can be transferred into your name electronically by the lenders. 

Did you insure your new vehicle?

After returning home with your new vehicle, one of the first calls you probably made was to your insurance agent.  Few people realize that agents are not actually employees of the companies that underwrite your insurance policy.   Most agents are independent entities that sell exclusively on behalf of one insurer or sell policies for multiple carriers.  B2B integration technologies such as ACORD and EDI are used to exchange information about policies, ratings, claims and billing between these independent agents and the actual insurers.   Agents are not the only entities that companies communicate with electronically.  For example, insurers are required to provide state Motor Vehicle Associations with reporting that identifies vehicle owners who have not purchased the appropriate liability insurance for their vehicles.  So whether you purchased insurance or you did not, B2B integration technology was part of the process!

Have you performed any maintenance on your vehicle since purchasing?

If you are a car enthusiast you may have shopped at an automotive aftermarket retailer such as Advanced Auto Parts, Carquest or NAPA to pick up touch up paint, spark plugs or an engine filter.  Even if you are not a car expert, you have probably purchased motor oil, car wax or wiper blades at a general merchandiser such as Wal-Mart, Target or Sears.  You may not have given much thought as to the supply chain process that is used to stock these parts in the stores.  Aftermarket retailers utilized specialized B2B integration technologies with their parts suppliers to support merchandising, purchasing, transportation and payment processes.  Standards such as XML are used for Internet based parts ordering and PIES for sharing of product and price data.