E-Commerce in Energy and Natural Resources: A Dynamic, Challenging Landscape
It's almost impossible to pick up a newspaper, magazine, or industry periodical and not see a headline that discusses how the Internet is changing the way business is conducted across any industry. The role of business-to-business e-commerce is significant because it is creating new models that will allow real-time communication between businesses to reduce the high cost of information transfer. Relationships with customers and suppliers and the ability to change to an e-commerce environment are critical to the future success of a company. Forrester Research estimates business-to-business e-commerce will increase from $43 billion in 1998 to $1.3 trillion by 2003. The energy and natural resources industries must take full advantage of this opportunity in order to effectively compete within their respective marketplaces. This article discusses challenges, choices, and opportunities that await energy and natural resources companies as they continue to focus their attention on conducting the trade of goods and services and enhance revenue over the Internet.
Challenges
The energy industry is comprised of oil, natural gas, and petrochemical companies while the natural resources industry is made up of forest products, metals, glass, and mining companies. Both industries are experiencing business challenges that are impacting profitability. Natural resources companies are cyclical, commodity-driven, and capital-intensive in nature with minimal opportunity for differentiation. There are times when demand exceeds supply, thus driving up price and improving profitability. However, more often than not, supply exceeds demand, which creates an oversupply and drives prices down. This cyclical nature is the result of an inability to maintain a level balance between supply and demand. Another challenge facing the industry has been the inability to generate earnings above the cost of capital. Customer requirements and the capital-intensive nature of the business have made companies focus on improving productivity and reducing costs. Finally, consolidations within the industry and the desire for global versus domestic presence have presented a new set of issues. The energy industry is facing a similar situation due to crude oversupply, competition from domestic and European markets, a poor outlook from Asian markets, and an increased regulatory burden. With so many challenges facing both industries, participation in business-to-business e-commerce will be a key factor in order to sustain a competitive position.Historically, most energy and natural resources companies have been slow to invest in new technologies that are information-related. There are several accepted myths which have slowed progress, including:
- Business models offer limited opportunities
- Products can't be delivered over the Internet
- High barriers to entry eliminate
start-ups
as a competitive threat - Industry customers are not demanding
- e-commerce capabilities
- Existing business models work well with e-commerce activity
In reality, energy and natural resources companies have the ability to create significant value by utilizing the capabilities of e-commerce. The business-to-business e-commerce market can significantly improve the value chain for energy and natural resources companies by reducing costs, improving revenue, and lowering working capital. New sourcing tools, sales channels, and materials recovery options have become available to companies who are looking to participate in e-commerce. Effective customer segmentation, brand image building, transaction cost reduction, and improved forecasting accuracy are additional areas in which e-commerce plays a key role. Energy and natural resources companies must understand the risks, cost reduction, and revenue opportunities that business-to-business e-commerce provides. In order to accomplish this, a company must ask several questions including:
- What do customers want to buy?
- What business should I be in?
- Who are my competitors, and how do I need to be positioned?
- What is my operating model?
- With whom should I partner/network?
Several companies are starting to consider how business-to-business e-commerce will play a role in their future. Increased competition, timely information, a reduction in costs, and meeting customer demand around the intimacy that e-commerce provides are examples of why companies must begin utilizing this capability.
Success Stories
Many traditional and new e-business companies are entering the energy and natural resources market space to provide e-commerce services. Value propositions include cost savings, one-stop shopping, product selection, and education. Utility.com, Essential.com, Energy.com, Greenmountain.com, Energyagent.com, Chem Connect, Inc., and Enermetrix.com are examples of companies pursuing opportunities in the e-economy. ChemConnect Inc. is the world's largest global Internet exchange for all chemicals and plastics. More than 4,000 member companies participate in ChemConnect's World Chemical Exchange. In addition, BP Amoco recently selected ChemConnect Inc. as its third party platform for Internet-based chemical trading. Enermetrix.com, another e-business, is a leader in Internet commerce for the energy industry. The company provides Internet technology and business process standards. Finally, Petroleum Place and its subsidiary, The Oil & Gas Asset Clearinghouse, are partnering with InfoMech to sell oil and gas properties through a Web site. InfoMech is integral to the Web auction space.In order to succeed in the e-commerce space, energy, and natural resources companies must have an organized and well thought-out approach. Vision and direction, supplier management, demand management, organization strategy, technology strategy, and transaction strategy are the other pieces that should be part of an organization's business objectives. An effective strategy can improve productivity and reduce costs by targeting benefits in a specific market or location. In addition, the type of commodity, operating model (internal or outsourced solution), and pricing mechanism must be defined to achieve benefits:
- An effective solution will allow customers to deal directly with suppliers. This will allow a greater focus on other value-added activities within a company.
- Data collected from an internal system can be analyzed to adjust sourcing policies and process flows.
- Improved planning is also a benefit of an e-procurement strategy because integration of inter-company business processes allows for effective planning with suppliers, which reduces working capital and lowers inventory levels.
The good news is that benefits are sustainable since many of the current purchasing practices are changed. Slow manual processes, inaccurate data, and limited information on purchase orders that currently take place are eliminated. Additional improvements include easy access to data, improved purchase cycles, and lower administration costs.
A further example of an area where e-procurement can be extremely effective in reducing costs is in the area of indirect material purchasing. Non-production (MRO) purchasing is typically an area that is poorly managed by most companies. Purchasing Magazine estimates that $1.4 trillion is currently spent on indirect materials and services. Minimal volume leveraging, out-of-contract spending, lack of enterprise software, and non-compliance are reasons for high spending in this area. Examples of indirect goods and services include office furniture, office equipment, janitorial supplies, travel, and temporary help services. A company can experience a 5-10 percent reduction in the price of goods and services, a significant reduction in purchase and fulfillment cycles, and a 25-50 percent reduction in inventory costs through e-procurement. Suppliers also benefit from an e-procurement program that in turn helps a company negotiate better pricing. Benefits are obtained through increased volume, automated order management, and lower inventory and service costs.
An effective business-to-business e-commerce strategy enables energy and natural resource companies to significantly improve service, reduce costs, and pursue new revenue streams. Succeeding will require an e-commerce vision, coordinated efforts, preparation, and proper execution. Energy and natural resources companies that are able to take advantage of this opportunity will see a much brighter future.
