Opening the Spigot

It used to be that if you were in the market for a new faucet, you could have

any color as long as it was chrome. Plumbing fixtures were meant to be

practical, not pretty.

Then, in the mid-1990s, baby boomers started fixing up their homes or

building huge new ones with gourmet kitchens and swanky bathrooms. Chrome got

the cold shoulder. Goosenecks, gold, and built-in water filters got the welcome

mat.

That’s when faucet maker Moen decided it was really in the fashion

business, selling jewelry for the bathroom and kitchen. The 54-year-old company

needed to churn out new faucet designs in fresh finishes like silver, platinum,

and copper as often as Donna Karan introduces a new ready-to-wear line. Moen

President Jeffrey Svoboda calls it the "9-to-5" strategy. If consumers

had a choice of new styles and were able to mix parts, they might buy a new

faucet once every five years instead of every nine years. "We would double

the size of the market and enjoy a gain in market share," says Svoboda, who

spent 20 years at General Electric and another three at Black & Decker

before joining Moen in 1996. The only problem: Moen was selling many faucets

designed in the ’60s and ‘70s. The sleepy Midwestern company was lucky to

introduce one new line a year.

Svoboda decided it was time to open the spigot. How? By using the Internet to

design jazzy products–fast. Sure, everyone believed that the Web could help

speed communications, but few thought it could turbo-charge product design and,

in turn, manufacturing. Yet by collaborating on designs with suppliers over the

Web, a new Moen faucet goes from drawing board to store shelf in 16 months on

average, down from 24 months. The time savings makes it possible for Moen’s 50

engineers to work on three times as many projects, and introduce from five to 15

fashion (er, faucet) lines a year.

The change is paying off handsomely. More products reaching the market faster

has helped boost sales by 17% since 1998–higher than the industry average of

9% over the same period. Moen has jumped from No. 3 in market share to a tie for

no 1 with archrival Delta Faucet. Both claim about 30% of the $2.5 billion North

American faucet market. Now, Moen is the star performer in the lineup of its

parent, Fortune Brands, contributing one-sixth of its $5.8 billion in 2000

revenues. "Better communication means more rapid deployment of ideas,"

says Svoboda.

That doesn’t mean big budgets and fuel-injected scheduling.

Moen is taking the steady-drip approach to the Web. Since 1997, technology chief

Tim Baker and his now 20-member Internet Program Office have been setting

priorities, laying out what can be accomplished with the resources they have. So

far, Moen’s Web work has cost only $1.5 million, with money spent to hire

software developers for in-house work and on outsourced features like an online

design room that allows customers to mix and match shower fixtures. This is the

new model for an effective Net strategy, say consultants: methodical, with a

focus on the bottom line.

Moen has known this for years. First, the company focused on

clearing its own clogged pipes in product development. Moen’s engineers

typically work six to eight weeks to come up with the design for a new faucet.

Until three years ago, they would burn that design onto CDs and mail the CDs to

its suppliers in 14 countries that make the hundreds of parts that go into a

faucet.

That’s when it got tricky. Suppliers at times found they

couldn’t meet Moen’s specs. So they would make changes, burn a new CD

incorporating their suggestions, and send it back to Moen. The faucet maker

would then combine the changes from all its suppliers. If some spec changes were

incompatible with others, the whole process might start all over again. Going

back and forth once would take two weeks. Doing it several times could extend

the design process up to 16 weeks or longer. The extensa pull-out faucet,

introduced in 1999, was so troublesome that it took 17 weeks just to finish the

design. The $294 faucet is a smash hit, selling in the hundreds of thousands of

units.

Imagine sales if Moen had been able to get the extensa to

market five months sooner. Svoboda did. That’s why, in late 1998, Moen started

sending electronic files of new product designs by e-mail. A few months later,

it launched ProjectNet, an online site where Moen can share digital designs

simultaneously with suppliers worldwide. Every supplier can make changes

immediately. Moen consolidates all the design changes into a master Web file.

That way, design problems are discovered instantly and adjustments can be made

just as fast, cutting the time it takes to lock in a final design to three days.

Next, the company attacked the cumbersome process of ordering

parts from suppliers and updating them by fax or phone. In October, the company

launched SupplyNet, which allows parts suppliers to check the status of Moen’s

orders online. Every time Moen changes an order, the supplier receives an

e-mail. If a supplier can’t fill an order in time, it can alert Moen right

away so the faucet maker can search elsewhere for the part. Today, the 40 key

suppliers who make 80% of the parts that Moen buys use SupplyNet. The result:

The company has shaved $3 million, or about 6%, off its raw-materials and

work-in-progress inventory since October.

Moen’s approach is like light speed compared with

competitors. Many still rely on fax machines to do most of their business. The

percentage of companies using the Net to speed the supply chain in the

construction/home-improvement field, which includes plumbing, is expected to

rise to just 7.7% in 2004, up from 3.2% in 2000, according to Forrester Research

Inc. By comparison, the auto industry is expected to reach 26%, up from 6%, over

the same time period.

"Moen is a step ahead of its peers in embracing

Internet technologies," says an analyst at Forrester Research.

A lot of the credit goes to Svoboda, who studied at the ‘School

of Improving Productivity Through Technology’. That is, GE. Svoboda, 50, spent

most of his career at the corporate giant, running manufacturing plants in GE’s

appliance division. His marching orders were to cut out the fat, speed products

through the assembly line, reduce inventory, and free up cash for new

investment. He has applied the same philosophy at Moen, only with an Internet

twist. "Anything that could take time out of the process is a huge

advantage for managing cash for the business,"says Svoboda. "The Web

is a natural."

Moen may be ahead of its peers, but there’s plenty of work

to do. Technology chief Baker’s most sensitive task is CustomerNet, the

company’s attempt to wire wholesalers, which account for 50% of the company’s

business. Unlike suppliers, who depend on Moen for most of their business, the

company has little sway with wholesalers that buy plumbing, heating, and other

products–not just faucets–from many manufacturers. Most still order by fax,

even though that process causes errors up to 40% of the time.

Moen execs are undaunted. They’re courting wholesalers with

the same methodical determination that has made Moen a Web-smart company. By the

end of the year, they expect the trickle of online orders to turn into a steady

stream, clearing the final blockage in the pipeline.

By Faith Keenan in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

True grit

But the very strengths of the Net are also its limitations. Just because

communication is ubiquitous doesn’t mean it’s everything. The last five

years have taught us that in industries such as retailing, manufacturing, and

transportation, physical factors overpower the virtual. E-tailing turns out to

be more about which company is best at moving boxes around rather than who has

glitziest web site or the biggest virtual store on earth. Linking supply chains

over the Net cuts costs and improves response times, but ultimately

manufacturers succeed or fail if they develop good products and figure out how

to produce them at low cost and high quality. Online airline reservation systems

can improve customer convenience and boost the revenue yield per passenger, but

they can’t do anything about long delays caused by runaway congestion, too few

loading gates, antiquated air traffic control systems, and mechanical

difficulties on airplanes.

Even in areas where the Internet can play a central role, the big changes are

not going to come overnight, as investors have found to their chagrin. Some of

the information-intensive industries where the Internet could have its biggest

effect are also the ones where institutional and regulatory barriers are the

highest and vested interests are the strongest. In health care and education,

for example, the possible benefits from widespread use of the web are enormous,

but it’s going to happen in baby steps, over time. What’s more, it’s a

difficult, painful, and slow process to restructure companies and markets.

In the end, it turns out that the speed of Internet time has more to do with

the capital markets than with the pace of technology adoption. The enormous

amounts of venture capital available to startups drove companies to grow far

faster in a few short years than the underlying infrastructure or consumer

demand could support. In fact, the eventual benefits of the web should be

measured over a decade. "People had higher expectations for the next couple

of years than are likely to be realized," says Jeffrey Bezos, CEO of

Amazon.com. "And people have much lower expectations for the next couple of

years than are likely to be realized over the next 10 years." That may help

explain the current confusion about the future of the Internet.

Got Web?

That’s why Internet optimists are refusing to retreat. Analyst Mary Meeker

of Morgan Stanley Dean Witter is urging Net leaders such as Amazon, Yahoo, and

AOL Time Warner to band together in a ‘Got Milk?’-style marketing campaign

promoting the idea that the web is alive and well.

Such webfests, however, aren’t likely to change the minds of burned

investors or restore the once-buoyant expectations for the Net. For instance,

Merrill Lynch analyst Henry Blodget recently reduced his expectations for how

much retail sales will go online to only 5% to 10%, down from 10% to 15% he

envisioned just a few months ago. Even Bradford Koenig, head of the technology

banking practice at Goldman, Sachs, which underwrote many of the hottest Net

IPOs, has lost confidence in pure Internet companies: "The notion of an

Internet company is no longer viable."

But that’s too pessimistic. In fact, part of the problem was that much of

the investment flowed into areas where the Internet is incremental rather than

revolutionary. Take retailing. The hyped consumer dot-coms were supposed to blow

away their brick-and-mortar counterparts. But it turns out that the importance

of information and communication in retailing–the Internet’s forte–is much

smaller than the role of logistics. How much smaller? According to a Softbank

spokeperson, it takes between $15 million and $25 million to build a

top-of-the-line web site. Yet it costs at least $150 million to build a

warehouse and distribution system for a consumer web operation.

All across retailing, the Internet is no longer seen as the 800-pound

gorilla. For example, a year ago, the prevailing wisdom was that old-fashioned

auto dealers were going to be passe. But so far, that hasn’t turned out to be

true. "There hasn’t been the massive shift to buying cars online that we

thought there would be 18 months ago," admits Mark Hogan, president of

e-GM, the auto maker’s online consumer unit.

And there’s growing evidence that shoppers on the Net are supersensitive to

price, according to Austan Goolsbee, an economist at the University of Chicago.

The implication is that any profits e-tailers might make could be short-lived as



competition drives prices down on the web.

Perhaps the biggest surprise is the comparatively limited impact that the Net

may have on manufacturing. To be sure, there is no doubt that e-business has

become an essential part of any manufacturer’s toolkit. The use of the Net can

reduce inventories, take costs out of the supply chain, and eliminate

unnecessary transactions. Collaboration can also speed up product development,

e-marketplaces can lower the cost of components and other supplies, and detailed

info on customers can help customize products to snag bigger orders or even help

determine which customers aren’t cost-effective. At Procter & Gamble, a

web-based information-sharing network makes it easier to collect and evaluate

new product ideas from the company’s far-flung workforce of 110,000 people.

Nevertheless, at the end of the day, manufacturers are still in the business

of making things, not simply moving bits and bytes around. Wheels have to be

bolted onto the car, circuit boards have to be installed in the router–and

that has to be done physically.

To know how this limits the impact of the Net in manufacturing, look at the

example of Cisco, the communications equipment giant, universally regarded as

the poster company for using the web. Some 68% of Cisco’s orders are placed

and fulfilled over the web and 70% of its service calls are resolved online.

Cisco is in the process of linking all of its contract manufacturers and key

suppliers into an advanced web supply-chain management system, dubbed eHub

speeding up the rate at which information about demand is distributed to

suppliers.

According to Cisco’s own calculations, its payoff from its use of the

Internet amounts to $1.4 billion per year, or 7% of sales. If the rest of

manufacturing could even do half as well as Cisco in using the Net, that would

cut an impressive $150 billion from annual manufacturing costs. And yet it is

not the radical reduction in costs that would signal a revolution.

Slow as molasses

While supply chains linked over the Net are more responsive than their

predecessors, they have their limits, too. "The flexibility now being

demanded by customers exceeds the physics of what the supply chain can actually

deliver," says Kevin Burns, chief materials officer for contract

manufacturer Solectron, whose big customers include Cisco and IBM. Now that

companies have switched to web-based models, he notes, they expect to be able to

ramp up or halt production of a product within weeks. But it still takes at

least three months to get a specially designed chip made in a Taiwanese foundry

and around 40 weeks to order an LCD screen.

Obstacles don’t disappear, but it’s easier to see the far-reaching

potential of the Net in industries that are primarily about moving information

rather than goods. Take financial services. In many ways, financial products are

ideally suited to the Internet, since they deal only with information. A recent

Goldman Sachs survey reported that 63% of financial companies had sold their

products through an e-marketplace or a web site, the highest of any industry.

The Internet is already well on its way to transforming financial services.

Online brokers such as E*Trade Group have completely changed how the retail

brokerage business worked. And Net services are now offered by nearly every US

bank and credit union. Bank of America says it’s signing up 130,000 online

customers a month, giving it more than 3 million Net customers. Citigroup has

2.2 million, Wells Fargo, more than 2.5 million.

But as in the case of entertainment, technological and institutional barriers

are slowing down the eventual gains. Consider online bill-paying, widely

anticipated to be the "sticky app" that drives traffic. The benefits

of paying bills on the Net, for both consumers and businesses, could be

enormous. But the technology has proven exceptionally complicated, and it has

hit a wall trying to penetrate the banking industry. Among the problems: Banks

and billers have been unable to agree on how bills should actually appear

online. Still, Bank of America plans to launch a big ad campaign later this year

to promote its bill-paying service.

And then there’s health care. Despite the tangible nature of many medical

services, health care has a very large information component that makes it a

natural for Internet applications. Just shifting claims- processing to the web

could save $20 billion a year, according to the Brookings economists. At a

leading provider of prescription drug care in the US, it costs a matter of cents

to handle a prescription order on the Internet, as opposed to more than $1

through other methods.

Broadband’s promise

But there are enormous institutional barriers. For one, privacy

considerations may slow down the full shift of health-care records to the web.

Moreover, health-insurance companies, doctors, and hospitals are unwilling to

give up control of patient records and insurance payments to a third party. This

reluctance helped frustrate WebMD and Healtheon, which expected to lead a

restructuring of health care by moving many claims, payment, and related

processing services to the Net. WebMD’s efforts to provide real-time payment

capabilities were shunned by insurers and HMOs, who prefer the current

cumbersome process that lets them hold onto the money longer.

There’s also the technology factor. In the long run, realizing the promise

of the Net will depend on the widespread introduction of advanced technologies

such as broadband to the home and high-speed wireless. With broadband

connections over telephone or cable-television lines, consumers will be able to

watch TV-quality video clips of the NCAA basketball tournament or download

crystal-clear music files faster than ever before. What’s more, they’re more

likely to use the Net because they’ll always be connected and won’t have to

spend minutes dialing into the Net each time they want to visit a site.

The problem is that getting the new technologies in place may take longer

than expected. Financially stressed telecom companies are slowing down the roll

out of broadband. The failure of small telecom providers means that subscriber

growth may slow down in second- or third-tier markets. And the prices for

high-speed Internet access may rise.

In the end, the Internet seems likely to revolutionize mainly

communications-intensive industries. If that seems too



limited, remember that almost every breakthrough technology over the last 200
years affected some areas of the economy more than others. The automobile

transformed personal transportation and patterns of housing while little

affecting manufacturing. Electricity radically altered manufacturing practices

and any industry that was power-intensive, while not having an enormous effect

on health care. The Net deserves to be put in such august company.

Michael J Mandel and Robert D Hof with inputs from Linda Himelstein in

Silicon Valley, Dean Foust in Atlanta, Joann Muller in Detroit, and bureau

reports–BusinessWeek