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