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Chapter 1
The Information Supply Chain
If you were to open up an iPad, iPhone or iPod you might be surprised
to learn that many of the components inside of these magical and revolution-
ary devices are actually not made by Apple. While Apple enjoys most of the
credit for its blockbuster products, a great deal of the innovation occurs in
other parts of the supply chain. Consider the iPad2. Within the tablet there
is an A5 microprocessor that is designed by Apple, but manufactured on its
behalf by Samsung. Te 16GB or 32GB of memory available with the device is
also supplied by Samsung. Apples dependency on Samsung is interesting given
that it is one of the key competitors in the tablet market. Another chip, manu-
factured by Broadcom, provides the Wi-Fi, Bluetooth and FM tuner functions.
Te controller for the touchscreen display is also supplied by Broadcom. STMi-
croelectronics provides gizmos such as the accelerometer and gyroscopes that
enable you to control the machine by tilting it in diferent directions.
1
Apple is not the only company to source components from outside
suppliers. If you review a teardown of a Nikon digital camera, a Barnes & No-
ble e-book reader, a RIM Blackberry or a Sony HDTV you would fnd that
most of the components are sourced from third parties as well.
Not only do high tech manufacturers source the component parts for
devices from third parties, but they are increasingly dependent upon outside
companies to design, build, ship, sell and service their products. Te term
Original Equipment Manufacturer (OEM) is utilized to describe companies,
such as Dell, IBM, HP, Apple, Motorola, RIM, Nintendo, Sony, Microsof, Cis-
co and Alcatel Lucent, whose brand names are on high tech products. How-
ever, in todays high tech supply chain some of these OEMs never touch the
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products sold under their brand name. Tere are specialized service providers
that will design, manufacture, transport, distribute and service products on an
outsourced basis.
Te high tech industry was not always so fragmented. When the frst
mainframes were introduced back in the 1960s a single company performed
all the manufacturing and servicing of the computers. High tech manufactur-
ers, such as IBM, GE and Honeywell, not only assembled the mainframe, but
designed the memory, storage (DASD) and processors inside. Te operating
system, database and even some applications were developed by the same ven-
dor who manufactured the hardware. Maintenance and repair activities were
typically performed by the manufacturer as well. If the mainframe broke or
needed an upgrade, the original hardware manufacturer provided the repair
and service.
Contrast the mainframe model to the complex, multi-tiered value
chain in todays computer industry. I am writing this book on an IBM Tink-
Pad. However, while the logo on my laptop says IBM, the manufacturer of the
machine is actually a Chinese companyLenovowhich only contributes a
small percentage of the parts in my laptop. Te components inside the laptop
are sourced from third-party suppliers. Kingston supplies the memory. Seagate
manufactured the hard drive. Intel designed the microprocessor. Also note-
worthy is the fact that Lenovo does not typically sell the machine directly to its
customers. My laptop was purchased through our companys preferred distrib-
utorCDW. Te sofware on the machine is made by another group of spe-
cialized companies. Microsof publishes the Windows operating system and
Ofce application suite. Other sofware vendors, such as Adobe, Symantec and
Apple, provide additional applications for document viewing, desktop security
and digital music. And when my laptop breaks, who do I call? Not Lenovo, but
a third party, such as a high tech distributor, for warranty support and repair.
My point is that the computer industry has migrated from a vertically
integrated model to a highly specialized, heavily outsourced model. Orches-
trating todays highly outsourced, globally distributed high tech supply chains
can be extremely complex. Te activities of designers (ODMs), contract manu-
facturers, 3PLs, distributors and afermarket service providers must all be syn-
chronized to ensure the right products are in the right places at the right times.
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A critical factor for success is the ability to exchange real-time information
with a community of business partners in the supply chain.
OEMs, such as Apple, Nikon and Lenovo, need visibility into the avail-
able supply of parts, such as processors, memory and storage as well as the raw
materials used to make these components, such as silicon, tin and tungsten.
Is there a shortage of supply expected in the near future? If so, then the OEM
may not be able to manufacture its products in sufcient quantities to meet
customer demand.
Specialized contract manufacturers will buy the parts, assemble the
devices and perform quality testing on behalf of an OEM. Contract manufac-
turers act efectively as an outsourced factory. Examples of contract manufac-
turers include Foxconn (Hon Hai), Flextronics and Celestica. OEMs also need
visibility into the work in progress activities of contract manufacturers. How
many units of each SKU are being produced? When will these products be as-
sembled and shipped? Are there any expected delays arising due to problems
with workers or the supply of parts?

Specialized and Outsourced
Tis type of highly outsourced model, in which OEMs outsource
much of the components to suppliers, is growing more common in all discrete
manufacturing sectors. Boeing outsourced 65% of the design and manufactur-
ing for the recently released 787 Dreamliner. Boeing enlisted the support of
100 diferent subcontractors and parts suppliers to build the plane. Rolls Royce
and GE Aircraf designed the engines. Honeywell and Rockwell Collins pro-
vided fight guidance and control. Tere were suppliers located in Korea and
Japan; Russia and India; France, Germany, Italy, UK and Australia.
Te manufacturing industry is not the only sector that has become
highly specialized with extensive outsourcing. Te structure of the health care
industry has developed in a similar manner. Doctors, for example, have always
been specialized. If you are diagnosed with a chronic condition, such as diabe-
tes, cancer or heart disease, you will not only work with a primary care physi-
cian, but also with a series of specialists in diferent facilities. Te entire health
care system today depends upon referrals.
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Not only are the doctors specialized, but the health care facilities have
diferent capabilities as well. For example, most doctors ofces lack the sophis-
ticated equipment necessary to perform a blood test, MRI or X-ray on-site.
Instead, they outsource these functions to specialized lab services and imaging
companies.
Te fnancial services industry is extremely specialized as well. Firms
that were traditionally banks designed to ofer savings and loans, now sell a
broader portfolio of insurance, investment and retirement services. Most
banks did not build their own insurance and investment practices, but instead
resell the services of other fnancial institutions. Many of the life insurance,
retirement and college savings plans ofered by banks are actually delivered by
third parties.
Te mortgage industry has become highly specialized as well. Te
company from which you purchase your original mortgage likely will pack-
age your loan with hundreds of others through a process called securitization.
Tese securitized bundles of mortgages are then sold to investors around the
world who then become the recipients of your monthly principal and interest
payments. As we learned in the 2008 fnancial crisis, specialization and out-
sourcing is not always a good thing as it can lead to irresponsible behavior on
Wall Street.
Companies in every business sector are becoming more and more
specialized as they outsource more and more of their business functions. Cus-
tomer service is being outsourced to ofshore frms, such as Wipro and TCS. IT
functions are being outsourced to systems integrators, such as Accenture and
IBM. Public relations and marketing are outsourced to large agencies, such as
Omnicom and Interpublic. Strategic planning is outsourced to management
consultants, such as McKinsey and Boston Consulting Group. Tax and ac-
counting functions are being outsourced to Big 4 frms, such as Deloitte and
KPMG. It is hard to fnd an example of an industry today that has not become
highly specialized and highly dependent upon business partners for success.

The information Supply Chain
For companies to successfully outsource such a broad range of func-
tions so extensively, they must have access to real-time information about the
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activities of their business partners. Unfortunately, however, this information
supply chain between business partners is not always as streamlined or ef-
cient as it should be. Less than 50% of all interactions between business part-
ners are performed electronically. Te inefciencies resulting from this lack of
automation create a tremendous drag on productivity throughout the world.
In fact, many people have referred to the commercial activities that occur be-
tween companiesBusiness-to-Business (B2B)as the most inefcient part
of the global economy. While data fows at the speed of light between comput-
ers within the four walls of a corporation, the information fowing between the
frewalls of business partners ofen moves at a snails pace.
Inefciencies exist in the fnancial services market. Hedge funds de-
ploy sophisticated computer algorithms to churn through terabytes of data in
order to recommend the best investment strategies for portfolio growth. But
when a trade for $500,000 worth of bonds needs to be placed, the hedge fund
manager picks up the phone and calls a stock broker that hand keys the order
into a computer screen at his desk. Afer the trade is executed, the broker calls
the hedge fund manager back to provide a confrmation. Te follow-up call
ensures that the hedge fund has an up-to-date view of its position for the three
days before the paper trade confrmation arrives in the mail.
Te health care system experiences inefciencies as well. A 45-year
old woman might undergo $50,000 of medical procedures and diagnostics in
the process of treating a chronic disease. Specialized tests are performed using
MRI machines. Expensive consultations are received from industry-leading
specialists. Minor outpatient surgeries are undertaken at various hospitals.
However, the results of these medical procedures are printed out onto pieces of
paper, and then stored in fling cabinets at diferent physicians ofces. When a
new doctor needs to review the patients medical records, he must phone all of
the diferent practices to request that copies of notes, lab results and radiology
images be faxed or couriered to his ofce.
Consumer products companies spend billions of dollars on research
and development each year in hopes of inventing the next big energy drink
or pain relief medication. When these new potential blockbuster products are
ready for sale, the manufacturers blitz television screens with millions of dol-
lars of advertisements. But the availability of the products on the shelves of
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stores is typically delayed two to four weeks, waiting for the new product to
be properly set up in the retailers IT systems. Someone in the retailers mer-
chandising department must hand-key the new products size, weight, descrip-
tion and price into various systems before it can be sold.
Te commercial sector has successfully generated trillions of dollars
in productivity gains over the past few decades by deploying information tech-
nology within the four walls of their company. However, efciency levels drop
of a clif when it comes to B2B processes. Much of the information relayed be-
tween business partners is exchanged using people and paper-intensive tech-
niques such as snail mail, fax machines, phone calls and documents attached
to emails.

introducing B2B e-Commerce
You may be wondering why these widespread inefciencies in B2B
communication exist? Are there not technologies that could be used to auto-
mate the exchange of information between business partners that buy or sell
from one another? Te answer is Yes, there is an entire category of technology
called B2B e-commerce that is specifcally designed to facilitate regular com-
munications of data between business partners.
When most people hear the term e-commerce they envision visit-
ing the Amazon.com website to buy clothing, books or electronics online for
home delivery. We have all become accustomed to paying bills via online bank-
ing sites; listing products on Internet auction sites; and buying stocks via elec-
tronic trading portals. Tese are all examples of Business-to-Consumer (B2C)
e-commerce technologies. But consumers are not the only ones using the In-
ternet for commerce. Many businesses also have the need to buy merchandise,
pay bills and trade stocks electronically. Tese electronic interactions between
businesses are what we refer to as B2B e-commerce.
Te frst B2B e-commerce technology, Electronic Data Interchange
(EDI), was introduced back in the 1960s. EDI continues to be used extensively
today in the retail, manufacturing, transportation and health care industries.
Te company I work forGXSis one of the leading providers of EDI and
B2B e-commerce services with almost $500 million in annual revenues. Tech-
nically, EDI refers to a specifc standard for exchanging data between compa-
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nies, but the term is also used more broadly to describe the entire category of
B2B e-commerce technologies.
I like to defne B2B e-commerce as a set of technologies that help to
facilitate the real-time transfer of information, money, goods and services.
However, I think the best way to understand B2B e-commerce is through real-
world examples.
Perhaps, the easiest examples to understand are the B2B e-procure-
ment applications, which mimic the online shopping experience you are ac-
customed to, but for business buyers rather than consumers. Large Global 500
companies and government agencies can use e-procurement sites to purchase
everything from raw materials for their manufacturing plants to toner reflls
for their ofce printers. B2B e-commerce technologies can be used not only to
purchase goods and services, but to manage entire supply chains. American,
European and Japanese frms can utilize B2B e-commerce networks to track
goods manufactured in China, Malaysia and Vietnam as they travel via con-
tainer ships to their destinations around the globe.
Te entire health care system depends upon B2B technologies. When
you arrive at a doctors ofce, EDI technology can be used to ask your insur-
ance company about your eligibility for medical care. If you visit a specialist,
Electronic Health Records technology can be used to share copies of your
medical history, recent lab tests and X-ray images. Te electronic records are
typically shared across specialized Health Information Exchanges. If you are
issued a prescription, your doctors ofce may send it electronically to the local
pharmacy to fll. Once you have lef the doctors ofce, another series of EDI
messages can be exchanged with the insurance company to pay for the care you
received. Tese electronic claims and payment transactions can be exchanged
over specialized health care clearinghouses.
Banks are big users of B2B e-commerce technology also. Most transfers
of money that occur between banks around the world are facilitated through
specialized B2B e-commerce networks. Another common use case is in the
stock market. Professional money managers that buy and sell lots of stocks on
behalf of mutual funds, endowments and pension funds can use specialized
FIX networks to submit electronic orders to their stock brokers. Te brokers
execute the trades, and then work with the money manager and their bank to
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clear and settle the trades. At every step of the lifecycle of a stock trade, B2B
e-commerce technology can be used.
In some cases there are no humans involved at all. Machines commu-
nicating with other machines using B2B e-commerce technologies are assum-
ing responsibility for entire business processes. For example, hedge funds are
utilizing algorithmic trading programs to execute stock trades. Tese com-
puter programs automatically monitor the stock market trends, and then de-
cide when to buy or sell stocks. Te trade instructions are passed electronically
via FIX networks to brokers for execution. Next, the details of the trade are
collected, matched and forwarded for clearing and settlement. In this straight
through processing model no humans are involved. Te stock trading is or-
chestrated completely by computers leveraging B2B e-commerce technologies.
Stock trading is just one example of a business process occurring in
what economist W. Brian Arthur describes as the Second Economy. He is
referring to business processes that once took place among human beings that
are now being executed electronically. Arthur predicts that in about two de-
cades the digital economy will reach the same size as the physical economy.

investments in B2B e-Commerce
But we still have quite a bit of work to do before we can realize Arthurs
vision of the fully digital Second Economy. One of the key obstacles which
must be overcome is the inability of diferent businesses to exchange informa-
tion with one another. As we learned from the examples earlier in the chapter,
there are numerous cases in which B2B e-commerce technologies are not be-
ing used to efectively streamline communications between business partners.
You may be wondering why not. One of the key challenges relates to
small businesses which by numbers represent the majority of companies in the
world. In industries such as health care, retail and manufacturing, small busi-
nesses outnumber large ones by a factor of 1000-to-1. Tese small businesses
lack the budget, resources and expertise to implement sophisticated B2B e-
commerce applications.
Imagine a four-person dentist ofce that runs its entire business on
the PC located at the check-in desk. One day the dentist ofce gets an email
from an insurance company requesting that it submit all claims going forward
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using the HIPAA EDI 837-D transaction set. Dont know what the 837-D is?
Neither does the dentist ofce.
Imagine a three-man hedge fund startup in Connecticut that doesnt
have an administrative assistant to answer the phones or a permanent ofce
space to work out of. One day the hedge fund gets an email from its stock
broker requesting that it start sending trades electronically over the Sungard
FIX network.
Imagine a 50-person toy manufacturer in China that exports its prod-
ucts to big-box stores in the US. One day the toy maker gets an email from
its largest retail customer in the US requesting that it place RFID tags on all of
its shipments and must send 856 Advanced Shipment Notices when goods
leave the factory. Te retail customer also stipulates that penalties will begin to
be assessed within 60 days if the supplier fails to comply with the new shipping
guidelines.
Hundreds of companies have tried to break down the barriers to
electronic commerce with innovative and disruptive technologies. During the
dot-com era, venture capitalists invested billions in startups to improve B2B
interactions in the health care, fnancial services, manufacturing and retail sec-
tors. In the past 20 years, over 60% of the Fortune 50 has made direct invest-
ments in companies that provide B2B e-commerce technologies. Big industrial
manufacturing companies, such as GM, Ford, HP, Boeing, United Technolo-
gies and Dow Chemical, have created joint ventures in the B2B e-commerce
sector. Each of the major consumer products companies, including Procter &
Gamble, Johnson & Johnson, PepsiCo, Kraf Foods and Coca-Cola, have made
equity investments in B2B startups. Te big banks, like JPMorgan Chase, Citi-
group and Bank of America, each own stakes in multiple B2B e-commerce
ventures. Even health care companies, such as McKesson, Cardinal Health,
Medco, CVS Caremark and Express Scripts, have invested millions in these
technologies. But most of these strategic investments in B2B e-commerce have
met with only modest levels of success.
Convincing a few thousand of your small business partners to adopt a
new B2B e-commerce technology can be a bit like herding catsat least that is
most peoples view of the situation. But with the right approach, it is possible to
achieve high levels of participation in B2B e-commerce initiatives. So perhaps
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the idea of herding geese is a better analogy. Herding geese is much easier than
herding cats, that is, if you have a scientifc approach.

get the Flock Out of Here
Lack of technology profciency by small businesses is one of the key in-
hibitors to further B2B e-commerce adoption. But there are just as many chal-
lenges caused by the hundreds of diferent technology vendors that develop and
sell B2B e-commerce solutions. Many of these vendors generate millions of dol-
lars in revenues, but take no accountability for the success of B2B e-commerce
ventures. For example, sofware companies sell big companies the infrastruc-
ture necessary to build a world-class B2B e-commerce platform and then walk
away before the hard work of implementation and onboarding begins.
Another set of challenges is created by the standards organizations
that operate in various vertical industries. Tere are hundreds of diferent B2B
standards that companies can use to exchange information electronically with
business partners. In fact, many people say that the best thing about B2B e-
commerce standards is that there are so many to choose from. Te standards
industry has become a big business in B2B with hundreds of industry associa-
tions introducing new e-commerce frameworks every year. Although these
associations operate as non-profts the competitive dynamics between them
rival even some of the most cut throat activities of for-proft corporations.
Tere are also some unusual technology dynamics in B2B e-com-
merce that would qualify for a chapter in the next Freakonomics book. In most
parts of the consumer and business world, new technologies are adopted over
a period of a few years, if not months. But new B2B e-commerce technolo-
gies ofen take decades to be adopted. For example, when consumer products
companies place labels on multi-million dollar shipments of products destined
for retail stores, they do not use the RFID technology that recently came out of
the labs at MIT. Instead, they use barcode labels that were invented back in the
1950s to track railroad cars. When a high tech company, such as Apple, Sam-
sung, or RIM, places an order for chips to put in its next batch of smartphones,
they could use the RosettaNet e-commerce standards developed in the late
1990s. But these cutting-edge, high tech innovators are three times more likely
to send their supplier an order using the EDI technology developed for main-
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frame computers back in the 1960s. When I share these stories with colleagues
in the IT industry they stare at me in disbelief almost as if to say Get the fock
out of here.
Herding Geese is the story of the numerous attempts by venture capi-
talists, standards organizations, government entities and Fortune 500 compa-
nies to create an information supply chain that connects all the business part-
ners within an industry electronically. Troughout the book we will examine
attempts to implement B2B e-commerce programs in fve industry segments
manufacturing, retail, government, health care and fnancial services. I think
you will be surprised to learn not only of the potential for B2B e-commerce in
each of these sectors to enable individual corporations to be more successful,
but to solve some of societys greatest challenges. B2B e-commerce is playing a
critical role with improving homeland security, reducing sovereign debt, sim-
plifying international trade and reforming the US health care system.
I also think you will be surprised to learn how many of these B2B pro-
grams have failed to achieve the desired adoption levels and business outcomes
despite the level of enthusiasm and investment applied. In fact, at times some
of these programs have appeared more like a wild goose chase than an orga-
nized industry-wide initiative. Tere are unique challenges that exist in B2B e-
commerce that are not present in any other sector of the Information Technol-
ogy industry. Connecting the business applications of two diferent companies
is ten times more challenging than connecting two applications within the four
walls of a single organization.
STEVE KEIFER
H
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G
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S
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Welcome to the world of B2B e-commercethe little-known sibling of the very cool and
popular B2C e-commerce. B2B e-commerce technology is the plumbing that connects
networks of business partners together electronically. Hospitals use it to process health
care claims. Institutional investors use it to place stock trades. Manufacturers use it to
purchase raw materials. Retailers use it to manage inventory.
I know what you are thinkingUgh! What could be more boring? But, the
world of B2B e-commerce is anything but boring. In fact, B2B is home to an
unusual set of dynamics that would qualify for the next Freakonomics book.
This is a sector where cutthroat competitors from GM and Ford to PepsiCo
and Coca-Cola unite in joint ventures to solve common business problems.
This is a sector in which 35 of the 50 largest US companies including
Chrysler, Boeing, Kraft, Dow and Chase have either funded technology
startups or acquired them in hopes of obtaining competitive advantage.
This is a sector where technologies developed in 1965 still dominate
newer substitutes introduced in 2005. This is a sector in which the
non-profit standards organizations compete more ferociously than
the for-profit technology vendors.
Most importantly, B2B e-commerce is a sector which is playing a critical
role in solving some of society's greatest problems. B2B is at the center
of health care reform, homeland security and manufacturing
competitiveness in the US. And it is a key requirement to enabling growth
in emerging markets in Asia and harmonizing the European Union.