E-commerce: What’s up with e-commerce?

The celebrations began on both sides of the Atlantic nearly two years ago when 16 of the industry’s biggest players kick-started an electronic procurement project called Quadrem with the signing of definitive management agreements at simultaneous ceremonies in London and Las Vegas. The goal then as now, was to bring producers and suppliers together, streamline transactions, improve inventory management and reduce operating costs.

The level of enthusiasm at the October 2000 signings was palpable. Phelps Dodge proclaimed that this new virtual marketplace would transform the procurement practices of the entire industry, a sentiment echoed by Sir Robert Wilson, chairman of the British mining giant Rio Tinto. Speaking at the London Metal Exchange’s annual dinner, Wilson talked about the importance of electronic communications. “The Internet seems to have already passed through the obligatory four stages marking the arrival of any great new idea – ignore it, ridicule it, fight it, take it for granted,” he said. “No one now doubts that it is going to alter the way in which business is conducted.

“Unfortunately, I am not smart enough to see where all this will lead in five or 10 years time. Nor can I predict the specific impacts of new kinds of Internet-enabled exchanges. What I do know is that all of us are looking to find ways to expand our role in the value chain and that this has the potential to bring about significant changes in the relationships between producers and consumers.”

It’s Still Early Innings

While much has happened since then, there is a still a long way to go. Speaking at a monthly meeting of the Association of Internet Marketing and Sales (AIMS) in Toronto late last year, digital guru and author Don Tapscott said the e-commerce revolution wasn’t about creating an ill-conceived dot com or even building a functional Web site. “This is not over, it’s just the beginning,” he said “We’re still in the first inning of a nine-inning game.”

It’s because of the need to learn that MinE-com 2002 was held this past May at Laurentian University in Sudbury, Ont. Organized jointly by the Canadian Association of Mining Equipment and Services for Export (CAMESE), National Resources Canada and Industry Canada, the one-day course discussed the benefits of adopting an e-commerce strategy.

It was a scaled down version of MinE-com 2001, two one-day conferences whose goal was far loftier. “To date, there has been little public dialogue among buyers, sellers and intermediaries in the mining industry on this critical topic that would appear to have important near-term ramifications for many or all,” CAMESE announced in the run-up to the conferences held in Toronto and Vancouver in April 2001. “Canadian junior and senior mining companies and their suppliers need a forum to discuss e-commerce in the mining industry.”

The conferences brought together buyers, sellers, brokers, consultants and technology providers and included debate and discussion about the challenges and opportunities of doing business in the Internet age.

The need for more dialogue was contained in a document submitted to the Energy & Mines Ministers’ Conference last September in Quebec City. In it, CAMESE admitted that very little use is made of Internet technology for buy-sell transactions between mining companies and the suppliers of equipment and services.

The report noted that most senior managers of mining companies and their suppliers accept, in principle, that the Internet can facilitate buy-sell transactions; however, most of them have serious concerns about how such an important change in commercial processes might affect them in practice. They were also concerned about “potential threats” to the close relationships that they have established, which has been the key to their business success, stated the report.

“Surveys conducted by CAMESE reveal that most Canadian mining suppliers see a high level of potential opportunity in e-commerce, and about 75% believe that they have the resources to adapt appropriately. As yet, however, few mining suppliers are buying or selling via the Internet and there is a great deal of uncertainty about how to proceed.”

It was a familiar argument and one that is still being discussed and debated today, especially considering that if Quadrem wasn’t part of the picture, the level of e-commerce activity in the Canadian mining industry might be alarmingly low.

Gordon Peeling, president and CEO of the Mining Association of Canada, says it comes down to who is the most innovative. It is, he says, all about doing things smarter than your competitor and in that regard, e-commerce can definitely play a role.

Late last year, the association released a new study, prepared by Global Economics Ltd. The study stated that the Canadian primary metals sector has the highest overall productivity among all industrial sectors in the country. Peeling noted that mining productivity surpasses other industries in large part because “we have transformed the industry into a high-technology sector.

“Our industry has undergone massive change over the past 20 years,” he said. “We have invested heavily in the technologies needed to compete successfully in a fierce global market, and employ thousands of people across the country.

“We exist in an international market and you have to compete against the rest of the world. If you are not competitive, you’re not going to survive. Managing your costs and using technology to help reduce those costs is a way of survival.”

That theory certainly extends to e-commerce, where the report notes that savings will come from lower transaction costs, streamlined procurement, reduced inventories, more standardization, greater transparency and more automated ordering.

In a paper entitled Leveraging Technology to Meet Your Needs, PricewaterhouseCoopers Canada suggests that no matter where a company mines, technology is changing the way any organization works. “In the pit or underground, at the mine site or head office, the workplace is approaching a state of non-stop technical advancement. These changes create greater efficiency, lower costs … and often a growing sense of uncertainty.

“You need computer systems that match your requirements, so that new technologies in different departments fit together and communicate reliably with customers and suppliers.”

It’s a sound theory, but there are a couple of questions that need to be answered. With e-commerce providing savings of anywhere from 5% to 15%, why is the level of activity adequate at best? Secondly, what will it take to improve that activity?

Les Keay, a partner with Pricewaterhouse- Coopers’s supply chain practice in Toronto, sums it up this way: “The mining industry is reasonably progressive along with everyone else. They’re not as far ahead as financial services, but they’re certainly not as far behind as government services where hardly anyone has adopted it yet. As an industry, it’s doing fine.”

The Rise of Reverse Auctions

In terms of what is available, there are several e-procurement sites to choose from including eMinePortal.com, eSupplyshop.com, Mine Depot.com, MineSupplies.com, MRO.com, metalshopper.com, and of course, Quadrem.

Will Berends, director of e-business for Hatch Consulting, a global consulting engineering firm, sees two major trends happening in the industry. The one involves the creation of something called “collaborative” Web sites for improved communications and the use of reverse electronic auctions on certain transactions.

In the last year, Hatch has conducted 40 reverse auctions, launched its own extranet which is used on all client projects, and installed a Web-based document management system for what Berends calls “global knowledge sharing.” Reverse auctions, he says, fits within the “price-setting” phase of the company’s typical procurement process. The collaborative Web site provides the necessary content.

And while the transaction may be the enabling thing, it’s the content that matters. It comes down to this, he says: “Am I getting the right thing for the right job and
will the client be happy because the plant’s working at the end of the day?”

Asked whether the industry is using the Internet to its full capability, he responds by saying that as new mining initiatives come along, companies are implementing some type of e-commerce, but on a project-by-project basis.

“We’re already seeing a tremendous opportunity in our business with a lot of projects that we’re bidding on. Virtually every one of them has some facet of e-commerce, whether it’s using reverse auctions or collaborative sites for communicating between offices.

“These are like new decorations on a tree or new tools in the toolbox. But you’re still the carpenter and you still have to get things built.”

Keay, who has overseen a number of electronic procurement projects involving Canadian mining companies, divides e-commerce activity into two groups. The first is what he calls internal e-commerce, in which e-procurement software engines from vendors such as Ariba, SAP or Commerce One are integrated into an organization’s existing back office software systems. What it means is that all a buyer needs to complete an acquisition is to log on to a Web browser and access an electronic catalogue.

“That side to me is still alive, because the business case for that relied on reducing costs and getting greater volume leverage from your suppliers. If you start looking around in the mining industry, there are still a number of companies using e-procurement and a number who have it on their radar screens and are busy implementing.

All Is Well with Quadrem

“The piece that was the hardest hit [by the lack of activity] was the vertical marketplaces. Quadrem is a survivor. I can call them a survivor because their business did not go as planned. At the end of their first year, they didn’t get anywhere near the revenue they thought they would.”

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Still, nobody including Keay is about to hoist the white flag when it comes to Quadrem, the industry’s only full-fledged public e-marketplace exchange that uses the Internet and catalogues to link buyers and suppliers. For starters they have a healthy balance sheet. As Keay notes: “They’ve had a fair amount of money to run on. One would assume that if they manage their costs appropriately, they’ll be in the game.”

Since Quadrem is a private company, all Mike Rose, its regional vice-president for the North American region, will say on the subject of profit is that the company is “actively” generating revenue with transactions, membership fees, catalogue creation, auctions and RFQs. What is known is that the e-marketplace appears to be working. Projections from the company for the next 12 months call for the monthly number of transactions to continue to grow and the membership list to increase.

As of the end of May, Quadrem had 1,300 trading partners, 1,100 transaction-ready sellers, 380 electronic catalogues representing 860,000 items for sale online and an estimated 36,000 items had been ordered electronically.

“We’re going to see a number of companies in Canada go online and actively trade in Quadrem,” Rose predicts. “The dynamics are such that there are a small number of very large mine sites and you’re going to see a lot of activity as they start to roll out. You don’t have to be a rocket scientist to know where they are – Sudbury, Thompson and the iron sites in Newfoundland and the upper St. Lawrence area.”

In order for that to happen, more attention will need to be paid to the small-to-medium-sized enterprises (SMEs), which supply equipment and services to the mining industry. “Seventy per cent of the operational transactions that any one mining company undertakes in a year come from regional small to medium sized players,” says Rose. “It’s a big chunk of the spending we’re looking to capture.”

The big challenge is getting them to the point where they can sell and market themselves online. “The bigger guys can afford to buy an e-procurement model and use that as their on-ramp to Quadrem,” says Keay. “The smaller guys are going to use a hosted e-procurement engine, which is something offered by Quadrem and you just need a Web browser to access it. The integration to your financials and inventory management systems is not very robust. It’s like a batch file once a week, but for the smaller guys that may be what they’ll have to live with, because it’s still cost-prohibitive to buy an e-procurement on-ramp.”

Among the organizations helping the cause of the mining industry’s SMEs is CAMESE. Its report to the Energy & Mines Ministers’ Conference clearly identified the problem that existed last year and for the most part, still exists today.

CAMESE’s role, says John Baird, its managing director, is to understand what is happening in the electronic marketplace and interpret it to the membership in the “best way” possible. “E-commerce is a very broad term in my mind,” he says. “But, when it comes down to it, we’re really talking about the buying and selling aspect and obviously that requires dialogue.”

Paul Barker, a contributing editor with the Business Information Group, specializes in e-commerce and Internet issues. He can be reached at pbarker@businessinformationgroup.ca.

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