THE IMPACT OF XML ON THE CONSUMER PACKAGED GOODS INDUSTRY
By Russ Klein
November 16, 1999
XML, or Extensible Markup Language, has the power to change substantially how consumer packaged goods ranging from Kraft Macaroni to Tide are sold and marketed online. Until recently, few packaged goods producers considered the Web to be a viable medium for distribution. However, the emergence of online grocers such as Webvan and Peapod has increased the urgency for P&G and other manufacturers to develop e-commerce strategies. XML could help overcome many of the logistical problems inherent with moving their businesses online. More importantly, it could fundamentally alter and eventually improve several core business processes of consumer goods manufacturers.
XML, like HTML, is a text-based markup language that can be used to display information in Web browsers. However, there are several important differences between these languages. To begin, HTML, unlike XML, does not separate data from instructions regarding its presentation. Most HTML documents would therefore require re-coding in order to be accessible from Internet appliances such as cellular phones and Palm Pilots, whereas style sheets would allow the same XML document to be used in any format. The most important difference between XML and HTML is that XML enables computers to easily compare and compile information such as prices and product features across or within Web sites. For example, American Airlines uses XML tags to associate information about its vacation destinations (i.e. activities such as golf or skiing) with its fares in its online database. The application of standard tags such as those used by American Airlines makes XML far superior for e-commerce automation than HTML.
In Unbundling the Corporation, John Hagel and Marc Singer assert that most corporations engage in three core business processes, namely product innovation, customer relationship management, and infrastructure management. This framework can easily be applied to most consumer goods companies. The product innovation (i.e. new product development) function would assume responsibility for identifying new markets, creating new products, and adapting existing products to changing consumer needs. The customer relationship (i.e. brand management) group would segment markets, identify target segments, and use marketing tools to build relationships with wholesalers, retailers, and consumers. The infrastructure unit (i.e. Operations) would be responsible for controlling supply chain logistics as well as building and maintaining manufacturing and distribution facilities. Although XML could be used to make incremental improvements such as online test marketing and using Web-based shopping agents to seek out the lowest cost component suppliers for product innovation, I believe that it has the most far-reaching implications for infrastructure management and customer relationship management.
Many packaged goods companies currently enable distributors and retailers to execute purchase orders through EDI. XML presents an opportunity to achieve far greater infrastructure cost savings and efficiency gains. EDI typically requires the use of expensive dedicated networks and proprietary, highly structured coding protocols that often result in "rigid" data that can only be used for narrowly defined tasks. XML, on the other hand, runs on open, relatively inexpensive Internet or extranets networks. Due to its flexibility, XML data can be used for multiple tasks and, therefore, new types of electronic transactions. If consumer packaged goods producers were to generate standardized XML tags for describing the price, size, and attributes of each product (SKU), this set of codes could be deployed throughout the supply chain in systems ranging from inventory management to online ordering and product shipment tracking. For example, if a local grocery store is running low on Kellogg’s Fruit Loops, the store could generate an automatic order (based on checkout scanner data used to monitor inventory levels of each SKU stocked by the store) to its regional wholesaler. The wholesaler could tap into the Kellogg’s online ordering system and could use an XML agent to identify optimal order quantities and product shipment dates. Kellogg’s, in turn, could automatically order more raw materials if necessary based on the ingredients required to fulfill the order. This system would contribute to lower costs for manufacturers as well as other participants in the supply chain through reduced inventories, less data entry, and more accurate sales forecasting. It is important to note that HTML would not work for these type of transactions because a common set of tags must be associated with many different product attributes.
A common set of XML standards for consumer packaged goods would also benefit the customer relationship management function. Retailers and distributors would be able to use Web-based shopping agents to compile prices and product features of various producers. As a result, producers and wholesalers would be able to better inform retailers of special trade promotions. They could also make more frequent price adjustments in response to rapidly changing market conditions. This system could also be extended to enable consumers to place online orders directly from producers or through Web grocers such as Peapod; I predict that online grocers will become increasingly reluctant to buy from any producer that does not provide detailed product information in XML.
XML will not be a magic bullet for the consumer packaged goods industry. Agreeing on a common set of tags for use by all firms in the industry will be a very difficult task (perhaps an independent manufacturing or advertising association could assist in this effort). Some firms might also resist replacing existing systems with XML-based applications. Nevertheless, I believe that the vast potential of XML to improve core business processes in this industry is simply too large to ignore.
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