Deciding to Go Digital

How do you compete with that? What large businesses can safely pursue are transitional strategies that employ electronic commerce to sustain existing operations. But big companies can't change the rules. Inventing and enacting a completely new business model, one that takes full advantage of the Internet to revamp the way the company relates to its customers, its suppliers, even its competitors, and to change the way it makes money -- that just hasn't been done. The only way for an established business to pursue a revolutionary Net strategy is to create entirely new organizations -- ones that will compete with, and perhaps replace, what already exists.

This is the story of one big company's attempt to become a Netco -- to remake itself on the Web. Alliant Foodservice Inc. is a $6.1 billion distributor of food and supplies to restaurants, hotels, hospitals, and other institutions. Its network comprises warehouses, trucks, and call centers in 39 U.S. markets. Until 1995, it was Kraft Foodservice, a division of Philip Morris Co.; then Clayton, Dubilier & Rice purchased it for $690 million. Under CD&R, Alliant's revenues have grown by 17% in each of the past two years.

Alliant's effort to change is a work in progress, an example of a real-time transformation. Born at Schnall's meeting last February, the Alliant story won't fully be revealed until the end of the year. Even half-finished, though, it makes an intriguing tale. In short order, the company is introducing a transitional Internet strategy that could win new customers even as it profoundly reduces selling expenses. At the same time, CD&R -- itself a bastion of the dirt world -- is leveraging Alliant's existing assets to fashion a completely new, transformational Net startup, building it from the digits up. Its accessory: Diamond Technology Partners Inc., a hot e-commerce consulting firm based in Chicago that will take an equity stake in the new company.

For all three, the partnership represents a fundamentally different undertaking, one that requires wholesale changes in thought and strategy. Will it succeed? None of the three partners knows for sure. On one thing, however, Alliant, CD&R, and Diamond agree: It must be done.

Trucks and Warehouses

At 6 am, six days a week, supplier trucks start backing into the 34 bays at Alliant's cavernous distribution center north of Albany, New York. Workers unload vegetable oil, potatoes, and 10,000 other products, and stack them five stories high. When they're done, the night shift begins weaving forklifts through the aisles, assembling pallets of outgoing goods to match the orders that have been entered by some 90 sales reps earlier that day. Starting at midnight, those pallets are loaded onto Alliant trucks for delivery across New England and New York State. Each year, Albany's 65 rigs deliver more than 9 million cases of food to 3,800 restaurants, hospitals, and universities.

Trucks and Warehouses. It's not too complicated. Get some trucks and a warehouse, and you can play in the food-service - distribution business. "This industry hasn't changed very much," says Michael J. Mulhern, the 38-year-old president of Alliant's Albany market. "For 50 years, it has accepted mediocrity. Customers have tolerated it. It is an industry just waiting for someone to do things differently."

The industry is classically fragmented. Its biggest distributor, Sysco Corp., controls just under 10% of total sales; together, the top five, including Alliant, account for about 20%. Most smaller players have little grasp of professional management skills or advanced technology. And since margins historically have been quite narrow -- around 2% to 3% before taxes -- distributors have tended to pay more attention to managing working capital than to meeting customer needs. True, the logistics are complex: Orders received one day must be processed and delivered by the next. Yet even the big players provide service that is abhorrent by the standards of most businesses. Industrywide, 2% of every customer order goes unfilled, often because items are out of stock. Procurement errors average close to 1%. "Why do we have to have that?" Mulhern wonders. "Why can't we give customers exactly what they want?"

Here, then, is part of Alliant's opportunity. It can employ technology to improve customer service, to reduce errors, and to cut costs. Online purchasing systems, for example, allow restaurant owners more flexibility in how and when they order, while diminishing the possibility of data-entry errors. It represents just one way in which technology can change the job descriptions and tasks inside the old organization, freeing reps from taking orders and allowing them to spend more time selling -- pushing more of Alliant's high-margin house brands, for example, or offering some value-added services such as inventory control or menu planning.