Jonathan W. Ayers, president of Carrier Corp., thinks that the Web is pretty cool — and not just because, in his words, “All those boxes that power the Internet require cooling.” Ayers heads up the world’s largest manufacturer of air conditioners — a global enterprise with nearly $10 billion in revenues, more than 40,000 employees, and customers all over the world. He also runs an extremely Web-savvy operation. Carrier buys more than 50% of its components and services through a Web-based procurement system, and $1 billion in revenue passed through the company’s Web-enabled sales channels last year alone. What’s even more impressive, Carrier used the Web to cut costs last year by an estimated $100 million.
That kind of performance puts Carrier in the vanguard of old-line industrial companies that have figured out how to achieve huge efficiencies through their deployment of Internet technology. This transformation has not happened overnight: Carrier has been shifting its operations to the Net for the past four years. But Ayers, 44, who took over as president in late 1999, has accelerated the company’s e-business trajectory. His message: Start with customers, measure everything fanatically, and focus on key business results, such as revenue growth and market share, as well as on the operating metrics that drive those results. The payoff for Carrier, according to analysts, has been a surge in customer satisfaction and profitability — and a two-year lead over its competitors.
Sure, making a big bet on Web technology requires a leap of faith among senior executives. But Ayers argues that big-company leaders will get the Internet religion if they can see large and quantifiable benefits once their Net initiatives swing into play. “For an industrial company that uses the Web, I don’t think there’s any end to the opportunities for savings, efficiency, and innovation,” he says. In an interview, Ayers explained how his company got with the Web program.
So what’s the secret to saving $100 million on the Web?
Many of us tend to get starry-eyed when we look at the Internet. At the same time, there’s still a lot of fear and confusion surrounding the Net, particularly inside big companies. When you have 40,000 employees and almost $10 billion in revenues, you’ve got to get people focused on a coherent strategy. So we decided to focus initially on things that we could do to Web-enable our existing businesses. The really big benefits have come from channel integration and supply-chain management. The supply chain is especially important. A lot of people get distracted by trying to create completely new e-commerce initiatives. They forget that the big leverage comes with moving core processes, brands, and relationships online.
What’s an example of using the Web to improve the basics of your business?
Here’s one from Brazil. We went to our channel partners there — our dealers, retailers, and installers — and we said, “We’re going to start handling all of our transactions with you over the Web.” We started with 3 partners in 1997, and we expect to have 550 partners online by the end of 2000. This is having a direct impact on growth. Our revenue in Brazil will be about $280 million in 2000. It’s growing by about 25% per year, and that growth rate is accelerating. But, just as important, more than 80% of that revenue now passes through our Web-enabled channel partners. The time required to get an order entered and confirmed by our channel partners has gone from six days to six minutes. Customer satisfaction is way up, with 77% of our customers saying that they are “satisfied” or “highly satisfied.” And we’re turning over our air-conditioner inventory 24 times a year, compared with about 17 times in 1998. That’s a big jump in asset velocity, and it means that we’re a lot more efficient now.
We’re doing the same thing in Korea, where we started our Web initiative in 1999. A year later, 50% of our sales volume passes through our Web channel. The cycle time for an order there has gone from 33 days in 1998 to 18 days in 2000.
How do you persuade people to embrace that kind of change?
One of my key messages is that you have to measure everything. We learned that from Dell. When you’re changing an organization, you have to measure both the drivers of change and the results that you want to achieve. In Brazil, for instance, we tracked (among other things) how many partners we were bringing online, the percentage of our revenues that were moving through our online channel, and how long it took us to complete an order. And sure enough, we saw higher revenue growth, faster asset velocity, and greater customer satisfaction — all of which helps drive market share.
What else do you measure?
We look at some things that don’t directly generate revenue: warranties, sales orders, how many people are using electronic forms versus paper forms. But revenue growth, inventory turnover, customer satisfaction — those are the core metrics. Eventually, our competitors will start figuring all of this out, and they’ll get some of the same benefits. Our success comes from moving fast and with the right priorities.
How are you applying the Web to other parts of Carrier’s operations?
Another area where our Web strategy has had a major impact is cost reduction. We’re moving our purchasing online with the help of FreeMarkets Inc. Because of this new, Web-based procurement system, there are costs that we had last year that we won’t have this year — and those savings are going straight to the bottom line.
We buy more than 100 million motors each year. A few years ago, when I was running our Asian operations, we tried to set up an auction in which motor suppliers would submit competitive bids for Carrier’s business. We worked really hard and ended up qualifying 20 vendors in Asia. And when it was all over, we saved about 5% on our buy over the previous year.
We decided to do an auction again, this time with an online bidding process managed by FreeMarkets. Right off the bat, we expanded the number of qualified vendors from 20 to 68. Then, over a two-day period, we ran a series of competitive-bidding events. By using the Net, we were able to have lots of suppliers bidding in real time from several countries, including China, Korea, Malaysia, and Thailand. We simply couldn’t consider that kind of thing before we started using the Web. And this time around, we saved 16% on the cost of components that used to cost us a total of $70 million a year.
We’re doing that kind of thing over and over now. This approach doesn’t really work with a strategic supplier — a supplier that’s embedded in your operation. But if there are several vendors to choose from, and if there are other vendors that you may not even be aware of until you do this kind of thing, then you can get huge benefits. We average a 15% saving when we do one of these online bidding events.
How long can you continue to wring those kinds of savings out of the system?
We’re learning new things every day. For example, we saved 48% on the cost of our customer-service call center. In our case, customer service is a seasonal business (people call us when it’s hot outside), and by opening up our contract to competitive bidding online, we found a call center that also had a seasonal business — except that its heavy-volume period happens to be the other season. We filled its gap in capacity, and the savings got passed back to us. We’re doing the same kind of thing with real estate, with tax-preparation services, and with the consultants who conduct our employee-evaluation process.
We are even organizing competitive-bidding events for our suppliers’ suppliers. One of our compressor suppliers buys plastic components that go into its compressors, which then get sold to us. We helped that company put together an online bidding event, with the goal of generating savings at the next layer down. That helps us by taking costs out of the entire system.
How do your suppliers react when you tell them that they will have to bid online for Carrier’s business?
We’ve been open with them since we began moving in this direction four years ago. We’ve said, “This is what we’re doing. You are our assets. You need to change with us, because we’re in this together.” When you have a clear strategy and you communicate it, and then ask people to fill in the blanks and the details, that wipes out a lot of fear. People realize that there’s a lot more opportunity than threat.
Did suppliers look at you like you were crazy when you started talking about all of this four or five years ago?
Back in 1996, we didn’t use the term “B2B,” or “e-commerce,” or anything like that. We just started thinking about how to Web-enable our relationships. We’re usually the first company to go to our suppliers and say that we want to put them on a Web-based procurement system. We give them instant transparency: Once we get a supplier on board, its people can see our daily production schedules. They say, “Oh, that’s neat. I really like that.” When their second-biggest customer comes along and says, “We’d like you to use our Web-based purchasing system,” they say, “We’re already using Carrier’s system, and we don’t want to juggle two.” So first-mover advantage with suppliers is a big deal — which is why we have a target of Web-enabling 50% of our purchases by the end of 2000.
How will achieving that goal improve your financial results?
A lot of it translates into asset velocity. You get some cost reduction also, because you’re moving cumbersome, paper-based processes online. But the real benefit is that it makes your business more efficient by providing real-time information right where it needs to be — inside your suppliers’ factories. We used to build air conditioners according to forecasts and then hope that customers would buy what we produced. Now we build air conditioners on demand, with customers pulling the product all the way through our value chain. We couldn’t approach that kind of transparency without the Web.
Carrier is a big company. Are the changes that you describe really just a matter of fine-tuning the company’s operations, or are they more fundamental?
You’ve got to get people to think differently and to change, but once you achieve that, you see big flows taking place, and you get big benefits. Yes, okay, there’s disintermediation; there’s re-intermediation. That’s all neat stuff to talk about, and it’s really happening — out on the periphery. But when big companies get on the Web, they see huge benefits because of their relationships, their brands, and their assets. And that’s what we’re seeing inside Carrier. Large businesses can create shareholder value that overwhelms the value that the dotcoms can create. We have a fantastic relationship with FreeMarkets, but the benefits that we get from the relationship are an order of magnitude greater than what FreeMarkets gets. And then all of these little pilot fish feed off the big businesses.
Carrier has the dominant market share in its industry, and there are no competitors in the pure-play dotcom field coming at you. What has enabled you to “get it” enough to be the first movers in this space?
First, we have a lot of different businesses, and we’ve turned diversity into a virtue, with lots of creativity taking place in the field. Second, and this is very important, we really encourage the communication and dissemination of best practices. When we see something that works somewhere, we grab it and propagate it across the whole organization. Brazil, for instance, was one of the first places where we built the Web into our sales and distribution channel. We said, “Hey, this is fantastic. Boom, let’s do it for the whole company.” And third, members of our senior management team have identified the Web as critical to our strategy, and they talk about it all the time.
This kind of change really has to begin at the top. Since I started this job, back in December 1999, I’ve been spending about 30% of my time on e-business. Every single one of my direct reports is passionate about e-business. And that’s not just because I talk about it — that’s because they can see the results. They see how fast you can move when you focus on the right things.
Last February, I challenged my parts organization to build an online store for replacement components. This initiative isn’t aimed at consumers; it’s an online store for our channel partners. I got up in front of Wall Street analysts and said, “We’re going to get a virtual parts store up and running in 90 days.” And the reaction from the replacement-components group, two layers down, was “We’re not quite sure what he means, but it sounds interesting. Let’s figure it out.” Ninety days later, we had a virtual store that was handling transactions. And now that initiative is gospel. When it comes to e-business strategy, nothing really should take longer than three months from an idea to the start of production.
Paul C. Judge (email@example.com) is a Fast Company senior editor. Contact Jonathan W. Ayers by email (firstname.lastname@example.org).