Elusive ExpectationsBy Deborah Gage | Posted 2002-07-10 Print
The Springdale, Ark., food giant produces more than 146 million pounds of chicken per week and it's looking to electronic exchanges to get more efficient—and gain understanding of the products people want to eat.
But getting even the first $1 million of savings from taking orders online has proven surprisingly elusive.
One problem is government. By the time EFS announced its existence in July 2000, Provision X's parent company—Commerce Ventures—was already fielding inquiries from the U.S. Department of Justice, after 10 Minnesota legislators complained to assistant U.S. Attorney General Joel Klein and Minnesota Attorney General Mike Hatch that Commerce Ventures was "the OPEC of meat," and that its founders would conspire to control product supply.
That April, Commerce Ventures announced itself—or, really Provision X— as "a neutral Web-based exchange" for buyers and sellers of meat and poultry. But among its founders—Tyson, IBP, the Cargill subsidiary Excel, Smithfield Foods, and three other meat producers—Commerce Ventures controlled over half of the market for beef and pork.
The companies were suspected of planning to set prices along the entire supply chain, from the grain that animals ate to the supermarket packages in which they ended up. EFS believes it has covered itself by establishing anti-trust guidelines that forbid members from discussing price, terms of sale, costs, intentions to enter or leave a market, and other topics that could be construed as encouraging anti-competitive behavior.
Commerce Ventures' problems didn't stop with the DOJ. Tyson soon became embroiled in a bidding war with Smithfield Foods over IBP, whose shareholders had stopped a management buyout because they thought the $3.8 billion offer was too low. The buyout was supposed to help IBP finance a transition from wholesaler of meat into the more lucrative business of providing prepared foods—like Thomas E. Wilson case-ready roasts, which can be served in as little as five minutes.
Tyson ultimately won the bidding for IBP over the objections of Don Tyson, who thought the deal was too expensive. Tyson found accounting irregularities in IBP's SEC filings and sued to try to extricate itself from the acquisition. Meanwhile, in March 2001, Provision X opened for business.
Former Provision X CEO Kevin Nemetz says that although Provision X was successful, its funds were depleted by lawyers paid to handle the government inquiry. The case also meant board members such as Tyson Chief Marketing Officer John Lea and former IBP President (now Tyson co-Chief Operating Officer) Dick Bond were distracted.
That meant inaction. "When IBP merged with Tyson, suddenly we had one company representing more than half of the company." And retailers, like Kroger, were just dabbling in electronic purchasing. "Suppliers didn't see the need to jump in the water until the retailers said it was time," recalls Nemetz.
Urged on by Tyson and others, EFS and Provision X talked for months about merging. The networks were based on the same software infrastructure, Model N's Business Network Server, and could have handled complementary portions of the food supply chain. Provision X would have handled meat and poultry transactions within EFS, Parisi says. But the firms couldn't reach agreement.
Provision X was also done in by its users' reluctance to adopt new technology. Tyson's fresh meat customers, for instance, negotiate orders weeks in advance at a price that floats depending on when the order is delivered and whether it is subject to rebates or special agreements. "It's not like every time a distributor needs Tyson wings, they put it out for bid," says Lambert. "They go to Tyson and they've already negotiated a price."
Negotiators know each other and liked talking on the phone. "All players had to use the new [software] interface," says Kevin Simpson, the EFS project manager for Model N. "With Provision X, they chose the hardest piece to adopt, which was learning a new interface and a new process."
ITN declined to use Model N's software when it acquired Provision X, arguing that its own was superior, and Model declined to provide software, arguing that iTN was not a Fortune 500 company. So, with iTN, Tyson needs to integrate its processes—again—with those of the network.
So, now, Model now has set its sights on other industries. Nemetz feels so strongly about the quality of the technology developed for Provision X that he is now marketing on Model N's behalf to health care, as well as food companies. "I feel awful over how much money we invested, in technology and the expertise that Model put in, to have this sit on the shelf," Nemetz says.
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