(FORTUNE Magazine) – It was March 2000, and 20 executives from staid consumer-goods makers like Kraft, Kellogg, and Nabisco were gathered over lunch at the trendy Tribeca Grill in New York City discussing how the Internet was changing their business. These weren't just old-line managers but tech-oriented folks, newly ordained with titles like vice president of e-business and futurist. But despite the new-economy lingo, they had yet to drag their companies far into e-commerce, and frankly, they were restless. Conversation soon turned from banner-ad issues to the just-announced formation of Covisint, a hub formed by DaimlerChrysler, Ford, and GM for buying and selling auto parts. A common thought shot through the room: Why can't we do that? A Campbell Soup executive grabbed a pen and began making notes. The others gathered around. Within minutes a rudimentary business plan covered the backs of three napkins.

The napkin story--spend ten minutes at the company born from that lunch, a 250-person operation called Transora, and you're guaranteed to hear it. No surprise: For managers in a business still mired in the world of 300-page research reports, dreaming up a business over lunch was heady stuff. But what was really different (and this is where the storyteller gets excited) is what happened next. They actually did it. Those stodgy, slow-growing manufacturers of soap and cereal and soup moved at Internet speed. Two months after the lunch, the napkin plan had evolved into a business plan. When Transora was unveiled last June, it boasted an investor list of 49 (now 56) of the largest packaged-goods companies in the U.S. and abroad and $250 million in pledged startup funds. "With this venture," proclaimed Sara Lee executive Judy Sprieser at the introductory press conference back at the Tribeca Grill, "old-economy companies are becoming new-economy leaders."

Now, a year later, Transora is about to find out whether it will one day have another story to tell, that of how a group of competitors came together to remake an industry. The goal: a massive Web-based hub for manufacturers to trade information, logistics, and goods with suppliers and retailers around the world. The grocery business today is largely governed by a chaotic series of faxes and phone calls between far-flung managers. If Transora works, razor blades, pantyhose, and Parmalat should effortlessly flow along the supply chain, cutting inventory and errors.

Need to check how your corn flakes promotion is playing in Iowa? Transora will tell you if supplies are getting low. Need to ship paper towels to a Kmart in Carmel, Ind.? Transora will route others' goods onto the truck, enabling competitors to split the bill. Instead of having individual companies negotiate deals to buy simple cardboard boxes, Transora hopes to strike uniform industrywide deals, cutting costs for both suppliers and buyers. In a business like packaged goods, where as much as $1 trillion is wasted every year in excessive inventory and where billions more are lost from ordering errors, Transora's investors are betting they can slash costs. The promise of boosting margins only this way has brought even bitter rivals like Coke and Pepsi together. They're both among Transora's investors, a muscular group that accounts for two-thirds of the $900 billion in annual revenue among packaged-goods manufacturers.

But just as Transora is moving from a grand idea to a working company, it's already beginning to show signs of problems. For one, the trend that led to Transora has faded: After 13 months, Covisint still doesn't have a CEO, scores of B2B exchanges have imploded, and many companies are considering building proprietary exchanges for their suppliers rather than joining industrywide ones.

Even more worrisome are the cracks developing along the seemingly united front of competitors. Transora is rumored to have burned through more than half its $250 million in startup funds, and investors are beginning to question whether they're getting their money's worth. Once Transora is running, all members--including investors--will have to pony up millions of dollars more in "subscription fees." Says Gartner Group analyst Lora Cecere: "They're in sticker shock." As one beverage-company executive mused privately, the millions his company has shelled out for Transora seems to have gone to teaching the startup about how e-commerce works. "It's like expensive school fees," he says.

If Transora is going to work, it must stop the industry from fracturing. "They're catching a lot of flak right now," says Jack Haedicke, a packaged-goods industry consultant and former Kraft executive. "I think they've gone at a good pace, but there were unrealistic expectations. This is tough work. Trying to define new turf while you've got people shooting arrows in your back is not a pleasant thing." Transora is now built, but will the customers come?

It may seem odd to hear a CEO acknowledging that her company might fail, but Sprieser, 47, can't help it. "Transora may not be the model that survives, but business as usual is fundamentally changing," she says. Sprieser, who gave the impassioned coming-out speech for Transora, is now heading the company. She knows not only the enormous complexity of the project but also the slow-growth mentality of the industry, which might kill it.

The 6-foot-tall Sprieser was a packaged-goods lifer at Sara Lee before she jumped at the chance to head Transora. While rising through the ranks to eventually oversee Sara Lee's worldwide food business, Sprieser was a constant advocate for new technology. She raged against the lack of communication that existed even between divisions in her own company. "I used to get nightmares about Jimmy Dean trucks and Hillshire Farm trucks passing each other on the highway, racing to a Kroger in Cincinnati," she says. When the packaged-goods industry began to dabble in supply-chain management technology in the early 1990s, Sprieser was an early believer. But efforts to corral the industry proved as easy as teaching the guys who package ham how to brew beer. After almost a decade--and few technological improvements--Sprieser was fed up. Now she's leading the charge.

It's hard to imagine an industry with a less efficient design than consumer packaged goods. Just look at what it takes to keep a grocer's freezer full of, for example, Stouffer's frozen lasagna, Nestle's No. 1 revenue-generating product in the U.S. Although it's the world's largest food company, Nestle (a Transora investor) is dependent on stock boys around the country to stay on top of supply. When one of them notices that his freezer is getting low on lasagna, he tells his manager. The grocery's manager calls the local distribution center, whose corporate buyers contact a Nestle service center. Nestle starts the process of boosting frozen lasagna supplies and ships out replacement stock. Along the way is a series of handwritten invoices, phone calls, and faxes--each an opportunity to introduce errors. Now take that and multiply it by the thousands of different products Nestle offers. "We're champing at the bit to make this run more efficiently," says Nick Riso, vice president of e-business for Nestle USA.

Which is where Transora is--in steps--coming in. Sprieser's first move is to deliver some quick cost savings to her customers. Using its buying power, Transora has already signed up Corporate Express to provide office supplies at discount to Transora members. Since last fall it has conducted auctions for suppliers to bid on contracts for everything from light amber honey to black pepper. But that's the easy stuff, and with giants like Diageo already able to squeeze suppliers, it's questionable how much more Transora can wring out. Indeed, the company says it's likely to eventually abandon auctions.

A bigger goal is to standardize the entire industry. To do so, Transora is creating and hosting data catalogs--databases containing uniform descriptions of thousands of products--for each of its members. This system would improve the ability of retailers to order the right goods for the lowest cost offered by a manufacturer. Industry studies show that roughly a third of orders from retailers contain errors; Transora calculates that for a $10 billion company, creating a data catalog could save close to $200 million. By standardizing logistics planning, Transora hopes to solve the problem of half-empty trucks that are carrying food from just one company. Why shouldn't Stouffer's lasagnas ride along in refrigerated comfort next to Quick Meal barbecue sandwiches from Hormel?

All of this is just a step toward the industry's Holy Grail, something called CPFR (collaborative planning, forecasting, and replenishment). Right now manufacturers can see only one link away in the supply chain and only one retailer at a time. CPFR aims to change all that by seamlessly linking the packaged-goods industry from creator to consumer, allowing executives to see supply and demand from one end to the other. In a perfect CPFR world, the instant a Stouffer's lasagna is scanned for sale, the purchase registers throughout the system, alerting grocery-store buyers, stock shippers, product manufacturers, and suppliers all the way back to the guy who grows the tomatoes for the sauce. According to a Procter & Gamble study, the 2,000 best-selling items in a grocery store are out of stock 12% of the time. A CPFR system would allow the industry to operate at a radically higher level of efficiency, with manufacturers able to safely produce far less extra stock.

Yes, it sure would. But even the most optimistic estimates put effective CPFR years away. Connecting all the diverse systems is a huge problem: Changing behavior may be an even bigger one. Two-thirds of retailers' forecasting is currently still done on the phone. "The technology's easy, and people are hard," says Martha Uhlhorn, vice president of e-commerce at Earthgrains, a St. Louis baked-goods company. "And the technology's not that easy."

On a Tuesday afternoon in early March, Sprieser is decked out in a blue power pantsuit with gold pinstripes. She has abandoned her normal startup casual for a meeting she has just finished with her former colleagues at Sara Lee. Instead of having a plush 47th-floor office at Sara Lee, Sprieser now sits in a stark cubicle in Transora's temporary headquarters in Chicago, previously the home of a failed dot-com. (In May the company is scheduled to move to a new office a few blocks away.) Among her charges are about 60 industry associates--executives on loan from investor companies for periods ranging from months to years. High-level managers from companies like P&G work alongside bitter rivals from Unilever. It's the corporate equivalent of the Hatfields going into the moonshine business with the McCoys. But the rivals toss out phrases like "winning with my competitors" and note that the technology they're working on is too complex and too expensive for any one company to try to build. Says Shane Fitzgerald, a Quaker Oats manager on loan to the supply-chain division: "We need to get to a point where we can get over ourselves. On things that don't make a lot of difference to the consumer, we might as well work together and cut costs."

Sprieser, too, is acutely aware of the need to prove bottom-line value to her potential customers. She has recently started asking all her investors for more money. The cash they invested earlier went to building Transora. Now if investors want to use the service they created, they'll have to ante up like everyone else. According to one analyst, annual subscription fees come to $150,000 per billion in company sales. (For P&G, that's a $6 million check.) While Sprieser says she isn't in too big a rush to begin making money, industry analysts and comments from investors indicate that Transora has already gone through about $150 million of its startup funds. Sprieser won't comment on the figure but says most of Transora's big costs are behind it. She expects to break even by next summer, having spent $214 million. So far only three investors--Unilever, Earthgrains, and Lysol producer Reckitt Benckiser--have signed up for the service. Sprieser expects to get two-thirds signed by the end of this year. After that she can target suppliers and retailers.

None of this will be an easy sell. Part of what prompted the aggressive move to invest in Transora was fear. The 1990s were a decade of declining profit margins for most of these companies. As some packaged-goods players began toying with technology, the others became afraid of falling behind. Then came the great IPO boom; Transora seemed the perfect way to make systems work better and to cash in. "Clearly some people got caught up in the hoopla and thought this was a way to IPO," says Steve David, P&G's CIO and the chairman of Trans-ora's board. "But this is really about reinventing the supply chain."

That doesn't quite have the sex appeal of easy Internet money; persuading senior executives to drool over a new supply-chain system won't be easy. "In many manufacturers there's an e-business group that's excited about Transora, but when you get into [other divisions] it's a different story," says AMR Research analyst Roddy Martin. As decisions wend their way through the corporations, it might slow companies in implementing even the most basic of Transora's systems. "We are part of the problem," says Earthgrains' Uhlhorn. "There are some CEOs who wrote that check who are still waiting for the big box to arrive."

The challenges extend beyond galvanizing investors. Transora must persuade partners at both ends of its investors' supply chain to link up. Surprisingly, the easiest sell has been to suppliers--companies that stand to lose the most by having their margins squeezed further. The auto industry's Covisint has faced resistance from its suppliers. But so far Transora has received favorable reviews from that group, many of which are finding that they can decrease their own costs by placing and filling orders online. Larger suppliers like agri-giant Cargill say they are willing to work with Transora if customers request it. And some smaller companies welcome a chance to get a piece of the action. Bill Neiman's Neiman Brothers foods in Chicago entered an auction for honey and won, for the first time, a large order from Heinz. "This process has tremendous potential," he says. "It's straight up, no hanky-panky."

It's the other end of the supply chain that may ultimately provide a serious competitive challenge. Retailers--the last link of the supply chain before consumers--may have second thoughts about buying in to Transora. More than 50 big sellers, including Target and Supervalu, have lined up to create a company called the WorldWide Retail Exchange. A smaller group, including Kroger and Sears, are backing GlobalNetXchange. Both are pushing their own Transora-like services. And Wal-Mart, the giant of the retail world, is continuing to expand its own private exchange for dealing with Transora's investors. If the retailers, whose buying power is even larger than Transora's, start demanding that Transora's investors use the retailers' systems, Transora could be left with little reason for existing.

So will Transora end up a $250 million flash in the pan? In early March, Sprieser appeared before the board of the Grocery Manufacturers of America, a formidable group comprising many of the CEOs who invested in Transora a year ago. They had the same question. "They were worried," she says. "They hadn't heard a lot from us during the past nine months. All they knew was that we might be squandering their money." Her presentation on the company's new business plan earned her a standing ovation. Sprieser walked away happy that industry was, finally, paying attention. "Whether or not we succeed, I don't see people looking back at the spring of 2000 and saying, 'Boy, were we wrong.'"

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