A 'frictionless future'
Internet-based trade exchanges will facilitate end-to-end supply chain collaboration
By Sidney Hill, Jr. Executive Editor -- Manufacturing Business Technology, 2/1/2001 12:00:00 AM
There is little doubt that Internet-based trading exchanges will soon be the primary platform for conducting business-to-business (B2B) commerce.
There are simply too many numbers adding up to that conclusion. For instance, Dan Rybeck, managing director of ASI Associates, an e-Business research and consulting firm based in Minneapolis, notes that 55 percent of all Internet-based transactions already flow through B2B exchanges. Currently, Rybeck adds, trading exchanges are operating in more than 750 vertical markets, and the number of exchanges, as well as the markets in which they operate, grows daily. In addition, a recent ASI survey revealed that two-thirds of all corporate buyers expect to be purchasing goods through exchanges by 2002.
There are numerous reasons for the rise of trading exchanges, and those reasons also begin with mathematics. "Mathematically, you can prove that a six-buyer, six-seller network will be 66-percent more efficient operating on an exchange than those same six buyers and sellers would be if they did business individually," Rybeck says.
This efficiency boost stems largely from the time and cost savings that result when documents such as purchase orders and invoices are processed electronically rather than manually. Many companies also have reported securing lower prices for certain goods after joining trading exchanges, either by aggregating their buying power with other exchange members, or by participating in reverse auctions.
In a reverse auction, the buying company posts the items it wishes to purchase on an electronic messaging system run by an exchange operator. Suppliers that have registered with the exchange then offer to sell those items to the buyer at specified prices. Typically, the supplier offering the lowest price wins the business.
While reverse auctions are among the most publicized activities currently taking place on exchanges, they appear destined to be forced into the background by other functions that companies are likely to find more valuable. Most industry experts expect trading exchanges to ultimately become vehicles for conducting collaborative business processes, with those processes spanning the continuum of activities that take place within a supply chain-from product design and manufacturing to delivery and post-sales service and support.
It's about collaboration
"Our view all along has been that trading exchanges are about collaboration," says Charlie Latch, director of the B2B Alliance for i2 Technologies, a Dallas-based supplier of supply chain management and e-Business software applications. The B2B Alliance is a joint venture involving i2; IBM, Armonk, N.Y.; and Ariba, the e-procurement and trading exchange software supplier based in Mountain View, Calif. The trio has agreed to co-develop and market e-Business solutions, including trading exchange platforms. In most cases, IBM will provide the underlying infrastructure for linking the applications that comprise an e-Business solution, with i2 and Ariba providing the individual applications.
"The same functions that [i2] has been facilitating within the supply chain for many years, such as helping companies share information on product demand and manufacturing capabilities, as well as providing the ability to make dynamic changes within a supply chain, will be done on trading exchanges," Latch says. "The real value comes not from buying things over the Internet, but from bringing together buyers and suppliers so that they can connect their back-end systems."
To participate in an exchange, Latch says, companies must be prepared to share information from these back-end systems-which include enterprise resources planning (ERP) and supply chain management applications-in an organized manner.
"You want to share the information that matters most," Latch says. "In addition to having the security in place to make sure that information is not available to unauthorized parties, with our supply chain planning tools, you have the foundation for gauging changes in the marketplace in real time, which allows for making the proper adjustments to your plans for producing various products."
Several factors contributed to the initial focus on using exchanges primarily as vehicles for buying and selling goods. Among them is the fact that the software vendors that launched the exchange movement started out by building applications that were designed to automate procurement processes.
These pioneering vendors, which include Ariba and Commerce One, Pleasanton, Calif., concentrated their early efforts on building systems that handled the purchasing of indirect materials such as office supplies. Buyers typically select such items from a catalog and then issue a purchase order to initiate the transaction.
Multiple exchange models
Once these first-generation e-procurement systems began catching on, groups of entrepreneurs saw an opportunity to use these systems to create "virtual marketplaces" in which buyers would congregate to seek out the best deals from a wide range of competing suppliers. Thus, the trading exchange was born.
The first wave of exchanges consisted largely of what are now referred to as public marketplaces. They are run by independent companies and typically are designed to serve specific industries. The independent exchange operator provides most of the services on the exchange, which includes posting catalogs containing products from the participating suppliers and processing purchase orders and invoices. The exchange operators usually make money by charging buyers and suppliers a fee for each transaction they execute on the exchange.
In recent months, some high-profile public exchanges have ceased operations, raising questions about the long-term viability of this model. Industry analysts are more confident about the prospects for two other exchange models: the industry consortium, and the private exchange.
Large players within a given industry typically finance industry consortium exchanges. Covisint, an exchange launched in early 2000 by the Big Three auto manufacturers, is the most notable example of the industry consortium exchange. "The number one reason that Covisint exists was the Big Three not wanting to pay fees to an independent exchange operator," Rybeck says. "They also wanted to have control over how e-commerce evolves in their market."
Rybeck and other experts believe the industry consortium model can survive in industries like automotive and retail, where a small number of large buyers, like the Big Three, are served by a large number of suppliers. But they believe the private exchange ultimately will prove to be the predominant exchange model.
"Our research shows that the building of private exchanges could produce 75 percent of the revenue in the e-commerce software space over the next two years," Bruce Richardson, a senior vice president with Boston-based AMR Research, recently told MSI. Richardson added, "When the dust settles, the private exchange software market could prove to be ten times larger than the ERP market."
Private hubs will dominate
Private exchanges, which already are popping up in many industries, follow the hub-and-spoke model that is common to the practice of electronic data interchange. A sponsor company usually purchases the tools to build the exchange from a software vendor and then allows its suppliers to connect to the exchange through Web browsers.
Private exchanges also are where the greatest amount of supply chain collaboration is expected to take place, because they will be communities of companies that, in many cases, already have long-standing relationships.
The expected growth of private exchanges validates the business models of smaller e-commerce software vendors that have been quietly developing technology for building private trading hubs while most of the attention was focused on a group of large vendors and their public exchange platforms. The smaller exchange technology suppliers include Atlas Commerce, Malvern, Pa., and Comergent Technologies, Redwood City, Calif.
Atlas Commerce targets its primary product, called Metaprise, at companies that want to conduct e-Business with their closest suppliers. The Metaprise product actually is a suite of applications that allows a company to conduct a range of functions-from sharing demand data to opening and closing orders-with its suppliers over the Internet.
Scott Beaver, Atlas' director of marketing communications, says Hewlett-Packard has used Metaprise to create an exchange through which it manages the flow of all plastic materials used in its products, from its suppliers to its manufacturing facilities-some of which are run by subcontractors.
"Metaprise does several things for its customers, starting with automating what traditionally have been manual functions like creating and responding to RFQs [request for quote]," Beaver says. "It also enables closer collaboration among trading partners. That starts with exposing suppliers to the central customer's demand data, which makes it easier for everyone in the supply chain to do their own planning. Ultimately, this lowers everyone's cost of doing business because no one is holding excess inventory. That's the kind of win-win situation you just don't get on a public exchange."
Comergent is building trading hubs for manufacturers that want to include members of their sales channels in their e-Business strategies. With Comergent's Distributed E-Business System, a manufacturer can blend its entire distribution network-distributors, retailers, and other resellers-into a single entity supporting an Internet-based storefront.
When a customer places an order over a Web site supported by the Comergent application, the request can be routed either to the manufacturer or any other channel member, depending on who is capable of providing the requested items at that moment. Cisco Systems, a San Jose, Calif.-based provider of Internet networking solutions; and Scotts Valley, Calif.-based Seagate Technology, a leading manufacturer of data storage products, were two of Comergent's early customers.
When it introduced its system, Comergent was, in effect, ignoring another piece of conventional industry wisdom: the idea that e-commerce would drive intermediaries like product distributors into extinction as companies used the Internet to sell products directly to end customers. Having debunked that myth, Jean Kovacs, Comergent's CEO, has been fielding calls lately from public exchange operators seeking help in getting manufacturers to join their communities.
Kovacs suspects these calls are coming partly because the publicex-changes have billed themselves primarily as places where buyers can obtain lower prices for goods by, in effect, pitting suppliers against one another. That prospect is making suppliers reluctant to join those exchanges, and it has the public exchange providers looking to vendors such as Comergent for help, says Kovacs.
"I think the public exchanges like us because we work with companies that see their brands as very important, and they are reluctant to offer their products on an exchange where they don't know how they will be represented," she says. "The public exchanges have buyers, but they need to tie suppliers in as well. They see Comergent as potentially being able to help manage the branding of suppliers' products on the public exchange."
The frictionless future
Rybeck says connecting supply chain applications to trading exchanges can lead to a "frictionless future" in which goods and services move through supply chains in the most efficient manner possible. In this world, companies will be able to operate with almost no inventory, because they will have a direct a link to demand information from their customers, as well as the ability to quickly locate alternate suppliers if their regular sources of components have problems meeting delivery requirements. With exchanges also providing the ability to share product design data, some industry observers contend product quality should improve as well.
This frictionless future is still a long way off, however, and Rybeck says some manufacturers and distributors may never get there, unless they heed some trends that have accompanied the spread of e-commerce. These trends include the desire of large companies to reduce the number of companies they regularly purchase goods from.
Rybeck says small and medium-sized manufacturers, particularly those that do business primarily in small geographic regions, are most vulnerable. "We recently talked to one large manufacturer that currently has 60,000 suppliers and it wanted to pare that list to 5,000 by 2005," Rybeck says. "That means 55,000 companies are going to lose a customer."
Rybeck says trading exchanges allow large companies to make such changes by enabling them to purchase goods for all of their divisions from a central location, while still having access to suppliers all over the world.
To combat this problem, Rybeck advises manufacturers to make sure that they provide their customers some real value, such as engineering or manufacturing expertise that they cannot get elsewhere. He also advises companies to become e-Business-enabled, including being capable of collaborating over a trading exchange.
"The best way to approach this is to choose a key customer and start working with them on one-to-one collaboration over the Internet," Rybeck says. "In the end, the two companies might decide to connect to a public exchange, but that is a better strategy for maintaining relationships with your customers than simply going to an exchange and waiting to see what happens."
AMR's Richardson agrees. "The whole industry seems to have missed an important step in going from client/server-based ERP systems to doing business over the Internet," he says. "We have major companies such as Procter & Gamble announcing that they plan to take half of their orders from customers over the Internet within the next 12 months. In order to adopt those types of business models, companies will need to develop strategies for exposing the right data from their back-end systems to their business partners. It makes sense to develop those strategies by first working with your strategic customers and suppliers in a smaller private exchange before connecting your enterprise to a large public exchange."
