From procurement to product design to supply
chain planning, eMarkets are transforming the way organizations do business.
Early efforts have stumbled, to be sure. But the resulting shakeout means that
online B2B commerce is a permanent feature on the business landscape.
By William C. Copacino and Roger W.
Dik Outlook Journal, July 2001
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One of the casualties of the
Great Dot-com Shakeout of 2000 has been the B2B eMarket. Technology failures,
financial woes and other setbacks have brought unwelcome publicity to these
online exchanges, which new economy pundits once predicted would replace
traditional relationship-based buying and selling.
What happened? Mainly a recognition that the costs to most
businesses—transaction fees for buyers, content management costs to suppliers
and integration costs for everyone—were often higher than expected and the
benefits to participants more elusive than anticipated. These and other issues
were exacerbated when suppliers failed to join eMarkets en masse, as was widely
expected. Liquidity, rather than the build-out of capabilities, quickly became
the number one priority for many eMarkets as they struggled to survive.
But despite well-publicized eMarket failures, Accenture
believes online B2B commerce is a permanent fixture on the business landscape.
Three robust models have emerged—the public independent trading exchange, the
industry-sponsored marketplace and the private exchange—and they will change
the way business is conducted. Most companies will adopt a portfolio approach
to eMarket participation, using different models for different business
requirements.
Public Independent Trading
Exchanges
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In recent decades, few
business phenomena became media darlings—or captured investors' interest—as
quickly and completely as independent trading exchanges. These exchanges
generally were established to serve a particular industry or product group. The
value proposition included the discovery of trading partners worldwide, a
single venue for conducting business, virtual management of business
relationships and visibility to prices around the globe.
Despite the significant venture capital invested in
independent trading exchanges and the thousands of companies formed, real
success stories are hard to find. In October 2000, for instance, Commerx, the
parent company of PlasticsNet and MetalClick, announced the resignation of its
two cofounders and CEOs, and it withdrew a planned IPO. PaperExchange and
BuildNet also withdrew IPOs last year, while Fleetscape.com, a truck-parts
exchange, and Chemdex, a well-known chemicals exchange, went out of business. A
rapid consolidation among such exchanges is now under way.
New Strategies Needed
In general,
independent trading exchanges ran into trouble because their business models
misjudged how much, and for which services, customers were willing to pay. This
issue often was compounded by management teams comprised of industry outsiders
who lacked expertise in the markets they were trying to serve.
More fundamentally, basic economics worked against these
exchanges. Where low barriers to entry exist, many participants will enter. The
result: extreme competition and low margins. The original idea of an electronic
marketplace for the chemicals industry was innovative, for example, but so easy
to implement that 30 such eMarkets emerged—among them CheMatch, eChemicals,
ChemB2B.com, ChemCross, OneChem, ChemicalDesk, ChemRound and Chemdex. No single
exchange was able to capture a dominant share of transactions, resulting in
most entrants either redefining their business strategy, merging with
competitors or simply going out of business.
For long-term survival, independent trading exchanges need
more differentiated, hard-to-replicate capabilities that serve a particular
vertical or horizontal niche—which is more easily accomplished in highly
fragmented industries. Take BuildNet in the construction industry. This
exchange now goes beyond merely trading products to providing specialized
solutions for such industry-specific problems as job-lot scheduling and
materials planning.
Other independent trading exchanges will find that their
most favorable roles focus on low-risk trading activities, such as purchasing
materials for maintenance, repair and operations, or on functional niches, such
as disposing of surplus materials. Still others will partner with the major
industry-sponsored marketplaces to bring focused, specific services to an
industry. For example, ingredient marketplaces Novopoint and Foodtrader.com
deliver specialized capabilities through their relationship with Transora, the
packaged food and beverage industry-sponsored marketplace.
Strategically well-positioned independent trading exchanges
will continue to play an important role in a company's portfolio of eMarkets,
but they won't be the dominant model predicted during the dot-com revolution.
Industry-Sponsored
Marketplaces
Industry-sponsored marketplaces were one mechanism
for traditional companies to fight back against dot-coms with their own
eCommerce strategies. These marketplaces offered major industry players the
opportunity to capture directly the online benefits and control of the B2B
services provided to participants.
Founders of industry-sponsored
marketplaces typically represent a substantial portion of a given industry's
trading volume, thus marginalizing potential competitors. Consider Quadrem, an
electronic marketplace for mining, minerals and metals companies. Its 21
founding members represent almost two-thirds of the industry's total market
capitalization and more than one-quarter of its buying power. Covisint and
Exostar sought to harness similarly powerful industry participants in the
automotive and aerospace industries, respectively. (For a related article, see
"Can Exostar transform the
aerospace industry?")
Speed and Agility
Despite
high-powered founding members, many industry-sponsored marketplaces are
struggling with their own set of problems. Establishing a marketplace that can
serve the needs of its many founders, as well as meet the specific requirements
of any individual member, is inherently challenging. Online commerce demands
speed and agility, yet the sheer number of powerful owners can make decision
making slow and cumbersome.
Many industry-sponsored marketplaces also have struggled
with governance issues. It is not surprising that for many, the build-out of
capabilities is proceeding more slowly than members anticipated.
It has also proven difficult to find industry
participants—particularly leaders with a history of strong supply chain
management capabilities—that are willing to publicize business information
considered sensitive and proprietary. And like their independent trading
exchange counterparts, many industry-sponsored marketplaces are finding that
building their supplier base is taking longer than expected.
Industry-sponsored marketplaces will endure; however, their
role likely will emphasize standard setting, indirect procurement and, over
time, the creation of robust capabilities for direct materials procurement.
They will also have a clear advantage in providing community content—industry
news, education, job postings—and specialized services for their industry.
In select markets (such as aerospace and defense) that
require the coordination of engineering efforts across many companies,
industry-sponsored marketplaces will facilitate improved design collaboration
among members. From its outset, Exostar, the global aerospace and defense
exchange, emphasized that buying and selling would be only one part of a more
comprehensive, collaborative environment. Soon participants will be able to
engage in real-time product collaboration while ensuring that proprietary and
sensitive information is kept private from other members.
Private Exchanges
 To varying degrees, each B2B
eMarket model can complement and extend traditional ERP capabilities; however,
private exchanges will enable the deepest integration between a company and its
trading partners. Private exchanges leverage existing enterprise systems to
enable supply chain collaboration and visibility. It is no accident that many
early adopters of private exchanges were supply chain leaders who saw private
exchanges as a way to extend their competitive advantage.
Another strength of the private exchange is its ability to
support a company's unique strategy and requirements. Dell, Cisco, Motorola,
Wal-Mart and others use private exchanges to provide a level of intimacy with
their trading partners that is not achievable currently in a public marketplace. Consider
these examples:
At Taiwan Semiconductor Manufacturing Co., private exchange
technology makes it possible for geographically dispersed engineers to
collaborate on chip-design projects. The system is secure: Users cannot copy or
download the layout, and the database on which the design resides is protected
by TSMC's corporate firewall. Engineers with access along TSMC's supply chain
can view part or all of a given design simultaneously, isolate and mark
individual circuits or lines, trace circuits and provide comments for all to
see.
Cisco's private exchange allows customers to configure,
place and check the status of orders independently and online. More than 90
percent of Cisco's orders come in through the exchange. Order cycle time has
been slashed from as long as eight weeks to as short as one week.
Customer satisfaction ratings are up at the systems maker.
Because changes in demand go directly and instantaneously through the supply
chain, suppliers can adjust their inventory levels and production schedules
accordingly.
The exchange has also helped Cisco reduce materials costs by
more than $170 million and labor costs by about $108 million, cut inventory
nearly in half and double inventory turns. Its suppliers' engineers can
assemble in minutes document packages that used to take a day or two to put
together. As a result, one stage of the new-product prototype phase has been
eliminated and, on average, the remaining four stages have been shortened by
more than one week. The resulting improvement in time to volume and scalability
has brought an additional $338 million into Cisco’s revenue line.
In response to customer feedback, in
December 2000 Bayer launched an expanded and improved version of BayerOne,
which links customers of all five of the company's polymers and chemicals
divisions. This lets customers customize their own account reports to include
as much or as little of the available information as they want, as well as have
their reports compiled and e-mailed to them automatically, as often as they
want. In the future, BayerOne may be expanded to include features such as
inventory management and direct B2B transactions.
Adaptability
One of the most
impressive advantages of the private exchange is its adaptability: Companies
can tailor the basic concept to fit their own strategic needs or operating
idiosyncrasies, although most are either buyer- or seller-based.
Buyer-Based private exchanges aim to
make supply chain management functions more efficient and effective. At the
most elementary level they allow for online ordering, confirmation, shipment
notification and invoicing. More sophisticated exchanges provide for
collaboration with suppliers on forecasts, supply planning, product design,
exception management and other functions. For example, Wal-Mart makes a
two-year history of customer transaction data available to suppliers through
its private exchange. In return, suppliers analyze sales-trend data and make
recommendations about store assortments, market segmentation and inventory
management.
Seller-Based private exchanges add
value for key customers. They may remind customers to order certain regularly
purchased items, or even allow the seller to examine the customer's inventory
and replenish it automatically. Customers may also be empowered to collaborate
on product design, track orders and otherwise join forces with the seller.
Cisco's private exchange is one of the most ambitious and comprehensive
seller-based exchanges.
Value Propositions
While the
breakthrough collaborative capabilities of the private exchange ensure its
dominant position in the coming months, a private exchange is not for all
companies.
In industries where the supply chain is simple and
straightforward, there may not be enough supply chain inefficiency to justify
building a private exchange. Industry-sponsored marketplaces or independent
trading exchanges may serve those companies better.
When the supply chain is complex, small companies will have
to weigh the startup costs carefully against benefits. One approach that has
proven successful is for the channel master to build out the private exchange
infrastructure and allow participating companies to leverage its capabilities.
In this instance, smaller businesses receive advanced capabilities for minimal
cost and the channel master receives significant improvements in supply chain
efficiency. Over time, additional low-cost options will become available for
firms as technology standards develop, startup costs fall and private exchange
hosting services evolve.
Even larger companies with complex, unpredictable supply
chains should take a close look before investing in a private exchange
infrastructure. When the product cycle is long, the number of suppliers or
customers small, outsourcing infrequent and engineering rather simple, it may
not make sense to build a private exchange. Lower-cost alternatives could
deliver equivalent results.
For example, most industry-sponsored marketplaces recognize
that their participants are interested in private exchanges, and many are
identifying ways to provide participants with hosted private exchange rooms and
collaborative tools. Under this arrangement, the marketplace benefits as both
public and private transactions continue to be conducted in its forum, while
the participants have access to basic collaborative capabilities at a lower
cost than they would have if they had built out their own infrastructure.
More tailored private exchange capabilities often may be a
necessity for companies in engineering-intensive industries with unique design
and production requirements, high degrees of supply chain collaboration, rapid
cycles, and volatile supply and demand.
Dell's extraordinarily short cycle time, for example, is an
important competitive advantage. Joining an industry-sponsored marketplace
would bring Dell's capabilities to its competitors, so Dell relies on its own
private exchange to outpace competitors while keeping its proprietary supply
chain management practices secret.
Companies with a dominant position in their industries, or
world-class supply chain management capabilities, sometimes will choose to
build their own private exchanges. In these instances, the capabilities
available in an industry-sponsored marketplace fall far short of their specific
business requirements and supply chain management processes.
Wal-Mart already has done an outstanding job of aggregating
and leveraging its purchasing power. Any benefits Wal-Mart might receive from
joining an industry-sponsored marketplace are outweighed by the advantages of
an emarket that's tailored to its own needs. Moreover, its dominant market
position ensures that key suppliers will participate in Wal-Mart's B2B eMarket
initiatives. So a private exchange is eminently sensible.
Managed Portfolios
Each online B2B
model seeks to make one or more of these necessary functions more efficient:
supplier discovery, price visibility, product tracking, logistics, product
development, procurement, supply chain planning and collaboration, and services
management.
Yet no one eMarket model can deliver all the above benefits.
For a company to have a full host of capabilities, it will need to have a
strategically and dynamically managed portfolio approach that aligns eMarket
types and capabilities with business need.
For example, Dow Chemical is involved in almost 10 different
online marketplaces to best meet its diverse needs. Dow's customers can use the
private exchange MyAccount@Dow to buy from the company. Dow also participates
in the industry-sponsored marketplaces Omnexus and Elemica to sell plastics and
chemicals, respectively. In addition, the company uses ChemConnect (an
independent exchange in which it has an equity stake) for auctioning direct
materials as well as for finding new suppliers.
Accenture expects the effective management of an eMarket
portfolio to be an important sign of industry leadership in the coming decade.
Companies already are using independent trading exchanges and
industry-sponsored marketplaces to more effectively buy, sell and exchange
information. Moving forward, eMarkets, led first by the private exchange,
should enable the next wave of supply chain management synchronization and
collaboration gains.
As B2B eCommerce continues to evolve, remaining on the
sidelines could be a costly mistake. There already is a growing gap between the
supply chain capabilities of an industry leader and those of its average
competitors. Those companies that fail to recognize that eMarkets entail more
than buying and selling goods risk losing even more ground to their
competition.
William C. Copacino is the global
managing partner of the Accenture Supply Chain Management service line. With 27
years' experience, he is one of the world's most recognized professionals in
the field. Mr. Copacino, who serves as consulting editor of the
Supply Chain Management Review, has written or coauthored
three books on supply chain management, has contributed to many other books and
is an active speaker on this topic in numerous business forums. He is based in
Boston.
Roger W. Dik, a Boston-based partner in
the Accenture Supply Chain Management service line, leads the company's B2B
eMarket efforts in the Americas. With almost 20 years of industry and
consulting experience, Mr. Dik advises a broad range of public- and
private-sector clients on a variety of issues, including how eMarkets can
transform buying, selling and collaboration. He is a frequent author and
speaker on the topic of eMarkets.
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