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B2B

• E-Procurement

• Metamediaries

• Intermediation Opportunities

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B2B Buying

Problems

Sourcing: Search Costs due to large number of sellers

Ordering: Workflow and transaction costs from many orders & dependent demand

Replenishment: Continued reliance on old source

Fulfillment: Monitoring costs to avoid errors

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Electronic Data Interchange (EDI)

Definition.

- First developed in the late 1960s

- Business to Business exchange of standardized documents in electronic form (e.g., Invoice, Purchase order)

Background.

• Early barriers: lack of standards, telecom infrastructure

• New national (X.12), international (EDIFACT) standards

• Used heavily by large companies (e.g., Fortune 1000)

• Enables re-structuring business relationships

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Common EDI Applications in B2B Commerce

• Quick Response (QR): POS data to supplier

• Model Stock Replenishment: Supplier manages inventory

• Materials Management: JIT systems

• Efficient Customer Response (ECR): Grocery industry chain

• Evaluated Receipt Settlement: No invoice

• Collaborative Forecasting and Replenishment: Sharing forecast

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Value Added Networks (VAN)

• Advantages: Translation, security, auditability, integrity

• Disadvantages: High price, Connect time + mailbox charges

Translateincomingdocument

VAN

Translate X.12

EDIFACT

Compliance checking

Route to mailbox

Buyer Bank

Transport company

Seller

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Why EDI was not sufficient?

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The e-Procurement Cycle

Web based Procurement Process

Old Approach: Task orientation (slow and error prone)

New Approach: Process orientation (Faster and cheaper)

1. Browse online

catalogs

2. Create Requisition

3. Check availability

7. Receiving

8. Accounts Payable

9. Route to Recipient

6. Ship Product

5. Supplier Fulfillment

4. Online Approval

5a. Check status

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Production Vs. Non-Production Items

Production Items Non-Production Items

Raw materials and components Office & computer supplies;

MRO supplies; Travel

Scheduled by production runs

Ad hoc, not scheduled

Professional buyer initiatesEmployee initiates

No approvals required Approval required

High degree of automationLittle automation

Design-spec driven Catalog driven

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Requirements of e-Procurement Systems

Purchasing Management

Quality Evaluation

Supplier Selection

Purchasing Contracts

Accounting

Order Mgt, Quotations, Negotiations

Goods Received, Source Quality

Identification, Price, Lead Time

Quantity Contracts, Discounts

Budgeting, Overheads, Costing

Most systems provide a subset of these functions!

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B2B• E-Procurement

• Metamediaries

• Intermediation Opportunities

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Large Market size

Fragmented supply chain

Some product differentiation

High search costs

Product comparison hard

High workflow costs

Markets ready for

intermediaries

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B2B Trading Models

1. Multi-vendor catalogs• Price posted, Product comparison, Customization

• Chemdex, e-Chemicals, PlasticNet, NetBuy

2. Post and Browse • Bulletin Board accessible by pre-qualified users

• One-on-one negotiation of non-standard products

• Catex (insurance), PaperExchange, CreditTrade

3. Auction• Seller driven liquidation of surplus inventory (MetalSite)

• In reverse auction, buyer specifies items and lot-sizes

• Popularized by FreeMarkets, VerticalNet, Tradeout

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B2B Revenue Models• Transaction fees

Often paid by seller (e-Steel), sometimes shared by parties Difficulty of collecting fees in post and browse exchanges Pressure to waive fees to achieve acceptance

• Membership fees (visitors with restricted privileges)

• Order posting fees with volume discounts

• Supplier listing fees (VerticalNet)

• Auction Commissions

• Selling content, trading and historical data (Manheim Online)

• Advertising

• Software licensing

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Intermediary

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Buying guides

Credit verification Risk management

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Intermediary vs. Metamediary

A successful marketplace does more than matching buyers and suppliers!

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Value Creation by Intermediary

Improve Information Flows

Improve Price / Quality

Build Liquidity

Reduce Costs

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Improve Information

Flows

Increase communication

channel efficiency

Increase the number of buyer-seller channels

Decrease the number of

communication channels

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Reduce Costs

Carrying Cost Carrying Cost

Fulfillment Cost Fulfillment Cost

Transaction Cost

Transaction Cost

Workflow Cost

Workflow CostSearch Cost

Search CostProduct Cost

Product Cost

Bulk Chemicals Office Supplies

Different industries provide different cost

reduction opportunities!

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Improve Price / Quality

Price / Quality

Number of Sellers

Savings from more

sellers

Traditional cost of search Internet cost

of search

Value Added

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Build LiquidityTransaction

automation leads to Improved

Velocity

Central marketplace leads to

Improved Reach

Improved Reach + Improved Velocity

= Liquidity

Market liquidity brings more buyers and sellers

Product liquidity helps sell goods / services

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B2B• E-Procurement

• Metamediaries

• Intermediation Opportunities

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Origins of Intermediaries

Buyers

Sellers Third Parties

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Origins of Intermediaries: Sellers

Electronic catalog, transaction capabilities

Access to product information and transaction automation

Migration from one seller to multi-vendor catalogs

Global Healthcare Exchange (J&J, GE Medical, Baxter, Abbott)

MetalSite by steel producers

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Industry

World market over 750 million tons, US Share 10%

Founders: Weirton Steel, LTV Steel, Steel Dynamics, Bethlehem Steel, Ryerson Tull

History

- First provided industry news and product information

- Next introduced e-commerce capabilities

- New services (banking, logistics, billing,…) added later

- 2000 Results: 50,000 transactions; 22000 users; 2 million tons; 30,000 products listed

- Closed June 2001, MSA buys Metalsite in August 2001

Sellers Initiated Exchange: MetalSite

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Rules

• Open, neutral marketplace, confidentiality

• Users must register, MetalSite to check legitimacy

Sellers’ Goals

• Expand customer base

• Improve selling efficiency

• Increase inventory turnover

• Reduce non-value added tasks

Buyers’ Incentives

• Locate and purchase products effectively

• Cut costs and time

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Major Functions

• Marketplace Products: Auction, Product guide, QuoteFinder

• System Integration services

• e-Business consulting services

• Fulfillment products (Transportation, Financing, Collaborative forecasting, Advance order status notification)

Revenue Model

• Transaction fees 0.25%-2% on auctions and product guide, small fee to use QuoteFinder

• Difficulty in collecting transaction fees

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Origins of Intermediaries: Buyers

Buyers want catalogs or reverse auction

Gain access to product information and availability

Migration from one buyer to multi-buyer market place

GEIS TPN procurement to marketplace

Automakers’ Covisint

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Industry

• Procurement market for Automakers, over $350 billion

• Major Players: DaimlerChrysler AG, Ford, GM, Nissan, Renault

History

• Announced in Feb 2000

• 200 catalogs; 1000 users; 20,000 transactions by June 2001

• Total volume in 2001 is expected to be $129 Billions

Major Functions

• Procurement

• Catalogs

• Buyer / Seller auction

Buyers Initiated Exchange: Covisint

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Auto makers’ Goals

Cut time and costs

Exchange engineering data

More suppliers

Custom cars

Tier-1 Suppliers’ Incentives

• Cut costs

• Buyer pressure

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Regulatory Issues

- Auto makers not to combine requirements

- Auto makers can’t see needs of others

- Export regulations enforcement

- No loss in tax revenue

Requirements

- Currency conversion

- Language translation

- Supplier order management capabilities

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Industry

Aviation ($500 Billion)

Major Players: Nine airlines and three aerospace manufacturers

History

• Airlines announced AirNewco as their B2B marketplace in 4/00

• Suppliers announced MyAircraft.com in 2/00

• AirNewco and MyAircraft merge to become Cordiem in 3/01

• First major B2B marketplace supported by buyers and sellers

• Partners - i2 Technologies, Ariba

• Competes with Exostar led by Boeing, Lockheed & Raytheon

• More than two dozen aerospace marketplaces

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Major Functions

• Online catalogs

• Reverse and forward auctions

• Inventory and supply chain management tools

• Transaction support

Revenue Model

• Transaction fees on auctions, small fee for catalog listing

• Subscription fees for supply chain management services

• Both buyers and suppliers pay

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Rules

– Neutral, global e-marketplace

– Open to any airline and supplier

– No requirement on membership or exclusive use

Sellers’ Goals

• Focus on selling after-market products and services

• Reduce inventory, errors, costs

Buyers’ Incentives

• Maintenance & engineering, fuel & fuel services, catering & cabin services, airport support services & general procurement

• Locate and purchase products quickly

• Cut costs and time

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3rd Party Intermediaries

– Exploit inertia in product markets

– Speed, neutrality, but acceptance?

– Internet players: (e-Steel, Chemdex, FreeMarkets)

– Infomediaries: Create virtual community, no

procurement experience (Asian Sources, SeaFax)

– Software Provider: Trusted name, but no market

experience (Ariba, Commerce One, Oracle Exchange)

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Industry

Initial market - industrial intermediate components ($600 Billion)

Large order size - $3 million per transaction

History• Launched in 1995 as an independent B2B marketplace• Reduce price and transaction costs• Worldwide expansion in 55 countries

Score Card 2000

– Market volume $9.9 B, saved $2.7 B

– 9200 auctions, 9300 suppliers

– Revenue $91.3 m, loss $44m

3rd Party Initiated Exchange: FreeMarkets

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Value Creation for Buyers

ConsultingPurchase

Outsourcing

Distribution Intermediary

TechnologyEnabler

Price reduction

Purchasing cost reduction

Research product, outsource RFQ

New suppliers identification

• Identify potential saving

• Prepare specs, RFQ

• Identify + Qualify suppliers

• Buyer’s agent• Suppliers compete

• Conduct auction• Train buyer• Post-auction analysis

REVERSE

AUCT ION

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Find new buyers

Bid preparation

TechnologyEnabler

New buyer identification

Reduce sales costs

But face more competition!

Reduce transaction costs

• Respond to inquiry

• Receive certification

• Conduct auction• Train seller• Award preparation

MORE

SALES

Value Creation for New Suppliers

• Respond to RFQ

• Complete specs

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Challenges Facing Intermediaries

Acceptance by buyers and sellers

Revenue generation

Sales and marketing costs

infrastructure and operating costs

Intense competition!

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B2B Myths

• The middleman must go!

• Speed is everything!

• EDI will vanish!

• Old economy companies don’t get it!

• Throw away your old systems!

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Private Exchanges

• Limited access!

• Pre-existing business relationship

• Higher level of integration

• Order confirmation, tracking

• Seller / buyer auctions

• More volume than public exchanges ($b 242 >

43 in 2000)!

• Example: Buyer GE $ 20b

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What went wrong with Public Exchanges?

– Bias. Many exchanges required standardized product descriptions by sellers, and often allowed price comparison by buyers.

– Funding. Many independent exchanges were funded by the financial community who pulled the plug when they did not sufficient revenue.

– Technology. Lack of integration between the exchange and supplier ERP system. Buyers had to call the supplier anyway!

– Complexity. Too many terms (specs, pricing, availability, delivery dates) require direct negotiation between buyers and sellers.

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Its not the technology, stupid!

• Its about redesigning workflows, processes and structures (BPR / Change Management)!

• Its about collaboration between various parties inside and outside the company! Its about the cross-functional approach.

• Its about changing decision making! Multi-million dollar contracts today are decided by higher ups who act in weeks!

• The cost of training and process redesign exceeds technology costs.

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Market Dynamics

� Cost of connection proportional to participants

� Value of market proportional to buyer-seller relationships

� Value increases if each participant can be either buyer or seller

� Value accelerates if multiple transactions occur before consumption

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Key Points

• E-Procurement is a must!

• Searching for a B2B revenue model!

• More online business, fewer exchanges?