Chapter 6 Public B2B Exchanges

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Chapter 6

Public B2B Exchanges

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Learning Objectives

List the various types of e-marketplacesDescribe B2B portalsDescribe third-party exchangesDistinguish between e-procurement and e-selling consortiaDescribe the various ownership and revenue models of exchangesDescribe the support mechanisms offered by exchanges, including auctions

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Learning Objectives (cont.)

Describe networks of exchanges and exchange managementDescribe the critical success factors of exchangesDiscuss implementation and development issues of e-marketplaces and exchangesDescribe the major support services of B2BDescribe the extranet and its role in supporting marketplaces and exchanges

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ChemConnect:The World Chemical Exchange

The ProblemThousands of companies trade raw and partially processed chemicals and plastics dailyBefore the Internet the trading process was slow, fragmented, ineffective, costly As a result:

Buyers paid too muchSellers had high expensesIntermediaries were needed for to smooth the process

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ChemConnect (cont.)

The SolutionProvides free membership in trading marketplaces and information portals

Public exchange floor for anonymous bidsCommodities floor for buying and exchangingCorporate trading rooms—private online auctions

Up-to-the-minute market informationLarge electronic catalogIndependent intermediary

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ChemConnect (cont.)

The ResultsIn ChemConnect trading rooms companies can save up to 15% in just 30 minutes of reverse auctionChemConnect is growing rapidly, adding members and increasing trading volume each year

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B2B Exchanges

Public e-marketplaces (public exchanges)—trading venues open to all interested parties (sellers and buyers) and usually run by third parties

Exchange—a many-to-many e-marketplace. Also known as e-marketplaces, e-markets, and trading exchanges

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B2B Exchanges (cont.)

Market maker—the third-party that operates an exchange (and in many cases, also owns the exchange)Companies that use exchanges are pleased with them and plan to increase the number of exchanges they participate Traders expect to more than double the value of transactions that they do through the exchanges

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Exhibit 6.1Trading Communities: Information Flow

and Access to Information

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Classifications of Exchanges

Systematic sourcing—purchasing done in long-term supplier-buyer relationshipsSpot sourcing—unplanned purchases made as the need arisesVertical exchange—an exchanges whose members are in one industry or industry segmentHorizontal exchange—an exchanges that handles materials traded in several different industries

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Exhibit 6.2Classifications of B2B Exchanges

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B2B Exchanges

Dynamic pricingOwnership of exchangesGovernance Organization of exchangesGains and risks of B2B exchange participation

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Dynamic Pricing

Dynamic pricing—a rapid movement of prices over time, and possibly across customers, as a result of supply and demand

Stock exchanges sometimes change minute by minute Auction prices vary all the time

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Dynamic Pricing (cont.)

Typical process that results in dynamic pricing in most exchanges

1. A company lists a bid to buy a product or an offer to sell one

2. Buyers and sellers can see the bids and offers—anonymity is often a key ingredient of dynamic pricing

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Dynamic Pricing (cont.)

3. Buyers and sellers interact in real time with their own bids and offers—join together to obtain a volume discount price (group purchasing)

4. A deal is struck when there is an exact match between a buyer and a seller on price, volume, and other variables such as location or quality

5. The deal is consummated, and payment and delivery are arranged

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Ownership of Exchanges

An industry giant (IBM’s patent exchange delphian.com)A neutral entrepreneur—a third-party intermediary (ChemConnect.com)The consortia (or co-op)—several industry players set up an exchange (Covisint.com)

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Governance

Exchanges governed by guidelines and rules

How the exchange operatesWhat the requirements are to join the exchangeWhat fees are involvedWhat rules need to be followed

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Governance (cont.)

Security and privacy for documents Contract terms between an exchange and buyers/sellersAssurances that the exchange is fair

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Organization of Exchanges

MembershipGenerate revenue

Transaction and other feesRegistration feesAnnual membership fees

qualification processdeposit may be requiredLimits set on how much each member can trade

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Organization of Exchanges (cont.)

Site access and securityInformation should be carefully protected—competitors congregate in the same exchangePrevent illegal offers and bidsList of individuals who are authorized to represent the participating companies

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Exhibit 6.3Services in Exchanges

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Exhibit 6.4Gains and Risks of B2B Exchanges

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B2B Portals

B2B portals—information portals for businesses

Thomas register—facilitates business transactions for MROsAlibaba.com

DatabaseReverse auctionsFeatures and ServicesRevenue model

Vortals--B2B portals that focus on a single industry or industry segment; “vertical portals”

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Third-Party (Trading) Exchanges

Electronic intermediariesDo not favor either sellers or buyers—neutralwithout a built-in constituency of sellers or buyers they have a problem attracting enough buyers and sellers to attain financial viability

Liquidity—the result of having a sufficient number of participants in the marketplace as well as a sufficient transaction volume

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Exhibit 6.6Supplier Aggregation Model

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Exhibit 6.7Buyer Aggregation Model

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Suitability of Third-Party Exchanges

Fragmented marketsMarkets that have large numbers of both buyers and sellersMainly suitable for MROs

Buyer-concentrated markets—several large companies sell to a very large number of buyersSeller-concentrated markets—several large companies do most of the buying from a large number of suppliers

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Consortium Trading Exchanges (CTE)

CTE (consortium)—an exchange formed and operated by a group of major companies to provide industry-wide transaction services

Vertical, purchasing-orientedHorizontal, purchasing-orientedVertical, selling-orientedHorizontal, selling-oriented

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Purchasing-Oriented (Procurement) Consortia

E-Procurement Consortia can be:Vertical purchasing-oriented

All the players are in the same industry Support buying and selling

Horizontal purchasing-orientedOwner-operators are large companies from different industries Improving the supply chain

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Covisint

Covisint—e-market of automotive industry

B2B integrated buy-side marketplaceGeneral MotorsFordDaimlerChrysler

Entire industry gainsLower costsEasier business practicesIncreased efficiency

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Covisint (cont.)

“Co” stands forConnectivityCollaborationCommunication

“Vis” stands for visibility provided by the Internet“Int” stands for integrated solutions

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Covisint (cont.)

Collaborative commerceFacilitate product designEnable procurement processProvide broad marketplace of buyers and suppliers

Vertical consortia trading exchangeFew large buyersMany sellers (suppliers to the industry)

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Covisint (cont.)

Marketplace’s connectivity integrates buyers and sellers into a single network

Flow of information integrates buyers and sellers into a single networkVisibility provides real-time information for:

Fast decision makingCommunication throughout the supply chain, anywhere in the world

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Covisint (cont.)

Web use allows changes to be sent simultaneously and instantly throughout its entire supply chainThe result:

Less need for costly inventory in the supply chainIncreased ability to respond quickly to market changes

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Covisint (cont.)

One of the major objectives of the exchange is to facilitate product design:

Offers best-of-breed functionality Ability to integrate providers across the supply chain creates (collaborative commerce)Enables e-procurementProvides broad marketplace of buyers and suppliers Accesses a wealth of supply chain expertise and experience

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Consortium Trade Exchanges

Selling-oriented consortiaVertical exchanges Thousands of potential buyers within a particular industry

Legal challenges for B2B consortiaExchanges introduce a level of collaboration among both competitors and business partnersAntitrust and other competition laws must be considered

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Critical Success Factors of Consortia

Size of industryAbility to drive user adoptionElasticity—measure of incremental spending by buyers as a result of savings generatedStandardization of commodity-like productsManagement of intensive information flowSmoothing inefficiencies in supply chain

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Dynamic Trading

Dynamic trading—exchange trading that occurs in situations when prices are being determined by supply and demand (dynamic pricing)

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Dynamic Trading:Auctions and Matching

MatchingMarket makers conduct matching supply and demand (e.g., stocks)More complex than auctions because they match:

PricesQuantitiesTimesLocations

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Dynamic Trading:Auctions and Matching

AuctionsPrivate trading rooms—members conduct auctions at the exchangeAuction services may be one of the activitiesExchange may be fully dedicated to auctionsCan conduct many-to-many public auctions

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New Entrant to the Dutch Flower Market: TFA

Dutch auction methodWere semi-automated

Buyers and sellers went to one location to see the flowersAuctioneer used a clock with a large hand set at a high price

Price dropped as the time ticked off on the clockUntil clock was stopped by pushing an order button

Quantity ordered was clarified over an intercom , Process continued until all of the flowers were sold

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TFA (cont.)

TeleFlower Auction (TFA)—competing electronic auction enables its initiators to penetrate the Dutch flower market

Buyers bid on flowers via their PCsDesignated timesFrom any locationAuction clock shows on buyer’s PC screenClock stopped by pushing space bar Auctioneer completes sale by telephone

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TFA (cont.)

Process is much quickerAfter-sale delivery is much faster—within half an hour after the sale

Major issue can be the quality of the flowers

Flowers are not physically visible to the buyers Large amount of relevant information is available

TFA quickly built a competitive advantage using IT

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TFA (cont.)

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Exhibit 6.9Comparing the Major B2B

Many-to-Many Models

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Building and Integrating Marketplaces and Exchanges

Step 1—Think aheadStep 2—PlanningStep 3—System analysis and designStep 4—Building the exchangeStep 5—Testing, installation, and operationStep 6—System evaluation and improvement

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Building and Integrating Marketplaces and Exchanges (cont.)

IntegrationBetween 3rd-party exchange and back-office systems of participantsAcross multiple, incompatible exchanges

External communicationsWeb/client accessData exchangeDirect application integrationShared process

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Building and Integrating Marketplaces and Exchanges (cont.)

Process and information coordination—how to coordinate external communications with internal information systems

External process Internal processData transformation Exception handling

System and information management—involves management of:

SoftwareHardwareInformation components

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Managing Exchanges

Revenue modelsTransaction feesFee for serviceMembership feesAdvertisement fees

Networks of exchanges“First mover” primary objective is the acquisition of buyers and sellersIntegration with other companies or exchangesSome exchanges are beginning to integrate in order to better serve their customers

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Exhibit 6.11Several Exchange, One Supply Chain

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Managing Exchanges (cont.)

Centralized managementOne market builder builds and operate several exchanges

Manages all the exchanges ’catalogs, auction places, discussion forumsCentralizes: accounting, finance, human resources, IT services

Third-party vendors providing logistic services and payment systems are more efficient when supplying services for “families ” of exchanges

VerticalNet (verticalnet.com)Ventro (nexprise.com)

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Critical Success Factors

Early liquidityBusiness’s chance of survival is best when liquidity (volume of business conducted) is achieved early

Right ownersPartner with companies that can bring liquidity to the exchangeBest owner may be intermediary that can push both buyers and sellers

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Critical Success Factors (cont.)

Right governanceGood management and fair /effective operations and rules are criticalGovernance provides rules for the exchange, minimized conflicts, decision making support

OpennessExchanges must be open to all from organizational and technical point of viewOpen standards require universal commitment and agreement on the standards

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Critical Success Factors (cont.)

Full range of servicesParticipants are attracted by an exchange that helps cut costsExchanges team up with banks, logistic services and IT companies to help

Importance of domain expertiseMarket makers need an in-depth understanding of:

The industryBusiness processes inherent in the industryKnowledge of industry structureGovernment and policy stipulations

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Critical Success Factors (cont.)

Targeting inefficient industry processesContribute to increased costs and time delaysVertical exchanges can add value

Targeting right industriesLarge base of transactionsMany fragmented buyers and sellersHigh vendor and product search/comparison costsStrong pressure to cut expenses

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Critical Success Factors (cont.)

Brand building is criticalIncrease switching costs by adding features and functionalityInvest in:

Gaining brand awarenessAttracting businesses to exchangeCustomer retention

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Critical Success Factors (cont.)

Exploiting economics of scopeValue-added services make exchange compelling

Industry newsExpert adviceDetailed product specification sheets

Support servicesBanks and financial information providersIdentification supported by sophisticated digital certificate architecture

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Critical Success Factors (cont.)

Garner diverse and multiple revenue streams

Software licensingAdvertisingSponsorship

Critical mass of users will garner more value-added services

Auction servicesFinancial servicesBusiness reportingData mining services

Choice of business/revenue models

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Critical Success Factors (cont.)

Blending content, community, and commerce

Content and community perspective—stimulate trafficEC transaction perspective—creates higher level of customer “stickiness”

Managing channel conflictHostile phase as buyers interact directly with sellers (disintermediation of supply chain)Short-term revenues impacted by backlash from existing fulfillment channels result in price erosion affecting medium-term profitability

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Communication Networks and Extranets for B2B

The Internet—a public, global communications network that provides direct connectivity to anyone over a local area network (LAN) via an Internet service provider (ISP) or directly via an ISP

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Communication Networks and Extranets for B2B (cont.)

Intranets—a corporate LAN or wide area network (WAN) that uses Internet technology and is secured behind a company’s firewalls

Links various servers,clients,databases,and application programs within a companyLimited to information pertinent to the company

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Communication Networks and Extranets for B2B (cont.)

Extranets—a network that uses a virtual private network (VPN) to link intranets in different locations over the Internet; an “extended intranet”

Provide secured connectivity between a corporation’s intranets and the intranets of its business partnersprotected environment of an extranet allowsAllows partners to securely collaborate and share information

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Communication Networks and Extranets for B2B (cont.)

Virtual private network (VPN)—a network that creates tunnels of secured data flows, using cryptography and authorization algorithms, to provide secure transport of private communications over the public Internet

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Exhibit 6.12An Extranet

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A Network Loaded with Extras: ANX

Automotive Network Exchange (ANX)—an infrastructure for B2B applications

Backed by General Motors, Ford, and Chrysler

Allows companies in the automotive market to:

Swap supply and manufacturing dataBuySellCollaborate

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ANX (cont.)

Benefits of ANXOne-to-one and one-to-many connections

ProcurementCAD/CAM file transfersEDIE-mailGroup-ware

“Big Three” expect to save millions of dollars

Consolidating communications linksReduce order turn-around time

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ANX (cont.)

A VPN for ANXMost visible B2B implementation of VPNs that run over the Internet Security—all participants must have tools compliant with (IP) security standards covering

AuthenticationEncryptionEncryption key management.

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Categories of Extranet Benefits

1. Enhanced communications2. Productivity enhancements3. Business enhancements4. Cost reduction5. Information delivery

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Implementation Issues

Problems with exchangesHigh transaction fees Sharing informationUnclear cost savings Recruiting suppliersToo many exchangesDifficult to coordinate supply chain process

Private exchanges—e-marketplaces that are owned and operated by an industry giant or a consortiumProblems with private exchanges

Lack of trustLiquidity is questionable

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Implementation Issues (cont.)

Software agents in B2B exchangesDisintermediationEvaluating exchanges

How much will company really save and/or gain?Determine viability of the exchangeContracts and technology that lock into a long-term relationshipMembership—who sits on the board.Who provides payment, logistics, other services?

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Support Services for B2B Exchanges

Directory services and search enginesPartner relationship managementOther services:

Trust services Digital photosTrademark and domain names Client matchingGlobal business communities Encryption sitesE-business rating sites Promotion programsWeb-research services

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Managerial Issues

Have we “done our homework?”Can we use the Internet?Which exchange?Will joining an exchange force restructuring?Will we face channel conflicts?What are the benefits and risks of joining anexchange?

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Summary

E-marketplaces and exchanges definedThe major types of e-marketplacesB2B portalsThird-party exchangesConsortium trading exchangesDynamic pricing and trading

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Summary (cont.)

Ownership and revenue modelsExchange networks and management of exchangesCritical success factors for exchangesExtranetsE-marketplaces and exchange implementation and development issuesSupport services