B2B
• E-Procurement
• Metamediaries
• Intermediation Opportunities
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Sourcing: Search Costs
due to large number of
sellers
Fulfillment:
Monitoring costs
to avoid errors
B2B
Buying
Problems
Ordering: Workflow
and transaction costs
from many orders &
dependent demand
Replenishment:
Continued reliance
on old source
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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
3
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
4
Value Added Networks (VAN)
• Advantages: Translation, security, auditability, integrity
• Disadvantages: High price, Connect time + mailbox charges
VAN
Buyer
Translate
incoming
document
Route to
mailbox
Seller
Bank
Compliance
checking
Translate
X.12
EDIFACT
Transport
company
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Why EDI was not sufficient?
•
•
•
•
•
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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
4. Online
Approval
5a.
Check
status
9. Route to
Recipient
5. Supplier
Fulfillment
8. Accounts
Payable
7. Receiving
6. Ship
Product
The e-Procurement Cycle
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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 initiates
Employee initiates
No approvals required
Approval required
High degree of automation
Little automation
Design-spec driven
Catalog driven
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Requirements of e-Procurement Systems
Most systems provide a subset of these functions!
Purchasing
Order Mgt, Quotations, Negotiations
Management
Quality Evaluation
Goods Received, Source Quality
Supplier Selection
Identification, Price, Lead Time
Purchasing
Contracts
Quantity Contracts, Discounts
Accounting
Budgeting, Overheads, Costing
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B2B
• E-Procurement
• Metamediaries
• Intermediation Opportunities
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Large Market size
Fragmented
supply chain
High workflow
costs
Markets ready
for
intermediaries
Product
comparison hard
Some product
differentiation
High search
costs
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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 vs. Metamediary
Metamediary
Metamediary
Metamediary
Metamediary
Intermediary
Credit verification
Match
buyers and
suppliers
Intermediary
Risk management
Metamediary Metamediary Metamediary Metamediary
A successful marketplace does more than matching buyers and suppliers!
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Improve Information
Flows
Reduce Costs
Value
Creation by
Intermediary
Improve Price /
Quality
Build Liquidity
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Increase
communication
channel efficiency
Increase the
number of buyerseller channels
Improve
Information
Flows
Decrease the
number of
communication
channels
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Carrying Cost
Carrying Cost
Fulfillment Cost
Fulfillment Cost
Transaction
Cost
Transaction
Cost
Workflow Cost
Search Cost
Reduce Costs
Workflow Cost
Search Cost
Product Cost
Different industries
provide different cost
reduction opportunities!
Bulk Chemicals
Product Cost
Office Supplies
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Improve Price / Quality
Price /
Quality
Savings
from more
sellers
Traditional
cost of
search
Internet cost
of search
Value
Added
Number of Sellers
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Build Liquidity
Transaction
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
20
Buyers
Origins of
Intermediaries
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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Sellers Initiated Exchange: MetalSite
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
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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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Buyers Initiated Exchange: Covisint
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
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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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3rd Party Initiated Exchange: FreeMarkets
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 $44m
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Value Creation for Buyers
Consulting
Purchase
Outsourcing
• Identify potential saving
• Prepare specs, RFQ
• Identify + Qualify suppliers
Distribution
Intermediary
• Conduct auction
• Train buyer
• Post-auction analysis
R
E
V
E
R
S
E
Price reduction
Purchasing cost reduction
• Buyer’s agent
• Suppliers compete
Technology
Enabler
A
U
C
T
I
O
N
New suppliers identification
Research product, outsource RFQ
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Value Creation for New Suppliers
Find new
buyers
New buyer identification
• Respond to inquiry
• Receive certification
Bid preparation
• Conduct auction
• Train seller
• Award preparation
• Respond to RFQ
• Complete specs
Technology
Enabler
M
O
R
E
S
A
L
E
S
Reduce sales costs
Reduce transaction costs
But face more competition!
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Challenges Facing Intermediaries
 Acceptance by buyers and sellers
 Revenue generation
 Sales and marketing costs
 infrastructure and operating costs
 Intense competition!
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B2B Myths
• The middleman must go!
• Speed is everything!
• EDI will vanish!
• Old economy companies don’t get it!
• Throw away your old systems!
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Private Exchanges
• Limited access!
• Pre-existing business relationship
• Higher level of integration
• Order confirmation, tracking
• Seller / buyer auctions
• More volume than public exchanges ($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! Multimillion 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?
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