B2B

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B2B

• E-Procurement
• Metamediaries
• Intermediation Opportunities

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Sourcing Search Costs due to large number of
sellers
B2B Buying Problems
Ordering Workflow and transaction costs from
many orders dependent demand
Fulfillment Monitoring costs to avoid errors
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

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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

VAN
Bank
Buyer
Translate incoming document
Compliance checking
Translate X.12? EDIFACT
Route to mailbox
Transport company
Seller
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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)

2. Create Requisition
3. Check availability
1. Browse online catalogs
4. Online Approval
5a. Check status
9. Route to Recipient
5. Supplier Fulfillment
8. Accounts Payable
6. Ship Product
7. Receiving
The e-Procurement Cycle
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• Production Items
• Raw materials and components
• Scheduled by production runs
• Professional buyer initiates
• No approvals required
• High degree of automation
• Design-spec driven

• Non-Production Items
• Office computer supplies
• MRO supplies Travel
• Ad hoc, not scheduled
• Employee initiates
• Approval required
• Little automation

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Requirements of e-Procurement Systems
Most systems provide a subset of these functions!
Purchasing Management
Order Mgt, Quotations, Negotiations Goods
Received, Source Quality
Quality Evaluation
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
Buying guides
Procurement
Intermediary
Match buyers and suppliers
Intermediary
Intermediary
Metamediary Metamediary Metamediary
Metamediary Metamediary Metamediary
Credit verification
Risk management
Intermediary
Settlement
Order fulfillment
Metamediary Metamediary Metamediary
Metamediary
A successful marketplace does more than matching
buyers and suppliers!
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Improve Information Flows
Value Creation by Intermediary
Improve Price / Quality
Reduce Costs
Build Liquidity
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Increase communication channel efficiency
Improve Information Flows
Decrease the number of communication channels
Increase the number of buyer-seller channels
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Carrying Cost
Carrying Cost
Fulfillment Cost
Fulfillment Cost
Transaction Cost
Transaction Cost
Workflow Cost
Reduce Costs
Search Cost
Workflow Cost
Search Cost
Different industries provide different cost
reduction opportunities!
Product Cost
Product Cost
Bulk Chemicals
Office Supplies
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Improve Price / Quality
Price / Quality
Traditional cost of search
Savings from more sellers
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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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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B2B

• E-Procurement
• Metamediaries
• Intermediation Opportunities

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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 (JJ, GE Medical,
  Baxter, Abbott)
• MetalSite by steel producers

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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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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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Challenges Facing Intermediaries

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B2B Myths

• The middleman must go!
• Speed is everything!
• EDI will vanish!
• Old economy companies dont 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 gt 43 in
  2000)!
• Example Buyer GE 20b

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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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B2B Exchanges Industry Outlook

• At its peak in July 2000, as many as 1400
  exchanges emerged (Source Business Week)
• More than 100 shut down in 2000 (WSJ, May 21,
  2001)
• About 200 are expected to survive! (Forrester
  Research, 01)
• Industry Life Cycle Emergence (Many competing
  approaches, few succeed)

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Key Points

• E-Procurement is a must!
• Searching for a B2B revenue model!
• More online business, fewer exchanges?