Chapter 6

Public B2B Exchanges

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Learning Objectives

List the various types of e-marketplaces Describe B2B portals Describe third-party exchanges Distinguish between e-procurement and e-selling consortia Describe the various ownership and revenue models of exchanges Describe the support mechanisms offered by exchanges, including auctions 2

Learning Objectives (cont.)

Describe networks of exchanges and exchange management Describe the critical success factors of exchanges Discuss implementation and development issues of e-marketplaces and exchanges Describe the major support services of B2B Describe the extranet and its role in supporting marketplaces and exchanges 3

ChemConnect: The World Chemical Exchange

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

Buyers paid too much Sellers had high expenses Intermediaries were needed for to smooth the process

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ChemConnect (cont.)

The Solution Provides free membership in trading marketplaces and information portals

Public exchange floor for anonymous bids Commodities floor for buying and exchanging Corporate trading rooms—private online auctions

Up-to-the-minute market information Large electronic catalog Independent intermediary 5

ChemConnect (cont.)

The Results In ChemConnect trading rooms companies can save up to 15% in just 30 minutes of reverse auction ChemConnect is growing rapidly, adding members and increasing trading volume each year 6

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 8

Exhibit 6.1

Trading Communities: Information Flow and Access to Information

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Classifications of Exchanges

Systematic sourcing—purchasing done in long term supplier-buyer relationships Spot sourcing—unplanned purchases made as the need arises Vertical exchange—an exchanges whose members are in one industry or industry segment Horizontal exchange—an exchanges that handles materials traded in several different industries 10

Exhibit 6.2

Classifications of B2B Exchanges

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B2B Exchanges

Dynamic pricing Ownership of exchanges Governance Organization of exchanges Gains and risks of B2B exchange participation 12

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 13

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 14

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 15

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) 16

Governance

Exchanges governed by guidelines and rules How the exchange operates What the requirements are to join the exchange What fees are involved What rules need to be followed 17

Governance (cont.)

Security and privacy for documents Contract terms between an exchange and buyers/sellers Assurances that the exchange is fair 18

Organization of Exchanges

Membership Generate revenue

Transaction and other fees Registration fees Annual membership fees

qualification process deposit may be required Limits set on how much each member can trade 19

Organization of Exchanges (cont.)

Site access and security Information should be carefully protected— competitors congregate in the same exchange Prevent illegal offers and bids List of individuals who are authorized to represent the participating companies 20

Exhibit 6.3

Services in Exchanges

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Exhibit 6.4

Gains and Risks of B2B Exchanges

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B2B Portals

B2B portals—information portals for businesses Thomas register—facilitates business transactions for MROs Alibaba.com

Database Reverse auctions Features and Services Revenue model

Vortals--B2B portals that focus on a single industry or industry segment; “vertical portals” 23

Third-Party (Trading) Exchanges

Electronic intermediaries Do not favor either sellers or buyers—neutral without 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 24

Exhibit 6.6

Supplier Aggregation Model

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Exhibit 6.7

Buyer Aggregation Model

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Suitability of Third-Party Exchanges

Fragmented markets Markets that have large numbers of both buyers and sellers Mainly suitable for MROs Buyer-concentrated markets—several large companies sell to a very large number of buyers Seller-concentrated markets—several large companies do most of the buying from a large number of suppliers 27

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-oriented Horizontal, purchasing-oriented Vertical, selling-oriented Horizontal, selling-oriented 28

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-oriented

Owner-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 marketplace

General Motors Ford DaimlerChrysler

Entire industry gains

Lower costs Easier business practices Increased efficiency

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Covisint (cont.)

“ Co” stands for

Connectivity Collaboration Communication

“Vis” stands for visibility provided by the Internet “Int” stands for integrated solutions 31

Covisint (cont.)

Collaborative commerce

Facilitate product design Enable procurement process Provide broad marketplace of buyers and suppliers

Vertical consortia trading exchange

Few large buyers Many 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 network Visibility provides real-time information for:

Fast decision making Communication 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 chain The result:

Less need for costly inventory in the supply chain Increased 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-procurement Provides broad marketplace of buyers and suppliers Accesses a wealth of supply chain expertise and experience

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Consortium Trade Exchanges

Selling-oriented consortia Vertical exchanges Thousands of potential buyers within a particular industry Legal challenges for B2B consortia Exchanges introduce a level of collaboration among both competitors and business partners Antitrust and other competition laws must be considered 36

Critical Success Factors of Consortia

Size of industry Ability to drive user adoption Elasticity—measure of incremental spending by buyers as a result of savings generated Standardization of commodity-like products Management of intensive information flow Smoothing inefficiencies in supply chain 37

Dynamic Trading

Dynamic trading—exchange trading that occurs in situations when prices are being determined by supply and demand (dynamic pricing) 38

Dynamic Trading: Auctions and Matching

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

Prices Quantities Times Locations

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Dynamic Trading: Auctions and Matching

Auctions Private trading rooms—members conduct auctions at the exchange Auction services may be one of the activities Exchange may be fully dedicated to auctions Can conduct many-to-many public auctions 40

New Entrant to the Dutch Flower Market: TFA

Dutch auction method Were semi-automated

Buyers and sellers went to one location to see the flowers Auctioneer used a clock with a large hand set at a high price Price dropped as the time ticked off on the clock Until 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 PCs

Designated times From any location Auction clock shows on buyer’s PC screen Clock stopped by pushing space bar Auctioneer completes sale by telephone

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TFA (cont.)

Process is much quicker After-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 43

TFA (cont.)

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Exhibit 6.9

Comparing the Major B2B Many-to-Many Models

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Building and Integrating Marketplaces and Exchanges

Step 1—Think ahead Step 2—Planning Step 3—System analysis and design Step 4—Building the exchange Step 5—Testing, installation, and operation Step 6—System evaluation and improvement 46

Building and Integrating Marketplaces and Exchanges (cont.)

Integration Between 3 rd -party exchange and back-office systems of participants Across multiple, incompatible exchanges External communications Web/client access Data exchange Direct application integration Shared process 47

Building and Integrating Marketplaces and Exchanges (cont.)

Process and information coordination—how to coordinate external communications with internal information systems External process Internal process Data transformation Exception handling System and information management—involves management of: Software Hardware Information components 48

Managing Exchanges

Revenue models

Transaction fees Fee for service Membership fees Advertisement fees

Networks of exchanges

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

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Exhibit 6.11

Several Exchange, One Supply Chain

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Managing Exchanges (cont.)

Centralized management

One market builder builds and operate several exchanges Manages all the exchanges ’catalogs, auction places, discussion forums Centralizes: 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 liquidity Business’s chance of survival is best when liquidity (volume of business conducted) is achieved early Right owners Partner with companies that can bring liquidity to the exchange Best owner may be intermediary that can push both buyers and sellers 52

Critical Success Factors (cont.)

Right governance Good management and fair /effective operations and rules are critical Governance provides rules for the exchange, minimized conflicts, decision making support Openness Exchanges must be open to all from organizational and technical point of view Open standards require universal commitment and agreement on the standards 53

Critical Success Factors (cont.)

Full range of services Participants are attracted by an exchange that helps cut costs Exchanges team up with banks, logistic services and IT companies to help Importance of domain expertise Market makers need an in-depth understanding of:

The industry Business processes inherent in the industry Knowledge of industry structure Government and policy stipulations

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Critical Success Factors (cont.)

Targeting inefficient industry processes

Contribute to increased costs and time delays Vertical exchanges can add value

Targeting right industries

Large base of transactions Many fragmented buyers and sellers High vendor and product search/comparison costs Strong pressure to cut expenses

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Critical Success Factors (cont.)

Brand building is critical Increase switching costs by adding features and functionality Invest in:

Gaining brand awareness Attracting businesses to exchange Customer retention

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Critical Success Factors (cont.)

Exploiting economics of scope Value-added services make exchange compelling

Industry news Expert advice Detailed product specification sheets

Support services

Banks and financial information providers Identification supported by sophisticated digital certificate architecture

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Critical Success Factors (cont.)

Choice of business/revenue models Garner diverse and multiple revenue streams

Software licensing Advertising Sponsorship

Critical mass of users will garner more value added services

Auction services Financial services Business reporting Data mining services

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Critical Success Factors (cont.)

Blending content, community, and commerce

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

Managing channel conflict

Hostile 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 60

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 company Limited to information pertinent to the company 61

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 partners protected environment of an extranet allows Allows partners to securely collaborate and share information 62

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 63

Exhibit 6.12

An 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 data Buy Sell Collaborate

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ANX (cont.)

Benefits of ANX One-to-one and one-to-many connections

Procurement CAD/CAM file transfers EDI E-mail Group-ware

“Big Three” expect to save millions of dollars

Consolidating communications links Reduce order turn-around time

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ANX (cont.)

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

Authentication Encryption Encryption key management.

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Categories of Extranet Benefits

1. Enhanced communications 2. Productivity enhancements 3. Business enhancements 4. Cost reduction 5. Information delivery 68

Implementation Issues

Problems with exchanges

High transaction fees Unclear cost savings Too many exchanges Sharing information Recruiting suppliers Difficult to coordinate supply chain process

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

Lack of trust Liquidity is questionable

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Implementation Issues (cont.)

Software agents in B2B exchanges Disintermediation Evaluating exchanges How much will company really save and/or gain?

Determine viability of the exchange Contracts and technology that lock into a long term relationship Membership—who sits on the board.

Who provides payment, logistics, other services?

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Support Services for B2B Exchanges

Directory services and search engines Partner relationship management Other services:

Trust services Trademark and domain names Global business communities E-business rating sites Web-research services Digital photos Client matching Encryption sites Promotion programs

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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 an exchange?

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Summary

E-marketplaces and exchanges defined The major types of e-marketplaces B2B portals Third-party exchanges Consortium trading exchanges Dynamic pricing and trading 73

Summary (cont.)

Ownership and revenue models Exchange networks and management of exchanges Critical success factors for exchanges Extranets E-marketplaces and exchange implementation and development issues Support services 74