1

B2B

• E-Procurement

• Metamediaries

• Intermediation Opportunities

2

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

3

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

4

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

5

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

8

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

• 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

11

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

Procurement

Order fulfil

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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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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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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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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 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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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?