Electronic Marketplaces in Supply Chains

‘Kamesh’ Kameshwaran Skameshn(at)csa.iisc.ernet.inhttp://people.csa.iisc.ernet.in/kameshn/

Dept. of CSA, IISc

Foundations of Global Supply Chain ManagementSept 27, 2003Bangalore

Objectives

To bring out and understand the important role of e-marketplaces in SCM

To understand critical design and implementation issues of e-marketplaces

Categories

C2C: Consumer to consumer marketplaces allow buyers and sellers to trade personal goods (baazee)

B2C: Business to consumer sites sell products to online shoppers (amazon, fabmart)

B2B: Business to business marketplaces automate supply chains and link systems with business partners (this will be our focus)

SCM and e-Marketplaces e-Marketplaces in SCM: Why?

shrinking product lifecycles mass customization massive scalability faster and more flexible fulfillment to attract and serve larger customer bases

The above cannot be handled by the traditional SCM initiatives alone, such as strategic sourcing, contract manufacturing and joint product development

SCM and e-Marketplaces e-Marketplaces in SCM: Where?

Procurement and Selling: plasticsnet, paperexchange, indiamarkets

Subcontracting and Outsourcing of business processes like manufacturing and assembling (allocation.net, inventorydepot)

Logistics: LeanLogistics, infreight, intermodalex, nte, net4cargo, cargoreservations

e-Marketplaces Paper Products: clickpaper, eprintingx, paper2print,

papersite, paperspace Automobiles: autowebex, autotomorrow, edealr, covisint Food Items: foodtrader, foodenterprise, tomatrade,

globalfoodexchange, beverageindustry, candycommerce, terminalmarkets, stctrading, efoods

Energy: cetrade, oz-coal, trade-ranger, houstonstreet, amdax, watt-ex, energywindow, gsn-trade

Agriculture: xsag, ForestOne, farms, acoop, liquiorice, greentrac, theseam, flowergrower, agroinfo2000, florastream

Industrial: worldmetal, rockanddirt, metalsite, primeadvantage, thesteelhub, ironplanet, rollingcost

SCM of e-Marketplaces SCM of e-Marketplaces

Amazon.com delivered more than 789,000 copies of Harry Potter and the Order of the Phoenix across US via the U.S. Postal Service and FedEx Corp. as soon as the book was released

Weight of each book: 1.27 Kg. More than 1100 tons of processing, packaging and distribution.

Dynamic formation of supply chains during festivals and new product releases

Our focus will be on the e-Marketplaces of SC

Taxonomony Vertical: Markets suited to specific industries

like chemical or steel Horizontal: These are region-, functional- or

process-oriented. Usually for indirect materials like office equipment or spare parts

Private: One-to-many markets operated and owned by a single company to support commercial interactions with its own known traders

Public: Many-to-many markets (many sellers and many buyers)

Categories of B2B Independent: Operated by a third party who is

neither a seller or buyer. It is open for all buyers and sellers of particular industry or region (chemconnect, phonetrade)

Sales-oriented: Operated by a group of companies for efficient sales to a large # of buyers (toolstore, findmro)

Purchase-oriented: Operated by a group of buyers in order to obtain an efficient purchasing process (covisint, transora)

Business Models e-catalogues: Catalogue of products,

usually fixed price Market mechanisms: (Dynamic

pricing) Auctions (one seller, many buyers) Reverse auctions (one buyer, many

sellers) Exchanges (many buyers, many sellers)

Design of Markets Primary functions of markets

matching buyers to sellers facilitating exchange of information, goods,

services payments associated with a market

In “our” market: A central auctioneer or market-maker

communicates with the agents (traders) using a predetermined and mutually agreed upon protocol and vice-versa

The market maker determines the trade and price according to a known algorithm

Design of Markets Designing of markets involves designing

of protocols to exchange information between

agents and market (auction, negotiation and game theory)

an algorithm that matches buyers and sellers and determines the amount of goods traded between them (optimization, algorithms)

pricing mechanism (optimization, game theory)

agents' behavior (complementary problem to market design solved using game theory)

Markets Markets are resource allocation mechanisms, that

distribute the constrained resources to the competing agents efficiently through pricing

How does Market design differ from resource allocation mechanisms? Agents have lot of incentives to lie and they can lie Agents are conservative in information revelation as they may

be strategically used by other agents for purposes other than trade

Agents have intelligence to manipulate the allocation or market algorithm e.g. sniping in online auctions

Agents can be mischievous Design a market algorithm that cannot be easily

manipulated by the agents (mechanism design problem)

Auctions English Auctions: Iterative, open-cry,

ascending bid (property liquidation) First-price Auctions: One-shot, sealed bid

(tender auctions) Dutch Auctions: Iterative, descending

price auctions (flower markets) Many online auctions are variations of the

above. See baazee, ebay, amazon, indiatimes (includes B2B, B2C, and B2B)

Exchanges Double Auctions: Open bid,

continuous auctions with discriminatory pricing (stock exchanges)

Call markets: Closed bid, one-shot auctions with uniform pricing

Online exchanges use various combinations of rules

Multi-attribute Matching Matching of buyers and sellers Suitable for goods (raw materials,

sub-assemblies) and services (logistics)

Multiple attributes: Price, delivery time, service cost, quality etc.

Tools: Multi-attribute utility theory, Multiple criteria optimization

Configurable Bids Supplier’s bid for selling a computer:

Processor: (486: Rs. X1), (586: Rs. X2), (686: Rs. X3), …

OS: (XP: Rs. Y1), (ME: Rs. Y2), … Monitor: (14”: Rs. M1), (19”: Rs. M2),… Logical constraints: XP requires at least 586

The buyer configures the computer that meets his demand and budget

0-1 programming techniques and the problem is usually NP-hard

Piecewise Linear Price Fns Price varies non-

linearly with quantity Can express

negotiation strategy: buy more, pay less

Can express economies of scale

Mixed 0-1 programming problem and is usually NP-hard

0

100

200

300

400

500

600

100 200 300 400

Price

Combinatorial Markets Market sells products A, B, C Bids: Single bid price for a combination of

products - ([A, B], Rs. 100), ([B, C], Rs. 125), …

Can express complimentarity among products: A alone is Rs. 50, B alone is Rs. 60, but A and B together is Rs. 150

Allocation problem is NP-hard

Design of Agents Complementary problem to the design of

market protocol Given the rules of the market, what is the

strategy of the agent? In a bargaining situation, what is the first price

offered by the buyer: 50% or 75% of his value?

Experimental economics and game theory Celebrated Nash Equilibrium is a solution

concept to the above problem

Conclusions e-Markets are key to a faster and

more efficient trade e-Markets have positive influence all

through the supply chain There are challenging technical and

theoretical issues in setting up and operating an e-market