Perspectives of the E-Marketplace by Multiple

Stakeholders

G. Prem Premkumar

Business-to-business (B2B) e-commerce has been the focus of media hype for the last
five years. Like many other technologies in the e-commerce area, it has dropped from
a media and Wall Street favorite in 1999 to one that is going through a market shake-
out. In both the business-to-consumer (B2C) and B2B marketplaces, existing firms
in the physical marketplace (bricks-and-mortar) are responding to threats from new
entrants. In the B2C area, the physical stores have created their own online stores as
well as an alternative selling channel in what is popularly known as the clicks-and-
mortar approach. A similar transformation is occurring in the B2B area. Firms from
the physical marketplace, who were customers to the new electronic marketplaces
(e-marketplace), have created their own versions of these marketplaces. The big three
auto firms have developed their own exchange (Covisint) to link suppliers and buy-
ers, thereby creating serious competition to new start-ups such as Free Markets. While
it is relatively easy to create e-marketplaces with packaged software, it is more diffi-
cult to create the liquidity in the marketplace by enlisting an adequate number of
buyers and sellers to participate in the marketplace.
The current turmoil in the B2B area creates significant uncertainty for procure-
ment and IT managers in the organization. Companies have been undergoing a
major transformation in the procurement area in the last five years from various tech-
nologies and business practices including EDI, supply chain management (SCM),
continuous replenishment schemes, efficient consumer response systems, and collab-
orative commerce systems. Organizations are interested in knowing if e-marketplaces
are the next stage in the evolution of SCM or a passing fad. While these e-market-
places have much to offer, there is a significant cost for restructuring existing business
practices and supplier relationships. Business managers have to address many issues
including:

• How do we migrate from traditional SCM to the new marketplaces?

• What are the issues to consider as we formulate strategies to participate in the
marketplace?

G. (Prem) Premkumar (prem@iastate.edu) is the Union Pacific Professor of Information Systems in the
College of Business at Iowa State University, Ames, IA.

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COMMUNICATIONS OF THE ACM December 2003/Vol. 46, No. 12ve 279

• How will these e-marketplaces evolve in the future?
• What kind of information systems should we choose to support these initiatives?

Supply Chain Management

In recent years SCM has been touted as one of the major strategies to improve organi-
zational performance and generate competitive advantage [2]. A variety of changes in the
business environment including time-based competition, fast product cycle, just-in-time
production, and inter-organizational systems (IOS) have fueled interest in SCM. A sup-
ply chain can be considered the value chain for the industry, extending an organization’s
value chain to include its customers and suppliers [6]. It is a chain of interlinked trad-
ing partners that takes a basic raw material at one end, adds value to it while incurring
cost, and delivers a finished product to the ultimate customer at the other end. Figure
1a shows the three components—information, physical goods/services, and payment—
flowing through the supply chain. To facilitate the movement of these components, the
chain requires the service of transportation carriers for the movement of goods, and
financial institutions for the movement of payments. Information flow can occur
between the entities directly or through a third-party network. The basic thrust in SCM
is for tight integration of business process between different players in the supply chain
to facilitate the flow of the three components and realize various business objectives,
including increased inventory turnover, reduced cycle time, better customer service, and
greater flexibility in responding to customer requirements [3].
While from a buyer perspective the supply chain looks like a linear chain as in
Figure 1a, from an industry perspective it is a lot more complex, resembling some-
thing more like a web. The supply chain for a manufacturing firm, shown in Fig-
ure 1b, can have 2–3 tiers of suppliers, creating a complex network. Since they are
independent entities, there is no central management of the chain. However, the
chain has to operate efficiently to be competitive. A small change in any of the part-
ners’ supply chains, or a weak or broken link in the web, can create major reaction in
the entire chain.

E-Marketplace
Marketplaces can be broadly classified into dyadic and electronic marketplaces. While
an e-marketplace provides a central location for many buyers and sellers to congregate
electronically and complete their transactions, a dyadic market involves direct interac-

s1
Supplier Distributor Company Retailer Buyer

Goods and Services S1

Cash

Information B1

Figure 1a. Components flowing through supply chain.

280 December 2003/Vol. 46, No. 12ve COMMUNICATIONS OF THE ACM

 s1 s2 s3 s4
iler Buyer

S1 S2 S3 S4

B1 B2 B3 B4

Figure 1b. Manufacturing firm supply chain.

tion between a buyer and seller and the formation of long-term relationships. The evo-
lution of communication technologies and inter-organizational systems was a big factor
in the creation of e-marketplaces. In the 1980s, EDI technologies enabled the electronic
communication of transaction information between trading partners in a dyadic rela-
tionship. SCM initiatives such as JIT production and quick response systems also fos-
tered the growth of long-term relationships and exclusive contracts with suppliers. The
growth of the Internet led to Internet-based EDI systems, moving away from direct
links to use of a public network for communication. It naturally evolved into e-market-
places in the late 1990s as a technology solution to overcome inefficiency in dyadic
interactions.
Figure 2 shows the difference in the context of communication between a
dyadic market and an e-marketplace. In a dyadic market there are m x n interaction
links between the buyer (m) and supplier (n), with multiple communication messages
such as request-for-information (RFI), quote, design documents, purchase orders,
and so forth, traveling between these links. In an e-marketplace there is only m + n
interactions links. The number of messages flowing is also reduced since a Web-based
marketplace can provide richer information and reduce the number of queries.
While from a pure communication perspective the e-marketplace looks advanta-
geous, there are other cost factors that need to be examined [1]. Typically, transaction

Figure 2. Dyadic market vs. e-marketplace.

COMMUNICATIONS OF THE ACM December 2003/Vol. 46, No. 12ve 281

cost includes coordination cost and a cost associated with transaction risk. The coordi-
nation cost includes the search cost of finding the right supplier or buyer, the cost for
exchanging information, and the cost of contracting to reduce risk. Contracting cost
includes the cost for order negotiation as well as legal and administrative costs incurred
in creating an enforceable contract that satisfies both parties. There are other hidden costs
associated with transaction risk. Operations risk is the risk that one of the partners mis-
represents or withholds information or underperforms. It stems from differences in the
objectives of the partners and information asymmetries between the partners. Oppor-
tunism risk is the risk of the lack/loss of bargaining power due to relationship-specific
investment. It can be considered as the switching costs to switch from an existing rela-
tionship to a new one.
Buyers benefit from an e-marketplace since they get the opportunity to evaluate
a large number of sellers at a relatively low cost and the competitive marketplace will
result in lower prices. The coordination cost in terms of search and information
exchange are reduced. However, the operations risk is increased due to lack of knowl-
edge of every supplier in the marketplace. The buyer may incur additional costs in
contracting or prequalifying vendors to ensure that the supplier can meet their qual-
ity and schedule requirements. Sellers also benefit from an e-marketplaces as they
expand their market reach and reduce transaction costs. However, it also creates a
more competitive marketplace that increases pricing pressures, commoditizes the
product, and reduces the ability to compete on other product/service attributes.

Categories of E-marketplaces
E-marketplaces can be classified be based on various characteristics including type of
procurement, ownership, and industry focus (vertical or horizontal).
Procurement Type. Kaplan and Sawhney [4] classified e-marketplaces based on
product type and procurement practice into four categories—exchanges, catalog
hubs, yield managers, and MRO hubs.
Most firms have two types of procurement, manufacturing inputs (or direct
materials) and operating inputs (or indirect materials), and two types of transactions,
spot sourcing and systematic sourcing. MRO hubs are horizontal markets that enable
systematic sourcing of mainly indirect materials. Some of the characteristics of this
hub are a wide variety of low-value products, large numbers of transactions (high
transaction costs), and a large number of suppliers. Distributors (Grainger.com) and
infomediaries (MRO.com) provide large product catalogs on the Web and have auto-

Operating inputs Manufacturing inputs

MRO Hubs Catalog Hubs

Systematic Sourcing Grainger.com Chemdex
MRO.Com Plasticsnet.com
Yield Managers Exchanges
Adauction.com E-steel
Spot Sourcin g
Capacityweb.com Paperexchange.com

Figure 3. E-marketplace classifications.

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mated buy-side software customized to a firm’s Intranet. These hubs are low-risk ini-
tiatives with significant cost benefits for both buyers and sellers, and have been fairly
successful.
Yield managers use an auction format to buy operating inputs such as advertising
(Adauction), capital goods (Imark), and temporary labor (Elance). They are useful for
auctioning excess capacity or buying to meet temporary demand fluctuations.
Exchanges are typically used for spot sourcing of manufacturing inputs which are
either simple in description or can be well described in an industry standard format
such as steel, paper, and agricultural commodities. They are used by firms to meet
their daily requirements or smoothen sudden supply and demand fluctuations. Cat-
alog hubs are vertical marketplaces that enable suppliers in an industry to market their
products in a single e-marketplace. They are used for procurement of manufacturing
inputs and are closest to the notions of procurement through traditional supply chain
management. The participating firms will most likely have long-term relationships
and long-term contracts and use the hubs to reduce their transaction costs.
Ownership. Figure 4 shows four types of marketplaces based on ownership—
buyer hosted, seller hosted, neutral, and industry or consortium hosted.
Buyer-hosted marketplaces are normally created by a dominant buyer as a strategy
to move away from multiple dyadic supplier interactions to a single e-marketplace
interaction with suppliers. One of the initial pioneers in this area was General Elec-
tric, which posted their purchasing requirements on the Web and had suppliers bid
for them. Auto manufacturers followed suit with General Motors creating Trade
Exchange and Ford creating Auto Exchange. While it is convenient for the buyer, it
is not convenient for sellers as they have to manually interact with multiple Web sites
and run the risk of potential incompatibility problems due to interaction with non-
standardized interfaces and data. It seems very similar to the interoperability prob-
lems that suppliers faced in the 1980s, interfacing with proprietary
interorganizational systems. Standardized EDI mitigated the compatibility problems.
Seller-hosted marketplaces can be hosted by one seller or a host of sellers. These are
extended versions of the seller’s Web sites with additional functionality including auc-

Seller Buyer Seller Buyer

Seller Broker Buyer Seller Consortium Buyer

Owned Owned

Seller Buyer Seller Buyer

Buyer Seller

Seller Buyer Seller Buyer

Owned Owned

Buyer Seller

Figure 4. Marketplace ownderships.

COMMUNICATIONS OF THE ACM December 2003/Vol. 46, No. 12ve 283

tions, logistics coordination, financing and payment coordination, and accounting. Sell-
ers are able to displace middlemen by directly linking with the end-users. Most often
these are a dominant seller’s marketplace, since the seller-host(s) is disinclined to include
competitors in their marketplace. If the buyers are powerful, then it evolves over time
into an industry-administered or a neutral marketplace.
Broker-hosted marketplaces are the most popular; they were started by many entre-
preneurs as a neutral intermediary to provide benefits to both buyers and sellers.
These sites normally post offers from multiple buyers and sellers. Modern software
from vendors such as Ariba, Commerce One, and Oracle has made it relatively easy
to create these e-marketplaces. Vertical Net is an example of a firm that created over
50 marketplaces in different industries in a short time frame. A major constraint for
broker-hosted marketplaces is the difficulty in generating the necessary liquidity to
attract a sufficient number of buyers and sellers to ensure their survival. Many of the
initial pioneers such as Chemdex (Ventro), Vertical net, and Ariba have branched out
from hosting e-marketplaces to becoming software providers.
Industry-hosted marketplaces started as a response to the growth in broker-hosted
marketplaces. The participants in the physical marketplace (sellers, buyers) realized
that these e-marketplaces offered potential opportunities which were being exploited
by new firms with limited expertise in their industry. Hence, industry members
formed consortiums to create alternate marketplaces using their extensive industry
expertise. The presence of major buyers and sellers provides liquidity to these e-mar-
ketplaces. Covisint is an example of three major buyers (“Big 3” auto firms) creating
a marketplace for both customers and first- and second-tier suppliers to interact. The
Grocery Manufacturer’s Association created an e-marketplace, Transora, to improve
supply chain efficiency in their industry. A significant constraint to the formation of
these marketplaces is the willingness and ability of competitors to form a common
business entity based on trust and relationships. The ability for buyers to collude and
easily compare product/services provides a significant deterrent for sellers to partici-
pate in these marketplaces. A major legal issue relates to anti-trust concerns as the par-
ticipants could create a cartel and reduce competition.

Different Perspectives of SCM and the E-marketplace

SCM and the e-marketplace address business-to-business interaction from two dif-
ferent angles. While SCM focuses on developing a tightly integrated chain linking a
firm to its suppliers, e-marketplace focuses on technology for developing a sophisti-
cated marketplace without examining organizational procurement practices and cul-
ture. Buyers, sellers, and IS managers are overwhelmed with the media hype and are
unsure on how, if at all, to migrate from their existing business processes to these new
options. Below we provide the perspective of three stakeholders—buyers, sellers, and
IS managers.
Buyer’s Perspective. Procurement managers are concerned about the procure-
ment processes, relationship with trading partners, and costs. Some of the issues that
buyers have to address are:

• Where does e-marketplace fit in our SCM strategies?

• Is it compatible with our procurement philosophies and practices?
• How will our existing suppliers and relationships be affected by migration to
e-marketplace?

284 December 2003/Vol. 46, No. 12ve COMMUNICATIONS OF THE ACM

• How will procurement through e-marketplace affect the delivery and quality
requirements?

The introduction of JIT production in the manufacturing sector, and efficient

consumer response systems in the retailing sector, have brought significant changes to
procurement practices. SCM attempts to achieve cycle-time reduction and faster
inventory turnover by establishing tight linkages with suppliers and moving from
pure transaction orientation to greater coordination and integration of business
processes in various functional areas including product design and development, mar-
ket research, production planning, and so forth. A high level of trust and extensive
information-sharing are required for successful implementation of these initiatives
[5]. The focus on individual transactions and price reduction by e-marketplaces was
not consistent with the procurement philosophies of trust and long-term relationship
that have evolved in the last ten years. A firm could jeopardize its relationship with
its long-term suppliers by switching to an e-marketplace. Hence, the suitability of
e-marketplaces in the current procurement culture needs to be examined. A typical
comment from a trading partner is: “Well, you may find the same product at a
slightly lower price. But how sure are you of the quality, vendor’s credibility, ability to
deliver it to our production schedules?”
Since these new initiatives take significant effort and time to implement, a firm
has to evaluate if the initiative is in alignment with current SCM strategies. A worst
case scenario is the introduction of initiatives that are inconsistent and create confu-
sion among suppliers. Change management, both internal and external, is critical as
there are many instances of good systems not producing desired results due to faulty
implementation strategies. For example, Nike had major problems in their produc-
tion/distribution after introduction of an advanced production planning system. It
was later found that the problem was not with the software but with the quality of
data sent to the system. A major concern of procurement managers is the internal
changes in workflow processes and the resultant impact on procurement staff.
Seller’s Perspective. Some of the issues that suppliers have to address are:

• How do we choose which marketplaces to, or not to, participate in?

• Do we create our own or join an existing e-marketplace?
• What is its impact on current Web-based online operations—will there be syner-
gies or will one cannibalize the other?
• What will happen to existing long-term relationships and contracts with key cus-
tomers?
• Will the e-marketplace make their products commodities and create a price-
driven market?

A critical business strategy decision is whether to participate in the e-marketplace or con-

tinue to develop long-term relationships with key customers or do both. While long-
term relationships and contracts provide business stability, they reduce the flexibility of
exploring alternative markets and the possibility of growing at a faster pace or making
more profits in a niche market. Participating in both markets at the same time can be
problematic since the prices could vary and create opportunities for the buyer to break
away from exclusive contracts. The supplier also has the option of joining an existing
marketplace or creating a proprietary one for order processing and interacting with cus-

COMMUNICATIONS OF THE ACM December 2003/Vol. 46, No. 12ve 285

tomers. Capital equipment suppliers may opt for the latter option as the product is
unique and a one-time purchase, while other suppliers may find the B2B marketplace
provides more benefits.
Another major issue is that e-marketplaces tend to commodotize the offerings and
restrict the sellers’ ability to compete on other products or service features. The e-market-
place provides standardized order processing, fulfillment, and other related processes,
thereby considerably reducing the parameters that a seller can use to create a unique value
proposition. If a seller derives competitive advantage from its fulfillment process, the
e-marketplace will neutralize its advantage.
IS Managers. Some of the typical issues confronting IS managers are:

• How do we migrate from dyadic EDI platforms to these e-marketplaces?

• How do we integrate our internal ERP or other internal systems with these
e-marketplaces?
• What IT infrastructure is required internally and with our suppliers/buyers for
successful implementation?
• What are the system and data compatibility issues in interacting with non-stan-
dardized systems?

Many firms have internal legacy systems on the sales and procurement side that
work with EDI middleware to communicate with their trading partners. EDI pro-
vides a standardized data format for two computers to automatically communicate
transaction information without any manual intervention, which brings a high level
of transaction efficiency in communication. However, they are not very useful for
communication of unstructured information as in the initial search, evaluation, and
negotiation process. Migration to e-marketplaces may require interacting with differ-
ent Web interfaces and non-standardized data formats that may create problems with
internal systems. For example, getting demand forecast information from multiple
customers and incorporating it into internal systems would require individually visit-
ing customers’ Web sites, retrieving information, checking their data formats and
reentering them in internal systems. This may be a step backward in technology for
the seller unless automated interfaces are developed to automatically retrieve the
information from the Web site into internal systems.
In the last seven years, many firms have implemented ERP systems to integrate
the information flow within the organization. They have proprietary interface
requirements for data input and output. While ERP vendors have developed inter-
faces to EDI, they are still working on developing interfaces to e-marketplaces. New
software such as advanced production systems (APS) from I2 or Manguistics and
CRM applications have complicated the integration of data across multiple software.
e-marketplaces have focused more on improving the marketplace operations and less
on interfacing with their customers’ systems. There are many new initiatives to
address these problems. ERP vendors such as SAP and Oracle are trying to create
integrated software that will link their ERP systems with their e-marketplace software.
A single integrated SCM software that links all the participants in the supply and
demand chain may be the ultimate solution for an IS manager dealing with incompat-
ibilities in these systems. While communication incompatibilities are relatively easy to
overcome through XML and related technologies, data incompatibilities are harder to

286 December 2003/Vol. 46, No. 12ve COMMUNICATIONS OF THE ACM

handle. Unless a significant value proposition exists to move from existing EDI-based
systems to an e-marketplace, IT managers will be reluctant to make the migration.

The Future of SCM and the E-Marketplace

Any new initiative brings change and over time the existing practices and the new ini-
tiatives evolve to achieve a fit between the two. The focus on price in early e-market-
places was more suited for commodities and not consistent with the current
philosophy of collaboration in SCM. E-marketplace has to evolve to be consistent
with the paradigms of collaborative commerce, where the firm and its trading part-
ners, together as a community, provide greater value to its customers by enhancing
the value or reducing the cost in the value chain. The role of the physical marketplace
in fostering long-term relationships and trust that enables collaborative commerce
cannot be over emphasized. Electronic networks are excellent at creating communi-
ties. Software vendors have to develop modules to facilitate collaboration. Recent
mergers and partnerships among software vendors indicate recognition of this need.
Collaborative commerce is based on the premise that trading partners will collabo-
rate and freely exchange information to reduce the bullwhip effect that creates significant
inventory fluctuations in the chain. The sharing of information is a significant deterrent
in all interactions. While database technologies were available in early 1980s, it took
more than fifteen years to create integrated information systems in organizations due to
various constraints, including an unwillingness of departments to share information for
fear of loss of power. The same argument can be made for free flow of information across
organizational boundaries. Information asymmetry is critical for participants in the value
chain to survive. If we create a super efficient value chain where information flows freely
and uncertainty is significantly reduced, the role of many intermediaries in the value
chain become insignificant [8]. Hence, these firms have to evolve into other businesses
or create barriers to free flow of information to sustain their existence. Therefore, while
technology will be available, whether participants will be willing to use it is an impor-
tant factor that will determine the success of these new initiatives. Sometimes a domi-
nant member in the value chain may have to force its participants to share information.
Future e-marketplaces should provide comprehensive support to a variety of interac-
tions and relationships including spot transactions, short-term contracts, and long-term
relationships. An innovative approach to providing these services would be to create pri-
vate areas within the e-marketplace with limited access where firms that require (or have)
long-term relationships can interact. It would provide flexibility for an organization to
move all its transactions to a single marketplace, completing long-term relationship-based
contracts in private areas, and spot transactions in the public marketplace to take advan-
tage of liquidity and price performance. There are other strategies that e-marketplaces
could use to facilitate the creation of relationships. For example, they could use a mem-
bership-based model to only admit a select set of buyers and sellers who are referred by
an outside agency or by the members of the e-marketplace. This reduces risk and fosters
a sense of community.
In a networked age it is inevitable that firms will move to a 100% electronic com-
munication of business transaction information. However, the evolution will be slow
and there may be multiple electronic mechanisms to achieve that objective. Currently,
many firms use e-marketplaces extensively for procurement of operating inputs since
there is a good fit between procurement practices and the services provided in e-mar-

COMMUNICATIONS OF THE ACM December 2003/Vol. 46, No. 12ve 287

ketplaces. The large transaction volume, relatively low-value, inefficient procurement
process, and fragmented supplier market provide significant opportunities for an
e-marketplace to reengineer the processes. Since it is mostly integrated with a firm’s
Intranet, it offers significant cost reduction and reduces internal paperwork.
Unless there is a significant value proposition over existing EDI systems, tradi-
tional relationship-based methods will dominate the procurement of manufacturing
inputs. It is likely that buyers will provide all order information on their secure Web
sites for sellers. In the future, software agents will be able to retrieve information auto-
matically from these Web sites to the seller’s internal systems.
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