B2B

• E-Procurement

• Metamediaries

• Intermediation Opportunities

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 Sourcing: Search Costs
due to large number of
sellers

B2B Ordering: Workflow

Fulfillment: Buying and transaction costs
Monitoring costs from many orders &
to avoid errors Problems dependent demand

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

Buyer VAN Bank

Translate
incoming Compliance
document checking

Route to Translate
mailbox X.12
Seller EDIFACT Transport
company
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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 3. Check
1. Browse Requisition availability
online 4. Online
catalogs Approval

5a.
9. Route to 5. Supplier
Check
Recipient Fulfillment
status
8. Accounts
Payable
6. Ship
7. Receiving
Product
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The e-Procurement Cycle
Production Vs. Non-Production Items

Production Items Non-Production Items

Raw materials and

components Office & computer supplies;
MRO supplies; Travel

Scheduled by production Ad hoc, not scheduled

runs
Employee initiates
Professional buyer initiates

No approvals required Approval required

High degree of automation
Little automation

Design-spec driven Catalog driven 8

 Requirements of e-Procurement Systems
Most systems provide a subset of these functions!
Purchasing Order Mgt, Quotations, Negotiations
Management

Quality Evaluation Goods Received, Source Quality

Supplier Selection Identification, Price, Lead Time

Purchasing
Quantity Contracts, Discounts
Contracts

Accounting Budgeting, Overheads, Costing

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 B2B
• E-Procurement

• Metamediaries

• Intermediation Opportunities

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 Large Market size

Fragmented High workflow

supply chain costs

Markets ready
for
intermediaries
Some product Product
differentiation comparison hard

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

Metamediary Metamediary
Metamediary Metamediary Metamediary

Pr es
o d
cu
re g ui
m in g
en y
t
Intermediary Bu

Intermediary
Intermediary
Match
Credit verification buyers and Risk management
suppliers
Intermediary
n t

Se
e

Metamediary
illm

ttl
ulf

em
r f
e

en
d
Or

t
Metamediary Metamediary Metamediary Metamediary
A successful marketplace does more than matching buyers and suppliers!
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 Improve Information
Flows

Value
Improve Price /
Reduce Costs Creation by Quality
Intermediary

Build Liquidity

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 Increase
communication
channel efficiency

Improve
Increase the
Information Decrease the
number of
number of buyer- Flows communication
seller channels
channels

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 Carrying Cost Carrying Cost
Fulfillment Cost Fulfillment Cost
Transaction Transaction
Cost Cost
Workflow Cost
Search Cost Reduce Costs Workflow Cost

Search Cost
Different industries
Product Cost provide different cost
reduction opportunities! Product Cost

Bulk Chemicals Office Supplies

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 Improve Price / Quality

Price / Traditional
Quality cost of
Savings search Internet cost
from more of search
sellers

Value
Added

Number of Sellers

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 Build Liquidity
Transaction Central marketplace
automation leads to leads to
Improved Improved Reach
Velocity

Improved Reach +
Improved Velocity
= Liquidity

Market liquidity brings Product liquidity helps

more buyers and sellers sell goods / services

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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 (J&J, GE Medical, Baxter, Abbott)

 MetalSite by steel producers

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 Sellers Initiated Exchange: MetalSite
Industry
World market over 750 million tons, US Share 10%
Founders: Weirton Steel, LTV Steel, Steel Dynamics,
Bethlehem Steel, Ryerson Tull
History
- First provided industry news and product information
- Next introduced e-commerce capabilities
- New services (banking, logistics, billing,…) added later
- 2000 Results: 50,000 transactions; 22000 users; 2 million
tons; 30,000 products listed
- Closed June 2001, MSA buys Metalsite in August 200123
Rules
• Open, neutral marketplace, confidentiality
• Users must register, MetalSite to check legitimacy
Sellers’ Goals
• Expand customer base
• Improve selling efficiency
• Increase inventory turnover
• Reduce non-value added tasks
Buyers’ Incentives
• Locate and purchase products effectively
• Cut costs and time 24
Major Functions
• Marketplace Products: Auction, Product guide, QuoteFinder
• System Integration services
• e-Business consulting services
• Fulfillment products (Transportation, Financing, Collaborative
forecasting, Advance order status notification)

Revenue Model
• Transaction fees 0.25%-2% on auctions and product guide,
small fee to use QuoteFinder
• Difficulty in collecting transaction fees 25
 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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 Buyers Initiated Exchange: Covisint
Industry
• Procurement market for Automakers, over $350 billion
• Major Players: DaimlerChrysler AG, Ford, GM, Nissan, Renault
History
• Announced in Feb 2000
• 200 catalogs; 1000 users; 20,000 transactions by June 2001
• Total volume in 2001 is expected to be $129 Billions
Major Functions
• Procurement
• Catalogs
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• Buyer / Seller auction
Auto makers’ Goals
 Cut time and costs
 Exchange engineering data
 More suppliers
 Custom cars

Tier-1 Suppliers’ Incentives

• Cut costs
• Buyer pressure

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Regulatory Issues
- Auto makers not to combine requirements
- Auto makers can’t see needs of others
- Export regulations enforcement
- No loss in tax revenue

Requirements
- Currency conversion
- Language translation
- Supplier order management capabilities
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Industry

Aviation ($500 Billion)

Major Players: Nine airlines and three aerospace manufacturers

History
• Airlines announced AirNewco as their B2B marketplace in 4/00
• Suppliers announced MyAircraft.com in 2/00
• AirNewco and MyAircraft merge to become Cordiem in 3/01
• First major B2B marketplace supported by buyers and sellers
• Partners - i2 Technologies, Ariba
• Competes with Exostar led by Boeing, Lockheed & Raytheon
• More than two dozen aerospace marketplaces
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Major Functions
• Online catalogs
• Reverse and forward auctions
• Inventory and supply chain management tools
• Transaction support

Revenue Model
• Transaction fees on auctions, small fee for catalog listing
• Subscription fees for supply chain management services
• Both buyers and suppliers pay
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Rules
– Neutral, global e-marketplace
– Open to any airline and supplier
– No requirement on membership or exclusive use
Sellers’ Goals
• Focus on selling after-market products and services
• Reduce inventory, errors, costs
Buyers’ Incentives
• Maintenance & engineering, fuel & fuel services, catering &
cabin services, airport support services & general procurement
• Locate and purchase products quickly
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• Cut costs and time
 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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 3rd Party Initiated Exchange: FreeMarkets
Industry
Initial market - industrial intermediate components ($600 Billion)
Large order size - $3 million per transaction

History
• Launched in 1995 as an independent B2B marketplace
• Reduce price and transaction costs
• Worldwide expansion in 55 countries

Score Card 2000

– Market volume $9.9 B, saved $2.7 B
– 9200 auctions, 9300 suppliers
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– Revenue $91.3 m, loss $44m
 Value Creation for Buyers
Price reduction
• Identify potential saving R
Consulting E
Purchase • Prepare specs, RFQ
V
Outsourcing • Identify + Qualify suppliers E
R Purchasing cost reduction
S
E
• Buyer’s agent
Distribution • Suppliers compete
Intermediary A
U
C New suppliers identification
T
• Conduct auction Technology I
• Train buyer Enabler O
• Post-auction analysis
N Research product, outsource RFQ

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Value Creation for New Suppliers
New buyer identification
Find new • Respond to inquiry
buyers • Receive certification M
O
Reduce sales costs
R
E

• Respond to RFQ S
Bid preparation
• Complete specs A
L Reduce transaction costs
E
S
• Conduct auction Technology
• Train seller
Enabler But face more competition!
• Award preparation

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 Challenges Facing Intermediaries

 Acceptance by buyers and sellers

 Revenue generation

 Sales and marketing costs

 infrastructure and operating costs

 Intense competition!
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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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What went wrong with Public Exchanges?
– Bias. Many exchanges required standardized product
descriptions by sellers, and often allowed price
comparison by buyers.
– Funding. Many independent exchanges were funded by
the financial community who pulled the plug when they
did not sufficient revenue.
– Technology. Lack of integration between the exchange
and supplier ERP system. Buyers had to call the supplier
anyway!
– Complexity. Too many terms (specs, pricing, availability,
delivery dates) require direct negotiation between buyers
and sellers.
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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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 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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 Key Points
• E-Procurement is a must!

• Searching for a B2B revenue model!

• More online business, fewer exchanges?

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