Chapter 7

Chapter 7

Public B2B Exchanges

and Portals

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Learning Objectives

1. Define e-marketplaces and exchanges and describe their major types.

2. Describe the various ownership and revenue models of exchanges.

3. Describe B2B portals.

4. Describe third-party exchanges.

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Learning Objectives (cont.)

5. Distinguish between purchasing (procurement) and selling consortia.

6. Define dynamic trading and describe B2B auctions.

7. Describe the operation and benefits of networks of exchanges.

8. Discuss exchange management.

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Learning Objectives (cont.)

9. Describe the critical success factors of exchanges.

10.Discuss implementation issues of e-marketplaces and exchanges.

9. Describe the major support services of B2B.

10.Describe the role of extranets in supporting marketplaces and exchanges.

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ChemConnect: The World Chemical Exchange• The Problem

– Before the Internet, the B2B trading process was slow, fragmented, ineffective, and costly

– Buyers paid too much, sellers had high expenses, and intermediaries were needed to smooth the trading process

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ChemConnect: The World Chemical Exchange (cont.)

• The Solution– Traders meet electronically in a large Internet

marketplace– Save on transaction costs, reduce cycle time,

and find new markets and trading partners around the globe

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– ChemConnect provides a trading marketplace and an information portal to over 7,500 members in 135 countries

– Members are: • Producers• Consumers• Distributors• Traders• Intermediaries involved in the chemical industry

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– Trading Center consists of 3 trading areas1. Marketplace for buyers

2. Marketplace for sellers

3. Commodity market platform

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– ChemConnect members use the Trading Center to streamline sales and sourcing processes by automating requests for quotes, proposals, and finding new suppliers

– The center enables a member to negotiate more efficiently with existing business partners as well as with new companies the member may invite to the table in complete privacy

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– The revenue model includes:• members’ annual transaction fees• monthly or annual subscription fees (for

trading and for auctions)• fulfillment service fees

– Three trading locations provide up-to-the-minute market information

– Business partners provide several support services (payments, delivery, etc.)

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• The Results– Benefits of ChemConnect to its members are:

• more efficient business processes• lower overall transaction costs• time saved during negotiations and biddings • sellers reach more buyers and liquidate

surpluses rapidly

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• What we can learn…– Electronic exchange is owned and operated

by a third-party intermediary – Buyers and sellers, as well as other business

partners, congregate electronically to conduct business

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B2B Electronic 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 Electronic Exchanges (cont.)

• Market maker: The third-party that operates an exchange (and in many cases, also owns the exchange)

• Systematic sourcing: Purchasing done in long-term supplier–buyer relationships

• Spot sourcing: Unplanned purchases made as the need arises

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• Vertical exchange: An exchange whose members are in one industry or industry segment

• Horizontal exchanges: Exchanges that handle materials used by companies in different industries

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• Dynamic pricing: A rapid movement of prices over time, and possibly across customers, as a result of supply and demand

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• Process that results in dynamic pricing in most exchanges includes1. A company posts a bid to buy a product or an offer to sell one2. Anonymity is often a key ingredient of dynamic pricing3. Buyers and sellers interact with bids and offers in real time4. 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

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• Functions of exchanges– Matching buyers and sellers– Facilitating transactions– Maintaining exchange policies and

infrastructure

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• Ownership of exchanges– An industry giant– A neutral entrepreneur– The consortia (or “third-party” co-op)

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• Revenue models– Transaction fees– Fee for service– Membership fees– Advertising fees– Other revenue

sources

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• Governance and organization– Membership

the community in the exchange

– Site access and securityinformation should be carefully protected

– Services provided by exchangesprovide many services to buyers and sellers

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B2B Portals

• B2B portals: Information portals for businesses

• Pure information portals include:– directories of products offered by each seller– lists of buyers and what they want– other industry or general information

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B2B Portals (cont.)

• Vortals: B2B portals that focus on a single industry or industry segment; “vertical portals”

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B2B Portal Examples

• Thomas Register—information portal– Sellers distribute information on what they

have to sell– Buyers can find what they need and purchase

over a comprehensive and secure procurement channel

• reduce costs• shrink cycle times• improve productivity

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B2B Portal Examples (cont.)

• Alibaba.com—started as a pure information portal and is moving toward becoming a trading exchange– Huge database is a horizontal information portal with

offerings in a wide variety of product categories– Reverse auctions – Features–free email, email alerts, etc– Revenue model—advertisement and fees for special

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Third Party (Trading) Exchanges

• Third-party exchanges are characterized by two contradicting properties– they are neutral, not favoring either sellers or

buyers– they do not have a built-in constituency of

sellers or buyers and sometimes have a problem attracting enough buyers and sellers to attain financial viability

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Third Party (Trading) Exchanges (cont.)

• A major problem is:Market liquidity: The degree to which something can be bought or sold in a marketplace without affecting its price

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• Buyer aggregation modelbuyers’ RFQs are aggregated and then linked to a pool of suppliers that are automatically notified of the RFQs

• Suitability– aggregation models work best with MROs and

services that are well defined, that have stable prices, and where the supplier or buyer base is fragmented

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Consortium Trading Exchanges

• Consortium trading exchange (CTE): An exchange formed and operated by a group of major companies to provide industrywide transaction services

• Three basic types of environments:1. Fragmented markets

2. Seller-concentrated markets

3. Buyer-concentrated markets

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Consortium Trading Exchanges (cont.)

• CTEs, defined by two main criteria:– whether they focus on buying or selling– whether they are vertical or horizontal

• 4 types of CTEs1. Purchasing oriented, vertical2. Purchasing oriented, horizontal3. Selling oriented, vertical4. Selling oriented, horizontal

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• Purchasing-oriented consortia– Vertical Purchasing-Oriented CTEs

all the players are in the same industry

– Horizontal Purchasing-Oriented CTEsowner-operators are large companies from different industries that unite for the purpose of improving the supply chain of MROs used by most industries

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• Selling-oriented consortia– Most selling-oriented consortia are vertical– Participating sellers have thousands of

potential buyers within a particular industry

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• Other issues for consortia– Legal challenges for B2B consortia

• level of collaboration among both competitors and business partners

• antitrust and other competition laws must be considered

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– Critical success factors for consortia• Appropriate business and revenue models• Size of the industry• Ability to drive user adoption• Elasticity

Elasticity: The measure of the incremental spending by buyers as a result of the savings generated

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• Management of intensive information flow• Smoothing of supply chain inefficiencies• Harmonized shared objectives

– Combining consortia and third-party exchanges

• dot-consortia—large consortia + third-party owner

• combination may bring about the advantage of both ownership and minimizing third-party limitations such as low liquidity

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Dynamic Trading: Matching and Auctions• Dynamic trading: Exchange trading that

occurs in situations when prices are being determined by supply and demand (e.g., in auctions)

• Matching– supply and demand– quantity, delivery times, and locations

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Dynamic Trading: Matching and Auctions (cont.)

• Auctions– Exchanges offer members the ability to

conduct auctions or reverse auctions in private trading rooms

• auction services as one of its many activities• fully dedicated to auctions

– Many-to-many public auctions—vertical, horizontal, run on the Internet or over private lines

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Building E-Marketplaces

• Building e-marketplaces is a complex process– usually performed by a major B2B software

company• Commerce One• Ariba• Oracle• IBM

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Building E-Marketplaces (cont.)

• Integration issue– Seamless integration is needed between the

third-party exchange and the participants’ front and back-office systems

– In private exchanges the seller’s computing system must be integrated with the customers systems

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– External communications• Web/client access• Data exchange• Direct application integration• Shared procedures

– Process and information coordination in integration

how to coordinate external communications with internal information systems

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– Use of Web services in integrationWeb Services enable different Web-based systems to communicate with each other using Internet-based protocols such as XML

– System and information management in integration

management of software, hardware, and several information components, including partner-profile information, data and process definitions, communications and security settings, and users’ information

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Support Services for Public and Private Marketplaces

• Directory services and search engines– Directory services help buyers and sellers

manage the task of finding potential partners

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Support Services for Public and Private Marketplaces (cont.)

• Partner relationship management (PRM): Business strategy that focuses on providing comprehensive quality service to business partners

• E-communities and PRMB2B application needs to provide community services such as chat rooms, bulletin boards, and possibly personalized Web pages

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Support Services for Public and Private Marketplaces (cont.)

• Integration (as per Keenan Report)– Business-to-exchange (B2X) hubs connect all

of the Internet business services• e-merchant services• exchange infrastructure• buying and selling• member enterprises• other B2X exchanges

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Implementation Issues

• Private vs. public exchangesPrivate exchanges: E-marketplaces that are owned and operated by one company. Also known as company-centric marketplaces

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Implementation Issues (cont.)

• Problems with private exchanges– Transaction fees—required to pay transaction fees

with existing customers– Sharing information—do not want to share business

data with competitors– Cost savings—not great enough to attract buyers– Recruiting suppliers—lose direct contact with

customers– Too many exchanges

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• Supply chain improvers– Companies want to streamline their internal

supply chains, which requires integration with internal operations instead of “plugging in” to an exchange’s infrastructure

• Major problem is trust in the large corporation running the exchange

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• Software agents in B2B enable customized syndication of content and services from multiple sources on the Internet to any device connected to the Internet– provide real-time, tighter integration between buyers

and sellers– facilitate management of multiple trading partners and

their transactions across multiple virtual industry exchanges

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Example: Asite

• Asite’s B2B marketplace for the construction industry– B2B e-marketplace for the construction

industry in the United Kingdom– This industry is typified by a high degree of

physical separation and fragmentation, and communication among the members of the supply chain is a primary problem

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Asite (cont.)

– Two of the major advantages of the Internet:• ability it provides to communicate more

effectively• increased processing power made possible by

Internet technologies

– Asite decided not to build its own technology, but to establish partnerships with technology vendors that have highly specialized products

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Asite (cont.)

• Commerce One provides the business solution for the portal

• Microsoft provides the technology platform and core applications

• Attenda is the designer and manager of the Internet infrastructure

– Asite is committed to strong partnerships that allow it to seamlessly interact with other e-marketplaces

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Asite (cont.)

– Internet browser is all that is needed to connect to Asite’s portal

– Ease of access makes it particularly well suited to an industry such as construction

• Construction firms streamline their supply chains

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Asite (cont.)

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Managing Exchanges

• Open standards mean that the technology can be incorporated easily with participating firms’ back-end technologies, allowing full visibility of the supply and demand chains

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Managing Exchanges (cont.)

• Networks of exchanges (E2E)– Large corporations may work with several

exchanges, and they would like these exchanges to be connected in a seamless fashion

Commerce One and Ariba developed a strategy that allows them to plug a broad range of horizontal exchanges into their main networks

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• Centralized management– Managing exchanges and providing services

to participants on an individual basis is expensive

– Build “families” of exchanges managed jointly in order to operate several exchanges from a unified, centralized place

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– Manages all of the exchanges’:• Catalogs• Auction places• Discussion forums

– Managing and centralizing:• Accounting• Finance• Human resources• IT services

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• Critical success factors for exchanges according to Ramsdell:

1. Early liquidity

2. The right owners

3. The right governance

4. Openness

5. A full range of services

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• Other CSF:– Importance of domain expertise– Targeting inefficient industry processes– Targeting the right industries– Brand building– Exploiting economies of scope– Choice of business/revenue models– Blending content, community, and commerce– Managing channel conflict

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• New directions in B2B marketplaces– Early failures of exchanges were due mainly

to the failure of these marketplaces to foster a broad-based sharing of information

– Recognize the fundamental asset provided by their member base is the unique knowledge of the industry

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– e-distributors• Take title to the goods they sell• Aggregate those goods for the convenience of

buyers• Advise buyers which to choose• Reach hard-to-find buyers• Result in extra value for buyers and decent

profits for sellers

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Managerial Issues

1. Have we “done our homework”?2. Can we use the Internet?3. Which exchange to join?4. Will joining an exchange force

restructuring?5. Will we face channel conflicts?6. What are the benefits and risks of joining

an exchange?

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Summary

1. E-marketplaces and exchanges defined and the major types of exchanges.

2. Ownership and revenue models.3. B2B portals.4. Third-party exchanges.5. Consortia and e-procurement.6. Dynamic pricing and trading.

Documents

Chapter 7