The New Internet Intermediary
By Scott Latham -- Supply Chain Management Review, 5/1/2000
Chemdex, PlasticsNet.com, MetalSite ... During the past year, not a day has gone by without the emergence of a new independent trading exchange (ITE) or Internet business-to-business marketplace. ITEs bring together buyers and suppliers within a common vertical industry. They facilitate the real-time transfer of information, money, and goods. (Exhibit 1 shows the ITE model.)
ITEs are emerging predominantly in highly fragmented industries that have a considerable level of product or service complexity. Complexity in this context is defined by specific user needs, time-sensitive product, geographic concerns, volatile market conditions, and inefficient channel and manufacturing processes. ITEs are operated by neutral third parties, which leverage strong domain expertise and the Internet to manage relationships and vertical-specific processes. The following table details several industries and their corresponding ITEs.
Most independent trading exchanges derive revenues from a fee based on a percentage of the transaction, usually an average of 0.5 percent to 8.0 percent. The supplier typically pays the fee, although some ITEs split the fee between buyer and supplier. Other ITEs charge a standard markup or flat fee based on anticipated levels of transactions. All ITEs supplement transaction income with advertisement revenue, mainly from banner ads or links.
ITEs offer many benefits to buyers and suppliers. Buyers experience lower transaction costs, greater negotiating power, and streamlined sourcing. Many ITEs enable a buyer to execute an order across multiple suppliers on one purchase order. ITEs also offer consolidated directories of suppliers and enable buyers to collaborate with suppliers during the early stages of product development. Currently, most buyers are leveraging the trading exchanges' real-time market information to manage the mix of long-term negotiated procurement contracts and spot buys.
Suppliers using ITEs can expect to gain increased exposure to new sales opportunities and to manage existing relationships better at a lower cost. ITEs also expose suppliers to international markets and enable smaller companies to penetrate established supplier relationships. Another primary benefit is the ability to distribute excess and obsolete inventory that in the past was discarded or sold at a discount.
An Evolving FunctionalityIndependent trading exchanges are evolving across four distinct levels of functionality, as depicted in Exhibit 2. Most ITEs started as industry billboards or news sites, eventually added product postings, and now are rapidly migrating to add transaction and integration functionality.
Information
Similar to a consumer portal like America Online, an ITE's attraction is its ability to attract prospective customers. Successful ITEs convey a high level of industry expertise and relevant information. The information takes the form of industry directories, product databases and catalogs, and discussion forums and billboards.
Facilitation
Distinct from the first level of functionality, facilitation is the ability to match a buyer's specific need with a supplier's specific offering. The transaction, however, is completed offline via traditional channels such as EDI, phone, or fax. Most ITEs at the facilitation level serve as an auction site for buyer or seller. Auctions typically are conducted on a set-time basis and allow buyers and sellers to conduct ongoing private negotiations in e-mail or chat rooms. The auctions enable sellers to post excess materials and obsolete inventory and allow buyers to post requests for proposals. Prospective business partners can negotiate in a closed chat room. Currently, most ITEs are in the process of transitioning from the facilitation phase to the next level, transaction.
Transaction
Transaction functionality involves a stronger commitment from both the ITE and its participants. The primary difference between this level of functionality and the previous one is that trading partners can consummate the transaction online. Participants typically are registered with the ITE as well as with banking and industry institutions. The ITE takes title of the goods and responsibility for the accounts payable and receivable. This allows the trading exchange to supply the buyer with a consolidated billing statement from multiple suppliers. The supplier benefits, too, by receiving faster payment. At the transaction level, ITEs also begin to support prenegotiated terms and prices between trading partners. In addition, they are able to provide shipping and order status information.
Integration
Integration functionality allows the exchanges to fit into a larger supply chain integration strategy. ITEs greatly increase their value to organizations if they can help companies leverage investment in installed applications and established relationships.
Currently, there's a lack of integration across the board, with only a handful of ITEs offering any integration capability. Most now are focused on enabling the transaction and not on integration. ITEs represent a great vehicle for managing spot buys, disposing of excess and obsolete inventory, and procuring noncritical goods and services. But unless ITEs develop advanced supply chain and application integration, they will not become an integral part of participants' procurement and/or distribution strategies.
Successful ITEs will develop mechanisms for sharing collaborative information, such as production and demand planning. Over the past few months, a few ITEs have begun to incorporate integration capabilities at the behest of larger customers. A great example is ecFood, an independent exchange for the food-processing industry. EcFood offers prepackaged integration into the supply chain application provider, SCT Corporation. Based on changes in product demand, a food company can post automatic auctions to procure additional materials on ecFood. This example characterizes the strong supply chain integration functionality that users will increasingly demand of ITEs.
Building Liquidity and PartnershipsAs their functionality evolves, independent trading exchanges will face a number of challenges. A primary one is building liquidity. The success of an ITE relies on its ability to build a positive network effect. That is, the number of participants directly determines the ITE's value to any one participant. A buyer on the network, for instance, derives more value through selection and competition if more suppliers are part of the network; inversely, a supplier benefits from exposure to multiple buyers.
An interesting dynamic also is emerging between ITEs and established brick-and-mortar companies. ITEs originally touted their third-party status and neutrality. Increasingly, however, they are accepting investments from and partnering with established brick-and-mortar companies. Partnering with an established company provides trading exchanges with funds, validity, and, more importantly, transaction volume. DuPont invested and partnered with CheMatch, an ITE for the chemicals industry. Dow Chemical similarly partnered with ChemConnect, a competing chemicals exchange. The traditional companies are hedging their bets on the development of the new Internet intermediaries.
ITEs also are building relationships with the other channel intermediaries, contrary to early claims of some wholesalers and brokers. VWR Scientific Products, a traditional brick-and-mortar distributor, partners with Chemdex, a life-science ITE. Similarly, Ashland Distribution announced a partnership with e-Chemicals, a chemicals trading exchange. The reality is that although ITEs provide strong value through technology, they don't provide the more important side of the equation: supply chain execution. Distributors bring established relationships and supply chain execution capabilities to the table. A natural synergy exists between the two parties.
Over the past 18 months, approximately 600 ITEs have emerged across a wide spectrum of industries. Not all 600 will survive. In fact, at the end of the day, only one or two will be an integral part of an industry value chain. Savvy organizations will analyze their respective industries and identify how to fold ITEs into their supply chains. In the near term, most ITEs will be able to support only the procurement and distribution of noncritical and indirect goods. Over the next 18 months, however, successful ITEs will strengthen their supply chain integration functionality and brick-and-mortar partnerships. As this happens, they will evolve from dot-com start-ups to supply chain stalwarts.
| Chemicals/Plastics | ||
| CheMatch | ChemPoint | |
| E-chemicals | Plasticsbin.com | |
| ChemConnect | PlasticsNet.com | |
| Energy | ||
| Altra | ||
| Enermetrix | ||
| HoustonStreet | ||
| Health/Life Science | ||
| Chemdex | Neoforma | |
| SciQuest | Healtheon | |
| Agriculture/Food | ||
| DirectAG | ||
| EcFood | ||
| Instill | ||
| Metals | ||
| MetalSite | Metal Suppliers On Line | |
| E-steel | Steel.com | |
| Transportation | ||
| E-transport | ||
| Celarix | ||
| National Transportation Exchange | ||
| Electronics | ||
| QuestLink | ||
| Partminer | ||
| Electronicsbin.com |
| Author Information |
| Scott Latham is senior analyst, e-business technologies, at AMR Research Inc. |
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