Going private on web exchanges

Despite the proliferation of e-marketplaces, the promise of fabulous wealth and significant transaction savings, numerous dot.com initiatives have crashed due to poor transaction value. Others are finding the build-up slower and more complex than they anticipated, and many are busy rewriting their business models. Some analysts suggest there is an urgent need to move from ‘buyer-centric’ to ‘seller-centric’ exchanges, or to create models that satisfy both sides. And amid all this turmoil, new technologies are emerging which promise more for less. Today, the issue for manufacturers is to separate the reality from the hype – and decide what to do. Concerns include the level of investment required, the choice of technologies and the optimum strategy for speed and decent ROI (return on investment). More down to earth, there’s the obvious questions: will exchanges drive down prices, as many suppliers fear? Or will they smooth the processes of buying and selling, extracting savings from efficiency? Fact is, there’s much more to be gained by developing or using an exchange than simply driving down purchase prices. Beyond the potential to reduce transaction costs, many accept that they are the doorway to opportunities for collaboration (from forecasting and planning to engineering itself) that will improve business efficiencies not just for buyers, but suppliers as well. But since there are no hard and fast route maps to get all this, e-Manufacturing invited leading players and consultants to map out a strategy for those embarking on setting up or joining an e-marketplace. Paul Blake, project manager at exchange technology provider Commerce One (which sells through BT in the UK and has a tight alliance with eERP giant SAP) says: “The nuts and bolts of the exercise is to get the marketplace operational and actively transacting in the shortest time possible. Which typically means going live within three months.” Building an exchange For would-be exchange builders, he suggests a team should be drawn from business units across the spectrum, “but with a different focus from traditional operations.” The core team should involve technical project management, business process consultants, ‘supplier activation’ specialists, content managers, trading partners and system integrators. “The key is to ensure that everyone is working with the same goals, forming a structured implementation team to create the exchange.” And there is merit in his words for those who simply want to join one. Thereafter you’re into the detail. Choice of appropriate technology, for example, is important – from selection of servers, routers, back-up, security/firewall systems, to bandwidth, and system and service providers, including hosted data centres. The technology is likely to come from a variety of vendors, and has to be able to at least interoperate with all sorts of legacy systems – those that will be encountered among the participants. And remember, buyers and seller may well want to interface with other exchanges, so easing that path by sticking to ‘standards’ makes sense. For many it’s a job for systems integrators, like the Big Five consultants, with possibly an ISP for hosting, and specialists for content management, e-logistics, tracking and the rest. But implementation is never simply about using new technology. Commerce One emphasises the need for ‘supplier activation’, and Blake reckons the time to build a supplier community is often underestimated. “Don’t expect that once a marketplace is set up by a group of major buyers, suppliers will flock to it. Concerted effort is required with both push from the buyers and pull from the marketplace.” Blake suggests seven key steps to a seller-centric exchange. First, build the trading community – at least the critical suppliers – and involve them in creating the exchange, with pricing models and a contractual framework. Second, build the organisation to deliver and support the exchange. Blake recommends setting up a team not only to carry out the implementation, but to understand how it runs when the consultants go home. Third, harness the best partners to execute the implementation. Blake makes the point that the successful implementations are those where all the partners share the aims. Fourth, plan for internal changes: though organisations may be well versed in dealing with their existing supply and sales channel chains, they may not be prepared for the degree of dependence on suppliers and competitors that pertains in web-based trading. GM and Ford were not natural bedfellows, but there were clear advantages of aggregation in setting up the vertical auto-industry exchange Covisint. Fifth, define a structured implementation plan. “Don’t expect to create a marketplace which will be all things to all men and do everything at once,” says Blake. Companies should target the marketplace to meet the needs of current business drivers, with a plan for new activities as the site progresses. That increases speed to market and allows early success. For example, if a market is based on faxed purchase orders, but is crying out for more efficient ways of dealing with surplus stock, then the e-marketplace should concentrate on delivering an on-line auction service. Sixth, consider security and confidentiality. Creating a public exchange requires a secure environment with hefty firewalls to separate the system where required from existing operations. If a public or collaborative exchange is being built which involves people from the same community, the operator must ensure that access is by authorisation only. And finally, resolve the issues around industry specific services, such as shipping and payment, and/or the requirements of collaborative tools for, for example, planning and optimisation. These will provide the glue, holding the community together, not just for buying and selling but for adding real value and business benefit. Private versus public There is a choice today. You can either jump onto the public industry exchanges (the early web model of mass open buying and selling via the web) and get trading, or go for what turns out to be the more pragmatic option of joining a private (usually specific industry and supply/demand/engineering chain) exchange. Nigel Montgomery, European e-business director at analyst AMR Research says: “Private exchanges will get higher priority than public exchanges, driven by supply chain pressure and growing demands from the big consortium exchanges themselves.” And it’s a matter of public record that while large public exchanges are collapsing due to liquidity problems, private exchanges are proving much more resilient. Nevertheless, private exchanges are still costly to set up, ranging from £5 million to £40 million for software alone. And there are still the challenges of getting the job done quickly, ensuring ROI, integration and the rest. Montgomery insists the first priority is to get a clear understanding of customer needs. This will help focus the approach to procurement, cataloguing, product design, inventory visibility, etc. “It’s a question of not supplying all the bells and whistles, when people just need a bike,” he says. And be warned: “Often an electronic catalogue won’t increase sales, but simply allow the same amount to be bought by electronic means,” he remarks. And who pays for the catalogue? Some marketplaces cover this on the understanding that costs will be recovered from suppliers in transactions. Then again, defining standards is also growing in importance. Discussions are underway between vendors and suppliers but, “the problem is that there are so many ‘clubs’ and [it] is enormously time consuming,” says Montgomery. Mostly, it’s happening within exchanges. Recently 18 oilfield service firms formed a joint venture called OFS Portal, to provide a single source of standardised electronic catalogues and service information for oil and gas field operators. CEO William LeSage: “The intent is to use a common cataloguing approach to reduce costs and improve efficiency for suppliers serving multiple public and private e-marketplaces.” So what of the benefits? Better collaboration is often promised as one, but Montgomery says it isn’t easy. “There are cultural issues and competitive barriers to overcome; companies may not wish to share certain information even if it is vital to the chain.” There is also the difficulty of maintaining records in extended web enterprises for traceability. Montgomery observes that no vendor will satisfy this requirement alone. “Only by partnering and collaboration can we hope to satisfy this enormously complex picture.” Overall, Montgomery maintains that European organisations are too inclined to look at e-commerce tactically for ROI rather than strategically. According to an AMR survey of 250 manufacturers, 21% cited “opportunities for reduced costs and cost pressures from their customers.” When asked which part of their business would benefit from e-business, 41% said e-procurement would, and only 1% mentioned production. “But collaborative design and development will be able to provide far greater efficiencies,” he said. Endorsia.com’s success So which do you join? Private exchanges can work well. Notwithstanding the demise of Chemdex in the chemical industry and Petrocosm in petrochemicals, Endorsia.com is one that shows e-marketplace success. The exchange covers branded industrial MRO (maintenance, repair and overhaul) goods from SKF, Timken, INA Holding, Rockwell, Sandvik and others, for customers in utilities, oil and gas, manufacturing, automotive and aerospace. Launched in 1999 by SKF, it now has five more shareholders, links 500 distributors across 20 countries in 14 languages, and boasts tens of thousands of transactions a week. Endorsia.com runs on MRO Software e-commerce technology, and Simon Rothwell, alliances director says: “The lifeblood of a marketplace is transactions, getting buyers in touch with sellers.” He puts Endorsia.com’s success down to its focus on the opposite end of the supply chain to others that are driven by a consortium of buyers. “The buyer-centric model has tended to fail,” he says: for success, “you need sellers, buyers and technology that can support integration and interoperability.” And he stresses the importance of being able to interface with back office systems to get real benefit. Rothwell sees one of the main challenges as getting content on-line. MRO Software acquired Intermat for cataloguing industrial parts, and a key element of its approach is providing a structure that enables engineers to find items via detailed engineering attributes with real-time information on availability. He maintains that most public marketplaces simply can’t handle industrial procurement like this. “Web exchanges should be designed to streamline the supply chain from the buyers’ perspective, as well as enhancing the demand chain from the suppliers’ perspective,” he says. Looking to the future, Rothwell predicts consolidation. “There are about 250 marketplace platforms today and I can’t see more than 10% will succeed. These will be the one’s that act quickly to leverage access to liquidity.” He reckons the key to success is to take existing commercial relationships and make them electronic. “If you try to change the existing commercial relationship because of technology restraints, the marketplace will fail.” Direct or indirect Andy Leaver, business development director for Europe at Ariba, reckons most of the major public marketplaces have been formed. “It’s just a matter of people waiting to see who will get traction and how they will shape up.” Ariba is currently involved in setting up private marketplaces for VW and BMW, and Leaver agrees that private marketplaces will play a significant part in developing relationships with key suppliers, particularly with the trend for outsourcing work to firms like Flextronics and Selectron. “Many of these companies have supply chain excellence which they don’t want to put into the public arena,” says Leaver. For him, the strategy for private exchanges depends on whether a company is aiming at direct materials or indirect commodities. It also depends on whether they want to link in a supply chain processor, to share bill of materials (BoMs) across the web, do on-line auctions and so on. For example the GE Private Exchange Network handles about $12 billion worth of procurement through reverse auctions. There’s a very simple rule at GE: it estimated that 20% of suppliers represent 80% of direct spend, so if reverse auctions could be implemented with those, the savings would be worth having. In the automotive industry some $50bn of stock is tied up in the supply chain, “so even a 1% saving is very significant,” says Leaver. Leaver sees the main challenge for manufacturers as their willingness to make the leap of faith to get into e-commerce. “Suppliers are still very wary. Until certain industries understand collaboration, it’s going to be a barrier to success. There is simply not enough trust between buyers and suppliers.”