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A Supply Chain Revolution

B2B electronic marketplaces

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A report by Deloitte Consulting announced that, in the year 2000, there were some 1447 electronic marketplaces up and running. The Gartner Group estimates that at least $23 billion of trade in goods and services took place through such markets in 1999.

Although only a small fraction of business-to-business trade takes place electronically (estimated to be some $47 000bn in 1999), the fraction is set to rise. Estimates suggest that upwards of $12 000bn of business-to-business trade will be eventually conducted in this manner.

The potential cost savings that might be achieved through such e-marketplaces were examined in a recent Emetra/McKinsey report into the global metals industry. They estimate that, by 2005, 60 per cent of all metal produced will be sold via e-markets. By 2010, 95 per cent of transaction costs will have been removed and the steel industry alone would have saved some $70 billion.

In this case study we shall examine the nature of business-to-business (B2B) electronic marketplaces, how they work and who benefits from them, and in what way.

What is a B2B marketplace?

Business-to-business marketplaces can go under any number of names; ‘trading exchanges’, ‘vertical hubs’, ‘vertical portals’, ‘supply-chain backbones’, ‘net markets’, ‘electronic communities’ and ‘procurement hubs’. What they all offer, in one way or another, is a Web site, where a market is created by bringing together both buyers and sellers of products and services.

Vertical B2B marketplaces. Vertical B2B marketplaces are industry based. Most are arranged to enable manufacturers to source key suppliers. The motor industry, which purchases an estimated $240 billion worth of parts a year from thousands of suppliers, has created Covisint, a B2B marketplace which acts as a central supply hub for the industry. Covisint has been set up by some of the industry’s largest players: GM, Ford and DaimlerChrysler. They have all clearly seen the advantages from such a radical reorganisation of their supply network.

E-steel, an electronic marketplace in the steel industry, has some 3361 members and reflects the vertically-integrated structure of the industry. Spread over 96 countries, its members include 208 steel mills, 636 service centres, 873 fabricators, 333 distributors, 598 trading companies and 329 manufacturers.

Horizontal B2B marketplaces. Horizontal B2B marketplaces, rather than industry based, tend to be product or service specific. Office supplies, spare parts, airline tickets and services generally can be found in such B2B marketplaces.

Mordus, a B2B marketplace set up to cater for the specific needs of small and medium-sized enterprises, is a typical example of a horizontal B2B marketplace. It has 175 000 members and offers them a wide range of goods and services, including printing, office equipment and training.

How do B2B marketplaces work?

B2B marketplaces differ widely in both their complexity and objectives. Their principal aim, however, is to bring buyers and sellers together. How might such marketplaces achieve this goal?

Business introductions. Many e-marketplaces, such as , acts simply as an electronic notice board, bringing together buyers and sellers. Once they have found each other the transaction process is negotiated and settled off-line.

On-line catalogues. A more sophisticated e-marketplace is where a seller places on-line their catalogue, detailing products, price availability and delivery. Buyers can then browse, place orders electronically and on certain sites make payments on-line.

On-line or e-auctions. Just as in a normal auction process, only in this case within an e-market, the seller puts up for sale a given product or service and invites offers. Such a system would provide a useful way of disposing of surplus production or divesting of obsolete machinery.

, a European e-marketplace for selling used and surplus machinery, recently cited the example of a German company that, having budgeted $500 000 to dismantle a factory, decided to see whether they might auction off the factory on-line instead. They sold it for $1.8m and the buyer came and dismantled it.

Just as popular as the normal auction, the reverse or Dutch auction has a significant presence in e-marketplaces. Here a buyer puts out a tender and invites suppliers to put in a bid. Sainsbury, in a retail e-marketplace in which it is involved, recently tendered a contract for the three-month supply of mild Cheddar cheese. , a free energy procurement service, aggregates business demands for power and then invites tenders from energy suppliers to bid for the custom.

E-auctions are most suitable for products or services that are relatively basic, in which price is the most important determinant of sale. The more complex the product, or the more non-price factors determine sale, such as the product’s quality, reliability or after-sales service, the less useful the auctioning framework is. For example, the USA-based Celarix, an e-market designed to bring together shippers who require freight space, and carriers who have space to fill, found that the e-auction had only limited appeal and application. The system was fine for providing one-off shipments or in introducing new companies to the market. However, established freight buyers wanted a tried and trusted service, where the value of a service was not cost-based but in depended on whether a product would be in the right place at the right time – a dimension of product service not reflected in the auction-based marketplace.

Trading or e-exchanges. A more complex e-marketplace is the e-exchange. Like a stock exchange, it matches buyers and sellers via a bid and offer price system.

Other services. As well as buying and selling, a number of e-marketplaces are aspiring to greater things. Many currently provide an industry news service. Some are seeking to establish greater collaborative working between industry members, in for example areas such as demand forecasting and logistics.

Who gains what in a B2B marketplace?

B2B marketplaces look set to benefit not only those directly involved in them, but also consumers and the economy in general.

Buyers. The gains for buyers are essentially based around the significant reduction they are likely to experience in transaction costs. The simplified administrative process and reduction in time will drive such costs down. Buyers are also likely, via a bidding or auction process, to get the product or service at lowest price. Buyers will also benefit from having easy and direct access to new sources of supply, this will reduce the need to carry stocks. In the steel industry, stocks could be anything up to 10 per cent of the contract. E-steel believes that the e-marketplace will completely remove the need to have this buffer with its associated cost. Buyers will also benefit from being put into contact, not only with a wider number of suppliers but, with new suppliers as well.

Sellers. The main advantage to sellers of the e-marketplace is the access they gain to new buyers and the potential this creates to increase sales volume. As with the buyer, the seller is likely to experience significant reductions in transaction costs on each sale made.

Consumers. As procurement costs are cut, the costs of producing goods and services should fall. Some of these cost savings should be passed on to the consumer in lower prices.

Economy. IT contributes approximately 50 per cent to GDP growth. It is anticipated that this will rise with the proliferation of e-business. Goldman Sachs estimates that the effect of B2B on aggregate supply will be to cause average growth rates to rise by 0.25 per cent for the next 10 years.

Limits, drawbacks and problems with B2B

The problems with B2B e-marketplaces are less well articulated than their apparent strengths, which reflects the general perception that B2B e-marketplaces are a good thing, with an immense potential to improve efficiency.

However, B2B e-marketplaces are not totally free from problems. Many small businesses, especially component suppliers, have argued that e-markets are simply being used by large buyers to push supply prices down and thus forcing the suppliers to take smaller and smaller profit margins. In addition, many small businesses have suggested that they will not get or be able to afford access to B2B marketplaces. As business progressively focuses upon the e-marketplace for buying and selling, competition will be distorted, as those outside the marketplace are squeezed out by those inside. Claims that B2B marketplaces will be neutral in this respect would seem questionable.

As mentioned above, many of the B2B marketplaces actively seek to enhance collaboration between site and industry members. How far does such collaboration go before it starts to be anti-competitive and begins to infringe competition rules? Both here in the EU and in the USA, rulings thus far by the competition authorities have supported the creation of B2B marketplaces. It has been generally felt that the benefits from such marketplaces, both to business and consumers, are huge. What is more, the conventional (non-electronic) supply channels, which are still used, are seen to reduce the risk of competition rules being infringed at present. What the competition authorities seem most concerned about is the degree of collusion that the new marketplaces might enable and how it might be effectively regulated.

B2B e-marketplaces are set to grow and revolutionise many aspects of business behaviour, the benefits from which will be felt by not only the businesses themselves but by their customers as well.

|Question |

|Which of the two, vertical or horizontal B2B marketplaces, is likely (a) to offer the greater potential increase in competition; (b) |

|to pose the greater potential danger to competition? |

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