Chapter 6 Public B2B Exchanges Prentice Hall, 2003

Learning Objectives List the various types of e-marketplaces Describe B2B portals Describe third-party exchanges Distinguish between e-procurement and e-selling consortia Describe the various ownership and revenue models of exchanges Describe the support mechanisms offered by exchanges, including auctions Prentice Hall, 2003

Learning Objectives (cont.) Describe networks of exchanges and exchange management Describe the critical success factors of exchanges Discuss implementation and development issues of e-marketplaces and exchanges Describe the major support services of B2B Describe the extranet and its role in supporting marketplaces and exchanges Prentice Hall, 2003

ChemConnect: The World Chemical Exchange The Problem Thousands of companies trade raw and partially processed chemicals and plastics daily Before the Internet the trading process was slow, fragmented, ineffective, costly As a result: Buyers paid too much Sellers had high expenses Intermediaries were needed for to smooth the process Prentice Hall, 2003

ChemConnect (cont.) The Solution Provides free membership in trading marketplaces and information portals Public exchange floor for anonymous bids Commodities floor for buying and exchanging Corporate trading rooms—private online auctions Up-to-the-minute market information Large electronic catalog Independent intermediary Prentice Hall, 2003

ChemConnect (cont.) The Results In ChemConnect trading rooms companies can save up to 15% in just 30 minutes of reverse auction ChemConnect is growing rapidly, adding members and increasing trading volume each year Prentice Hall, 2003

B2B 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 Prentice Hall, 2003

B2B Exchanges (cont.) Market maker—the third-party that operates an exchange (and in many cases, also owns the exchange) Companies that use exchanges are pleased with them and plan to increase the number of exchanges they participate Traders expect to more than double the value of transactions that they do through the exchanges Prentice Hall, 2003

Exhibit 6.1 Trading Communities: Information Flow and Access to Information Prentice Hall, 2003

Classifications of Exchanges Systematic sourcing—purchasing done in long-term supplier-buyer relationships Spot sourcing—unplanned purchases made as the need arises Vertical exchange—an exchanges whose members are in one industry or industry segment Horizontal exchange—an exchanges that handles materials traded in several different industries Prentice Hall, 2003

Exhibit 6.2 Classifications of B2B Exchanges Prentice Hall, 2003

B2B Exchanges Dynamic pricing Ownership of exchanges Governance Organization of exchanges Gains and risks of B2B exchange participation Prentice Hall, 2003

Dynamic Pricing Dynamic pricing—a rapid movement of prices over time, and possibly across customers, as a result of supply and demand Stock exchanges sometimes change minute by minute Auction prices vary all the time Prentice Hall, 2003

Dynamic Pricing (cont.) Typical process that results in dynamic pricing in most exchanges A company lists a bid to buy a product or an offer to sell one Buyers and sellers can see the bids and offers—anonymity is often a key ingredient of dynamic pricing Prentice Hall, 2003

Dynamic Pricing (cont.) Buyers and sellers interact in real time with their own bids and offers—join together to obtain a volume discount price (group purchasing) 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 The deal is consummated, and payment and delivery are arranged Prentice Hall, 2003

Ownership of Exchanges An industry giant (IBM’s patent exchange delphian.com) A neutral entrepreneur—a third-party intermediary (ChemConnect.com) The consortia (or co-op)—several industry players set up an exchange (Covisint.com) Prentice Hall, 2003

Governance Exchanges governed by guidelines and rules How the exchange operates What the requirements are to join the exchange What fees are involved What rules need to be followed Prentice Hall, 2003

Governance (cont.) Security and privacy for documents Contract terms between an exchange and buyers/sellers Assurances that the exchange is fair Prentice Hall, 2003

Organization of Exchanges Membership Generate revenue Transaction and other fees Registration fees Annual membership fees qualification process deposit may be required Limits set on how much each member can trade Prentice Hall, 2003

Organization of Exchanges (cont.) Site access and security Information should be carefully protected—competitors congregate in the same exchange Prevent illegal offers and bids List of individuals who are authorized to represent the participating companies Prentice Hall, 2003

Exhibit 6.3 Services in Exchanges Prentice Hall, 2003

Exhibit 6.4 Gains and Risks of B2B Exchanges Prentice Hall, 2003

B2B Portals B2B portals—information portals for businesses Thomas register—facilitates business transactions for MROs Alibaba.com Database Reverse auctions Features and Services Revenue model Vortals--B2B portals that focus on a single industry or industry segment; “vertical portals” Prentice Hall, 2003

Third-Party (Trading) Exchanges Electronic intermediaries Do not favor either sellers or buyers—neutral without a built-in constituency of sellers or buyers they have a problem attracting enough buyers and sellers to attain financial viability Liquidity—the result of having a sufficient number of participants in the marketplace as well as a sufficient transaction volume Prentice Hall, 2003

Exhibit 6.6 Supplier Aggregation Model Prentice Hall, 2003

Exhibit 6.7 Buyer Aggregation Model Prentice Hall, 2003

Suitability of Third-Party Exchanges Fragmented markets Markets that have large numbers of both buyers and sellers Mainly suitable for MROs Buyer-concentrated markets—several large companies sell to a very large number of buyers Seller-concentrated markets—several large companies do most of the buying from a large number of suppliers Prentice Hall, 2003

Consortium Trading Exchanges (CTE) CTE (consortium)—an exchange formed and operated by a group of major companies to provide industry-wide transaction services Vertical, purchasing-oriented Horizontal, purchasing-oriented Vertical, selling-oriented Horizontal, selling-oriented Prentice Hall, 2003

Purchasing-Oriented (Procurement) Consortia E-Procurement Consortia can be: Vertical purchasing-oriented All the players are in the same industry Support buying and selling Horizontal purchasing-oriented Owner-operators are large companies from different industries Improving the supply chain Prentice Hall, 2003

Covisint Covisint—e-market of automotive industry B2B integrated buy-side marketplace General Motors Ford DaimlerChrysler Entire industry gains Lower costs Easier business practices Increased efficiency Prentice Hall, 2003

Covisint (cont.) “Co” stands for Connectivity Collaboration Communication “Vis” stands for visibility provided by the Internet “Int” stands for integrated solutions Prentice Hall, 2003

Covisint (cont.) Collaborative commerce Facilitate product design Enable procurement process Provide broad marketplace of buyers and suppliers Vertical consortia trading exchange Few large buyers Many sellers (suppliers to the industry) Prentice Hall, 2003

Covisint (cont.) Marketplace’s connectivity integrates buyers and sellers into a single network Flow of information integrates buyers and sellers into a single network Visibility provides real-time information for: Fast decision making Communication throughout the supply chain, anywhere in the world Prentice Hall, 2003

Covisint (cont.) Web use allows changes to be sent simultaneously and instantly throughout its entire supply chain The result: Less need for costly inventory in the supply chain Increased ability to respond quickly to market changes Prentice Hall, 2003

Covisint (cont.) One of the major objectives of the exchange is to facilitate product design: Offers best-of-breed functionality Ability to integrate providers across the supply chain creates (collaborative commerce) Enables e-procurement Provides broad marketplace of buyers and suppliers Accesses a wealth of supply chain expertise and experience Prentice Hall, 2003

Consortium Trade Exchanges Selling-oriented consortia Vertical exchanges Thousands of potential buyers within a particular industry Legal challenges for B2B consortia Exchanges introduce a level of collaboration among both competitors and business partners Antitrust and other competition laws must be considered Prentice Hall, 2003

Critical Success Factors of Consortia Size of industry Ability to drive user adoption Elasticity—measure of incremental spending by buyers as a result of savings generated Standardization of commodity-like products Management of intensive information flow Smoothing inefficiencies in supply chain Prentice Hall, 2003

Dynamic Trading Supply & Demand Dynamic trading—exchange trading that occurs in situations when prices are being determined by supply and demand (dynamic pricing) Supply & Demand Prentice Hall, 2003

Dynamic Trading: Auctions and Matching Market makers conduct matching supply and demand (e.g., stocks) More complex than auctions because they match: Prices Quantities Times Locations Prentice Hall, 2003

Dynamic Trading: Auctions and Matching Private trading rooms—members conduct auctions at the exchange Auction services may be one of the activities Exchange may be fully dedicated to auctions Can conduct many-to-many public auctions Prentice Hall, 2003

New Entrant to the Dutch Flower Market: TFA Dutch auction method Were semi-automated Buyers and sellers went to one location to see the flowers Auctioneer used a clock with a large hand set at a high price Price dropped as the time ticked off on the clock Until clock was stopped by pushing an order button Quantity ordered was clarified over an intercom , Process continued until all of the flowers were sold Prentice Hall, 2003

TFA (cont.) TeleFlower Auction (TFA)—competing electronic auction enables its initiators to penetrate the Dutch flower market Buyers bid on flowers via their PCs Designated times From any location Auction clock shows on buyer’s PC screen Clock stopped by pushing space bar Auctioneer completes sale by telephone Prentice Hall, 2003

TFA (cont.) Process is much quicker After-sale delivery is much faster—within half an hour after the sale Major issue can be the quality of the flowers Flowers are not physically visible to the buyers Large amount of relevant information is available TFA quickly built a competitive advantage using IT Prentice Hall, 2003

TFA (cont.) Prentice Hall, 2003

Exhibit 6.9 Comparing the Major B2B Many-to-Many Models Prentice Hall, 2003

Building and Integrating Marketplaces and Exchanges Step 1—Think ahead Step 2—Planning Step 3—System analysis and design Step 4—Building the exchange Step 5—Testing, installation, and operation Step 6—System evaluation and improvement Prentice Hall, 2003

Building and Integrating Marketplaces and Exchanges (cont.) Integration Between 3rd-party exchange and back-office systems of participants Across multiple, incompatible exchanges External communications Web/client access Data exchange Direct application integration Shared process Prentice Hall, 2003

Building and Integrating Marketplaces and Exchanges (cont.) Process and information coordination—how to coordinate external communications with internal information systems External process Internal process Data transformation Exception handling System and information management—involves management of: Software Hardware Information components Prentice Hall, 2003

Managing Exchanges Revenue models Networks of exchanges Transaction fees Fee for service Membership fees Advertisement fees Networks of exchanges “First mover” primary objective is the acquisition of buyers and sellers Integration with other companies or exchanges Some exchanges are beginning to integrate in order to better serve their customers Prentice Hall, 2003

Exhibit 6.11 Several Exchange, One Supply Chain Prentice Hall, 2003

Managing Exchanges (cont.) Centralized management One market builder builds and operate several exchanges Manages all the exchanges ’catalogs, auction places, discussion forums Centralizes: accounting, finance, human resources, IT services Third-party vendors providing logistic services and payment systems are more efficient when supplying services for “families ” of exchanges VerticalNet (verticalnet.com) Ventro (nexprise.com) Prentice Hall, 2003

Critical Success Factors Early liquidity Business’s chance of survival is best when liquidity (volume of business conducted) is achieved early Right owners Partner with companies that can bring liquidity to the exchange Best owner may be intermediary that can push both buyers and sellers Prentice Hall, 2003

Critical Success Factors (cont.) Right governance Good management and fair /effective operations and rules are critical Governance provides rules for the exchange, minimized conflicts, decision making support Openness Exchanges must be open to all from organizational and technical point of view Open standards require universal commitment and agreement on the standards Prentice Hall, 2003

Critical Success Factors (cont.) Full range of services Participants are attracted by an exchange that helps cut costs Exchanges team up with banks, logistic services and IT companies to help Importance of domain expertise Market makers need an in-depth understanding of: The industry Business processes inherent in the industry Knowledge of industry structure Government and policy stipulations Prentice Hall, 2003

Critical Success Factors (cont.) Targeting inefficient industry processes Contribute to increased costs and time delays Vertical exchanges can add value Targeting right industries Large base of transactions Many fragmented buyers and sellers High vendor and product search/comparison costs Strong pressure to cut expenses Prentice Hall, 2003

Critical Success Factors (cont.) Brand building is critical Increase switching costs by adding features and functionality Invest in: Gaining brand awareness Attracting businesses to exchange Customer retention Prentice Hall, 2003

Critical Success Factors (cont.) Exploiting economics of scope Value-added services make exchange compelling Industry news Expert advice Detailed product specification sheets Support services Banks and financial information providers Identification supported by sophisticated digital certificate architecture Prentice Hall, 2003

Critical Success Factors (cont.) Choice of business/revenue models Critical mass of users will garner more value-added services Auction services Financial services Business reporting Data mining services Garner diverse and multiple revenue streams Software licensing Advertising Sponsorship Prentice Hall, 2003

Critical Success Factors (cont.) Blending content, community, and commerce Content and community perspective—stimulate traffic EC transaction perspective—creates higher level of customer “stickiness” Managing channel conflict Hostile phase as buyers interact directly with sellers (disintermediation of supply chain) Short-term revenues impacted by backlash from existing fulfillment channels result in price erosion affecting medium-term profitability Prentice Hall, 2003

Communication Networks and Extranets for B2B The Internet—a public, global communications network that provides direct connectivity to anyone over a local area network (LAN) via an Internet service provider (ISP) or directly via an ISP Prentice Hall, 2003

Communication Networks and Extranets for B2B (cont.) Intranets—a corporate LAN or wide area network (WAN) that uses Internet technology and is secured behind a company’s firewalls Links various servers,clients,databases,and application programs within a company Limited to information pertinent to the company Prentice Hall, 2003

Communication Networks and Extranets for B2B (cont.) Extranets—a network that uses a virtual private network (VPN) to link intranets in different locations over the Internet; an “extended intranet” Provide secured connectivity between a corporation’s intranets and the intranets of its business partners protected environment of an extranet allows Allows partners to securely collaborate and share information Prentice Hall, 2003

Communication Networks and Extranets for B2B (cont.) Virtual private network (VPN)—a network that creates tunnels of secured data flows, using cryptography and authorization algorithms, to provide secure transport of private communications over the public Internet Prentice Hall, 2003

Exhibit 6.12 An Extranet Prentice Hall, 2003

A Network Loaded with Extras: ANX Automotive Network Exchange (ANX)—an infrastructure for B2B applications Backed by General Motors, Ford, and Chrysler Allows companies in the automotive market to: Swap supply and manufacturing data Buy Sell Collaborate Prentice Hall, 2003

ANX (cont.) Benefits of ANX One-to-one and one-to-many connections Procurement CAD/CAM file transfers EDI E-mail Group-ware “Big Three” expect to save millions of dollars Consolidating communications links Reduce order turn-around time Prentice Hall, 2003

ANX (cont.) A VPN for ANX Most visible B2B implementation of VPNs that run over the Internet Security—all participants must have tools compliant with (IP) security standards covering Authentication Encryption Encryption key management. Prentice Hall, 2003

Categories of Extranet Benefits Enhanced communications Productivity enhancements Business enhancements Cost reduction Information delivery Prentice Hall, 2003

Implementation Issues Problems with exchanges High transaction fees Sharing information Unclear cost savings Recruiting suppliers Too many exchanges Difficult to coordinate supply chain process Private exchanges—e-marketplaces that are owned and operated by an industry giant or a consortium Problems with private exchanges Lack of trust Liquidity is questionable Prentice Hall, 2003

Implementation Issues (cont.) Software agents in B2B exchanges Disintermediation Evaluating exchanges How much will company really save and/or gain? Determine viability of the exchange Contracts and technology that lock into a long-term relationship Membership—who sits on the board. Who provides payment, logistics, other services? Prentice Hall, 2003

Support Services for B2B Exchanges Directory services and search engines Partner relationship management Other services: Trust services Digital photos Trademark and domain names Client matching Global business communities Encryption sites E-business rating sites Promotion programs Web-research services Prentice Hall, 2003

Managerial Issues Have we “done our homework?” Can we use the Internet? Which exchange? Will joining an exchange force restructuring? Will we face channel conflicts? What are the benefits and risks of joining an exchange? Prentice Hall, 2003

Summary E-marketplaces and exchanges defined The major types of e-marketplaces B2B portals Third-party exchanges Consortium trading exchanges Dynamic pricing and trading Prentice Hall, 2003

Summary (cont.) Ownership and revenue models Exchange networks and management of exchanges Critical success factors for exchanges Extranets E-marketplaces and exchange implementation and development issues Support services Prentice Hall, 2003