FreeMarket Online

Questions? w How does FreeMarket create value for its customers? How is it different from existing/traditional models? w How do you assess the company’s business model? What are its strengths? Weaknesses? w Which of the following alternatives should the company choose in order to go forward to scale: horizontal market expansion or vertical market dominance technology and user subscription licensing networked purchasing information systems

Commission Revenues $7.5B (2.5 % X $300B)

Traditional Auction w One Seller w Many Buyers w Price Goes Up

Bid Auction w One Buyer w Many Sellers w Price Goes Down

Traditional Model: Manufacturers Rep Buyer Mft Rep Supplier1Supplier2Supplier3

New Model: Buyer’s Agent? Buyer FMKT Supplier1Supplier2Supplier3

Business Model w Consulting to Buyers (fees) w Commission from Seller w Software? Network Provider?

The Consulting Model w Fees from buyer w The marketing arm w Thus, priced at a discount w Labor intensive (industry experts?) w Little re-useable learning w Will decline over time for a particular buyer w Can spread to other departments w Must grow to grow business w Will remain unprofitable

The Commission Model w 2.5% w Over multiple years of contract w Cash flow delay w High fixed costs w Better returns w Commission for cutting their profits??? w The more they cut the less we make??? w Why not cut us out on next contract?

Recent Business $33 million electricity (5% savings) $123M of packaging materials (7%) $9M office furniture and installation (31%) $31M transportation services $93M relocation services (20%) $4M telecommunications services (30%) Hotel services (20%) Tax preparation services (50%) Security guards (14%)

Selling Excess Equipment

FreeMarketPlace: Selling Without the Labor?

Share Prices

Class Action Law Suit “During 12/10/99 through 1/4/00, FreeMarkets saw its stock price soar from... $48 per share to $350 per share as FreeMarkets misrepresented the true status of its relationship with General Motors, concealing the fact that GM, one of FreeMarkets's largest customers, had signed an agreement with Commerce One to create an internet auction site which would result in the total evaporation of all of FreeMarkets's business from GM. The Individual Defendants knew that disclosure of this Commerce One agreement with GM would devastate FreeMarkets's chances of going public which allowed FreeMarkets to raise $160 million in its 12/10/99 IPO.”

Analysts Still Positive (2/17/00) "We continue to remain impressed with the company's ability to horizontally scale its reverse-auction technology into additional vertical market segments, including, most recently, into higher-margin service offerings. In addition, we believe that as FreeMarkets further establishes comprehensive understandings of the competitive landscapes for multiple industries, the company should be able to increasingly convert suppliers to buyers and buyers to suppliers."

Other Big B-2-B Players w w w w w w w w

How can you Optimise Inventory? 1. Minimum Stock Level Engineers, Production and Procurement staff work together to set optimal stock levels that balance the costs of holding spares against the risk of being without them when equipment fails. Modified from presentation by Erran Carmel of American University

How can you Optimise Inventory? 2. Actual Stock Level However, large economic order quantities, slower than anticipated stock turnover and long lead times for difficult to source items, rapidly creates an inventory level somewhat different to the ideal one! 1. Minimum Stock Level Engineers, Production and Procurement staff work together to set optimal stock levels that balance the costs of holding spares against the risk of being without them when equipment fails. Modified from presentation by Erran Carmel of American University

How can you Optimise Inventory? 3. Excess Stock Certain items held to support in-service equipment are above the minimum level and represent a financial burden….. but you have neither the time nor the systems in place to find buyers and dispose of them efficiently. 1. Minimum Stock Level Engineers, Production and Procurement staff work together to set optimal stock levels that balance the costs of holding spares against the risk of being without them when equipment fails. 2. Actual Stock Level However, large economic order quantities, slower than anticipated stock turnover and long lead times for difficult to source items, rapidly creates an inventory level somewhat different to the ideal one! Modified from presentation by Erran Carmel of American University

4. Required Stock Other items are below the minimum level and represent a business risk….. and could be difficult to source, especially for older equipment still in service. How can you Optimise Inventory? 3. Excess Stock Certain items held to support in-service equipment are above the minimum level and represent a financial burden….. but you have neither the time nor the systems in place to find buyers and dispose of them efficiently. 1. Minimum Stock Level Engineers, Production and Procurement staff work together to set optimal stock levels that balance the costs of holding spares against the risk of being without them when equipment fails. 2. Actual Stock Level However, large economic order quantities, slower than anticipated stock turnover and long lead times for difficult to source items, rapidly creates an inventory level somewhat different to the ideal one! Modified from presentation by Erran Carmel of American University

5. Redundant Stock Spares still held to support redundant equipment and destined for disposal even scrapping. How can you Optimise Inventory? 4. Required Stock Other items are below the minimum level and represent a business risk….. and could be difficult to source, especially for older equipment still in service. 3. Excess Stock Certain items held to support in-service equipment are above the minimum level and represent a financial burden….. but you have neither the time nor the systems in place to find buyers and dispose of them efficiently. 1. Minimum Stock Level Engineers, Production and Procurement staff work together to set optimal stock levels that balance the costs of holding spares against the risk of being without them when equipment fails. 2. Actual Stock Level However, large economic order quantities, slower than anticipated stock turnover and long lead times for difficult to source items, rapidly creates an inventory level somewhat different to the ideal one! Modified from presentation by Erran Carmel of American University

Inventory Management with Horizontal and Vertical Supply Chains Manufacturer Supplier Traditional Vertical Supply Chains are designed to efficiently move engineering spare parts from Manufacturer to Industrial End User. Industrial End Users The case of spare parts. Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains To maximise profit, Manufacturers and Suppliers need a fast stock turn and a small inventory. Their stock needs to be visible and accessible to facilitate sale to Industrial End Users. Manufacturer Supplier Industrial End Users Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains Eventually, it becomes uneconomic for them to support older equipment as demand rate, and hence stock turn, reduces. Manufacturer Supplier Industrial End Users Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains. At this point, the traditional Vertical Supply Chain will fail - possibly resulting in expensive plant down time. Manufacturer Supplier Industrial End Users Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains Thus, plant management is inclined to build up insurance stocks. Such spares held by Industrial End Users usually have a low stock turn. They may be expensive to purchase and hold and can be held on site for many years. Manufacturer Supplier Industrial End Users Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains This is the physical location within the Supply Chain where the majority of spare parts are held. Inter-company visibility of these parts is usually poor or non- existent. Manufacturer Supplier Industrial End Users Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains However, typically 20% of the spare parts inventory held by an Industrial End User is Excess or Redundant stock. Manufacturer Supplier Industrial End Users Modified from presentation by Erran Carmel of American University

Horizontal and Vertical Supply Chains A part that is surplus to one companies’ requirement, and perhaps destined for disposal, may be desperately sought by another. How do we open up the Horizontal Supply Chain for internal and inter-company trade of surplus engineering parts. Manufacturer Supplier Industrial End Users But if they can’t see it they can’t attempt to buy it ! Modified from presentation by Erran Carmel of American University

SparesFinder.Com Modified from presentation by Erran Carmel of American University

Modified from presentation by Erran Carmel of American University

How it works Modified from presentation by Erran Carmel of American University

Want to Build a b2b Hub? The intermediary as a business proposition Modified from presentation by Erran Carmel of American University

Challenges of building a b2b electronic intermediary w Large amounts of money in up-front cost. w must build a critical mass very quickly w resistance by older middlemen w long sales cycles for buyers & sellers w need to qualify buyers & sellers w need to build domain expertise Lee & Clark, 1996 and others Modified from presentation by Erran Carmel of American University

Advantages to the electronic intermediary w Very small cost for marginal new member - - economies of scale w switching costs are high -- retention is high. Lee & Clark, 1996 Modified from presentation by Erran Carmel of American University