OR/MS Today - December 2000

December 2000

Cyberspace

The Changing Face of B2B E-Commerce

B2B marketplaces are evolving, but when all is said and done, will more be said than done? Broadly speaking, B2B marketplaces are evolving through three phases. Currently, they are moving from the first into the second phase.

The First Phase: Hot Air and Desperation

First there were the start-ups with coffers full of funds from venture capitalists. These threatened to turn commerce topsy-turvy. Then the brick-and-mortar companies, perhaps motivated by their sagging stock prices relative to those of these start-ups, began to announce B2B marketplaces in droves. A cynic — not me, of course — might even say that these companies learned a trick or two about vaporware from the IT industry, and therefore bought non-existent software to create non-existent B2B marketplaces! Wasn't it Khrushchev who said something about Americans buying things they did not need with money they did not have? Third, there were those who created or announced marketplaces purely to sell them at a large profit in the future. Finally, in some industries like retail, a few big companies announced their intention to create marketplaces to increase pressure on their suppliers, and thereby secure long-term low-priced contracts in the short-term. Indeed, a recent survey of suppliers to original equipment manufacturers (OEMs) of automobiles reflects the suppliers' fear of pricing pressure increases as a result of the auto B2B marketplace, Covisint.

The Second Phase: Real Business

However small the tangible results may have been at the end of the first phase, there were benefits. Had it not been for the start-ups, it is doubtful that brick-and-mortar companies would have been so quickly motivated to use the Internet or even to make announcements. These companies have now started thinking about using the Internet to improve their business. Consultants call this move "a revenge of the fundamentals." At the end of this phase in a few years, B2B e-commerce landscape might simply look like today's regular commerce landscape. Consider these:

Growth of bilateral B2B e-commerce: An auto industry survey of suppliers expects about 50 percent of online trade to be bilateral, i.e., based on direct links between two companies. Likewise, an analyst firm (Lehman) believes that 50-60 percent of trade in the chemical industry will be bilateral.
Contract-based trade: The Economist believes that 80-90 percent of trade is contract based and, therefore, not suitable to the present day spot-trade or auction-oriented B2B marketplaces.
Growth of private exchanges: Information Week discusses a trend of more "private" B2B exchanges between companies who trade with each other.

Many companies in this phase now are realizing they need to address supply-chain inefficiencies. Marketing departments are using the Internet to expand their channels or strengthen relationships with existing customers. Purchasing departments are implementing e-procurement for buying indirect materials. Companies are also gradually increasing direct purchasing; Forrester Research believes that online percentage of all direct purchasing will increase to about 40 percent in the next four years.

How will B2B marketplaces evolve or survive in this phase? They will either add functionality — supporting contracts or supply-chain planning that any business needs regardless of the Internet — or they will become a small part of the landscape for which spot-trading is well suited.

The Third Phase: Consolidation

At the end of the second phase, companies will undertake B2B e-commerce through many different avenues: bilateral trade, private marketplaces and public marketplaces providing more than spot-purchasing capability to participants. This phase will be one of integration and consolidation.

Consolidation will take at least three forms. One form will be the consolidation of B2B marketplaces. If spot purchasing is only a small part of all B2B trade, it is doubtful that all the existing or announced B2B marketplaces will survive. These marketplaces will have to consolidate in one of several ways: by acquisition, by providing a common front end, or by supporting search engines (meta-marketplaces) that would return results to companies to enable trade in any marketplace among these. These marketplaces need not be in the same vertical industry — a chemicals B2B marketplace could integrate with one for transportation.

A second form would be motivated by convenience of participants of private marketplaces to purchase from public marketplaces while still remaining "inside" their own private marketplace. The same holds for bilateral trade. A third form of consolidation would be that of integrating internal (e.g., ERP) data with that of the marketplace to allow participants of these marketplaces to get a closer, more real-time view of inventory and order-statuses for each other.

None of these forms of consolidation will be easy to realize. Right now, marketplace software requires integrating as many as 20 pieces of software to create just one marketplace, let alone integrating a company's backbone (or ERP) systems to a marketplace, or integrating two marketplaces. And that is just software — think of the effort involved in reengineering processes in participant firms when integrating two marketplaces! Even now, in the second phase, much more needs to be done.

ManMohan S. Sodhi (MohanSodhi@aol.com) is the director of enterprise e-business strategy with Scient in Chicago and the president of the Logistics Section of INFORMS.

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