OR/MS Today - February 2001

February 2001

Cyberspace

2001: A Cyberspace Odyssey

By ManMohan S. Sodhi

E-dust will settle down this year and real things will get done. We will move away from hot air and desperation into real business. And, though the Financial Times' (Dec. 30/31, 2000) prediction that no Internet company will remain by the end of 2001 because "real" and virtual companies will integrate, the point remains that we can expect a fundamental shift to real business issues.

In my April 2000 column, I discussed how companies could use their existing supply-chain processes to determine the type of e-businesses they could create or join, taking examples from the chemical industry. As supply-chain processes are central to most chemical companies, an e-business initiative that supports these processes has a high chance of succeeding, while one that requires revamping the supply chain does not. It is for this reason that new initiatives like Elemica and Shell's Global Exchange are getting attention while many of the existing ones are floundering. Ventro has shut down its subsidiary, Chemdex (lab chemicals and equipment). High-profile e-marketplaces like ChemConnect (auction-based trading for a wide range of chemicals and plastics) and CheMatch (spot trading for bulk chemicals) have too little order volume to justify their existence. Both are now revamping their previous strategies and have announced new efforts.

Why E-marketplaces Fail

The Economist believes that 80 percent to 90 percent of trade is contract-based and, therefore, not suitable to the present-day spot-trade or auction-oriented B2B marketplaces. So it is unlikely that ChemConnect, CheMatch or any other spot or auction-based e-marketplaces can become the typical way of trading in the chemical industry. And, for the remaining spot-based trade, existing e-marketplaces do not match the ease of selling or buying, i.e., liquidity, for chemical commodities that the financial markets provide for, say, wheat or copper. Thus, many B2B e-marketplaces do not meet business needs as they neither support contracts between trading partners, nor offer liquidity for spot trading. Indeed, according to AMR Research, none of the 600 e-marketplaces they studied had exceeded 1 percent of the industry trading volume.

How to Make an E-marketplace Successful

Any marketplace — e- or otherwise — can survive only if it has enough volume in the long term. Therefore, the market segment must be identifiable and large. One way to capture volume is to provide large companies with an incentive to direct much of their trading to this e-marketplace. Of course, they would do that only if the e-marketplace supports their buying (or selling) needs. Buying can be categorized as indirect purchasing (of goods and services that do not go into the manufacture of the finished goods, e.g., office equipment) and direct purchasing (of goods that are used in the manufacture of finished goods, e.g., tires for an auto manufacturer) which could be contract-based or spot. There are then three identifiable segments:

Indirect purchasing. An e-marketplace such as one for office supplies could supply to many industries or it could be specific to an industry. For instance, TradeRanger, a procurement e-marketplace for petrochemical as well as upstream and downstream oil & gas industry, has good chances to succeed because it is a joint initiative by 14 companies whose combined procurement is about $125 billion/year.

Direct contract-based purchasing. This is the segment with the most trading volume, and Forrester believes that online percentage of this will increase to about 40 percent in the next four years. Not only is the potential volume large, but the returns are pretty clear as the main benefit is decreased ordering cost and better order tracking. The customers are already there, so the challenge is mainly technological. Online trading can take any of the following forms, in increasing order of technological difficulty and reflecting the way trading is done without the Internet:

1. Hubs: Hub-based sales (or purchases) enable many small buyers (or sellers) buying from (or selling to) a single large company. An example is Dow's MyAccount@Dow where customers can configure their orders and purchases. Such sites can either fulfill all orders or divert small orders to dealers or distributors.

2. Bilateral links. These enable trade between two large companies. For instance, Geon and Oxy have created a bilateral link connecting their ERP systems to ensure seamless ordering from one system into the other and to get some visibility into the order status.

3. Private exchanges. These enable trade between a small number of large companies. Information Week talks about a trend of more "private" B2B exchanges between companies who currently trade with each other. Given the technology challenge of hooking up multiple ERP systems together, such exchanges likely maintain contracts offline even though ordering is online.

4. "B4B" integration. This is a term created by Envera, a marketplace that enables trade between a small number of large companies by linking their ERP systems. Elemica is in this sub-segment as well, and both are backed by large chemical and software companies.

Direct spot purchasing. Shell's Global Online Exchange is getting a lot of attention as it aims to take the exchange model of financial markets to chemical commodities, thereby providing the liquidity for key commodity chemical products that ChemConnect and CheMatch could not provide thus far.

With such initiatives we can expect e-business will become business-as-usual, and e-dust will become just dust!

ManMohan S. Sodhi (MohanSodhi@AOL.com) is president of the Logistics Section of INFORMS.

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