Your company can buy almost anything over the Internet, but is the ordering process as good as it gets? Until recently, Internet-based procurement was necessarily sloppy; it required juggling separate catalogues and transaction processes for each online supplier. Enter digital marketplacesDigital marketplaces are the latest wave in business-to-business commerce - where buyers and sellers trade money for goods over a secure procurement network. Digital marketplaces, also known as exchanges, have hit full speed in the past nine months.
You can build a private marketplace for your company or join semipublic marketplaces. The latter are ad hoc purchasing consortiums hosted by a third party. By aggregating buyers into a single site, sellers can afford to offer bigger discounts.
"Digital marketplaces are where the action is," says Jack Staff, chief Internet economist at Zona Research, a market research company. Published pricing and increased competition among sellers will drive prices down, and that's good for buyers, he says. Ultimately, it's good for sellers, too, because lower prices will be offset by higher volumes, provided sellers participate in multiple marketplaces, Staff says.
If you build a private system, purchase orders can be generated with a click of the mouse. Orders can then be routed through required approvals, eliminating costly human administrators. By putting all suppliers in a central Web-based catalogue, your purchasing department can easily compare prices.
Savings are further achieved by aggregating corporate-wide orders to the same suppliers. This makes it easier to negotiate discounts. And you can pump all exchange-related procurement data into corporate accounting or enterprise resource planning applications for budgeting, scheduling and other analysis.
In fact, users such as Hewlett-Packard have found a company can reduce its administrative costs a hundredfold. Since June, HP has been buying goods over Ariba's digital marketplace, one of several online exchanges that have sprouted up over the past year. For HP, Internet-based procurement has expanded from just office supplies and computers to software, maintenance, repair and operating products, network equipment, marketing print services, consulting services, and even temporary labour.
"Before, we had a couple of sites that were operated manually with a custom Web site for every commodity," says Gregson Siu, global solutions centre manager for HP's operation procurement organisation. "Now anything I can buy, I can put in a single catalogue," he says. HP calculated it was spending about $125 per purchase order in labour fees. When its rollout is completed in the next few weeks, Siu estimates it will cut that amount to $10 per purchase order, by reducing administration. The kicker is HP will save an additional 5 per cent simply by restricting purchases to pre-negotiated catalogue items and by buying these items in volume, Siu says.
With digital marketplaces, buyers may purchase directly from a catalogue using their company's prenegotiated pricing. This frees them from a lengthy approval process. It also prevents what is known as "rogue buying", in which users stray from approved products to find a better deal. In truth, unsanctioned purchases actually increase costs because they aren't tracked by the company. So they would be excluded from volume discounts and typically require manual administration - a person must see to approvals, purchase orders, system input and other issues.
With marketplaces, users can be restricted to seeing only approved items. Aggregation and procurement policy enforcement are automatic.
This isn't as restrictive as it sounds, nor does it mean having to recreate every supplier's e-commerce site. Like a personalised shopping portal, a marketplace can host links to approved suppliers' sites, serving up contracted prices. For instance, marketplace buyers can link to Dell's www.dellware.com and get their own prenegotiated prices rather than working through a Dell-created catalogue on the Ariba network. By ordering via the marketplace, the transaction, along with all its administration and integration with back-end systems, is done by the marketplace.
As for the transaction itself, most marketplaces offer a choice of formats, such as electronic data interchange, fax, e-mail or XML. The latter is the most popular method, particularly for those without legacy online procurement systems.
Marketplace options are vast and growing bigger. There are marketplace specialists including Ariba, Clarus, CommerceOne, Intelisys Electronic Commerce, Trilogy Software and TimeO, a Perot Systems business. Likewise, ERP powerhouses have jumped in, including SAP with its mysap.com network and Oracle with Oracle Exchange.
Plus, vertical exchanges have cropped up for virtually every industry. Some sites, such as Verticalnet.com, even host numerous vertical exchanges.
Each vendor makes money by marrying buyers with sellers, but how they assess fees varies. Ariba, for example, charges per transaction, but the company and its buyers keep the fee a closely guarded secret. In contrast, Clarus uses a subscription model, charging $995 a month.
Vertical sites typically operate under an auction model in which a request for proposal is issued and several suppliers bid on it. The attraction to sellers is increased access, far beyond traditional sales methods and even farther beyond what their existing network infrastructures can handle, says Dave Reinke, vice president at Braun Consulting, a Chicago marketplace consultant, which helped create BidBuyBuild.com, a marketplace for the construction industry.
"Suppliers don't have enough exposure to all contractors, and contractors don't get the full breadth of suppliers because they are limited by the bandwidth of their existing sales networks," he says.
Marketplaces also vary in how they process transactions. Some, such as Ariba, do the processing on their networks, inside their own firewalls, and others put that task in the users' hands.
While your company today would need to join two separate digital marketplaces - a horizontal one to procure office supplies and a vertical one to buy raw materials - expectations are that these two worlds will soon merge. Horizontal digital marketplaces have begun to set themselves up to offer vertical exchanges as a subset of their existing sites.
Lou Unkeless, senior director of applications marketing at Oracle, said: "The final step is to link these exchanges with smaller, grass-roots exchanges like Chemdex and e-STEEL . . . to make a single integrated buying experience."
To narrow down the choices, start by assessing the number of transactions your company will complete each month. That will allow an apples-to-apples comparison between fee-based and subscription services.
Also, while the list of participants on a network is important, don't be overly concerned with it. Each vendor is feverishly trying to populate its network with as many buyers and suppliers as possible by making joining as easy as launching a browser. Within weeks after it launched last year, Oracle claimed to have 270 companies signed on to be sellers and more than 400 customers. By the end of January, it claimed it had 950 companies registered as participants. Clarus claims to have 30 companies implementing its framework, totalling 200,000 employees with access to its network. Clarus also claims to have collected several hundred manufacturers and resellers participating with sellers on its network.
Of course, don't let the easy-to-join guise fool you. Choose a marketplace carefully, particularly if you must invest in the vendor's software and integrate it with existing network and back-end systems.
"This is the classic relationship between buyer and seller: they want to make the setup cost low and switching costs high," says Rob Kelley, vice president of e-business development at Broadreach Consulting. Every change is going to cost a lot, and it's going to be extremely painful."
While users say integrating marketplace software with back-end systems is fairly simple, they also point out that there are some gotchas.
One is security, a major concern for Visa International. A year ago, it opted to join Ariba's marketplace to replace a manual procurement system for office supplies, and ran into a conflict with its security policies. The concern surfaced over Ariba's model of processing transactions on its own network behind the Ariba firewall. That meant Visa users had to send sensitive buying data over the Internet.
"All of a sudden, we were going to have purchase orders sent via the Internet and have people going outside the company's firewalls," says Brian Hall, Visa's vice president of procurement. Ultimately, Visa adjusted its policy to use Ariba's marketplace, but first the company learned all it could about potential vulnerabilities.
Another gotcha is that these marketplaces may require beefing up your infrastructure. Visa, for instance, purchased two Windows NT servers in order to run Ariba's software in development and production modes. Savings on administration costs more than offset the price of these infrastructure upgrades. In the year since its deployment, Visa has reduced its labour costs by 66 per cent and increased the cycle time for processing requests by 21 per cent.
However, maintenance of a marketplace is more than just routine software administration, Hall warns. It requires constant monitoring of procurement policies and organisational structure to ensure that the system's automatic workflow features remain accurate. "From the IS perspective, a project like this really needs to have dedicated resources for ongoing management of the software," Hall says.
Vertical or horizontal, digital marketplaces are coming on fast, and they appear to be offering buyers and sellers an equal array of benefits. Efficiencies and cost savings have already been seen. The only factor left to prove is whether businesses will turn to them en masse.
Getting a share of the e-marketplace boomGartner Group predicts the number of B2B e-marketplaces will triple by the end of this year, however the analyst warns more than 50 per cent of those will fail by the end of 2002.
To avoid choosing the wrong e-marketplace, Gartner Group recommends:n Users looking to participate in e-marketplaces should remain flexible and balance value against the cost of participation. n Enterprises evaluate the motivations of sponsors behind vertical e-marketplace deals.n Channel masters - or enterprises looking to benefit financially in the development of an e-marketplace - should not be overcome with irrational exuberance when making their vendor or application selections. E-marketplace infrastructure vendor transparency is a vital criteria for the ongoing growth and health of an e-marketplace.n Channel masters looking to sponsor an e-marketplace should evaluate spinning it off, not only to offer an unbiased trading environment, but to protect their current stock value. Vendors share in the profitability, but do not take an equity stake in the e-marketplace for a very good reason: if the enterprise is tied to the marketplace, this could weaken earnings.
According to Gartner's forecasts, South Korea will become the region's largest direct materials e-procurement market, transacting more than $US12 billion electronically in 2003, while Australia will remain the largest regional market for indirect materials in the e-procurement segment, transacting $US27 billion electronically by 2003.
In the same timeframe, information technology, building materials, chemicals, industrial and transportation equipment and automotive sectors will account for more than 65 per cent of all vertical e-marketplace transaction values within the Asia/Pacific region - driven by the need to enhance competitive advantages within each industry.
Snapshot of vendors in the e-marketplace sectorCommerce OneCommerce One provides products, portals and services for buyers, sellers and Net market-makers to enable the next generation collaborative B2B trading dynamics. Customers use these products, portals and services to drive efficiencies in their supply chain and as a platform to extend their current business into new revenue-generating streams.
The Commerce One Global Trading Web is a large business-to-business trading community comprised of all Commerce One Net market-makers, buyers and suppliers to provide access to international markets.
Commerce One and its partner, Cable & Wireless Optus, launched www.cwomarketsite.net.au this month as an international B2B e-commerce platform for exchanging goods and services among businesses worldwide.
* The Commerce One portal solution allows Net market-makers to build open marketplaces and link them to the Commerce One Global Trading Web.
* Commerce One BuySite is an electronic procurement application for all purchasing worldwide.
* Commerce One Auction Services - allows for dynamic pricing for spot buying as well as liquidation of inventory and excess assets.
* Commerce One XML Common Business Library (CBL) - is a set of XML building blocks and a document framework that enables any business, large or small, to build document-based transactions over the Web.
Pricing: Varies with configuration.
Commerce One's products are available now with C&O Optus using all parts of the solution worldwide.
Contact: (02) 8923 2647, Tom.email@example.com CWO Marketsite: www.cwomarketsite.com.auwww. commerceone.comIBMTogether with its business partners, IBM is offering advanced open solutions designed to meet three critical aspects of accelerating the business-to-business economy, including integrated supply chain, range of open services, and full-service marketplaces.
Through local partnerships and offerings, IBM will build its presence and capabilities in the trading networks marketplace where its activity includes:
* The Ariba/ i2/ IBM alliance is an end-to-end, B2B e-Marketplace alliance with i2 and Ariba to provide e-marketplace consulting, systems integration, and hosting services. It will be available in Australia in June.
* IBM has also established vendor alliances with SAP, Siebel, Streamlink amongst others and set up a number of e-marketplaces as well as its own.
Pricing: Depends on configuration
Contact: 13 2426.
Great Plains offers e-business transaction backbone applications for financials, distribution, project accounting, electronic commerce, human resource management, manufacturing, sales and marketing management, and customer service and support.
Great Plains e.Commerce is an integrated Internet business-to-consumer order processing system, providing transaction backbone connectivity between back-end financials and front-end electronic storefront functions.
* e.Order is an out-of-the-box Internet storefront solution that seamlessly integrates business-to-business e-commerce sites with existing back-end business management systems.
* e.Order integrates Great Plains' eEnterprise core financials system, and Microsoft's Site Server 3.0 Commerce Edition.
* e.View delivers real-time detailed business and financial information to the Web browser on employees' desktops. It offers easy access to detailed product, vendor, purchasing, employee, sales and customer information.
* e.Employee is a Web-delivered application eliminating the need for form-based information changes and data re-entry. It also gives remote employees with a way to update information.
* e.Requisition electronically interconnects employees and eliminates the need for a paper-based requisition system by allowing them to enter their own purchase requisitions using a browser.
Pricing: e.Commerce $20,000, e.Order $10,000, e.View comes standard in the System Manager. e.Employee available in June, with pricing still to be announced, e.Requisition based on number of users; $13,000 for 20 users. All products except e.Employee are currently available.
Contact: (02) 9409 9200.
Oracle offers an integrated e-business suite for enterprise-wide manufacturing and supply chain management, financial, project, and human resource management, marketing, sales and service processes. This provides integrated enterprise information so you get a full view of your customers and your business. You can also align your strategic and tactical goals across your entire organisation.
Oracle E-Business Suite enables the transformation of your business into an e-business and runs on corporate Internets and the World Wide Web.
Oracle E-Business Suite consists of:
* Customer relationship management: marketing, sales, service, call centre/interaction centre, e-commerce (Internet selling) and Integration.
* Enterprise resource planning: Internet procurement, supply chain for manufacturing, supply chain for process manufacturing, financial management, treasury, euro, travel management, projects, human resources and manageability.
* Business intelligence: operational intelligence (BIS), analytical apps (OFA, OSA), strategic intelligence (SEM).
Oracle's e-business suite is currently available in Australia. Pricing varies on customers needs and requirements.
Contact: Oracle on 1300 366 5386
mySAP.com Marketplace is an online business-to-business community which enhances and supports the supply chain by allowing companies to find and collaborate with business partners, customers and product and service suppliers. The portal enables users to share information, to deliver and procure services, to seamlessly integrate systems with those of business partners, and to collaborate within industry-specific business communities.
The mySAP.com Marketplace hosts a variety of vertical and horizontal business communities, which provide Internet-based content tailored to particular industries and interests. Content includes news industry catalogues, news feeds, information on upcoming events as well as financial news.
For details, contact SAP or see the SAP Web site at http://www.sap.com SybaseEnterprise PortalTargeted at enterprise customers, the Sybase Enterprise Portal can offer its continuous availability by transparently migrating connections over to backup servers, virtually eliminating the impact of systems failure on the end user. This is complemented by personalisation, systems management, security and integration with reducing costs associated with multi-vendor solutions.
Sybase Enterprise Portal includes: built-in support for portal systems management; superior mainframe integration with CICS and IMS; support for open-Internet standards XML and Java; interfaces to industry-leading system management packages; support for major data sources and existing applications such as SAP and PeopleSoft; load balancing; cluster support and single sign-on security.
The Early Adopter version of the Sybase Enterprise Portal is available now, with the GA version scheduled to ship later in the month.
Pricing: Not yet available.
Contact: (02) 9936 8800