Overview Ch. 5

1. Overview Ch. 5 • Describe the major types of B2B models • Describe the characteristics of the sell-side marketplace • Describe the sell-side intermediaries models • Describe the characteristics of the buy-side marketplace and e-procurement • Explain how forward and backward auctions work in B2B • Describe B2B aggregation and group purchasing models • Describe collaborative e-commerce • Describe infrastructure for B2B

2. Public B2B Exchanges

3. Learning Objectives • Define e-marketplaces and exchanges • 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 • Describe the support mechanisms offered by exchanges • Describe networks of exchanges and exchange management • Describe the CSF of exchanges • Describe the major support services of B2B

4. An Overview B2B Electronic 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

5. An Overview B2B Electronic Exchanges [2] • 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

6. Trading Communities: Information Flow and Access to Information

7. Classification 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

8. Classification of Exchanges [2] Indirect (MRO) Direct Systematic Sourcing Spot Sourcing

9. 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

10. Ownership of Exchanges • An industry giant • A neutral entrepreneur • a third-party intermediary (ChemConnect.com) • The consortia (or co-op) • several industry players set up an exchange (Covisint.com)

11. Governance of Exchanges • 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 • Security and privacy for documents • Contract terms between an exchange and buyers/sellers • Assurances that the exchange is fair

12. Organization of Exchanges • Membership • Generate revenue • Transaction, Registration, Annual membership fees • Qualification process • Deposit may be required • Limits set on how much each member can trade • 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 • Services • Buyer-seller registration, qualification, coordination, etc

13. Gain and Risks in B2B Exchanges

14. B2B Portals • Information portals for businesses • Vortals • B2B portals that focus on a single industry or industry segment • “vertical portals”

15. 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

16. The Supplier Aggregation Model

17. Requests Responses - - - - - - - The Buyer Aggregation Model

18. 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

19. Consortium Trading Exchanges (CTE) • CTE (consortium) • An exchange formed and operated by a group of major companies to provide industry-wide transaction services • The major goal of CTEs • Provide industry-wide transaction services that support buying and selling • Types of CTEs: • Vertical, purchasing-oriented • Horizontal, purchasing-oriented • Vertical, selling-oriented • Horizontal, selling-oriented

20. Consortium Trading Exchanges (CTE) [2] • Purchasing-Oriented (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

21. Consortium Trading Exchanges (CTE) [3] • 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

22. 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

23. Dynamic Trading: Auctions and Matching • Dynamic trading • Exchange trading that occurs in situations when prices are being determined by supply and demand (dynamic pricing) • Matching • Market makers conduct matching supply and demand (e.g., stocks) • More complex than auctions because they match: • Prices • Quantities • Times • Locations

24. Dynamic Trading: Auctions and Matching [2] • Auctions • 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

25. Building and Integrating Marketplaces & Exchanges • 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

26. Building and Integrating Marketplaces & Exchanges [2] • 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

27. Managing Exchanges • Revenue models • 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

28. Managing Exchanges [2] • 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

29. Critical Success Factors • Early liquidity • Liquidity refers to volume of business conducted • Business’s chance of survival is best when liquidity 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

30. Critical Success Factors [2] • Right governance • Good management and fair /effective operations and rules are critical • Governance provides: • The rules for the exchange • Minimized conflicts • Decision making support • Good management induces necessary liquidity

31. Critical Success Factors [3] • Openness • Exchanges must be open to all from: • Organizational point of view • Technical point of view • Open standards require: • Commitment by all involved • Universal agreement on the standards • Using the wrong standards can hurt the exchange

32. Critical Success Factors [4] • 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

33. Critical Success Factors [5] • 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 • Difficulties bringing together buyers and sellers • High vendor and product search/comparison costs • Strong pressure to cut expenses

34. Critical Success Factors [6] • Brand building is critical • Increase switching costs by adding features and functionality • Invest in: • Gaining brand awareness • Attracting businesses to exchange • Customer retention

35. Critical Success Factors [7] • Exploiting economics of scope • Value-added services make exchange compelling • Industry news • Expert advice • Detailed product specification sheets • Adjacent services • Banks and financial information providers • Identification supported by sophisticated digital certificate architecture

36. Critical Success Factors [8] • Garner diverse and multiple revenue streams • Software licensing • Advertising • Sponsorship • Critical mass of users will garner more value-added services • Auction services • Financial services • Business reporting • Data mining services

37. Critical Success Factors [9] • 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

38. 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 • Intranets • A corporate LAN or wide area network (WAN) that uses Internet technology and is secured behind a company’s firewalls • Extranets • A network that uses a virtual private network (VPN) to link intranets in different locations over the Internet; an “extended intranet” • Protected environment of an extranet allows partners to securely collaborate and share information • 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

39. Implementation Issues • Problems with exchanges • Problems with public 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

40. Summary • Exchanges are e-marketplaces that provide a trading platform for conducting business among many buyers, sellers and other business partners • E-marketplaces include B2B portals, third-party trading exchanges, consortium trading exchanges and dynamic trading floors • B2B portals are gateways to B2B community-related information • A Consortium Trading Exchange (CTE) is an exchange formed and operated by a group of major companies

41. Exercise • Read article in the book and answer the questions: • Page 260-261 • Page 286-287 • Give an example of a benefit of a SCM system. What would it improve? • Describe the bullwhip effect and give an example! • Describe some of the difficulties of collaborative planning!