Chapter 7

Public B2B Exchanges and Portals

Learning Objectives
1. Define e-marketplaces and exchanges and describe their major types. 2. Describe the various ownership and revenue models of exchanges. 3. Describe B2B portals. 4. Describe third-party exchanges.

Prentice Hall 2004

Learning Objectives (cont.)

5. Distinguish between purchasing (procurement) and selling consortia. 6. Define dynamic trading and describe B2B auctions. 7. Describe the operation and benefits of networks of exchanges. 8. Discuss exchange management.
Prentice Hall 2004 3

Learning Objectives (cont.)

9. Describe the critical success factors of exchanges. 10. Discuss implementation issues of e-marketplaces and exchanges. 9. Describe the major support services of B2B. 10. Describe the role of extranets in supporting marketplaces and exchanges.
Prentice Hall 2004 4

ChemConnect: The World Chemical Exchange

The Problem
Before the Internet, the B2B trading process was slow, fragmented, ineffective, and costly Buyers paid too much, sellers had high expenses, and intermediaries were needed to smooth the trading process

Prentice Hall 2004

ChemConnect: The World Chemical Exchange (cont.)

The Solution
Traders meet electronically in a large Internet marketplace Save on transaction costs, reduce cycle time, and find new markets and trading partners around the globe

Prentice Hall 2004

ChemConnect: The World Chemical Exchange (cont.)

ChemConnect provides a trading marketplace and an information portal to over 7,500 members in 135 countries Members are:
Producers Consumers Distributors Traders Intermediaries involved in the chemical industry
Prentice Hall 2004 7

ChemConnect: The World Chemical Exchange (cont.)

Trading Center consists of 3 trading areas
1. Marketplace for buyers 2. Marketplace for sellers 3. Commodity market platform

Prentice Hall 2004

ChemConnect: The World Chemical Exchange (cont.)

ChemConnect members use the Trading Center to streamline sales and sourcing processes by automating requests for quotes, proposals, and finding new suppliers The center enables a member to negotiate more efficiently with existing business partners as well as with new companies the member may invite to the table in complete privacy
Prentice Hall 2004 9

ChemConnect: The World Chemical Exchange (cont.)

The revenue model includes:
members annual transaction fees monthly or annual subscription fees (for trading and for auctions) fulfillment service fees

Three trading locations provide up-to-theminute market information Business partners provide several support services (payments, delivery, etc.)
Prentice Hall 2004 10

ChemConnect: The World Chemical Exchange (cont.)

The Results
Benefits of ChemConnect to its members are:
more efficient business processes lower overall transaction costs time saved during negotiations and biddings sellers reach more buyers and liquidate surpluses rapidly
Prentice Hall 2004 11

ChemConnect: The World Chemical Exchange (cont.)

What we can learn
Electronic exchange is owned and operated by a third-party intermediary Buyers and sellers, as well as other business partners, congregate electronically to conduct business

Prentice Hall 2004

12

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

Prentice Hall 2004

13

B2B Electronic Exchanges (cont.)

Market maker: The third-party that
operates an exchange (and in many cases, also owns the exchange) Systematic sourcing: Purchasing done in long-term supplierbuyer relationships Spot sourcing: Unplanned purchases made as the need arises
Prentice Hall 2004 14

B2B Electronic Exchanges (cont.)

Prentice Hall 2004

15

B2B Electronic Exchanges (cont.)

Prentice Hall 2004

16

B2B Electronic Exchanges (cont.)

Vertical exchange: An exchange whose
members are in one industry or industry segment Horizontal exchanges: Exchanges that handle materials used by companies in different industries

Prentice Hall 2004

17

B2B Electronic Exchanges

(cont.)
Dynamic pricing: A rapid movement of
prices over time, and possibly across customers, as a result of supply and demand

Prentice Hall 2004

18

B2B Electronic Exchanges (cont.)

Process that results in dynamic pricing in most exchanges includes
1. A company posts a bid to buy a product or an offer to sell one 2. Anonymity is often a key ingredient of dynamic pricing 3. Buyers and sellers interact with bids and offers in real time 4. A deal is struck when there is an exact match between a buyer and a seller on price, volume, and other variables such as location or quality 5. The deal is consummated, and payment and delivery are arranged
Prentice Hall 2004 19

B2B Electronic Exchanges (cont.)

Functions of exchanges
Matching buyers and sellers Facilitating transactions Maintaining exchange policies and infrastructure

Prentice Hall 2004

20

B2B Electronic Exchanges (cont.)

Prentice Hall 2004

21

B2B Electronic Exchanges

(cont.)
Ownership of exchanges
An industry giant A neutral entrepreneur The consortia (or third-party co-op)

Prentice Hall 2004

22

B2B Electronic Exchanges

(cont.)
Revenue models
Transaction fees Fee for service Membership fees Advertising fees Other revenue sources

Prentice Hall 2004

23

B2B Electronic Exchanges (cont.)

Governance and organization
Membership
the community in the exchange

Site access and security

information should be carefully protected

Services provided by exchanges

provide many services to buyers and sellers

Prentice Hall 2004

24

B2B Electronic Exchanges (cont.)

Prentice Hall 2004

25

B2B Electronic Exchanges (cont.)

Prentice Hall 2004

26

B2B Portals
B2B portals: Information portals for
businesses Pure information portals include:

directories of products offered by each

seller lists of buyers and what they want other industry or general information
Prentice Hall 2004

27

B2B Portals (cont.)

Vortals: B2B portals that focus on a
single industry or industry segment; vertical portals

Prentice Hall 2004

28

B2B Portal Examples

Thomas Registerinformation portal
Sellers distribute information on what they have to sell Buyers can find what they need and purchase over a comprehensive and secure procurement channel
reduce costs shrink cycle times improve productivity
Prentice Hall 2004 29

B2B Portal Examples (cont.)

Alibaba.comstarted as a pure information portal and is moving toward becoming a trading exchange
Huge database is a horizontal information portal with offerings in a wide variety of product categories Reverse auctions Featuresfree email, email alerts, etc Revenue modeladvertisement and fees for special
Prentice Hall 2004 30

Third Party (Trading) Exchanges

Third-party exchanges are characterized by two contradicting properties
they are neutral, not favoring either sellers or buyers they do not have a built-in constituency of sellers or buyers and sometimes have a problem attracting enough buyers and sellers to attain financial viability
Prentice Hall 2004 31

Third Party (Trading) Exchanges (cont.)

A major problem is:
Market liquidity: The degree to which
something can be bought or sold in a marketplace without affecting its price

Prentice Hall 2004

32

Third Party (Trading) Exchanges (cont.)

Prentice Hall 2004

33

Third Party (Trading) Exchanges (cont.)

Buyer aggregation model
buyers RFQs are aggregated and then linked to a pool of suppliers that are automatically notified of the RFQs

Suitability
aggregation models work best with MROs and services that are well defined, that have stable prices, and where the supplier or buyer base is fragmented
Prentice Hall 2004 34

Third Party (Trading) Exchanges (cont.)

Prentice Hall 2004

35

Consortium Trading Exchanges

Consortium trading exchange (CTE): An
exchange formed and operated by a group of major companies to provide industrywide transaction services Three basic types of environments:
1. Fragmented markets 2. Seller-concentrated markets 3. Buyer-concentrated markets
Prentice Hall 2004 36

Consortium Trading Exchanges (cont.)

CTEs, defined by two main criteria:
whether they focus on buying or selling whether they are vertical or horizontal

4 types of CTEs
1. 2. 3. 4. Purchasing oriented, vertical Purchasing oriented, horizontal Selling oriented, vertical Selling oriented, horizontal
37

Prentice Hall 2004

Consortium Trading Exchanges (cont.)

Purchasing-oriented consortia
Vertical Purchasing-Oriented CTEs
all the players are in the same industry

Horizontal Purchasing-Oriented CTEs

owner-operators are large companies from different industries that unite for the purpose of improving the supply chain of MROs used by most industries

Prentice Hall 2004

38

Consortium Trading Exchanges (cont.)

Selling-oriented consortia
Most selling-oriented consortia are vertical Participating sellers have thousands of potential buyers within a particular industry

Prentice Hall 2004

39

Consortium Trading Exchanges (cont.)

Other issues for consortia
Legal challenges for B2B consortia
level of collaboration among both competitors and business partners antitrust and other competition laws must be considered

Prentice Hall 2004

40

Consortium Trading Exchanges (cont.)

Critical success factors for consortia
Appropriate business and revenue models Size of the industry Ability to drive user adoption Elasticity
Elasticity: The measure of the incremental
spending by buyers as a result of the savings generated

Prentice Hall 2004

41

Consortium Trading Exchanges (cont.)

Management of intensive information flow Smoothing of supply chain inefficiencies Harmonized shared objectives

Combining consortia and third-party exchanges

dot-consortialarge consortia + third-party owner combination may bring about the advantage of both ownership and minimizing third-party limitations such as low liquidity
Prentice Hall 2004 42

Dynamic Trading: Matching and Auctions

Dynamic trading: Exchange trading
that occurs in situations when prices are being determined by supply and demand (e.g., in auctions) Matching
supply and demand quantity, delivery times, and locations
Prentice Hall 2004 43

Dynamic Trading: Matching and Auctions (cont.)

Auctions
Exchanges offer members the ability to conduct auctions or reverse auctions in

private trading rooms

auction services as one of its many activities fully dedicated to auctions

Many-to-many public auctionsvertical, horizontal, run on the Internet or over private lines
Prentice Hall 2004 44

Building E-Marketplaces
Building e-marketplaces is a complex process
usually performed by a major B2B software company
Commerce One Ariba Oracle IBM
Prentice Hall 2004 45

Building E-Marketplaces (cont.)

Integration issue
Seamless integration is needed between the third-party exchange and the participants front and back-office systems In private exchanges the sellers computing system must be integrated with the customers systems
Prentice Hall 2004 46

Building E-Marketplaces (cont.)

External communications
Web/client access Data exchange Direct application integration Shared procedures

Process and information coordination in integration

how to coordinate external communications with internal information systems
Prentice Hall 2004 47

Building E-Marketplaces (cont.)

Use of Web services in integration
Web Services enable different Web-based systems to communicate with each other using Internet-based protocols such as XML

System and information management in integration

management of software, hardware, and several information components, including partner-profile information, data and process definitions, communications and security settings, and users information
Prentice Hall 2004 48

Support Services for Public and Private Marketplaces

Directory services and search engines
Directory services help buyers and sellers manage the task of finding potential partners

Prentice Hall 2004

49

Support Services for Public and Private Marketplaces (cont.)

Partner relationship management (PRM): Business strategy that focuses
on providing comprehensive quality service to business partners E-communities and PRM

B2B application needs to provide community services such as chat rooms, bulletin boards, and possibly personalized Web pages
Prentice Hall 2004 50

Support Services for Public and Private Marketplaces (cont.)

Integration (as per Keenan Report)
Business-to-exchange (B2X) hubs connect all of the Internet business services
e-merchant services exchange infrastructure buying and selling member enterprises other B2X exchanges
Prentice Hall 2004 51

Implementation Issues
Private vs. public exchanges
Private exchanges: E-marketplaces that marketplaces
are owned and operated by one company. Also known as company-centric

Prentice Hall 2004

52

Implementation Issues (cont.)

Problems with private exchanges
Transaction feesrequired to pay transaction fees with existing customers Sharing informationdo not want to share business data with competitors Cost savingsnot great enough to attract buyers Recruiting supplierslose direct contact with customers Too many exchanges
Prentice Hall 2004 53

Implementation Issues (cont.)

Supply chain improvers
Companies want to streamline their internal supply chains, which requires integration with internal operations instead of plugging in to an exchanges infrastructure

Major problem is trust in the large corporation running the exchange

Prentice Hall 2004 54

Implementation Issues (cont.)

Software agents in B2B enable customized syndication of content and services from multiple sources on the Internet to any device connected to the Internet
provide real-time, tighter integration between buyers and sellers facilitate management of multiple trading partners and their transactions across multiple virtual industry exchanges
Prentice Hall 2004 55

Example: Asite
Asites B2B marketplace for the construction industry
B2B e-marketplace for the construction industry in the United Kingdom This industry is typified by a high degree of physical separation and fragmentation, and communication among the members of the supply chain is a primary problem
Prentice Hall 2004 56

Asite (cont.)
Two of the major advantages of the Internet:
ability it provides to communicate more effectively increased processing power made possible by Internet technologies

Asite decided not to build its own technology, but to establish partnerships with technology vendors that have highly specialized products
Prentice Hall 2004 57

Asite (cont.)
Commerce One provides the business solution for the portal Microsoft provides the technology platform and core applications Attenda is the designer and manager of the Internet infrastructure

Asite is committed to strong partnerships that allow it to seamlessly interact with other e-marketplaces
Prentice Hall 2004 58

Asite (cont.)
Internet browser is all that is needed to connect to Asites portal Ease of access makes it particularly well suited to an industry such as construction

Construction firms streamline their supply chains

Prentice Hall 2004

59

Asite (cont.)

Prentice Hall 2004

60

Managing Exchanges
Open standards mean that the technology can be incorporated easily with participating firms back-end technologies, allowing full visibility of the supply and demand chains

Prentice Hall 2004

61

Managing Exchanges (cont.)

Networks of exchanges (E2E)
Large corporations may work with several exchanges, and they would like these exchanges to be connected in a seamless fashion
Commerce One and Ariba developed a strategy that allows them to plug a broad range of horizontal exchanges into their main networks
Prentice Hall 2004 62

Managing Exchanges (cont.)

Prentice Hall 2004

63

Managing Exchanges (cont.)

Centralized management
Managing exchanges and providing services to participants on an individual basis is expensive Build families of exchanges managed jointly in order to operate several exchanges from a unified, centralized place
Prentice Hall 2004 64

Managing Exchanges (cont.)

Manages all of the exchanges:
Catalogs Auction places Discussion forums

Managing and centralizing:

Accounting Finance Human resources IT services
Prentice Hall 2004 65

Managing Exchanges (cont.)

Critical success factors for exchanges according to Ramsdell:
1. 2. 3. 4. 5. Early liquidity The right owners The right governance Openness A full range of services
66

Prentice Hall 2004

Managing Exchanges (cont.)

Other CSF:
Importance of domain expertise Targeting inefficient industry processes Targeting the right industries Brand building Exploiting economies of scope Choice of business/revenue models Blending content, community, and commerce Managing channel conflict
Prentice Hall 2004 67

Managing Exchanges (cont.)

New directions in B2B marketplaces
Early failures of exchanges were due mainly to the failure of these marketplaces to foster a broad-based sharing of information Recognize the fundamental asset provided by their member base is the unique knowledge of the industry
Prentice Hall 2004 68

Managing Exchanges (cont.)

e-distributors
Take title to the goods they sell Aggregate those goods for the convenience of buyers Advise buyers which to choose Reach hard-to-find buyers Result in extra value for buyers and decent profits for sellers

Prentice Hall 2004

69

Managerial Issues
1. 2. 3. 4. Have we done our homework? Can we use the Internet? Which exchange to join? Will joining an exchange force restructuring? 5. Will we face channel conflicts? 6. What are the benefits and risks of joining an exchange?
Prentice Hall 2004 70

Summary
1. E-marketplaces and exchanges defined and the major types of exchanges. 2. Ownership and revenue models. 3. B2B portals. 4. Third-party exchanges. 5. Consortia and e-procurement. 6. Dynamic pricing and trading.
Prentice Hall 2004 71