1. Chapter 6 Public B2B Exchanges

2. Learning Objectives 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 of exchanges
Describe the support mechanisms offered by exchanges, including auctions

3. Learning Objectives (cont.)
Describe networks of exchanges and exchange management
Describe the critical success factors of exchanges
Discuss implementation and development issues of e-marketplaces and exchanges
Describe the major support services of B2B
Describe the extranet and its role in supporting marketplaces and exchanges

4. ChemConnect: The World Chemical Exchange
The Problem
Thousands of companies trade raw and partially processed chemicals and plastics daily
Before the Internet the trading process was slow, fragmented, ineffective, costly
As a result:
Buyers paid too much
Sellers had high expenses
Intermediaries were needed for to smooth the process

5. ChemConnect (cont.) The Solution
Provides free membership in trading marketplaces and information portals
Public exchange floor for anonymous bids
Commodities floor for buying and exchanging
Corporate trading rooms—private online auctions
Up-to-the-minute market information
Large electronic catalog
Independent intermediary

6. ChemConnect (cont.) The Results
In ChemConnect trading rooms companies can save up to 15% in just 30 minutes of reverse auction
ChemConnect is growing rapidly, adding members and increasing trading volume each year

7. B2B 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

8. B2B Exchanges (cont.)
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

9. Exhibit 6.1 Trading Communities: Information Flow and Access to Information

10. Classifications 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

11. Exhibit 6.2 Classifications of B2B Exchanges

12. B2B Exchanges Dynamic pricing Ownership of exchanges Governance
Organization of exchanges
Gains and risks of B2B exchange participation

13. Dynamic Pricing
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

14. Dynamic Pricing (cont.)
Typical process that results in dynamic pricing in most exchanges
A company lists a bid to buy a product or an offer to sell one
Buyers and sellers can see the bids and offers—anonymity is often a key ingredient of dynamic pricing

15. Dynamic Pricing (cont.)
Buyers and sellers interact in real time with their own bids and offers—join together to obtain a volume discount price (group purchasing)
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
The deal is consummated, and payment and delivery are arranged

16. Ownership of Exchanges
An industry giant (IBM’s patent exchange delphian.com)
A neutral entrepreneur—a third-party intermediary (ChemConnect.com)
The consortia (or co-op)—several industry players set up an exchange (Covisint.com)

17. Governance 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

18. Governance (cont.) Security and privacy for documents
Contract terms between an exchange and buyers/sellers
Assurances that the exchange is fair

19. Organization of Exchanges
Membership
Generate revenue
Transaction and other fees
Registration fees
Annual membership fees
qualification process
deposit may be required
Limits set on how much each member can trade

20. Organization of Exchanges (cont.)
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

21. Exhibit 6.3 Services in Exchanges

22. Exhibit 6.4 Gains and Risks of B2B Exchanges

23. B2B Portals B2B portals—information portals for businesses
Thomas register—facilitates business transactions for MROs
Alibaba.com
Database
Reverse auctions
Features and Services
Revenue model
Vortals--B2B portals that focus on a single industry or industry segment; “vertical portals”

24. 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

25. Exhibit 6.6 Supplier Aggregation Model

26. Exhibit 6.7 Buyer Aggregation Model

27. 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

28. Consortium Trading Exchanges (CTE)
CTE (consortium)—an exchange formed and operated by a group of major companies to provide industry-wide transaction services
Vertical, purchasing-oriented
Horizontal, purchasing-oriented
Vertical, selling-oriented
Horizontal, selling-oriented

29. Purchasing-Oriented (Procurement) Consortia
E-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

30. Covisint Covisint—e-market of automotive industry
B2B integrated buy-side marketplace
General Motors
Ford
DaimlerChrysler
Entire industry gains
Lower costs
Easier business practices
Increased efficiency

31. Covisint (cont.) “Co” stands for
Connectivity
Collaboration
Communication
“Vis” stands for visibility provided by the Internet
“Int” stands for integrated solutions

32. Covisint (cont.) Collaborative commerce
Facilitate product design
Enable procurement process
Provide broad marketplace of buyers and suppliers
Vertical consortia trading exchange
Few large buyers
Many sellers (suppliers to the industry)

33. Covisint (cont.)
Marketplace’s connectivity integrates buyers and sellers into a single network
Flow of information integrates buyers and sellers into a single network
Visibility provides real-time information for:
Fast decision making
Communication throughout the supply chain, anywhere in the world

34. Covisint (cont.)
Web use allows changes to be sent simultaneously and instantly throughout its entire supply chain
The result:
Less need for costly inventory in the supply chain
Increased ability to respond quickly to market changes

35. Covisint (cont.)
One of the major objectives of the exchange is to facilitate product design:
Offers best-of-breed functionality
Ability to integrate providers across the supply chain creates (collaborative commerce)
Enables e-procurement
Provides broad marketplace of buyers and suppliers
Accesses a wealth of supply chain expertise and experience

36. Consortium Trade Exchanges
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

37. 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

38. Dynamic Trading Supply & Demand
Dynamic trading—exchange trading that occurs in situations when prices are being determined by supply and demand (dynamic pricing)
Supply & Demand

39. Dynamic Trading: Auctions and Matching
Market makers conduct matching supply and demand (e.g., stocks)
More complex than auctions because they match:
Prices
Quantities
Times
Locations

40. Dynamic Trading: Auctions and Matching
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

41. New Entrant to the Dutch Flower Market: TFA
Dutch auction method
Were semi-automated
Buyers and sellers went to one location to see the flowers
Auctioneer used a clock with a large hand set at a high price
Price dropped as the time ticked off on the clock
Until clock was stopped by pushing an order button
Quantity ordered was clarified over an intercom ,
Process continued until all of the flowers were sold

42. TFA (cont.)
TeleFlower Auction (TFA)—competing electronic auction enables its initiators to penetrate the Dutch flower market
Buyers bid on flowers via their PCs
Designated times
From any location
Auction clock shows on buyer’s PC screen
Clock stopped by pushing space bar
Auctioneer completes sale by telephone

43. TFA (cont.) Process is much quicker
After-sale delivery is much faster—within half an hour after the sale
Major issue can be the quality of the flowers
Flowers are not physically visible to the buyers
Large amount of relevant information is available
TFA quickly built a competitive advantage using IT

44. TFA (cont.)

45. Exhibit 6.9 Comparing the Major B2B Many-to-Many Models

46. Building and Integrating Marketplaces and Exchanges
Step 1—Think ahead
Step 2—Planning
Step 3—System analysis and design
Step 4—Building the exchange
Step 5—Testing, installation, and operation
Step 6—System evaluation and improvement

47. Building and Integrating Marketplaces and Exchanges (cont.)
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

48. Building and Integrating Marketplaces and Exchanges (cont.)
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

49. Managing Exchanges Revenue models Networks of exchanges
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

50. Exhibit 6.11 Several Exchange, One Supply Chain

51. Managing Exchanges (cont.)
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
VerticalNet (verticalnet.com)
Ventro (nexprise.com)

52. Critical Success Factors
Early liquidity
Business’s chance of survival is best when liquidity (volume of business conducted) 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

53. Critical Success Factors (cont.)
Right governance
Good management and fair /effective operations and rules are critical
Governance provides rules for the exchange, minimized conflicts, decision making support
Openness
Exchanges must be open to all from organizational and technical point of view
Open standards require universal commitment and agreement on the standards

54. Critical Success Factors (cont.)
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

55. Critical Success Factors (cont.)
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
High vendor and product search/comparison costs
Strong pressure to cut expenses

56. Critical Success Factors (cont.)
Brand building is critical
Increase switching costs by adding features and functionality
Invest in:
Gaining brand awareness
Attracting businesses to exchange
Customer retention

57. Critical Success Factors (cont.)
Exploiting economics of scope
Value-added services make exchange compelling
Industry news
Expert advice
Detailed product specification sheets
Support services
Banks and financial information providers
Identification supported by sophisticated digital certificate architecture

58. Critical Success Factors (cont.)
Choice of business/revenue models
Critical mass of users will garner more value-added services
Auction services
Financial services
Business reporting
Data mining services
Garner diverse and multiple revenue streams
Software licensing
Advertising
Sponsorship

59. Critical Success Factors (cont.)
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

60. 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

61. Communication Networks and Extranets for B2B (cont.)
Intranets—a corporate LAN or wide area network (WAN) that uses Internet technology and is secured behind a company’s firewalls
Links various servers,clients,databases,and application programs within a company
Limited to information pertinent to the company

62. Communication Networks and Extranets for B2B (cont.)
Extranets—a network that uses a virtual private network (VPN) to link intranets in different locations over the Internet; an “extended intranet”
Provide secured connectivity between a corporation’s intranets and the intranets of its business partners
protected environment of an extranet allows
Allows partners to securely collaborate and share information

63. Communication Networks and Extranets for B2B (cont.)
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

64. Exhibit 6.12 An Extranet

65. A Network Loaded with Extras: ANX
Automotive Network Exchange (ANX)—an infrastructure for B2B applications
Backed by General Motors, Ford, and Chrysler
Allows companies in the automotive market to:
Swap supply and manufacturing data
Buy
Sell
Collaborate

66. ANX (cont.) Benefits of ANX One-to-one and one-to-many connections
Procurement
CAD/CAM file transfers
EDI
Group-ware
“Big Three” expect to save millions of dollars
Consolidating communications links
Reduce order turn-around time

67. ANX (cont.)
A VPN for ANX
Most visible B2B implementation of VPNs that run over the Internet
Security—all participants must have tools compliant with (IP) security standards covering
Authentication
Encryption
Encryption key management.

68. Categories of Extranet Benefits
Enhanced communications
Productivity enhancements
Business enhancements
Cost reduction
Information delivery

69. Implementation Issues
Problems with 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

70. Implementation Issues (cont.)
Software agents in B2B exchanges
Disintermediation
Evaluating exchanges
How much will company really save and/or gain?
Determine viability of the exchange
Contracts and technology that lock into a long-term relationship
Membership—who sits on the board.
Who provides payment, logistics, other services?

71. Support Services for B2B Exchanges
Directory services and search engines
Partner relationship management
Other services:
Trust services Digital photos
Trademark and domain names Client matching
Global business communities Encryption sites
E-business rating sites Promotion programs
Web-research services

72. Managerial Issues Have we “done our homework?”
Can we use the Internet?
Which exchange?
Will joining an exchange force restructuring?
Will we face channel conflicts?
What are the benefits and risks of joining an
exchange?

73. Summary E-marketplaces and exchanges defined
The major types of e-marketplaces
B2B portals
Third-party exchanges
Consortium trading exchanges
Dynamic pricing and trading

74. Summary (cont.) Ownership and revenue models
Exchange networks and management of exchanges
Critical success factors for exchanges
Extranets
E-marketplaces and exchange implementation and development issues
Support services