1. 1 B2B E-Procurement Metamediaries Intermediation Opportunities

2. 2 B2B Buying Problems Sourcing: Search Costs due to large number of sellers Ordering: Workflow and transaction costs from many orders & dependent demand Replenishment: Continued reliance on old source Fulfillment: Monitoring costs to avoid errors

3. 3 Electronic Data Interchange (EDI) Definition. -First developed in the late 1960s -Business to Business exchange of standardized documents in electronic form (e.g., Invoice, Purchase order) Background. Early barriers: lack of standards, telecom infrastructure New national (X.12), international (EDIFACT) standards Used heavily by large companies (e.g., Fortune 1000) Enables re-structuring business relationships

4. 4 Common EDI Applications in B2B Commerce Quick Response (QR): POS data to supplier Model Stock Replenishment: Supplier manages inventory Materials Management: JIT systems Efficient Customer Response (ECR): Grocery industry chain Evaluated Receipt Settlement: No invoice Collaborative Forecasting and Replenishment: Sharing forecast

5. 5 Value Added Networks (VAN) Advantages: Translation, security, auditability, integrity Disadvantages: High price, Connect time + mailbox charges Translate incoming document VAN Translate X.12  EDIFACT Compliance checking Route to mailbox Buyer Bank Transport company Seller

6. 6 Why EDI was not sufficient?

7. 7 The e-Procurement Cycle Web based Procurement Process  Old Approach: Task orientation (slow and error prone)  New Approach: Process orientation (Faster and cheaper) 1. Browse online catalogs 2. Create Requisition 3. Check availability 7. Receiving 8. Accounts Payable 9. Route to Recipient 6. Ship Product 5. Supplier Fulfillment 4. Online Approval 5a. Check status

8. 8 Production Items Raw materials and components Scheduled by production runs Professional buyer initiates No approvals required High degree of automation Design-spec driven Non-Production Items Office & computer supplies; MRO supplies; Travel Ad hoc, not scheduled Employee initiates Approval required Little automation Catalog driven

9. 9 Requirements of e-Procurement Systems Purchasing Management Quality Evaluation Supplier Selection Purchasing Contracts Accounting Order Mgt, Quotations, Negotiations Goods Received, Source Quality Identification, Price, Lead Time Quantity Contracts, Discounts Budgeting, Overheads, Costing Most systems provide a subset of these functions!

10. 10 B2B E-Procurement Metamediaries Intermediation Opportunities

11. 11 Large Market size Fragmented supply chain Some product differentiation High search costs Product comparison hard High workflow costs Markets ready for intermediaries

12. 12 B2B Trading Models 1. Multi-vendor catalogs Price posted, Product comparison, Customization Chemdex, e-Chemicals, PlasticNet, NetBuy 2. Post and Browse Bulletin Board accessible by pre-qualified users One-on-one negotiation of non-standard products Catex (insurance), PaperExchange, CreditTrade 3. Auction Seller driven liquidation of surplus inventory (MetalSite) In reverse auction, buyer specifies items and lot-sizes Popularized by FreeMarkets, VerticalNet, Tradeout

13. 13 B2B Revenue Models Transaction fees  Often paid by seller (e-Steel), sometimes shared by parties  Difficulty of collecting fees in post and browse exchanges  Pressure to waive fees to achieve acceptance Membership fees (visitors with restricted privileges) Order posting fees with volume discounts Supplier listing fees (VerticalNet) Auction Commissions Selling content, trading and historical data (Manheim Online) Advertising Software licensing

14. 14 Intermediary Match buyers and suppliers Buying guides Credit verificationRisk management Procurement Order fulfillment Settlement Metamediary Metamediary Metamediary Metamediary Metamediary Intermediary vs. Metamediary A successful marketplace does more than matching buyers and suppliers!

15. 15 Value Creation by Intermediary Improve Information Flows Improve Price / Quality Build Liquidity Reduce Costs

16. 16 Improve Information Flows Increase communication channel efficiency Increase the number of buyer- seller channels Decrease the number of communication channels

17. 17 Reduce Costs Carrying Cost Fulfillment Cost Transaction Cost Workflow Cost Search Cost Product Cost Bulk Chemicals Office Supplies Different industries provide different cost reduction opportunities!

18. 18 Improve Price / Quality Price / Quality Number of Sellers Savings from more sellers Traditional cost of search Internet cost of search Value Added

19. 19 Build Liquidity Transaction automation leads to Improved Velocity Central marketplace leads to Improved Reach Improved Reach + Improved Velocity = Liquidity Market liquidity brings more buyers and sellers Product liquidity helps sell goods / services

20. 20 Market Dynamics  Cost of connection proportional to participants  Value of market proportional to buyer-seller relationships  Value increases if each participant can be either buyer or seller  Value accelerates if multiple transactions occur before consumption

21. 21 B2B E-Procurement Metamediaries Intermediation Opportunities

22. 22 Origins of Intermediaries Buyers SellersThird Parties

23. 23 Origins of Intermediaries: Sellers Electronic catalog, transaction capabilities Access to product information and transaction automation Migration from one seller to multi-vendor catalogs Global Healthcare Exchange (J&J, GE Medical, Baxter, Abbott) MetalSite by steel producers

24. 24 Origins of Intermediaries: Buyers Buyers want catalogs or reverse auction Gain access to product information and availability Migration from one buyer to multi-buyer market place GEIS TPN procurement to marketplace Automakers’ Covisint

25. 25 3 rd Party Intermediaries –Exploit inertia in product markets –Speed, neutrality, but acceptance? –Internet players: (e-Steel, Chemdex, FreeMarkets) –Infomediaries: Create virtual community, no procurement experience (Asian Sources, SeaFax) –Software Provider: Trusted name, but no market experience (Ariba, Commerce One, Oracle Exchange)

26. 26 Challenges Facing Intermediaries          

27. 27 B2B Myths The middleman must go! Speed is everything! EDI will vanish! Old economy companies don’t get it! Throw away your old systems!

28. 28 Private Exchanges Limited access! Pre-existing business relationship Higher level of integration Order confirmation, tracking Seller / buyer auctions More volume than public exchanges ($b 242 > 43 in 2000)! Example: Buyer GE $ 20b

29. 29 Its not the technology, stupid! Its about redesigning workflows, processes and structures (BPR / Change Management)! Its about collaboration between various parties inside and outside the company! Its about the cross-functional approach. Its about changing decision making! Multi- million dollar contracts today are decided by higher ups who act in weeks! The cost of training and process redesign exceeds technology costs.

30. 30 B2B Exchanges: Industry Outlook At its peak in July 2000, as many as 1400 exchanges emerged (Source: Business Week) More than 100 shut down in 2000 (WSJ, May 21, 2001) About 200 are expected to survive! (Forrester Research, ’01) Industry Life Cycle: Emergence (Many competing approaches, few succeed)

31. 31 Key Points E-Procurement is a must! Searching for a B2B revenue model! More online business, fewer exchanges?