B2B

1. B2B • E-Procurement • Metamediaries • Intermediation Opportunities

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

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

6. Why EDI was not sufficient?

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

8. Production Vs. Non-Production Items

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

10. B2B • E-Procurement • Metamediaries • Intermediation Opportunities

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

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

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

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

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

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

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. B2B • E-Procurement • Metamediaries • Intermediation Opportunities

21. Buyers Origins of Intermediaries Sellers Third Parties

22. 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

23. Sellers Initiated Exchange: MetalSite • Industry • World market over 750 million tons, US Share 10% • Founders: Weirton Steel, LTV Steel, Steel Dynamics, Bethlehem Steel, Ryerson Tull • History • First provided industry news and product information • Next introduced e-commerce capabilities • New services (banking, logistics, billing,…) added later • 2000 Results: 50,000 transactions; 22000 users; 2 million tons; 30,000 products listed • Closed June 2001, MSA buys Metalsite in August 2001

24. Rules • Open, neutral marketplace, confidentiality • Users must register, MetalSite to check legitimacy • Sellers’ Goals • Expand customer base • Improve selling efficiency • Increase inventory turnover • Reduce non-value added tasks • Buyers’ Incentives • Locate and purchase products effectively • Cut costs and time

25. Major Functions • Marketplace Products: Auction, Product guide, QuoteFinder • System Integration services • e-Business consulting services • Fulfillment products (Transportation, Financing, Collaborative forecasting, Advance order status notification) • Revenue Model • Transaction fees 0.25%-2% on auctions and product guide, small fee to use QuoteFinder • Difficulty in collecting transaction fees

26. 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

27. Buyers Initiated Exchange: Covisint • Industry • Procurement market for Automakers, over $350 billion • Major Players: DaimlerChrysler AG, Ford, GM, Nissan, Renault • History • Announced in Feb 2000 • 200 catalogs; 1000 users; 20,000 transactions by June 2001 • Total volume in 2001 is expected to be $129 Billions • Major Functions • Procurement • Catalogs • Buyer / Seller auction

28. Auto makers’ Goals • Cut time and costs • Exchange engineering data • More suppliers • Custom cars • Tier-1 Suppliers’ Incentives • Cut costs • Buyer pressure

29. Regulatory Issues • Auto makers not to combine requirements • Auto makers can’t see needs of others • Export regulations enforcement • No loss in tax revenue • Requirements • Currency conversion • Language translation • Supplier order management capabilities

30. Industry • Aviation ($500 Billion) • Major Players: Nine airlines and three aerospace manufacturers • History • Airlines announced AirNewco as their B2B marketplace in 4/00 • Suppliers announced MyAircraft.com in 2/00 • AirNewco and MyAircraft merge to become Cordiem in 3/01 • First major B2B marketplace supported by buyers and sellers • Partners - i2 Technologies, Ariba • Competes with Exostar led by Boeing, Lockheed & Raytheon • More than two dozen aerospace marketplaces

31. Major Functions • Online catalogs • Reverse and forward auctions • Inventory and supply chain management tools • Transaction support • Revenue Model • Transaction fees on auctions, small fee for catalog listing • Subscription fees for supply chain management services • Both buyers and suppliers pay

32. Rules • Neutral, global e-marketplace • Open to any airline and supplier • No requirement on membership or exclusive use • Sellers’ Goals • Focus on selling after-market products and services • Reduce inventory, errors, costs • Buyers’ Incentives • Maintenance & engineering, fuel & fuel services, catering & cabin services, airport support services & general procurement • Locate and purchase products quickly • Cut costs and time

33. 3rd 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)

34. 3rd Party Initiated Exchange: FreeMarkets • Industry • Initial market - industrial intermediate components ($600 Billion) • Large order size - $3 million per transaction • History • Launched in 1995 as an independent B2B marketplace • Reduce price and transaction costs • Worldwide expansion in 55 countries • Score Card 2000 • Market volume $9.9 B, saved $2.7 B • 9200 auctions, 9300 suppliers • Revenue $91.3 m, loss $44m

35. Value Creation for Buyers Price reduction REVERSE AUCT ION Consulting Purchase Outsourcing • Identify potential saving • Prepare specs, RFQ • Identify + Qualify suppliers Purchasing cost reduction Distribution Intermediary • Buyer’s agent • Suppliers compete New suppliers identification Technology Enabler • Conduct auction • Train buyer • Post-auction analysis Research product, outsource RFQ

36. Value Creation for New Suppliers New buyer identification Find new buyers • Respond to inquiry • Receive certification M O R E S A L E S Reduce sales costs Bid preparation • Respond to RFQ • Complete specs Reduce transaction costs Technology Enabler • Conduct auction • Train seller • Award preparation But face more competition!

37. Challenges Facing Intermediaries • Acceptance by buyers and sellers • Revenue generation • Sales and marketing costs • infrastructure and operating costs • Intense competition!

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

39. 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

40. What went wrong with Public Exchanges? • Bias.Many exchanges required standardized product descriptions by sellers, and often allowed price comparison by buyers. • Funding. Many independent exchanges were funded by the financial community who pulled the plug when they did not sufficient revenue. • Technology. Lack of integration between the exchange and supplier ERP system. Buyers had to call the supplier anyway! • Complexity. Too many terms (specs, pricing, availability, delivery dates) require direct negotiation between buyers and sellers.

41. 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.

42. 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

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