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Chapter 6
Public B2B Exchanges
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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
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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
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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
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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
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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
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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
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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
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Exhibit 6.1
Trading Communities: Information Flow
and Access to Information
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Classifications of Exchanges
Systematic sourcing—purchasing done in longterm 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
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Exhibit 6.2
Classifications of B2B Exchanges
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B2B Exchanges
Dynamic pricing
Ownership of exchanges
Governance
Organization of exchanges
Gains and risks of B2B exchange participation
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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
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Dynamic Pricing (cont.)
Typical process that results in dynamic
pricing in most exchanges
1. A company lists a bid to buy a product or an
offer to sell one
2. Buyers and sellers can see the bids and
offers—anonymity is often a key ingredient
of dynamic pricing
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Dynamic Pricing (cont.)
3. Buyers and sellers interact in real time with
their own bids and offers—join together to
obtain a volume discount price (group
purchasing)
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
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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)
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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
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Governance (cont.)
Security and privacy for documents
Contract terms between an exchange and
buyers/sellers
Assurances that the exchange is fair
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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
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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
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Exhibit 6.3
Services in Exchanges
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Exhibit 6.4
Gains and Risks of B2B Exchanges
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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”
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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
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Exhibit 6.6
Supplier Aggregation Model
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Exhibit 6.7
Buyer Aggregation Model
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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
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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
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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
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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
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Covisint (cont.)
“Co” stands for
Connectivity
Collaboration
Communication
“Vis” stands for visibility provided by the
Internet
“Int” stands for integrated solutions
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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)
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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
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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
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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
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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
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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
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Dynamic Trading
Dynamic trading—exchange trading that
occurs in situations when prices are being
determined by supply and demand
(dynamic pricing)
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Dynamic Trading:
Auctions and Matching
Matching
Market makers conduct matching supply and
demand (e.g., stocks)
More complex than auctions because they
match:
Prices
Quantities
Times
Locations
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Dynamic Trading:
Auctions and Matching
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
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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
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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
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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
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TFA (cont.)
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Exhibit 6.9
Comparing the Major B2B
Many-to-Many Models
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Building and Integrating
Marketplaces and Exchanges
Step
Step
Step
Step
Step
Step
1—Think ahead
2—Planning
3—System analysis and design
4—Building the exchange
5—Testing, installation, and operation
6—System evaluation and improvement
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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
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Building and Integrating
Marketplaces and Exchanges (cont.)
Process and information coordination—how to
coordinate external communications with
internal information systems
External process
Data transformation
Internal process
Exception handling
System and information management—involves
management of:
Software
Hardware
Information components
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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
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Exhibit 6.11
Several Exchange, One Supply Chain
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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)
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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
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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
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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
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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
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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
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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
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Critical Success Factors (cont.)
Choice of business/revenue models
Garner diverse and
multiple revenue
streams
Software licensing
Advertising
Sponsorship
Critical mass of users
will garner more valueadded services
Auction services
Financial services
Business reporting
Data mining services
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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
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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
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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
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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
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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
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Exhibit 6.12
An Extranet
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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
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ANX (cont.)
Benefits of ANX
One-to-one and one-to-many connections
Procurement
CAD/CAM file transfers
EDI
E-mail
Group-ware
“Big Three” expect to save millions of dollars
Consolidating communications links
Reduce order turn-around time
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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.
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Categories of Extranet Benefits
1.
2.
3.
4.
5.
Enhanced communications
Productivity enhancements
Business enhancements
Cost reduction
Information delivery
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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
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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 longterm relationship
Membership—who sits on the board.
Who provides payment, logistics, other services?
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Support Services for B2B Exchanges
Directory services and search engines
Partner relationship management
Other services:
Trust services
Trademark and domain names
Global business communities
E-business rating sites
Web-research services
Digital photos
Client matching
Encryption sites
Promotion programs
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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?
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Summary
E-marketplaces and exchanges defined
The major types of e-marketplaces
B2B portals
Third-party exchanges
Consortium trading exchanges
Dynamic pricing and trading
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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
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