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 roomsprivate 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
Exchangea many-to-many e-marketplace.
Also known as e-marketplaces, e-markets,
and trading exchanges
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B2B Exchanges (cont.)

Market makerthe 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 sourcingpurchasing done in longterm supplier-buyer relationships
Spot sourcingunplanned purchases made as the
need arises
Vertical exchangean exchanges whose
members are in one industry or industry segment
Horizontal exchangean 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 pricinga 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
offersanonymity 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 offersjoin
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 (IBMs patent
exchange delphian.com)
A neutral entrepreneura 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
protectedcompetitors 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 portalsinformation portals for
businesses
Thomas registerfacilitates 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 buyersneutral
without a built-in constituency of sellers or
buyers they have a problem attracting
enough buyers and sellers to attain financial
viability

Liquiditythe 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 marketsseveral large

companies sell to a very large number of
buyers
Seller-concentrated marketsseveral 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
Covisinte-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.)
Marketplaces 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
Elasticitymeasure 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 tradingexchange 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 roomsmembers 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 buyers 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 fasterwithin
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 1Think ahead
Step 2Planning
Step 3System analysis and design
Step 4Building the exchange
Step 5Testing, installation, and operation
Step 6System evaluation and
improvement
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Building and Integrating

Marketplaces and Exchanges (cont.)
Integration
Between 3rd-party exchange and backoffice 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 coordinationhow
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
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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
Businesss 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
value-added 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 perspectivecreates 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 Interneta 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.)
Intranetsa corporate LAN or wide area
network (WAN) that uses Internet
technology and is secured behind a
companys 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.)
Extranetsa 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
corporations 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
Securityall 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 exchangese-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
Membershipwho 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
Digital
photos
Trademark and domain names
Client
matching
Global business communities Encryption sites
E-business rating sites
Promotion
programs
Web-research services

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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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