IT - Enabled B2B Markets
Courtesy of
Professor Ravi Aron, Wharton
B2B – Markets
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Aggregation and Matching
Biased and Neutral Markets
Manufacturing and Operating Inputs
Forward and Reverse Aggregators
Revenue Implications
– End-to-End Automated Models
– Shallow Linked Portals
Acknowledgement: Some of the contents of this presentation were extracted from the Article – “E-Hubs: The New
B2B Marketplaces” by Steven Kaplan and Mohanbir Sawhney in HBR May – June 2000.
Business to Business Markets
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Covisint, FairMarkets, FreeMarkets
Ariba, CommerceOne (enablers)
VerticalNet, Pantellos, GlobalNetExchange
SciQuest.com, Rubbernetwork
Plasticsnet.com, GCE Market
Why do Business on the Web?
Stuff you’ve heard before
• Greater Choice to buyers and sellers
• Reduction in transaction costs
• Different ways of enabling price discovery
Here’s a new one:
• Because the marketplaces are digital and not made of
bricks and mortar, they can scale upwards with
minimal incremental investment.
• Suggested Terminology for B2B Mkts. e-hubs.
How do B2B Mkts. Create Value?
• Two basic sources of value creation –
Aggregation and Matching.
• Aggregation:
– Internal Aggregation – Processes inside the firm
– Market Aggregation – Meta-Catalogs
• Internal Aggregation:
– Decrease the extent of human intervention
– 80 – 20 rule: the MRO Problem
Aggregation
• Market Aggregation:
– Bring many buyers and sellers to the same, shared
market space.
– Transaction costs are reduced by providing multiple
products in the same market.
– The infostrcutre: – 4 information components
• Product features, Price, Quality and reliability (reputation
and order fulfillment).
• Prices are pre-negotiated.
• Deep Linking
Supplier
Shippers
Supplier
Financial
Services
Database
Internal
Info
Repositories
Transaction
Status
Database
Copyright © Ravi Aron
Enabling Deep Linking – Firm
Wide IT Architecture
Supplier
Matching
Processes
Aggregation
Processes
B2B
Market
Search and Query
Processes
Buyer's
Information
System
Transaction
Processing System
Inventory
Management
System
Decision
Support System
Purchase
Order
Aggregation
When does Aggregation work best?
• The cost of processing a purchase order is high relative
to the cost of items bought.
• Specialized products (non commodities).
• Large number of products.
• Suppliers are highly fragmented.
• Easy to create a metacatalog the offerings of a large
number of sellers.
• Ex: Plasticsnet.com, SciQuest.com
• Pricing: Subscriptions, Listing fees, tertiary revenue
Matching
• Bring buyers and sellers together and allow
dynamic price discovery.
• Spot Sourcing, Auctions are examples of matching
mechanisms.
• It (generally) creates greater value than
Aggregation – however it is far more complex.
• Ex: Altra-Energy
• Pricing: commissions, subscriptions, listing fees,
subscription + commission, multi-part tariff
Optimal Conditions for the Matching
Mechanism
• Minimal product differentiation
• Buyers and sellers understand dynamic pricing.
• Demand (and therefore), Price volatility in the
market.
• Companies can use spot purchasing to achieve
demand smoothing.
• Trade sizes (dollar value) are massive compared
to trade costs.
B2B Markets: Products
• Products that are sold on e-Hubs can be classified
into manufacturing inputs and operating inputs.
• Manufacturing Inputs are raw materials that go into
the creation of a product.
• These goods vary considerably from one industry to
another.
• They are usually purchased from industry specific
suppliers (does O&M buy HNO3?)
• Tend to require specialized logistics and delivery
systems. UPS does not deliver Raw Steel (yet).
Operating Inputs
• These are not raw materials.
• Often used for Maintenance, Repair and Operational
purposes – MRO Goods.
• Ex: Office Supplies Airline Tickets, Diskettes etc.
• Often bought from Horizontal Suppliers – such as
Staples, Travlocity, American Express.
• Logistics and Delivery can be handled by generalists.
How do They Sell?
• Two forms of B2B buying.
• Spot Sourcing and Systematic Outsourcing.
• Spot Sourcing:
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Satisfy demand at lowest possible cost.
Usually buy to meet an immediate need.
Commodity Transactions: Oil, Steel, Energy.
Almost never involve long term relationship with suppliers.
• Systematic Outsourcing:
– Involves longer term supplier-buyer relationships.
– Specialized products and customization.
– Negotiated prices that are usually not changed based on
prevailing Supply-Demand imbalances.
Four Mkts. and a Matrix
MRO Hubs
Systematic
Outsourcing
Ariba
W.W. Grainger
MRO.Com
Bizbuyer.Com
Yield Managers
Spot
Sourcing
Emplyease
Adauction.com
CapacityWeb.com
Operating
Inputs
Catalog Hubs
Chemdex
SciQuest
PlasticsNet
Exchanges
e-Steel
Paper Exchange.com
Altra Energy
IMX Exchange
Manufacturing Inputs
Classifying B2B markets
E-Hubs can be classified into four categories
• MRO hubs:
– Horizontal mkts.that enable systematic outsourcing of Operating Inputs
– Ex. CommerceOne.com
• Yield managers:
– Horizontal mkts. that enable spot sourcing of Operating Inputs – Ex.
FairMarkets.com
• Exchanges:
– Vertical mkts. enable spot sourcing of Manufacturing Inputs – Ex.
CommerceOne.com,VerticalNet.com
• Catalog hubs:
– Vertical mkts that enable systematic outsourcing of Manufacturing
Inputs- Ex. PlasticsNet.com Ariba.Com, GCEMarket.com
Whose Mkt. is it Anyway?
Biased and Neutral B2B mkts.
• When an e-hub is run by independent third parties and
does not favor buyers over sellers or vice versa, it is
called a neutral mkt.
• Seller Bias: The e-hub acts as a forward aggregator
that amasses supply and acts downstream in a supply
chain.
• Ex: Ingram Micro: Forward aggregator in the
Computer industry. TradeOut.com acts as a forward
auctioneer of excess inventory.
• Objective: Increase the seller’s pricing power.
Forward Aggregators
Small Resellers
Large
Suppliers
Nortel
Ingram
Micro
JDSU
Cisco
Sycamore
Order
Fulfillment
Call Center
Financing
Configurators
Direction of Aggregation
Buyers
Reverse Aggregators
• E-Hubs that favor buyers act as Reverse Aggregators.
• What do Reverse Aggregators do:
– Attract large number of buyers
– Bargain on their behalf
– Therefore limit the seller’s pricing power.
• Face higher marketing and operational costs – since
they focus on small buyers.
• They are not particularly attractive to large buyers who
already enjoy discounts.
• Ex: FreeMarkets.com - a reverse Auctioneer (serves
Fortune 500 companies) and FOB.com reverse
aggregator of buyers in the chemicals mkt.
Reverse Aggregators
Small
Buyers
Distributors
Large
Suppliers
Dupont
FOB.com
Dow
Ashland
3M
Order
Fulfillment
Inspection
Recievables
Financing
Direction of Aggregation
Neutral Markets
• E-Hub run by third parties, attempt to favor neither side (to the
transaction).
• Suppliers on Neutral Aggregators often face channel conflict.
They participate at the expense of the ‘normal’ distribution
channels. Ex. Chemdex partnered with VWR.
• Poor Liquidity:
– Buyers don’t want to enter unless there are suppliers - who in turn don’t
want to enter the mkt. unless there are buyers (did somebody say “Chicken
and egg?”).
– Biased e-hubs have no such problems – they are aligned with the stronger
side and motivate its participation.
• Neutral e-Hubs are most successful in mkts. that are fragmented
on both sides while biased e-hubs add the greatest value when
the mkt. is fragmented on one of the two sides.
The Business Portal Model
Supplier
Supplier
Supplier
Supplier
Information
Sources
B2B Market
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyers
Copyright © Ravi Aron
Third Party
Service Providers
Supplier
Shippers
Supplier
Financial
Services
Database
Internal
Info
Repositories
Transaction
Status
Database
Matching
Processes
Aggregation
Processes
B2B
Market
Search and Query
Processes
Buyer's
Information
System
Transaction
Processing System
Inventory
Management
System
Decision
Support System
Purchase
Order
Copyright © Ravi Aron
End-to-End Linked Market
Supplier
Public Markets, Consortia and
Private Markets
• Independent Public Markets suffer from poor liquidity.
• To be successfull they need to move from the Business Portal
Model to the Deep Linked Market.
– To do this they have to attract large upfront investment
– They need buyers and sellers that will make this investment
• They rarely succeed
• Consortia-driven markets: Several large B2B companies form a
B2B consortium and run it to favor them
– Many companies commit to usage – therefore, they have some liquidity.
• They are large enough to define and enforce standards
• If their members are strong enough they can force the other side
(suppliers) to sign up.
Limitations of Consortia
• Prospect of Collusion between members.
• They favor one party (usually, buyers)
disproportionately to the detriment of another (usually
suppliers).
• The profit of the consortium may often come at the
expense of the owners and the market participants.
• If several firms team up and form a consortium – then
all will benefit from the efficiencies but none will gain
an advantage over their competitors.
• Firms are also often unwilling to reveal proprietary
information to rivals through these markets.
Benefits of Private Exchanges
• The benefits of private exchanges:
– Provide liquidity
– Improved Efficiency – IBM – saved $ 370 million (in 2000).
– Minimize Quality Risks
• Admit only those vendors with proven records
• Strategic Benefits:
– If a buyer consortium becomes disproportionately strong –
suppliers may resort to running a private exchange to control
the market mechanism.
– A Divide and Conquer device.
• Tighter IT-enabled integration between buyer and
seller.
Revenue Models:The Portal Model
• Subscriptions
• Listing fees
• Tertiary revenue becomes crucial
– Advertising
– Commissions from third party order fulfillment services – shippers
etc.
– Commissions from third party financial services (escrow, loan
origination, insurance)
• The portal is only as good as the information that it provides
- dependence on information providers such as OpenRatings
and industrial product rating services
• Ex: VerticalNet: Is the revenue model robust and
sustainable?
Revenue Models: Deep Linked Markets
• The End-to-End Automated market
• Revenue from a variety of sources
– Subscriptions & Listing fees
– Commissions:
• Flat rate commission
• Two part tariffs, multi-part tariffs
– Less dependence on tertiary revenues
– Extent of lock-in may determine if revenues are sustainable
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Costs: Adoption subsidies & Upfront costs
IT usage intensive – revenues slow to build up
No example yet of a successful fully functional Catalog Hub.
Contrary to hype in the business press the major source of revenue is
not auction (or market mechanism) related.
B2B: Markets – Revenue Models
• The Portal Model
• Subscriptions
– Listing fees
– Tertiary revenue becomes crucial
– VerticalNet
• The End-to-End Automated market
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Subscriptions & Listing fees
Two part tariffs, multi-part tariffs
Adoption subsidies & Upfront costs
Lock-in may offer sustainable revenues
Summary
• B2B – hubs create value by matching and
aggregation.
• They can be biased or neutral.
• B2B hubs are biased towards the party that they
seek to aggregate. They seek to increase that
party’s buying power.
• Two forms of sourcing: Spot sourcing and
Systematic Outsourcing.
• Two forms of goods: MRO goods and
Manufacturing inputs.
Strategic Auction Markets
• When buyers or suppliers wield
disproportionate clout, they set up auction
markets to maximize gains.
• Buyer driven auction markets
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Set up competition between suppliers.
Minimize suppliers’ pricing power.
Suppliers Bid for supply contract.
Descending Bid/ Sealed Bid format.
Lock-in & Switching Costs can play very
important roles.
Buyer Run Auction Markets
MRO Goods
Manufacturing Inputs
Spot Sourcing
• Maximum Gains
• suppliers will attempt to
aggregate.
• Presence of a few large buyers
can easily neutralize seller
aggregation.
• Reverse Auction.
• Buyers can create
switching costs to lock in
suppliers.
• Buyers’ supply risk can help
suppliers protect profits.
• Sealed Bid – Reverse
Auction.
Systematic
Outsourcing
• Buyers’ power diminishes as
level of customization increases.
• Order fulfillment complexity
offers suppliers opportunity to
customize – “Deep Linking”.
• Reverse Auction for long term
supply contracts – followed by
stable prices.
• Suppliers are strong.
• Buyer focus will be on
mitigating supply risks.
• Buyers’ power decreases
with increase in product
complexity and specificity.
Supplier Run Auction Markets
• Objective: Set up a bidding war between
buyers.
• Factors that determine outcome
– Supply Risks faced by buyers
– Extent of buyer fragmentation
– Asset specificity and extent of customization
required
– Presence of Reverse Aggregators
Supplier Run Auction Markets
MRO Goods
Manufacturing Inputs
Spot Sourcing
• Buyers are very strong.
• Presence of Spot Markets can
weaken seller’s pricing power.
• Suppliers will prefer to set up
ascending auctions / first price
sealed bid auction.
• Buyers’ supply Risks may
determine extent of seller
gains.
• Descending Bid Auctions.
Systematic
Outsourcing
• Suppliers’ pricing power increases
with extent of customization.
• Suppliers will attempt to erect
entry barriers for other suppliers.
• Production capacity constraints
may be the chief reason for auctions.
• Large, monopolistic suppliers will
gain disproportionate revenue.
• Suppliers’ gain increases
with increase in product
complexity and specificity.
• Buyer focus will be on
mitigating supply risks.
• Descending bid / First Price
Sealed Bid auctions for long
term contracts – or multi-tier
auctions.
A Summary of Auctions in B2B Markets
MRO Goods
Manufacturing Inputs
Spot
Sourcing
• Buyers are relatively strongest.
• Reverse Auctions – Sealed Bid
favor buyers.
• Limits to the effectiveness of
Forward Aggregators.
• Buyers stand to gain more than
suppliers.
• Buyers  Reverse Auctions
Suppliers  Descending Bid
Auctions / Multi-tier English
Auctions.
• Extent of supply volatility may
determine buyer / seller gains.
Systematic
Outsourcing
• Suppliers’ pricing power
increases with extent of
customization.
• Sealed bid reverse auctions for
longer term contracts favors
buyers.
• Opportunity for Forward
Aggregators.
• Suppliers’ pricing power is greatest.
• Descending Bid auctions.
• Product Specificity and
Customization determine seller gains.
• Opportunity for Reverse
Aggregators.