Internet Business-to-

Business Models

The Rhetoric, The Reality,

& The Promise
Roy Shapiro
May 15, 2001
E-Procurement:
A Taxonomy of B2B Business Models:
♦ Virtual Communities
– VerticalNet
♦ Post & Browse
– Catex
♦ Aggregators
– SciQuest
E-procurement
♦ Exchanges
– FreeMarkets
Aggregators

♦ Forward (e.g., PlasticsNet)

– one-stop shopping; reduced transaction costs
– creates a “mega-catalogue”
– prices typically fixed

♦ Reverse (e.g., FOB.com)

– creates virtual “buying groups”
– leverages power of small buyers
 Example: Life-science chemicals
♦ $36 B (biological & chemical reagents; lab supplies & equipment)
♦ Specialized, fragmented supplier base selling
– more than one million distinct products to
– 300,000 - 500,000 scientists worldwide
• pharmaceutical;
• biotech;
• university;
• NIH
– in more than 200,000 laboratories

♦ In US alone, 500 organizations purchase > $1 million yearly

 Typical player: CN BioSciences
♦ $50 million supplier of specialty chemicals
♦ Spends $1 million annually on catalogues to
support 35,000 purchase transactions
♦ Typical purchase transaction:
– PhD researcher spends several hours/week thumbing
through 50 dog-eared, outdated, Post-It-covered
catalogues covering most of his office’s shelf space
– “finds” needed chemical,
– calls boss / company’s Purchasing Dept.,
– calls supplier & faxes / phones in order
– PO / paperwork
– (if all goes well) UPS or FedEx delivers
 Typical player: CN BioSciences
♦ $50 million supplier of specialty chemicals
♦ Spends $1 million annually on catalogues to
support 35,000 purchase transactions
♦ Typical purchase transaction?
– PhD researcher spends several hours/week thumbing
through 50 dog-eared, outdated, Post-It-covered
catalogues covering most of his office’s shelf space
– “finds” needed chemical,
– calls boss / company’s Purchasing Dept.,
35,000 times
– calls supplier & faxes / phones in order
per year!!
– PO / paperwork
– (if all goes well) UPS or FedEx delivers
 Enter SciQuest
♦ Web-based mega-catalog, virtual warehouse
(takes title; not possession)
♦ Products bought at pre-negotiated discount from >500
suppliers, with >800,000 SKUs (online product “inventory”)
♦ Resells at catalog pricing
♦ 60+ buyer organizations = $1.5 billion in annual purchases
– cuts PO transaction cost from $100 to $10
♦ All customers pre-qualified (e.g., w/ company PO)
♦ Offer suppliers greater reach, quicker updates
 Exchanges -- Web Market Makers
♦ In principle, modeled after stock exchanges
♦ 1500 exchanges at present
♦ Predicted to be 37 - 53% of US online trade by 2004
(Forrester predicts $746B; Goldman Sachs -- $660B)
♦ Smart search engines (like aggregators)
♦ Process execution
– buyer credit
– supplier qualification?
– supply chain facilitator?
– other value-added services
Dynamic pricing
♦ Buyer-centric (FreeMarkets)
– buyer RFQ, seeks out sellers, and applies leverage
– reverse auction pricing (downward)
♦ Seller-centric (Boeing; MetalSite)
– attracts buyers and applies leverage
– auction pricing (upward)
– Supplier consortia (WWRE, Chipcenter)
♦ Neutral hubs (e-STEEL)
– dynamic pricing based on supply & demand
– importance of neutrality
– subject to “Color TV” syndrome
FreeMarkets
♦ Founded 1995
♦ Reverse auction “bidding events”
♦ To date,
– 9200 online bidding events
– for > $14 billion of goods & services
– created > $2,7 billion in savings for buyers
– > 100 buyers; > 1300 suppliers
– 165 goods / service categories
– 13 countries
– > 30 languages
FreeMarkets Real-Time Bidding Event
Product xxxxxx Lot 005 Units 20,000

historical
price

target
price

2:00 2:30 3:00 3:30 4:00

FreeMarkets -- Case 1
♦ Tier One auto supplier (10 plant locations)
re-sourcing springs, a critical component
– consolidate the division's large supply base new
– locate new high-quality suppliers
♦ Historic Cost: $3.7 million
♦ FreeMarkets located / qualifies 38 ISO-certified
suppliers (after rigorous parts testing)
♦ Number of Bids: 1059
♦ Results
– Consolidated supply base from 21 suppliers to 5
– Final bid = $2.2 million (41% savings)
FreeMarkets -- Case 2
♦ Global durable goods mfg. (7 global divisions) to
source 457 different types of thermoplastic parts
♦ Historic Cost = $7.5 million
♦ FreeMarkets located / qualifies 50 US and
international suppliers
♦ Number of Bids = 422
♦ Results
– consolidated global purchasing for plastics
– introduced new suppliers in low cost countries
– final bid = $5.5 million (27% savings)
 FreeMarkets -- Case 3
♦ Global appliance manufacturer, seeking to:
– consolidate scrap metal disposal operations over 7 plants
– reduce the number of contractors used
– increase its sale price.
♦ Historical Price = $5.1 million
♦ Auction Format: upward auction; 242 Bids
♦ Results:
– FreeMarkets located more scrap metal buyers to increase
competition for the contract (18 participated in auction)
– additional competition yielded a 19.8% increase in the
scrap sales price (final bid = $6.11 million)
– manufacturer consolidated its operations, giving all its
business to a contractor that could serve multiple plants
 For Aggregators and Exchanges:
Value Created when ...
♦ Matchmaker
– most effective when buyers & sellers are highly fragmented &
search/visibility costs are high
– most effective when supply chain consists of multiple
intermediaries who add little real value and often are barriers to free
flow of information
– beware the Napsterization of B2B
♦ Take people and paper out of routine transactions
– most effective when transaction costs are high
♦ High product variety
♦ Commodity or convenience buying predominates
 The New Exchange
“The current exchange-based model is structurally
flawed, … few of these exchanges will create the
liquidity needed to survive.
… the value proposition offered by most exchanges,
[that] competitive bidding among suppliers allows
buyers to get the lowest possible prices … runs
counter to the best recent thinking on buyer-supplier
relations. Most companies have come to realize that
[purchasing] at the lowest [invoice] price may not be
in their best economic interest.”

Wise & Morrison, “Beyond the Exchange:

The Future of B2B, HBR, Nov. Dec., 2000
Cost = Invoice Price
 The Internet Revolution?
CPFR
Collaborative Planning, Forecasting & Replenishment

♦ Shared Information vs. Shared Data

♦ Truly Co-Managed Business Processes

♦ LT, link business systems across supply chain

 Today’s Reality: CPFR in retail contexts

♦ Wal-Mart (CFAR) and Warner Lambert*

Changes in demand, promotions, policies

forecasts / plans adjusted quickly

♦ Pilots: collaborate in forecasting processes

– “Event Calendar” (promotions, openings, vendor advertising campaigns, etc.)
– Analysis of POS data history + key causal factors

* and SAP, Manugistics, Benchmark Partners, E&Y, Sun

Source: VICS
Report by Exception:
The Core of the CF Process

Source: Syncra Systems

Which exceptions are highlighted depend on time,

stock levels, new stores, new promotions, ...
 Early Results: CPFR

♦ Reduced forecast error

♦ Increased sales

♦ Shorter replenishment lead times

♦ Visibility into consumer buying trends /

patterns
 The Economic Imperative is Clear.
Why is this so difficult? Because channel
coordination requires shifts in company boundaries.
The reality is a limited sharing of vital information
Regularly Shared with Channel Partners

All the Above

Other
New Product / Design
POS data
Inventory Status
Sales Forecasts
Order / Replenishment Plans
Business Goals
Promotional Plans

0% 10% 20% 30% 40% 50% 60%

Source: Syncra Systems survey, 2000

 Yet, Looking Forward
♦ Snowballing interest in retail

♦ Beginning in B2B supply chains

– high complexity (construction)

– volatile demand

♦ Technology continues to develop

– standards

– “n-tier” CPFR in development

Truly collaborative supply
chains?
Now, that would be a revolution
“ The twin principles that firms have
boundaries and that these should be kept
sharp are basic assumptions in much of
our traditional thinking about management.
They are also ideas whose time
has passed.”
– Joseph Badaracco
The Knowledge Link: How Firms
Compete Through Strategic Alliances
“ The twin principles that firms have
boundaries and that these should be kept
sharp are basic assumptions in much of
our traditional thinking about management.
They are also ideas whose time
has passed.”
Joseph Badaracco
The Knowledge Link: How Firms
Compete Through Strategic Alliances

1990